UDMY - NASDAQ

Thank you for standing by and welcome to Udemy’s First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference to your host Ms. Stacey

Thank you. With me today are Gregg Coccari, Udemy's Chairman and Chief Executive Officer; and Sarah Blanchard, Udemy's Chief Financial Officer. Before we begin, during this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based on information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements, except as required by applicable law. In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with the U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website. A replay of today's call will also be posted on the website. I will now turn the call over to Gregg.

Thank you, Stacey. Good afternoon, everyone, and thank you for joining us. We kicked off the year with a strong first quarter as businesses and consumers alike continue to choose Udemy to provide flexible, expansive and effective skill development to empower organizations and individuals. Our Q1 results demonstrate several of the large secular forces fueling our growth: hybrid and remote work driving learning on our online platform; accelerating digital transformation requiring massive upskill and reskill demands; and the ongoing great resignation, which has accelerated an urgent need to engage and support employees through ongoing career development paths. As a leading destination for learning and teaching online, Udemy is benefiting from the societal tailwinds. This quarter's numbers clearly speak to this momentum. We grew revenue by 22% year-over-year in Q1 bringing our total revenue to $152 million. This was driven by outstanding Udemy Business performance in Q1, which grew 77% versus the prior year with over 11,600 total Udemy Business customers and $280 million in ARR, up 80% from the prior year. In fact, we now expect the Udemy Business will eclipse our consumer business in Q3 2022 earlier than we previously projected. As I look ahead to the rest of the year, I'm excited to continue to grow our footprint internationally where we have an opportunity to further our tremendous momentum in Udemy Business. I'm also excited to further our innovation leadership in our platform and technology and continue investing in our marketplace by supporting instructors around the world as they produce roughly 5,000 new courses every month. Our Q1 results illustrate these themes at work. Let's dig a little deeper. I will cover 3 critical growth drivers of our Udemy Business and performance in Q1. First, I'll briefly talk about Udemy Business where we saw a very strong demand, solid execution and continued top line performance in the quarter. Second, I'll discuss the unprecedented and far-reaching changes we are seeing in the way employers are prioritizing a new always-on approach to workforce skills and learning culture that drives our massive TAM. And third, an update of our marketplace, which continues to serve as the vibrant and healthy engine fueling Udemy Business' rapid growth. Let's start with Udemy Business. We achieved a record ARR of $280 million, up 80% year-over-year in Q1, driven by strength across all regions and multiple verticals, including government, financial services and manufacturing. New customers this quarter included Baptist Health System, Crocs, Medici, Sparta Global and Volta Trucks. We also saw strong momentum in larger enterprise organizations as more customers expand their use of Udemy's curated quality content and consumer-driven learning experience. This resulted in 87% year-over-year growth in customers with over $100,000 in ARR and 56% year-over-year growth in customers with over $1 million ARR, both reflective of the expansion trends within our customer base. Speaking of expansion. Our yearly business net revenue retention this quarter was 120%, up from 118% in the prior quarter as we continue to see massive success in growth in our land-and-expand strategy. For example, Randstad, the world's largest provider of flexible work and human resources services, places over 100,000 people weekly in the United States and Canada, with the goal of impacting the working lives of 500 million people by 2030 through career training and development opportunities. Since 2019, Randstad has used Udemy Business to increase talent mobility across their client base, and has since doubled the number of licenses they use to support their efforts. Randstad has built learning paths for key technical roles, and the company's top Udemy Business course categories include IT and cloud certifications, web development and machine learning. In 2021, 61% of workers placed through Randstad's technology organization were active Udemy Business learners or course completers. In addition, 96% of Randstad employees noted that Udemy has helped them learn a new skill, gain promotion or become more effective at work. The company recently won an American Staffing Association Elevate Award, recognizing their innovation and effectiveness to train, upskill and reskill temporary and contract employees for the most in-demand roles, all built on the Udemy platform. Other existing customers growing their Udemy offering this quarter include Grupo Falabella, Abu Dhabi Port, Gympass USA, Indeed, Picsart and Klarna. As we look into some of the deal highlights this quarter, I'm excited to note that together with our end-market partner, Sanjieke, Udemy Business has closed our first deals in the People's Republic of China and launched a new website in management along with an iOS app for mobile learning. We are pleased with how the pipeline in China is growing as we deepen our presence there. Adding to our wins in APAC, we achieved nearly $500,000 in ARR in our first quarter selling Udemy Business in South Korea through our partner, Woongjin ThinkBig, that we announced last quarter. Our momentum in China highlights the incredible runway ahead of us as we further penetrate the international market in Udemy Business where 53% of our revenue is currently outside of North America. Domestically, Udemy recently closed a large deal with