UDMY - NASDAQ

Good day, and welcome to Udemy's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Thank you. Joining me today are Udemy's Chief Executive Officer, Hugo Sarrazin; and Chief Financial Officer, Sarah Blanchard. 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 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. During this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, which are prepared in accordance with U.S. generally accepted accounting principles referred to by the SEC as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner. 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 on the Investor Relations section of our website. A replay of today's call will also be posted to the website. With that, I will now turn the call over to Hugo.

Thank you, Dennis. I'm proud of the Udemy team for making solid progress during the quarter on our priority to accelerate subscription revenue growth across the entire business. As a result, consolidated subscription revenue grew 8% year-over-year and now makes up 74% of total. We are building a more durable business that delivers predictable and recurring revenue that creates more value for all stakeholders. For Q3, we beat our revenue guidance and delivered on our 15th consecutive quarter of better-than-expected adjusted EBITDA. Our team continues to execute with discipline while we make investment in our future growth. Udemy Business segment revenue increased 5% year-over-year, and we generated $7 million of net new ARR. These results exceeded our expectation and signal our underlying strength of our enterprise business. In our Consumer segment, we surpassed our full-year paid subscribers target and revenue from subscription increased an impressive 43% year-over-year. When people subscribe instead of just purchasing one course, they engage more, learn more and realize better career outcomes. Bottom line, subscription customers are our best customers. That's why growing that piece of our business faster is our top priority, and we are seeing strong momentum across both segments. Our market position is built on a unique strategic foundation of 2 businesses, each independently compelling and highly complementary. We combine the depth and stickiness of enterprise relationships with breadth and innovation velocity of a global consumer marketplace. On the enterprise side, companies are heavily invested in AI transformation. However, they are struggling to demonstrate ROI because many haven't developed the core workforce capabilities required to extract value from their investments. On the consumer side, we're addressing a different but complementary need. Individual learners must become AI native and require comprehensive support that leads to career advancement. In order to meet the needs of both organizations and individuals, a skill acceleration platform must deliver measurable outcomes. There are 4 critical pillars of Udemy's platform, which bring the best of AI and humans together to deliver impactful results. These include: first, skill acquisition through course collection tailored for specific role. That's the traditional Udemy value prop. Skill mastery through hands-on practice using lab, workspace and role play experiences. Third, skill validation through assessment and certification; and fourth, skill amplification through human connection and expert guidance. Our integrated approach is transforming learning from a onetime event into a continuous skill building engine that delivers strong ROI and learner outcomes. Our platform features AI learning path, AI assistant, AI-generated assessment, AI-assisted content creation and MCP capabilities. Udemy enables organizations to build their own content and custom path, develop their own AI Role Plays and deliver just-in-time reskilling through integration with their existing LLM and their LMS and their LXP system, creating stickiness. We are in the midst of the most important workforce evolution in generation with nearly 60% of global professionals needing new skills by 2030. Udemy is aiming to be the natural extension to traditional education, bridging the gap from what a learner already knows to the new skills the market demands. While LLMs excel at answering questions, Udemy excels at changing behaviors and building skills that drive real impact. We do this through structured learning journeys with measurable progress, human expertise and community support that learner cannot get from AI alone. We are building an enterprise-grade workflow integration that embeds seamlessly into how organization actually operates that translates into business outcome and career development. Our comprehensive platform also enables organizations to manage their talent development strategies, track progress against their strategies and validate company-wide skill proficiency with proprietary data to support meaningful outcomes. For consumers, we are embedding personalized learning experiences into subscription offerings to support career transformations. We will enable skill acquisition through engaging experiences and validation through assessments and other services that lead to mastery and ultimately better career outcomes. The future of work requires continuous skill development and AI makes that need more urgent, not less relevant. We are empowering all customers to stay ahead of rapidly evolving skills demand through adaptive just-in-time learning. We are positioning Udemy to be an essential lifelong learning solution for professionals that drive career advancement with the structure, support and validation that LLMs alone cannot deliver. What is uniquely powerful about our platform is the combination of creating a more human-centric experience of our more than 85,000 expert instructors with AI. Instructors leverage our AI to develop assessment, labs and role play that adapts in real time as each person is progressing. Innovations like our Role Play technology are opening entirely new markets in sales enablement and customer support by allowing them to build custom training experiences. Our AI can create realistic and bespoke practice environments tailored to our customers' business. This can include practicing a company sales methodology, rehearsing difficult client conversation or working through unique compliance scenario. Building on our proven success in skill acquisition and skill mastery, we are evolving the platform to deliver even more robust and personalized experiences that amplify skills development. This is about human connection that delivers through learning comprehension and retention. Instructors can now offer live individual coaching sessions to millions of learners around the world. Soon, we will be launching virtual instructor-led training to allow learners to participate in structured cohort-based experiences. At the same time, this gives instructors the ability to engage with groups of learners simultaneously. These offerings strengthen the stickiness of our platform by creating meaningful engagement for both instructors and learners. They also ensure learners receive the guidance and support that transform knowledge into real-world capabilities. One example of our 4 pillars in practice is Centific, a leader in advanced AI solution. Centific is leveraging Udemy to build workforce fluent in collaboration with AI system. By aligning training and strategic technologies like Snowflake, Microsoft and NVIDIA with business priorities, Centific significantly accelerated value creation. The results are impressive. Centific reduced AI project onboarding time by 20%, increase AI-driven innovation by 40% and enable content creation to 70% faster with generative AI. This skill-based approach underscores Centific's commitment to continuous learning, operational efficiency and sustainable competitive advantage. We're evolving our consumer business from selling courses to enabling careers. Our subscription model creates ongoing relationship we're invested in the learner success, not just course completion. This aligns our business model with learner outcome. To do this effectively, we are launching career-focused subscription offering that validates learner with 2 specific outcomes: first, certification journey; and second, career journey. Let me start first with certification journeys, which will help people prepare for professional exam with personalized learning path, practice tests and exam vouchers in order to achieve universally recognized skill validation. When learners embark on the CompTIA certification journey, which we launched in August, the average revenue per learner increased by 4x. Building on this success, we are partnering with Pearson to create a seamless certification journey for learners. On career journeys, we will structure path for job readiness that integrates all 4 pillars through curated courses, hands-on project and assessment tied to specific roles. Many of these will be co-branded with partners, directly connecting best skills people learn to career growth and higher earning potential. The majority of Udemy's learner come to the platform to advance their career. Our partnership with Indeed is already proving the strength of this alignment with learners showing materially higher consumer subscription start conversion rates. We are seeing an average monthly conversion rate of Indeed job seeker to subscription that's 16x better than the Udemy average. From our career and certification journeys to our comprehensive platform capability, everything we're building is designed with one clear goal in mind, supporting the complex needs of our customers and the [indiscernible] workforce. While AI democratize access to information, Udemy democratize access to career transformation. We are the platform where ambition meets achievement that combines human support with structured learning that delivers validated skill mastery. Whether it is an individual professional seeking to advance their career or an enterprise looking to future-proof their talent, Udemy bridges that critical gap between where skills are today and where they need to be tomorrow. In closing, we are leveraging AI to strengthen Udemy's competitive position and expand our market opportunity. The future of work requires continuous learning and Udemy is building the infrastructure to power that transformation. The opportunity ahead of us is immense, and I'm incredibly excited about what we'll accomplish together. With that, I'll turn it over to Sarah.

