UDMY - NASDAQ

Thank you, and welcome to Udemy Second Quarter 2022 Earnings Conference Call. With me today are Greg 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 upon 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 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. Q2 was a very strong quarter for Udemy, continuing our momentum as the platform with exceptional breadth, depth and reach for learners and instructors around the world who seek to improve lives and business outcomes through learning. In a changing labor market where highly skilled talent is both scarce and increasingly valuable, Udemy's platform for reskilling and upskilling has become mission-critical for businesses and individuals. The added tailwinds of hybrid and remote work as well as digital transformation are further driving Udemy's adoption. But what makes Udemy truly unique is the unsurpassed quality of our content. Learners come to Udemy because that's where they learn best. That's why we win. We hear this directly from learners. For example, we were thrilled in June with Stack Overflow's annual survey of nearly 30,000 developers around the world found that two thirds of the responders selected Udemy as the most popular online course or certification program for learning how to code. This truly incredible result reminds us of why we do what we do, help people learn valuable skills like coding so they can advance their careers, explore new opportunities and ultimately change their lives. We saw a strong execution this quarter with revenues of $153 million, up 21% year-over-year. We delivered another quarter of outstanding Udemy business performance with year-over-year revenue up 77% and ARR of $316 million, up 74% year-over-year. We now have over 12,000 Udemy business customers. And for the first time, Udemy business revenue exceeded consumer revenue in June. As we've outlined on previous calls, our Udemy business learning platform has expanded beyond on-demand courses to also include additional learning methodologies to further engage the learner, help them interact with the instructor and their peers in practice and test their knowledge. During the quarter, we signed our largest deal in Udemy history, a multiyear existing customer renewal deal with a large global professional services firm, encompassing all three Udemy business learning methods. These included on-demand learning via our marketplace-driven curated course content, cohort-based learning via our core offering and immersive learning via our Udemy Business Pro offering with labs, workspaces and assessments. We also saw some early but encouraging signs of stabilization in our consumer business in Q2. After adjusting for FX impact, consumer revenue declined by 2% year-over-year in the quarter. As I look ahead to the second half of the year, several key drivers will help position us for further growth and expansion. First, our ability to grow at scale with a large market opportunity ahead of us as enterprises increasingly embrace upskilling and reskilling. Second, our expansion into larger enterprises as they tap into a broader set of Udemy's products and learning methods. And third, the customer-centric driven product innovation that we're delivering to individuals and organizations as we continue to invest in our marketplace to support our 71,000 instructors around the world and the nearly 5,000 new courses they produce every month on Udemy. That said, we continue to see a more volatile and uncertain macroeconomic environment, which has already impacted our consumer business, as we've noted in previous quarters. While these are forces beyond our control, we believe that these macro factors will drive more organizations to prioritize cost-effective training, reskilling and upskilling of their workforces. Additionally, the current economic environment positions us well. We have a high and measurable ROI and are also rapidly deployable. Our strong employee engagement also demonstrates the immediate impact of our learning. We believe these factors promote a certain level of resilience and counter cyclicality in our business and will help us weather the coming months as organizations prioritize their spend. Let's dig in a little deeper into three of our key performance areas this quarter. First, I'll speak to Udemy Business, where we saw a very strong global and enterprise demand as well as solid go-to-market execution, and more importantly, significant ROI for our customers. Second, I'll discuss our on-going work to promote a vibrant and healthy marketplace, including supporting our instructors. And third, I would detail the product innovation we are bringing to our customers and the workforces they support. Let's start with the Udemy Business. Our