Online learning platform Udemy (NASDAQ:UDMY) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 16.4% year on year to $178.2 million. However, next quarter's revenue guidance of $178 million was less impressive, coming in 1.36% below analysts' estimates. Udemy made a GAAP loss of $25.7 million, improving from its loss of $29.4 million in the same quarter last year.
Udemy (UDMY) Q2 FY2023 Highlights:
- Revenue: $178.2 million vs analyst estimates of $173.2 million (2.93% beat)
- EPS: -$0.17 vs analyst estimates of -$0.23 (25.4% beat)
- Revenue Guidance for Q3 2023 is $178 million at the midpoint, below analyst estimates of $180.4 million
- The company reconfirmed revenue guidance for the full year of $716 million at the midpoint
- Free Cash Flow of $6.96 million is up from -$20 million in the previous quarter
- Gross Margin (GAAP): 57.4%, in line with the same quarter last year
- Monthly Active Buyers: 1.34 million, up 50 thousand year on year
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.
Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to or what movie they watch, or finding a date, online consumer businesses today are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have 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 strong, averaging 20.2% annually. This quarter, Udemy beat analysts' estimates and reported 16.4% year-on-year revenue growth.
Guidance for the next quarter indicates Udemy is expecting revenue to grow 12.4% year on year to $178 million, slowing down from the 22.3% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 16.2% over the next 12 months.
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 2.5% annually to 1.34 million. This is one of the lowest rates of growth in the consumer internet sector.
In Q2, Udemy added 50 thousand active buyers, translating into 3.88% 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's ARPB growth has been excellent over the last two years, averaging 16.3%. The company's ability to increase prices while growing its active buyers demonstrates its platform's value, as its buyers are spending significantly more than last year. This quarter, ARPB grew 12.1% year on year to $133.01 per buyer.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert 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 57.4% this quarter, up 0.4 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 $0.57 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Udemy's gross margins have been trending up over the last year, averaging 56.4%. 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
Consumer internet businesses like Udemy grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
It's very expensive for Udemy to acquire new users as the company has spent 84.8% 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.
Udemy reported EBITDA of $1.9 thousand (well, it is technically still profit!) this quarter, resulting in a close to 0% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -5.98%.
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's free cash flow came in at $6.96 million in Q2, turning positive year on year.
Udemy has burned through $58.4 million of cash over the last 12 months, resulting in an uninspiring negative 8.82% free cash flow margin. This low FCF margin stems from Udemy's capital intensive business model and desire to stay competitive.
Key Takeaways from Udemy's Q2 Results
With a market capitalization of $1.66 billion, Udemy is among smaller companies, but its more than $323.2 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
It was good to see Udemy beat analysts' revenue expectations this quarter. Unit economics are also moving in the right direction. On the other hand, its revenue guidance slightly missed Wall Street's expectations and growth is slow these days. Overall, this was a mediocre quarter for Udemy. The stock is flat after reporting and currently trades at $11.33 per share.
Is Now The Time?
When considering an investment in Udemy, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. 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. Its revenue growth has been solid. But while its top-tier ARPU growth shows the increasing value of its platform to its users, the downside is that its sales and marketing spend is very high compared to other consumer internet businesses and its growth in active buyers has been lackluster.
Udemy's price/gross profit ratio based on the next 12 months is 3.8x. 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.
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