one of the U.S. military's branches and now proudly supports several branches with our learning programs. All of these wins speak of the momentum of our partnership as well as the large investments in time, money and resources organizations are making to deploy Udemy at scale and to a wider audiences. While we do expect Udemy Business to grow larger than our consumer business in Q3, we are truly just getting started on the B2B opportunity for Udemy, and we believe the global market will only serve to accelerate our top line Udemy Business growth over the long term. It's important to recognize that we have quickly reached top line scale at hundreds of millions of dollars in ARR and continue to see an exceptional growth in Udemy Business. Over the last 3 years, ARR has grown at a CAGR of nearly 90%. With the massive tailwinds highlighted earlier, a world-class go-to-market team and a huge addressable opportunity in front of us, it's clear that we are executing, gaining market share and building the right ecosystem of partners. Building world-class partnerships is a key component of our strategy to scale through market entry or further market penetration, supporting our goal of providing accessible, affordable education for everyone. Our partnerships with well-regarded international brands have served us well in establishing our presence in markets, including Japan, China, South Korea and Sub-Saharan Africa. To that end, Udemy is excited to announce a partnership with First National Bank, one of South Africa's largest banks, serving over 9 million customers. Through this multimillion dollar partnership agreement, First National customers now have access to hundreds of global courses from Udemy. Not only does this partnership introduce Udemy to a whole new audience but it aligns our brand with one that F&B customers already trust with their finances. Let's move on to the second area of focus in my remarks today, the secular tailwinds we see across employee learning and the digital transformation that are fueling these rapid changes. In February, Harvard Business Review published a study analyzing 50 million recent job announcements to see what skills and degrees are in demand. What the researchers found is the great recession has dramatically accelerated the trends of organizations moving away from degree requirements and towards skill-based hiring. A brief quote from the article underscores why Udemy is winning, "What we've learned is that employers are indeed resetting degree requirements in a wide variety of roles. The change is most noticeable for middle-skill positions. In evaluating job applicants, employers are suspending the use of degree completion as a proxy and instead now favor hiring on the basis of demonstrated skills and competencies." At Udemy, we are uniquely suited to benefit from the trends highlighted in this HBR report and the dramatic changes in the way employees are expanding their skill sets and taking charge of their career development. For example, our marketplace enables learners to not just stay current on the ever-evolving skills required in the digital workplace but to do so in a practical and efficient manner, what we like to think of as learning at the speed of business. Plus our marketplace accessibility and the ability to rapidly create and curate top quality content enables these learners to complete these courses at the speed of light with their appetite for knowledge, without waiting months or even years for course creation to catch up with a skills gap. Indeed, to be the leader in defining this category of what HBR calls demonstrating skills and competencies means that we have to continue to push the innovation envelope on our technology and products so that organizations can successfully reskill and upskill their employees. To that end, this quarter, we launched 3 new assessments and 19 new labs within Udemy Business Pro and launched a Learning Paths API that allows learners to bring their curated Udemy Business learning paths directly into their LMS or internal sites to help drive effective learning. We've launched 8 career landing pages on udemy.com to help learners discover the skills they need to start or improve their careers in data science or web development, for example. In addition, we've launched career guides as part of our subscription offering to guide subscribers through their learning journey. Our proprietary skills graph helps learners chart a skill acquisition course journey that matches their professional aspirations. Together with our investments in AI and machine learning, these product enhancements create longer-term learning paths that strengthen the relationship between learners and Udemy, and most importantly, help our learners achieve their goals. We also continue to prove and innovate on how our content is delivered and updated while always ensuring that it remains fresh, relevant and high quality. This quarter, we launched an integration with Workday, allowing learners and administrators to access course completion data in near-real time. The beauty of Udemy's marketplace model is the ability for us to learn based on the feedback loop from our users and the content they select. Powering this enormously valuable learning data with AI will drive more and more relevant and targeted results for our customers. Speaking of our marketplace, let's now turn to the marketplace community, our valuable instructors and the learner community that they help to thrive. As I've said before, our instructors are our lifeblood. They fuel our rich marketplace with expert-driven content and allow us to provide a unique learning path to 52 million learners. For example, Udemy instructor, Steve Ballinger, a personal finance expert based in the United States, earned $1 million in total revenue after publishing over 30 courses on our platform. Steve recently shared that creating and filming courses is now his full-time job and that he's been able to achieve this without accruing any personal expense besides the $900 initial investment for a camera and a microphone. He credits