record ARR of $316 million was up 74% year-over-year in Q2, driven by strength across all regions and multiple verticals, including professional services, technology and manufacturing. Our Udemy Business net dollar retention rate this quarter was 118% and as we continue to see success in growth in our land and expand strategy. We delivered 79% year-over-year growth in customers with over $100,000 in ARR and 60% year-over-year growth in customers that had over $1 million ARR, reflecting continued success in the enterprise. Multiyear deals now represent over 40% of total ARR, a strong signal of Udemy's mission-critical value with larger organizations. As I noted earlier, Udemy signed our largest deal in company history in Q2. This record deal was a significant expansion with a global professional services company in a multiyear deal encompassing the full range of Udemy Business products: On-demand, Cohort and Immersive Learning. The deployment of both Cohort and Immersive Learning methods in tandem with On-demand learning demonstrates how tame serves as a learning partner with a comprehensive end-to-end learning platform that can be tailored to help achieve specific business goals. We're thrilled to work together with this customer to bring Udemy to even more employees in their organization. Just a couple of weeks after this deal closed, we signed our second largest deal in Udemy history, a competitive displacement and a multiyear deal with a large global services and consulting company who will deploy Udemy Learning to over 100,000 users, along with 25,000 Udemy Business Pro licenses. This company will use Udemy to help increase leadership, technology and data science skills across their organization with ample opportunity to scale even larger as they seek to deploy more Udemy learning methods, including cohort-based, tailored learning journeys to drive organizational change and leadership excellence. Organizations are choosing Udemy Business because we show them tangible, measurable results. For example, Booz Allen Hamilton, a global firm providing world-class industry-leading expertise across industries, utilizes Udemy Business for their upskilling efforts. Using Udemy business to power a program for thousands of data scientists, nearly 94% of Booz Allen Hamilton learners are now highly proficient in data silence and their Udemy trained graduates now have a 93% employee retention rate. On top of that, Booz Allen has a 3% increase in consultant billability since beginning their work with Udemy business. These measurable results are why customers continue to expand and grow their footprint with us, especially with highly technical content like data science. Further proving out our land and expand model, other existing customers growing their Udemy offering this quarter include Colgate-Palmolive, lululemon athletica, Volkswagen Group China, TIBCO Software, Bosch Global Software Tech and Globant. And new customers this quarter include Broadridge Financial Solutions, Samsung SDS, Cision US, Edenred Brazil and Glanbia. We continue to see strong uptick internationally across multiple regions, including APAC, where through our partner, Benesse, we support the Tokyo metropolitan government in their efforts to accelerate the digital transformation of small and medium sized enterprises in Tokyo. By the end of March 2023, Udemy and Benesse will provide over 250 Tokyo-based SMEs with skills, courses in Japanese to support digital transformation. Udemy's growth is also fueled by expanding partnerships. Our partners range from other businesses offering Udemy courses as an additional product to their customers as well as other online learning platforms that use Udemy's course offerings as a way to up-level their content portfolio and further serve the levers. For example, we've partnered with SumTotal, a global leader in talent acquisition, on boarding, learning management and talent management solutions, enabling them to sell Udemy Business content through their learning management experience platform. This, coupled with our SumTotal and Udemy Business integration, provides some total customers with a streamlined purchasing process and access to Udemy courses. And in Latin America, we partnered with E-Class, an online learning platform in Chile, enabling them to resell Udemy Business courses. As we look ahead to Q3, we believe that the global market and demand for online learning will help drive strong Udemy Business growth over the long term. Since launching just seven years ago, Udemy Business has quickly scaled to over $300 million in ARR. With revenue CAGR of 90% plus, over the last three years, as our marketplace content and instructor flywheel has provided a powerful foundation for organizations, learning