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Udemy (NASDAQ:UDMY) Exceeds Q4 Expectations But Stock Drops 17.8%


Full Report / February 14, 2024

Online learning platform Udemy (NASDAQ:UDMY) reported results ahead of analysts' expectations in Q4 FY2023, with revenue up 14.6% year on year to $189.5 million. On the other hand, next quarter's revenue guidance of $194.5 million was less impressive, coming in 2.8% below analysts' estimates. It made a non-GAAP profit of $0.02 per share, improving from its loss of $0.16 per share in the same quarter last year.

Udemy (UDMY) Q4 FY2023 Highlights:

  • Revenue: $189.5 million vs analyst estimates of $186.1 million (1.9% beat)
  • EPS (non-GAAP): $0.02 vs analyst estimates of -$0.02 ($0.04 beat)
  • Revenue Guidance for Q1 2024 is $194.5 million at the midpoint, below analyst estimates of $200.1 million
  • Management's revenue guidance for the upcoming financial year 2024 is $802.5 million at the midpoint, missing analyst estimates by 3.1% and implying 10.1% growth (vs 15.9% in FY2023)
  • Management's EBITDA margin guidance for the upcoming financial year 2024 is 1.75% at the midpoint, missing analyst estimates of nearly 3%
  • Free Cash Flow was -$10.58 million, down from $8.54 million in the previous quarter
  • Gross Margin (GAAP): 58%, up from 55.2% in the same quarter last year
  • Monthly Active Buyers: 1.37 million, up 10,000 year on year (in line)
  • Market Capitalization: $2.14 billion

With courses ranging from investing to cooking to computer programming, Udemy (NASDAQ:UDMY) is an online learning platform that connects learners with expert instructors who specialize in a wide range of topics.

The company’s key offering is its marketplace of diverse courses. Consumers turn to the platform to learn new skills or brush up on existing ones for professional or leisure purposes. You can take a data analysis course in the morning to improve your performance at work and a photography class at night because it’s a hobby!

Udemy addresses two customer pain points of learning: convenience and selection. First, learning traditionally involved a physical presence. Some people don’t have the time or resources to go to the local community college three times a week in the afternoon to learn music production, for example. Secondly, it is sometimes hard to find a high-quality instructor in a local area. Udemy digitizes learning and acts as a marketplace, allowing consumers to learn from anywhere they have an internet connection and to choose from a vast selection of instructors all over the world.

Udemy generates revenue through a revenue-sharing model with instructors. Instructors create courses and upload them to the platform, and Udemy takes a percentage of the revenue generated from the course sales. In addition, Udemy also offers a subscription service called Udemy Pro, which provides access to a curated selection of courses along with exclusive features and benefits.

Consumer Subscription

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

Competitors offering online educational services include Coursera (NYSE:COUR), Microsoft’s LinkedIn Learning (NYSE:MSFT), and Skillsoft (NYSE:SKIL).

Sales Growth

Udemy's revenue growth over the last three years has been solid, averaging 19.6% annually. This quarter, Udemy beat analysts' estimates but reported mediocre 14.6% year-on-year revenue growth.

Udemy Total Revenue

Guidance for the next quarter indicates Udemy is expecting revenue to grow 10.2% year on year to $194.5 million, slowing down from the 15.9% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to reach $802.5 million at the midpoint, representing 10.1% growth compared to the 15.9% increase in FY2023.

Usage Growth

As a subscription-based app, Udemy generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Udemy's active buyers, a key performance metric for the company, grew 2.9% annually to 1.37 million. This is one of the lowest rates of growth in the consumer internet sector.

Udemy Monthly Active Buyers

In Q4, Udemy added 10,000 active buyers, translating into 0.7% year-on-year growth.

Revenue Per Buyer

Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Udemy because it measures how much the average buyer spends. ARPB is also a key indicator of how valuable its buyers are (and can be over time). Udemy ARPB

Udemy's ARPB growth has been impressive over the last two years, averaging 14.3%. The company's ability to increase prices while growing its active buyers demonstrates its platform's value, as its buyers continue to spend more each year. This quarter, ARPB grew 13.8% year on year to $138.35 per buyer.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Udemy's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 58% this quarter, up 2.7 percentage points year on year.

For internet subscription businesses like Udemy, these aforementioned costs typically include customer service, data center and infrastructure expenses, and royalties and other content-related costs if the company's offering includes features such as video or music services. After paying for these expenses, Udemy had $0.58 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Udemy Gross Margin (GAAP)

Udemy's gross margins have been trending up over the last year, averaging 57.5%. These margins are around that of a typical consumer internet business, but Udemy's rising margins may indicate improving pricing power or scale advantages over costs.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Udemy grow from a combination of product virality, paid advertisement, and incentives.

It's very expensive for Udemy to acquire new users as the company has spent 75.6% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Udemy and its peers.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, Udemy's EBITDA came in at $3.98 million, resulting in a 2.1% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 1%.

Udemy Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Udemy burned through $10.58 million in Q4, increasing the cash burn by 69.2% year on year.

Udemy Free Cash Flow

Udemy has burned through $15.07 million of cash over the last 12 months, resulting in a negative 2.1% free cash flow margin. This below-average FCF margin stems from Udemy's continuous need to reinvest in its business to penetrate the market.

Key Takeaways from Udemy's Q4 Results

It was good to see Udemy narrowly top analysts' revenue expectations this quarter, although ARR missed. Adding to the negatives was guidance. The company's full-year revenue and adjusted EBITDA margin guidance both missed analysts' expectations. Next quarter's revenue guidance followed the pattern and also came in below Wall Street's estimates. Overall, this was a mediocre quarter for Udemy, and the guidance is sure to weigh on shares. The company is down 17.8% on the results and currently trades at $11.51 per share.

Is Now The Time?

Udemy may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for everyone who's making the lives of others easier through technology, but in the case of Udemy, we'll be cheering from the sidelines. Although its revenue growth has been solid over the last three years, Wall Street expects growth to deteriorate from here. And while its increasing ARPU shows the growing value of its platform, the downside is its sales and marketing spend is very high compared to other consumer internet businesses. On top of that, its growth in active buyers has been lackluster.

Udemy's price/gross profit ratio based on the next 12 months is 4.5x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

Wall Street analysts covering the company had a one-year price target of $15.88 per share right before these results (compared to the current share price of $11.51).

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