Udemy for providing the platform and the marketing resources to help him reach thousands of learners around the world. Then there's Rahul Iyer based in India. In October 2021, Rahul announced his retirement from the services industry to become a full-time Udemy instructor at age 36. When Rahul began his journey teaching on Udemy, he was in debt 80 lakhs, equivalent to $110,000. Today, 6 years later, he is the owner of 4 villas in Pune, several commercial offices and recently gifted his father a commercial property for business. Together, our 68,000 instructors help add roughly 5,000 courses each month, and we now have 196,000 courses available on our learning platform that helps filter the best courses to the top. I'd like to take a moment here to thank all the incredible and talented instructors who help make Udemy what it is. Your content fuels are unique, dynamic and diverse learning engine. We are proud to have welcomed nearly 4,000 new instructors to our Udemy community this quarter. Steve and Rahul typify Udemy's extraordinary instructors. They are real-world experts who deliver high-quality, fresh content. Udemy, in turn, provides the scale to deliver their knowledge to learners worldwide. Our learning platform is fueled by our incredible content engine, our marketplace, which is the engine generating the user feedback and their ever-evolving content that we leverage to ensure the quality, breadth and depth of content sought by corporate and consumer learners alike. Before I conclude, I'd like to briefly cover 3 other topics close to my heart: first, our ESG initiatives and partnerships that we continue to grow and prioritize; second, a brief word on the Ukraine war and the refugee crisis; and third, the company DNA of equity and inclusion that anchors our company mission and workforce. Simply put, Udemy exists to improve lives through learning. ESG is embedded in our mission to provide flexible, effective skill development to empower organizations and individuals. In March, we published a new ESG section on the Udemy website, showcasing our key ESG activities, goals and procedures. And soon, we'll launch our first ESG impact report, highlighting our ESG efforts and spotlighting how we will support our learners, instructors, customers and communities. To further our mission, we partnered with a number of amazing nonprofit organizations to provide Udemy's courses to those in need free of cost. One example of many is our partnership with SV Academy, a San Francisco-based organization that prepares over 1 million underrepresented professionals to pursue careers in technology. Through SV Academy's Udemy partnership, its job seekers can now access the latest, most in-demand educational resources in their preparation to work in the technology industry. In 2020, [indiscernible] determination to succeed was evident when she joined SV Academy's customer success program. She accessed training including Udemy courses and a support network that enabled her to launch a career in technology. Immediately after finishing the program, [indiscernible] secured a customer success position with, SV Academy's hiring partner, Genesys. In only 4 months, she was promoted to customer success manager, and now she's holding the door open for other immigrant black mothers who want to break into the tech industry. And just as important in this global nonprofit work is what we're doing to assist in Ukraine. We extend our thoughts to all who are impacted by the war in Ukraine and the refugee crisis. We realize there are many Ukranians who no longer have access to traditional education, and we are, therefore, partnering with Ukraine's Ministry of Education and Science to provide 1.5 million Ukranian students at 600 universities and higher education institutions free access to technical business language and other relevant course content. In addition, our free resource center continues to offer over 700 free Udemy courses to learners worldwide. We realize that these are small steps against the greater events taking place, but we believe it's absolutely critical that we do what we can and demonstrate our support for those who have had their lives so devastatingly impacted. Udemy's culture and ability to attract and retain our valuable employees is always top of mind for our leadership team. Our mission to provide flexible, effective skills development to empower organizations and individuals is grounded in equity and inclusion. We are pleased Great Place to Work Ireland has honored Udemy as #5 on the list of Ireland's best midsized workplaces in 2022. Additionally, Udemy's Dublin office has been named a 2022 Best Workplace for Women, which recognizes top organizations with women-friendly policies and benefits. We also recently announced that Udemy has been certified as a Great Place to Work in the United States, a distinction based entirely on what current employees say about their experience working at our company. In order to support our commitment to diversity, equity and inclusion, we have added new courses covering areas such as unconscious bias, empathy, allyship, psychological safety and leading with a diverse mindset, which are top of mind across enterprises now. To conclude, at Udemy, we are first and foremost a mission-driven company, addressing one of the largest global workforce issues of the rapidly changing digital age. This is what inspires our employees, instructors and learners. The beauty of our model is that as we grow content on the Udemy marketplace and engage more and more new learners, Udemy Business' SaaS-based model continues to benefit with the broadest and most relevant content in what is still a very large and underpenetrated market. Together, Udemy employees, instructors and customers are changing lives while driving a durable learning platform and high-growth business. As I tell our employees every day, one of our core values at Udemy is to be both mission-driven and results obsessed. This quarter's performance proved that we can be both. With that, I'll turn the call over to Sarah to dive into the numbers.