and skilling. With Udemy Businesses predictable revenue stream eclipsing our consumer business in June, we look forward to continuing to drive this momentum and expanding into larger global and domestic organizations. Let's move on to the second area of focus in my remarks today, our work to support our instructors and learners in building and growing our vibrant and healthy marketplace. Instructors are the foundation of everything we do here at Udemy. They power our marketplace with dynamic content that helps grow careers and enable unique learning paths for over 54 million learners at Udemy. Our instructors also encompass a truly global footprint, spanning learning across over 75 languages. Udemy and its instructors succeed together. Our team takes an active role in partnering with instructors to help them broaden their global reach and impact as well as their earnings. For example, Ranga Karanam, is the India-based web developer instructor on Udemy who helps prepare students in over 200 countries to succeed in AWS, Global Cloud and other certification exams. In June, Ranga surpassed 1 million Udemy students worldwide. He credit the support he received from Udemy's instructor partner team with helping him reach this incredible milestone. Our instructor success is our success, and we know it is vital for us to nurture these relationships so the highest quality instructors continues to choose Udemy as their teaching platform. It's not just the quality of our instructors that matter. It's their ability to rapidly produce high-quality content. For example, a new version of the AWS certified solutions architect associate exam will replace the current exam this month to help employees and individual learners around the globe successfully prepare to achieve the certification, Udemy instructor, Chandra Lingam, has had a 4.6 rated Udemy course available on this updated certification since April, showcasing the freshness and relevance of our content offering. More than 10,000 learners have taken this course to date. And speaking of content, according to our Q2 Global Workplace Learning Index, courses to help individuals improve their test-taking skills saw a nearly 300% increase in course consumption in the U.S. compared to the previous quarter, signaling the importance professionals place in preparing for certification exams and providing their knowledge of various software skills. We are proud of Udemy's role in helping individuals prepare for these important milestones in their careers. Now let's move on to the third area of my remarks today, Udemy's continued product innovation. This quarter, we saw this in action with Udemy Business while we rolled out our skills insights dashboard, enabling customers to unlock learning insights within their organization. We also introduced 18 new labs, 4 in-course workshops and 6 updated Udemy Pairs [ph] and Udemy Business Pro. These new rollouts were implemented in response to direct consumer feedback and reflect a wider customer-centric approach to our product development. This approach is a large factor in why new customers come to Udemy and why existing customers expand their relationships with us. And in our marketplace, we're driving higher conversions with five new payment methods in Belgium, Malaysia, Singapore and Philippines, improved search ranking for our users and algorithm-optimized personalized discount promotions. We're also expanding our subscriptions footprint with personal plan subscriptions now available at 100% of users in the U.S., Great Britain, Australia and South Africa. Lastly, we launched a bulk coupon creation tool that enables instructors to market their courses more effectively across our global community of learners. Together, we're continuing to build the best and most innovative learning company in the world so that our customers realize the best possible outcomes and ROI from learning through Udemy. Our customer-centric approach to product development aims to provide the best experience for learners, the highest monetization opportunities for our instructors and the most flexible and effective way to upskill and reskill employees for organizations. Before I conclude, I'd like to cover two important areas of investment for us at Udemy. First, our ESG goals and partnerships. And second, our equity and inclusion initiatives to help anchor our company mission and workforce culture. Turning first to ESG, where we're currently rated in the first percentile for ESG risk ratings in our industry category last year by the ESG research firm Sustainalytics. I'm excited to announce that we recently launched our first ESG impact report in Q2, highlighting our ESG efforts and spotlighting how we support our learners, instructors, customers