Thank you, Gregg. As Gregg said, we had a great start to 2022 with very strong Udemy business growth. A recent Deloitte study concluded that organizations, which foster a learning culture, are 92% more likely to develop novel products and services, 17% more profitable and have as high as 50% greater employee engagement and retention rates than their peers. Our Udemy Business growth speaks to the fact that more and more organizations are increasing investment in employee skills acquisition because of the proven ROI. I'm especially encouraged by our exceptional Udemy Business ARR growth, up 80% versus the prior year as well as acceleration in Udemy Business customer growth, up 49% versus the prior year. Udemy Business continues to serve as a key growth lever for us as we see healthy new logos and expansion among existing customers, wins across a wide range of industry verticals and good momentum in international growth. Q1 revenue of $152.2 million was up 22% year-over-year and up 12% sequentially. Our net dollar retention rate was 120% this quarter, highlighting the continued success of our land-and-expand motion. Udemy Business revenue was $64.9 million, up 77% from the prior year, continuing to demonstrate our strong growth at this scale. Our consumer business delivered $87.3 million in revenue, down 1% from the prior year. Our consumer business is performing as we expected to, as we discussed on our last call. A healthy marketplace is one that is able to attract and retain instructors and that provides the incentives for those instructors to publish and update high-quality courses. The consumer marketplace is healthy. We are adding instructors and thousands of courses monthly, and it continues to serve as a vibrant engine that fuels Udemy business growth. The symbiotic system of these 2 parts of our business is a unique and differentiated model that we believe will continue to drive Udemy business' top line growth over the long term. For the remainder of this call, all financial metrics are non-GAAP unless stated otherwise. Q1 gross profit was $87.4 million, up 31% year-over-year, driven by Udemy Business. Gross margin was 57% of revenue, up from 54% in Q1 of 2021. This margin expansion was a result of the continued revenue mix shift to Udemy Business from consumer and a reduction in content costs as a percentage of revenue across both segments. For OpEx, total operating expense was $98.3 million or 65% of revenue compared to 58% in Q1 of last year. Sales and marketing expenses represented 41% of total revenue compared to 41% this quarter last year as we continue to invest in the strong growth and clear ROI in Udemy Business by expanding our go-to-market and enterprise marketing teams. R&D expense was 13% of revenue, up 2 points year-over-year. We're investing in innovating on our sophisticated learning platform, which is fueled by our marketplace content engine. Furthermore, we are building capabilities to provide our learners with immersive learning experiences and proactive guidance on the skills and courses they need to achieve their professional goals. These investments in our business will bring a tighter relationship between Udemy, our learners and our customers. As Gregg mentioned, our innovation focuses on 3 core areas. First, we are rolling out proprietary skills graphs that match courses and skills to real-life professional aspirations. We will first launch these on Udemy Business, and then we will launch them as a part of the consumer offering. Second, we are fueling these skills graphs with sophisticated machine learning and AI models that can personalize the learning experience for each individual. Finally, we launched career guides as part of our consumer subscription offering. Ultimately, these investments will lead to superior learning experiences, more tangible outcomes for learners and customers and higher LTVs over time. They are also the foundation of our future efforts in credentialing. Rounding out our discussion of operating expenses. G&A expense was 11% of revenue versus 7% a year ago as we invested in the team and systems to operate as a public company. Net loss in the quarter was negative $11.2 million or negative 7% of revenue. Adjusted EBITDA was negative $7 million or negative 5% of revenue. In the quarter, we had some consumer marketing project spend that we had previously expected to occur in Q1 shift to Q2, which positively benefited our EBITDA margin in Q1. This was in addition to the gross margin expansion I mentioned earlier. And lastly, free cash flow was negative $17.3 million versus negative $18 million a year ago. Moving on to the balance sheet. We ended the quarter and the year with $511 million of unrestricted cash, cash equivalents and marketable securities. By segment, consumer revenue was $87.3 million, down 1% year-over-year. In the first quarter, we had approximately 1.4 million monthly average buyers, which was down 2% versus a year ago. Consumer gross profit was $47.5 million or 54% of consumer revenue, approximately 270 basis points higher than in Q1 2021. Gross margin expansion was driven by lower consumer GMV in the quarter as a percentage of revenue. As a reminder, in our consumer transaction business, instructor costs are recorded immediately, but revenue is recognized over a 4-month period. We also added 2.8 million new consumer and business learners, bringing our total order base to 52 million. Of note, we define a learner as someone who has enrolled and spent time learning on the platform. Udemy Business continued its robust growth with Q1 revenue of $64.9 million, up 77% year-over-year. The Udemy Business customer base is now well over 11,000, up 49% from a year ago. Udemy Business ending ARR of $279.6 million was up 80% as compared to a year ago. We are pleased with the trajectory of Udemy Business, and we now expect it to exceed consumer as a percent of revenue in Q3, as Gregg noted earlier in his remarks. Udemy Business gross profit was $42.7 million or 66% of Udemy Business revenue, which represents a roughly 120 basis point increase year-over-year. The improvement was primarily driven by a decrease in Udemy Business content costs as a percentage of Udemy Business revenue. Let's turn now to guidance. Looking ahead to the second quarter of fiscal 2022, we expect revenue to be between $147 million and $151 million. As mentioned earlier, we continue to expect Udemy Business to experience strong growth, becoming the majority of our revenue in Q3 of this year. I want to provide a little more color on our Q2 guidance. Our consumer business continues to be affected by some of the larger macroeconomic factors that have impacted our consumer growth over the last several quarters. While visitor traffic and leads to Udemy business remain strong, the conversion of those visitors into consumer buyers has slowed a bit compared to last year. We believe these headwinds remain leading into Q2 and will put additional pressure on consumer growth in the near term. We do expect our marketplace to continue to be healthy and fueling Udemy Business. Growth in Udemy Business remains strong, and we are very excited and encouraged by the rapid revenue expansion and strong net dollar retention. For the second quarter, we expect an adjusted EBITDA margin of negative 15% to negative 12%. Let me provide a little more color on our Q2 EBITDA guidance. As I mentioned earlier, in Q1, we benefited from certain consumer marketing projects not impacting our Q1 expenses. As we look ahead to Q2, some of these consumer costs we did not see in Q1 are now expected to land in our Q2 operating expenses. This quarter-to-quarter timing issue is an important consideration in our Q2 EBITDA margin guidance. Of note, our full year revenue, segment revenue and adjusted EBITDA margin guidance remains unchanged at $610 million to $640 million in revenue, with the Udemy Business at $300 million to $310 million in revenue and consumer at $310 million to $330 million in revenue. We continue to expect an adjusted EBITDA margin of negative 12% to negative 10%. To conclude, I'm pleased with our Q1 performance and the strong growth of Udemy Business. Our continued momentum here is providing us with greater visibility into our revenue via more and more recurring revenue streams as well as unlocking further expansionary growth opportunities as we land and expand into even more organizations globally. We continue to demonstrate strong performance with 80% ARR growth and a 120% net dollar retention rate and are excited to see Udemy Business comprise a majority of our revenues next quarter. We look forward to further success and momentum in Q2 and the rest of the year. And with that, we'll open up the call for Q&A. Moderator?

[Operator Instructions] Our first question comes from the line of Stephen Sheldon from William Blair.

Nice results here. Maybe just starting on the business side. You guys have rolled out a lot of new functionality there with assessments and labs, learnings paths, et cetera. I guess with all of these, what have you seen so far in terms of businesses actually utilizing some of the product improvements? Or maybe where are you expecting the biggest adoption when you think about the next few years?

Yes. Great. Thanks for the question. I think one of the things that we've spoken about is how we engage our customers and their employees through 2 different things. One is our customer success team. And upfront, we align with the customers to understand what it is that their business goals are. And so for some of these newer products like Udemy Pro that has the assessments and the labs, for those employees that want those, and we align with them, we have some preset ways that they can engage those teams. And so we're starting to gain traction with the new products that we're rolling out. The other thing that we've spoken about are those tools, those enterprise tools, to engage the teams in all of our offerings. And so those tools are -- they are very robust, and they're used by learning leaders and those who are buying the product. So we're happy with the engagement we're seeing. Obviously, there's always room for improvement, and so we never stop improving. But we're going to continue innovating and rolling out new features because of the response we're getting.

Got it. That's good to hear. And then maybe just a follow-up on the consumer side. Consumer gross margins, nice step up there year-over-year and sequentially. I think you mentioned some benefit from content costs, but can you just give more detail behind that and how you're thinking about consumer gross margins over the rest of the year?