and communities. You can find the report on our ESG website, and I encourage you all to take a look. This impact report marks the first major step in telling our ESG story to our larger audience, and we look forward to expanding our dialogue with relevant investors, partners and non-profits in the coming months. I'd like to share with you the incredible impact we've seen with one of our non-profit partners, The Last Mile, an organization that provides incarcerated and formally incarcerated individuals access to resources to thrive in today's rapidly evolving job market. Since 2019, The Last Mile has used Udemy to set up learning paths with specific objectives and groups has successfully helped over 150 program participants learn coding and workplace skills for a successful re-entry into the workforce. Telisa [ph] Howe, who had served a prison sentence from 2018 to 2020, signed up for Udemy business courses through The Last Mile program to learn coding and open doors to a new career. Fast forward two years, Telisa now teaches others from her community how to code, and has used the skills she leaned on Udemy to secure a role as the lead web designer at the Indiana Department of Corrections. We're also excited to continue our partnership with Upwardly Global. Upwardly Global helps eliminate employment barriers among skilled immigrants and refugees as they integrate with the U.S. workforce. Udemy has partnered with Upwardly Global since 2020 to provide access to resources that can help individuals prepare to pass industry-recognized certifications and secure new jobs. Take [Ph] Maria, a business analytics professional originally from Jamaica. Following her Upwardly Global job coach recommendation, Maria completed several data analytics courses through the Udemy Business platform, including Microsoft XL, business intelligence with power query [Indiscernible] and the C learning for data analysis, progressing and forecasting. Soon after adding her new skills and core certificates through our LinkedIn profile, a hiring manager reached out to her to schedule an interview. Maria passed the interview and was offered a business analyst role at the company. These are just a few examples of the way Udemy is improving lives to learning. Growing a successful business always comes down to talent and culture. And at Udemy. I'm proud to say that we continue to attract and retain our valuable employees. As we move forward, we continue to fuel Udemy Business growth with targeted talent investments particularly in sales and customer success. Though we remain confident about our business trajectory and continue to hire to support growth, we are also honing our resource allocation to remain strategically efficient against the macroeconomic environment. It is a balance we take seriously. Our unique culture, our diversity, equity and inclusion commitments and our company's mission to impact careers and lives for the better help us hire and retain a truly passionate and talented team of Udemy. And we continue to be recognized as a top employer. I'm proud to share that this quarter, Great Place to Work Ireland honored Udemy on its 2022 list of Ireland's Best Workplaces in Tech, a wonderful build upon our Great Places to Work award in Ireland last quarter. We're also excited to share that Fair Pay Workplace has certified Udemy as a company achieving pay equity. This important certification means that we are committed to using the most trusted and transparent methods to analyze pay equity by race, gender and their intersection to ensure on-going pay equity for our employees. To conclude, Q2 continues to demonstrate that our symbiotic model is working. Growing and supporting our content on the Udemy marketplace benefits learners and instructors alike, and drives high-quality, global and broad content for Udemy Business customers and organizations. The strong top line growth of Udemy Business in turn helps fuel further investment and growth in our marketplace content creators. This ecosystem is not only unique to the industry, but it's helped us surpass over $300 million in recurring revenue in Q2, with an enterprise scale and recurring revenue business model that is firing on all cylinders. Udemy is disrupting learning through our unparalleled platform and rapidly scaling SaaS business. Improving lives through learning is our mission. And we are proud to bring together our 71,000 instructors, over 12,000 customers and growing roster of strategic partners to deliver it worldwide. Together, united in our commitment to upskilling and reskilling, we are activating positive outcomes for businesses and individuals even in the face of economic uncertainty. With that, I'll turn the call over to Sarah to dive into the numbers.