Sure. So 2 pieces. One is our revenue recognition. So as a reminder, we typically actually see an increase in consumer gross margin in the first quarter because we have a large Q4 promotion. And so we have a lot of buying that happens in Q4. The content costs are recorded in Q4. And then what you'll see in the first quarter is that revenue is coming in because it comes in over 4 months for the transactional revenue, and you don't have those instructor costs. The other piece of it is for the majority of our transactional revenue, the revenue share is 37%. For learners that come to us from the instructors, actually, they're paid a much higher rate. And what we're seeing actually is the number of learners coming from instructors decreasing as the things that we're doing in the market and our organic growth continues to increase as a percentage of the total. So for the year, we expect to see those, what I'll call, normal fluctuations in gross margin because of our promotion cycle, but we do anticipate a small step-up over the year.

Our next question comes from the line of Rob Oliver from Baird. Our next question comes from the line of Josh Baer from Morgan Stanley.

I want to focus on Udemy Business. We saw the acceleration in ARR and the improvement in the net retention rate, acceleration in customer count. Like so taking a step back, I mean, if you could provide any more context really on what's resonating on that side of the business? Anything to call out to start there?

Yes. Thanks for the question, Josh. I think the interesting thing about Udemy Business is just the breadth of what's going on there is that we are doing extremely well in all geographies and all segments of the business. And I think that's what's unique about it. We are doing well everywhere. And then we have these new partnerships that are starting off well with Korea. We started our first full quarter in Korea, and we did almost $500,000 ARR in our first full quarter. We're starting to sell in Mainland China. So it's just -- the business is just extraordinary. I think there's amazing market fit. I think our content is really superior to what's out in the marketplace. And so it's reflected in our business results, but it's very, very broad-based.

That's helpful. And then second, I wanted to just ask if we are headed into a tougher macro environment recession, where do you think Udemy Business falls on the priority list? I mean, are there certain use cases that hold up better? Does the land-and-expand model help you there? Just wondering how you'd expect that business to perform in a weaker macro environment?

Yes. We believe that the Udemy Business will do very well under any kind of circumstances just because of the massive tailwinds behind it. There's the digital transformation that's going on. The future of work has changed due to the pandemic. There's a skills-based economy, creator economy. So there's just massive tailwinds in this business. And so we believe that a tougher economic environment will not hurt us at all. In fact, employee retention becomes much more of an issue in that type of an area. And so there's a great resignation going on and people want to make sure that they engage their employees and they keep them longer. So all the trends are really tailwinds for us right now.

Our next question comes from the line of Brent Thill from Jefferies.

This is David Lustberg on for Brent. Two, if I may. On -- I guess, on the first one, is there any color you can provide as to what percent of company's enterprises are currently using an enterprise learning product like it was today? Like how much opportunity is there left? How much of this market remains completely unpenetrated? Any color there would be helpful. And then I have a follow-up.

It's very early days for this market. Two years ago, the majority of the learning in corporations were done in person. And those days are vastly changed because of the pandemic and hybrid work and the complete future of work has changed. So it's very early days. So we believe that we are very early innings in this business.

And just to add to that, we have a large number of customers, over 11,000 customers right now, but we're only 10% penetrated. We're in a land-and-expand situation. And so we have really strong net dollar retention that's 120% in total. And for our larger customers, those with over 1,000 employees, it's 127%. So with our existing -- even with just our existing customers, we've got a long runway. But like Gregg said, it's just early days across the board.

Understood. That's helpful. And then on the consumer business, just wanted to touch on the -- how many -- what percentage of buyers or if you can give like rough direction of how this has trended, but how will the buyers each quarter, like how many of them are returning buyers versus net new buyers? And just kind of the discussion around new buyers versus returning buyers and your ability to retain some of these consumers on the consumer side of the business would be helpful.

Yes. Great question. So a large amount of our buying on the transaction side actually comes from returning buyers. It's well north of 50%. We're also seeing some trends that we'd like to see where engagement is up this year compared to last year as we continue to invest in things that drive engagement and retention. The last thing I'll mention is we're in the early stages as we've spoken about for our consumer subscription business. And we are innovating there and really driving career guidance and learning paths and different ways to engage and retain our learners. So a lot of current buying that happens is from returning, but also we have a lot of work that we're doing there that we're excited about.

Our next question comes from the line of Terry Tillman from Truist.

This is Connor Passarella on for Terry. I just wanted to start on one with international. So congrats on the deal in China. It's really great to hear. Just curious as to what you're seeing in terms of competitive pressure in some of these emerging regions like Japan, South Korea and China. And then also in terms of these emerging markets, maybe how does the land-and-expand dynamic change as you involve partners more heavily in these deals?