Thank you, Gregg. As Gregg said, we had a very strong second quarter, driven by continued momentum and execution in our Udemy Business segment. This is evident in our exceptional Udemy business ARR growth in Q2 of 74% versus the prior year, with Udemy Business customer growth of 44% versus the prior year. Udemy Business continues to perform well across a broad array of verticals and geographies. Q2 total revenue of $153.1 million was up 21% year-over-year and up 1% sequentially. Our Udemy business net dollar retention rate was 118% this quarter within our expected quarter-to-quarter range, highlighting the continued success of our land and expand strategy. Udemy Business revenue was $74.6 million, up 77% from the prior year, demonstrating our consistent and sustained growth at this scale. Our consumer business delivered $78.5 million in revenue, down 7% from the prior year. As Gregg noted earlier, we see encouraging so early signs of stability in our consumer business, which was down 2% year-over-year when excluding the impact of FX. While macro uncertainty still presents some degree of volatility in our consumer business and outlook, it's important to note that we continue to view the consumer marketplace as fundamentally healthy. And we're encouraged by the stabilization of top line performance that we saw in Q2. We continue to add instructors and thousands of courses monthly, and our marketplace serves as a vibrant engine that fuel Udemy Business growth. The symbiotic system of these two 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. Q2 gross profit was $89 million, up 27% year-over-year, driven by Udemy Business. Gross margin was 58% of revenue, up from 56% in Q2 of 2021. This margin expansion was the result of the continued revenue mix shift to Udemy Business from consumer. Moving to OpEx. Total operating expense was $101.7 million or 66% of revenue compared to 60% in Q2 of last year. Sales and marketing expenses represented 41% of total revenue compared to 39% 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 team. R&D expense was 13% of revenue, up 234 basis points year-over-year. We are continuing to invest in building out our comprehensive learning platform that sits on top of our marketplace content engine. Our focus is on building out the set of capabilities that allow our learners to achieve their professional goals in the way that works best for them. This includes continuing to build out immersive learning experiences like last an assessment, but also investing in the ability to more clearly align the skills needed to achieve professional aspirations with the capabilities to guide learners through their journey. These investments include three core areas of innovation. First, a proprietary skills graph that matches courses and skills to realize professional aspiration. We will first launch the Udemy business and then we will launch them as a part of our consumer offer. Second, we are fueling these skills graph 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 offerings. We expect these investments to improve owner experiences, provide more tangible outcomes for learners and customers and increase LTV over time. Rounding out our discussion of operating expenses. G&A expense was 12% of revenue versus 10% a year ago. Net loss in the quarter was negative $13.6 million or negative 9% of revenue. Adjusted EBITDA was negative $8.6 million or negative 6% of revenue. In Q2, we made a decision to pull back a bit on our direct response marketing spend, which positively impacted our adjusted EBITDA. As always, we continue to be disciplined on the efficiency of our marketing expense while also investing where we see clear and worthwhile growth opportunities. Free cash flow was negative a $6.5 million versus positive $2.7 million a year ago. Moving on to the balance sheet. We ended the quarter with $512 million of unrestricted cash, cash equivalents and marketable securities. By segment, free cash flow was made at $6.5 million versus positive $2.7 million a year ago. Moving on to the balance sheet. We ended the quarter with $512 million of unrestricted cash, cash equivalents and marketable securities. By segment, Consumer revenue was $78.5 million, down 7% year-over-year. In the second quarter, we had approximately 1.3 million monthly average buyer, which was down 2% versus a year ago. Consumer gross profit was $42.3 million or 54% of consumer revenue, approximately 20 basis points higher than in Q2 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 their revenue is recognized over a 4-month period. We also added 2 million new consumer and business learners, bringing our total order base to 54 million. As a reminder, we defined a learner as someone who is enrolled and spend time learning on the platform. Udemy Business continues its robust growth, with Q2 revenue of $74.6 million, up 77% year-over-year. We ended the quarter with over 12,500 Udemy Business customers, up 44% from a year ago. Udemy Business also crossed the $300 million ARR mark in Q2, ending the quarter at $360.1 [ph] million, up 74% as compared to a year ago. Udemy Business gross profit was $49.9 million or 67% 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 now turn to guidance. Looking ahead to the third quarter of fiscal 2022, we expect revenues to be between $153 million and $157 million. As mentioned earlier, we continue Udemy Business to experience strong level, becoming the majority of our revenue in Q3 of this year. I'd like to provide a little more color on our Q3 guidance. While we are encouraged by the stabilization of our Q2 consumer performance, 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. We believe these headwinds remain heading into Q3 and will continue to put some pressure on consumer growth in the near term. We do expect our marketplace to continue to be healthy and to further fuel Udemy Business. Growth in Udemy business remains strong, and we remain very excited and encouraged by the rapid revenue expansion and strong net dollar retention. For the third quarter, we expect an adjusted EBITDA margin of negative 14% to negative 12%. Given the growth and opportunity we see in the business, we are continuing to make targeted investments in R&D and go-to-market initiatives, which are factored into our Q3 operating expenses. Turning to our full year 2022 guidance. We expect full year revenue to now be between $615 million and $640 million, compared to a range of $610 million to $640 million previously. Our full year adjusted EBITDA margin guidance remains unchanged, and we expect a range of negative 12% to negative 10%. Before I back off, I'd also like to announce that we will be holding our First Investor Analyst Day on November 16. We'll be hosting it virtually and hope you all will join us. Please save the date. To conclude, our Q2 performance demonstrated the strong growth and momentum of Udemy Business and the symbiotic relationship with our marketplace. The continued growth in recurring revenue coupled with strong net dollar expansion underscores some massive opportunity in front of us to help organizations and people change lives through learning. So with that, we'll open up the call for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Brent Thill with Jefferies. Your line is now open.

Hey thanks for the questions guys.

Hi, Brent.

Brent, could you please re-queue? Thank you. Sorry about that. Brent, your line is now open.

Hey can you guys hear me?

Yes we can.

Thanks. This is David Lustberg on for Brent. Appreciate the questions. Gregg, I wanted to start, you talked a little bit in your opening remarks about shifting of budget, I guess, from online to -- offline to online rather. I think a lot of folks out there are a little bit worried about pressure on LND budgets as we head into a tougher macro. I'm curious, as you think about potential pressure on budgets, do you think that encourages the shift of dollars from off-line to online?

Yes, we actually do. Still 80% of the online -- of the training today is in-person. And we know with remote work, and we know with the remote workforce, that's very expensive, and it's more difficult. So we're seeing some budgets that are being cut back, but actually are -- they're adding more CCU to Udemy because we have a very effective cost-effective, high ROI business. And so we've been doing very well in this environment.

That's helpful. And maybe just a follow-up. Can you remind us about your sales cycle? What's the typical time line? And have you guys noticed any changes in that over the last couple of months? Thanks.

Not really. It's really too early for us to have seen any impact in that. It was very consistent over the last couple of quarters, so we have not seen that lengthen at all. And our normal sales cycle, it really depends on size of companies, the smaller companies we do within a quarter. The larger company is six months to 12 months.

Great. Appreciate it guys.

Our next question comes from Rob Oliver with Baird. Your line is now open.

Great. Thank you. Good evening, can you guys hear me okay?

Yes, we can.

Great. Hi, Gregg, hi Sarah. Just figured I'd double check. So obviously, a huge quarter for you guys on UP with some major signature wins, which you called out, Gregg, in your prepared remarks. I've been just analyzing the focus on bolt-on, but I'll just focus on one, and then I had a follow-up. On that -- on the second largest deal which came on the heels of the largest deal, which you characterized as a competitive displacement. I was wondering if you could add a little bit of color around the RFP process, what some of the salient points were for why Udemy was chosen? And was there a side-by-side trial period? I know we've -- you discussed in the past, you guys have mentioned often you run side-by-side with competitors. Any color there would be helpful. And then I just had a quick follow-up.

Yes, I believe it was a head-to-head test that went on for a significant number of months. And so normally, when that's in these larger companies, we'll be careful. They'll do head-to-head tests and we had much higher engagement. So it led to that deal.

Okay. Helpful. And Sarah, for you, just on the consumer side, you I think you guys were fairly clear you saw signs of stabilization. We're not out of the woods in still some unknowns. So would just love to get a sense from you, I guess, on some of the newer initiatives there, in particular, perhaps the consumer subscription offering. It appears you guys mentioned how you've rolled that out now broadly in the U.S., I think I heard -- it appears you guys have settled around that $30 price point per month with what struck us as a newer option. We're at a significant discount for upfront pay. Can you talk a little bit about how that's going, early reads on that, and if those economics are right? And then a corollary to that, if we can expect you guys will tweak that consumer subscription pricing similar to the pricing we see the levers you guys pull around your one-off course solutions. Thank you.

Yes, great questions. So you're right on the economics there. And it's too early to tell. It's pretty early that we launched that annual plan. So I would say too early to tell, but we are rolling it out. And we expect pretty broad rollout across most of the major markets in the back half. From a pricing perspective, we're always testing. We've discussed before that we have this really sophisticated pricing algorithm for our transactional courses. And we'll probably be doing some testing on the consumer subscription side, but we're not there yet.

Great. That’s helpful. Okay, thanks again guys appreciate it.

Thanks, Rob.

Our next question comes from Terry Tillman with Truist. Your line is now open.

Yes, thanks Gregg and Sarah, and congrats on the UB traction. I just had a couple of questions. It seems like with UB Pro and some of these enhancements like cohort learning, immersive learning. I think you all mentioned that those were added to some of these kind of signature wins in the quarter or renewals. This seems like this could be a pretty meaningful uplift on UB deals. So what is the typical uplift you're seeing so far where UB Pro is being attached? And then how much have you actually kind of made this programmatic selling and gone back to base and comfortable in selling in new deals? And then I had a follow-up.

Great questions. So we are still, as we've discussed, kind of seeding the market with these and some of these upsells really are smaller portions of the seats while our customers are testing it out. And I think they're ramping nicely. But too early to sort of give any uplift numbers. We are and have been sort of enabling our sales force to sell kind of a solution set to our customers comprehensively. And so we're hoping to continue to see that ramping and taking hold over the next few quarters.