So as far as the competition in those markets, in the Asian markets, in Japan, we have very little competition. We have, by far, the largest local Japanese business catalog. And so there's very little competition there. So we're growing rapidly there. In Korea, there's actually -- there's not a lot of international competitors, but there are a number of local competitors. So we built out our Korean content and we started with a nice size, but we're building that. And as far as China goes, there's actually one of our competitors actually just pulled out a quarter or 2 ago. So there's less international competition, but there is some local competition, but not that much. So -- but as far as land-and-expand, it's very similar. We work with our partners. We work very closely with them. We work like we're one team. So they're using the same procedures, they're using the same marketing materials. And they tend to do very well. Like our actual net retention in Japan is higher than it is in other places. So it's actually going very well.

Perfect. Yes, that's really good color. Maybe just one quick follow-up. So on marketing, in addition to generating traffic organically through the consumer side of the business, I know that there are some marketing testing from different channels like affiliate networks, partnering to systems and television. I'm just curious if any takeaways at those different marketing channels, maybe where do you plan to continue to invest in lead gen.

Yes. So we're always testing in consumer marketing. So it's that kind of a business. So we are doing a lot of TV testing. We're testing TV in about 5 or 6 countries right now, but we're also testing YouTube and Facebook and on and on and on. TikTok is something that we're going to launch a test in the next quarter. So I just think it's a never-ending test and roll, test and roll, test and roll, and just looking for the most efficient way to acquire customers. You're looking for the most efficient way with the lowest cost of acquisition. So it's a never-ending story.

Our next question comes from the line of Rob Oliver from Baird.

Can you hear me okay?

Yes, we can.

Yes, we can.

Great. Okay. Awesome. And apologies for that before. So just a couple of questions, Gregg and Sarah, and I did miss one of the questions as I was even trying to get back in, so I apologize if this was asked already. But just clearly, really strong enterprise Udemy Business trends across the board. And I wanted to just dive into that a little bit more on a couple of fronts. One, are you seeing any change or variance in where the lands are? I know you guys have traditionally landed in both HR and in IT. And just would be curious for any color there. And then second part of that question is, I know you guys often will sort of in the first year of an engagement run side by side with, say, another competitor and some of your marquee customers are ones that you've won following that year period. And just curious with the tremendous momentum in the UB side whether some of those new wins were ones were those expansions, were ones where you had been kind of running side by side with the competitor. And then I had a quick follow-up as well.

Yes. I don't think there's anything really different with the lands today. I mean we are building out our go-to-market team. So there's more people in more countries. So the lands tend to be more diverse than they were before as far as geographies. We're building out Latin America now. And so we're getting more new customers there. And so it's very, very broad, and it continues to be very broad on the lands. And the same thing with the expansions. Now as far as the trials, we are in trials all the time. And we like the trial with our competitors because we believe we have the deepest content, the freshest content and that we do very well in trials. So a number of the lands are in trials. So we are in trials every single day. And so as I said, we're winning more than our fair share. And I think that's reflected in our growth rate. We're growing faster than the market is. And again, it's a lot to do with our marketplace and our business model. So we love to go into trials.

Got it. Okay. That's great, Gregg. I appreciate it. And then, Sarah, just a question for you just on the consumer subscription side. Obviously, a lot of variability in the consumer trends. And you guys have done a nice job modeling to that and getting us focused on kind of that kind of flattish area. But can you talk a little bit about consumer subscription? I realize it's still very early. It does seem like the content at least from my checks and observations is getting richer around consumer subscription? And just would wonder albeit recognizing that it's early, what kind of trends you're seeing there.

Yes. Great. Thanks for the question. So it is still early days. We are happy with what we're seeing there. But as we spoke about, we're still kind of in beta mode until the second half of the year. As we've said, there is some limited visibility on the consumer side, especially on the transaction side where we're seeing some conversion suppression. And we do anticipate our second quarter to be down year-over-year. But from a subscription perspective, that is starting to gain traction nicely in our beta test areas. And so we're going to continue innovating there. I love that you're seeing some of the new stuff that we're doing from a content and from a capability perspective. And we're going to continue doing that. And then when we're ready, we're going to start rolling out more broadly in the back half.

Our next question comes from the line of Brett Knoblauch from Cantor Fitzgerald.

Could you maybe just go into a bit more detail on your full year guidance? It seems like enterprise momentum is really just picking up steam. I mean $40 million of net new ARR in the quarter is quite spectacular. I guess as you break out the segment guide for the full year, should we be expecting kind of enterprise to be closer to the top end of that range and maybe consumer now, I guess, a bit closer to the bottom of the range? Or is it still too early to tell given how early we are in the year, particularly for the consumer segment?