Okay. Great. And maybe a follow-up. I don't know if this is for you, Sarah or Gregg. But I'm kind of curious about like network effects in your business now. Particularly in AsiaPac, you seem like you have some interesting new nuggets for us every quarter. But I think you're setting a precedent whether you like it or not. You all had some large Japanese corporation deals, now you're working with municipalities. Whether it's Japan or maybe an update on South Korea or China, just how would you kind of characterize where you are on maybe creating these kind of halo effects or network effects where you're becoming kind of like a brand of choice in those markets? Thank you.

Yes. We absolutely believe that there's a network effect to this business. That as we are very well established in Japan, Japan continues to be one of our fastest growing markets. Our relationship with Benesse is very strong, and we're building it out, and it's very exciting to be around. But it's also helping us in Korea. We've only been there for two quarters, but we reached 100 -- we reached $1 million ARR in Q2 -- in the second quarter in South Korea. But we also had a couple of large corporations, too. So we've got a couple of anchor tenants. And so we feel real good about that. In Japan excuse me, in China, we're building the pipeline, but it feels very strong. It feels very good. So we are seeing network effects in Asia for sure. But I think we've seen this historically in other places.

Thanks.

Our next question comes from Jason Celino with KeyBanc. Your line is open.

Hi, thanks, this is actually Devin Au on for Jason tonight. It sounds like Udemy Business is firing in all cylinders. But just given the macro backdrop in Europe and a lot of investors are zooming in on that, curious to hear what you're seeing in that region in your Udemy business. Are you seeing deals getting delayed or pushed out? Just curious to hear any commentary on that?

Yes. We actually had a very strong quarter in EMEA in Udemy Business. So -- and they've been consistently very, very strong for us. And so we had another very good quarter. What we did see was a little softness in the small business segment. So it was the first time we've seen a little bit of that. And but other than that, the large corporations, the large enterprises did very, very well. So it was just one segment of Europe was a little bit soft.

Got it. That's good to hear. And then just one more. I know there's a lot of emphasis on profitability by investors recently. Has there been any sort of re-evaluation to Udemy's strategy or framework around profitability targets recently. Just want to hear some thoughts on that.

Yes. So we've always been focused on driving toward profitability. At the same time, we are making targeted investments. We continue to see really strong demand in Udemy Business. So we're very thoughtfully building out that go-to-market team and obviously watching very closely. And on the R&D side, investing in things that we believe are going to drive a long-term improvement in our LTV. So I would say we have always had a focus on profitability. Obviously, there was some macroeconomic uncertainty. We're trying to make sure we're being very prudent and very targeted. But we're still investing where we believe that makes sense from a unit economics perspective.

Great. Thanks.

Thank you.

Our next question comes from Josh Baer with Morgan Stanley. Your line is now open.

Hi, I guess it’s me. Thanks for the question and congrats on the strong quarter. Wanted to ask a few more on margins and maybe start on the outperformance in Q2. I was hoping you could quantify the pullback in marketing spend or give a little more context on what made you decide to pull back on marketing spend? And then as far as the outperformance, was it mostly that and just generally the strong segment gross margins or any other moving pieces in Q2?

Yes, great question. So the majority of the outperformance was pulling back on the direct marketing spend. Earlier on, we saw some softness in conversions. We actually saw in May and June many of those conversions have come back and are looking good. And there were some project spend as well that, just as we're watching the macroeconomic environment, we're trying to be really, really step with our spend. So I would say nothing unusual, just trying to run the business. We do -- we're very careful with our marketing ROI, and we run it by channel, by country. We have a pretty sophisticated machine over there, so continuing to progress that. And I think in the third quarter, if we -- if those conversion rates hold up, we might be leaning in a little bit more there where it makes sense, obviously, with the long-term bottom line in mind.

Got it. Yes, that's the next question on Q3 and just more generally the back half. I mean with that outperformance in Q2, you just did minus 5% margin in the first half and then guidance is for minus 13% in Q3. And then that implies minus 20%, I believe, in Q4. So like maybe going leaning back into direct marketing spend, we've heard about the R&D investments. I mean, but anything else broadly to and as far as investment areas or any other moving pieces, just surround that decline in the EBITDA margin?

Yes. The other moving piece is our go-to-market team. So we had some great success in Q2, bringing on some talent across the regions that we're still seeing more demand than we can handle. And so those expenses are sitting Q3 as those teams are ramping up, but nothing unusual. Same on the R&D side where we were able to bring in some key skill sets that we have been looking for in the second quarter.

Okay. Thank you.

Thanks, Josh.

Our next question comes from Brett Knoblauch with Cantor Fitzgerald. Your line is now open.

Hi, guys thanks for taking my questions. Just two for me. First, I know you guys added five new currencies or support from five new currencies in the quarter. Can you talk about what you initially see when you announced support for those currencies? Is it just for companies that pay in their local currency and maybe see an uptick in demand?

It's really on the consumer side that we're adding the currencies. So and when you add currencies, what you see is an uptick in the conversion rates. So that's why we keep adding currencies. And so we added -- it's a fairly simple math. We can see the conversions are, we can see new payment methods. If we could add 5% conversions in a country, we will do that. So this is the never-ending story. We've been working on currencies for over a decade. And we just actually those teams have gotten bigger because the opportunities are, of course, global.

Understood. That makes sense. And then on one of the large deals you guys flagged as you replace a competitor, there's just some insights into the customer's decision there. Was it price driven? Or is that a combination of those? And I guess, broadly speaking have you seen any changes in the competitive landscape? Or are you still winning a similar amount or a fair share?

Yes. We haven't seen a lot of change in the competitive landscape. We typically don't win on -- price is not usually the answer either. It's engagement. We win -- we go head to head, and it's the quality of the content, it's the depth of the content, it's the 13 local languages. And we add over 400 courses a month to Udemy Business. So it gets bigger and bigger, fresher and fresher, better and better. And that's why we win. And typically, we have people that are under-pricing us. And so we're winning and we're winning our fair share. So our close rates are, if anything, a little bit better.

Awesome, that’s good to hear. Thanks guys.

Our next question comes from Ryan MacDonald with Needham. Your line is now open.

This is Matt Shea on for Ryan. Thanks for taking the question. I wanted to start on the consumer segment. So going back to the currency and pricing and promotion updates, how do those changes impact the gross margin within the consumer business?

So our -- the biggest piece of our cost of revenue are the instructor costs, and those are a take rate. And so as we're doing pricing changes and promotion changes, because it's a take rate, it doesn't really impact the gross margin too much.

Got it. That makes sense. Okay. And then appreciating all the updates around Udemy Business and the tailwinds that you guys have behind you, what kind of impacts are you seeing from the potentially weakening macro that could cause seat-based decline because of layoffs or tightening budgets? Just kind of trying to get a sense of what negatives are built into the guidance?

We haven't seen a lot of impact. The fact is we are only in 10% of the seats, potential seats in our current customers. So our land and expand strategy is working very, very well. And you can see that from our net retention. So we think that there's -- in this environment, that gets more difficult. That the fact is because we have a very effective, efficient high ROI product that we will define in this environment.

Got it. Congrats on the quarter guys.

Thank you.

Our next question comes from Arvind Ramnani with Piper Sandler. Your line is now open.

Hi, thanks for taking my question. So I just wanted to ask about the overall strength in your business segment. Certainly, you provided some color, but I wanted to really ask sort of what are you seeing in terms of your overall pipeline now versus six months ago? And secondly, is there any sort of change in conversations you've had with clients now versus six months ago? And then I have a follow-up after that.

We're seeing continued strength in our Udemy Business. We're adding -- why we keep adding more people, why we keep adding more to our go-to-market teams. Our pipeline is bigger than it was six months ago, so it continues to grow. As we keep adding go-to-market people and we keep scaling well, our pipeline keeps building. So the business looks very strong at this point.

Terrific. And then with some companies looking to kind of conserve costs, I mean, certainly, we've seen a lot of like layoffs and focus on operating efficiency. Are you all benefiting from consolidation where a particular client may be using two or three education providers and -- but they're kind of like consolidating their spend with one provider. Are you seeing any benefit or any headwind from that consolidation?

We really haven't seen that at this point. I think it's too early for us to see that kind of an impact. So there's -- we really haven't. So our close rates continue to be very high. Our net retention keeps. So we really haven’t seen huge effect at this point.

Terrific. Thank you.