It's a great question. So I think we do anticipate Udemy Business to continue to have strong growth. I was really pleased with what we're seeing there. As Gregg mentioned, we're not just building out the team, but the team is ramping really nicely across all segments and all regions. And our land-and-expand motion is working well. From a consumer perspective, as I said, we do expect Q2 to be down year-over-year. We don't have visibility into growth in the back half right now. Like you're hearing from all the consumer [indiscernible] like we're also seeing conversion suppression at the top of the funnel, but we're kind of waiting to see. We do think that there's some countercyclicality that we have. So depending on what happens, as unemployment increases, we think that benefit could be a benefit to the consumer business. So we're reiterating guidance, but I think your instincts on UB continue to be really strong, are right.

Perfect. And then maybe from a seasonality perspective, as you may be landing with larger customers, are you seeing any shift in seasonality from the business side maybe towards a more traditional kind of software purchasing cycle or it's Q4 heavy?

We've always been very Q4 heavy like everybody else. But if anything, it's actually less so. The first 1, 2 -- quarters 1, 2, 3 tend to be -- are stronger, I think, than they were a little bit historically. But part of that is we're building on our go-to-market team, and we're just getting much better at what we're doing. But it's still going to be very fourth quarter heavy because that tends to be the business.

Okay. And maybe just one last one on FX. I know you guys are really global and the dollar has appreciated pretty significantly against pretty much every currency out there. Are you guys contracting with enterprises outside of the U.S. in local currencies? Or is it in U.S. dollar? Was there any FX impact on the quarter?

Yes. So the vast majority of our Udemy Business contracts are in U.S. dollars. And so as Udemy Business grows as a percentage of our revenue, the FX risk actually decreases. So we saw a very small amount of impact for the first quarter. And for the year, we think we have about 1% to 2% at the very outside risk to the top line.

Our next question comes from the line of Jason Celino from KeyBanc Capital.

This is actually Devin on for Jason today. Maybe just one, and I also want to double-click on Udemy Business, just given the strong growth there. You mentioned sales execution in that segment remains strong. But can you comment on maybe sales cycle, close rates, admin rates? Are you also seeing those metrics improving in the past quarter?

Yes. So sales cycles continue to be what you typically see there about 9 to 12 months for the larger enterprises faster for the commercial segments. Close rates are strong. They've gone up a little bit, but they've always been strong. And like Gregg said, our favorite thing to do is actually trial, and that's where we really see we win more than our fair share.

Our next question comes from the line of Ryan MacDonald from Needham.

This is Matt Shea on for Ryan. I wanted to touch on China a little bit more. Curious with the recent partnership and expansion. What kind of trends you guys have seen there, especially in terms of usage, given the lockdowns during Q1? And then any color on the contribution that China contributed in the quarter?

It's very early days in China. So it's not material at all at this point. We just opened it up. We just launched the app and we closed a few contracts. So it's really, really early days for us to really have enough data to really understand all that. But we like what we're doing. We're building a nice pipeline. We're building out our sales organization there, and our partners are very excited about what they're seeing. One of the interesting trends is we're getting a lot of pipeline from some of the European countries that have offices in China. So we -- and we actually have a bunch of existing Udemy customers that have offices in China. So we think there's a nice runway for us.

Got it. That's helpful. And then keeping in mind that it's still early, you noted the loss of a competitor pulling out of the Chinese market. Have you seen that kind of impacting your ability to build a pipeline more quickly or any opportunities that you're already seeing that create?

Yes, it's absolutely helping us build our pipeline. So there is certain -- we had one large European multinational who was looking for a replacement. And now that they know we're in the marketplace, they contacted us. So yes, we are seeing it will make it easier to build our pipeline in China, for sure. Less competition.

There are no further questions. We will now turn the call back to Gregg Coccari for closing remarks.

I want to thank everyone. I appreciate all your questions. To summarize, our strong Q1 results illustrate 3 themes driving Udemy's strong performance: first, strong demand, solid execution and continued top line growth; second, unprecedented tailwinds accelerating the workplace shift to digital upskiling and learning that drive our TAM; and third, the continued health of Udemy's consumer marketplace, which fuels the growth of Udemy Business. Simply stated, Udemy has the broadest and most relevant skill-building content in what is a very large and underpenetrated market. We're just getting started, and I'm excited for the opportunity ahead. I appreciate your time.