Thanks, Hugo. I'll cover the key financial highlights first and then our outlook. We have a complete set of financial tables available on our Investor Relations website. As we move down the P&L, note that all financial metrics other than revenue are non-GAAP, unless stated otherwise. Our Q3 results demonstrate that our transformation is on track and that we're seeing great momentum across the business. I'm proud of the financial discipline the team has shown as we've made strategic investments, building a strong foundation for future growth. Net new ARR is increasing. Total subscription revenue is growing as a percentage of overall revenue, and we continue to deliver meaningful additional adjusted EBITDA margin. Diving into the specifics, third quarter revenue of $196 million landed above the high end of our guidance range. As you know, we've pivoted to becoming subscription first, and it's delivering better-than-expected results. As this becomes a larger portion of our revenue, we will be providing greater transparency into the metric going forward. For the third quarter, we delivered $144 million of consolidated subscription revenue, representing an 8% increase year-over-year. Subscription revenue now accounts for 74% of our total revenue, up 600 basis points from last year. This fundamental shift in revenue quality is the foundation that sets us up for accelerated growth. Udemy Business delivered $133 million in revenue, up 5% year-over-year. We generated $7 million in net new ARR during the quarter, ending with a total of $527 million in ARR. We expect to see net new ARR increase again in the fourth quarter and land in the high-single digits. Udemy Business pipeline heading into Q4 and 2026 remains robust. The deal size opportunity and strategic importance of reskilling initiatives continue to grow. We're seeing particular strength in technology, manufacturing and financial services sectors. These industries are rapidly implementing AI solutions, which is driving urgent upskilling needs. Our total net dollar retention rate was 93%, while net dollar retention for large customers was 97%. There are 2 headwinds that were anticipated in this metric. First, we are still seeing some pressure from downsells from COVID era contracts as we work through the rest of those this year. Second, we have been working through previously announced go-to-market team transitions, and that work is now behind us. In addition, as we shared last quarter, we have brought on an outside organization to efficiently address SMB churn. We continue to see stability in gross dollar retention. And given the early signals that indicate our go-to-market optimization is on track, we are optimistic that net dollar retention will stabilize in the fourth quarter. On the Consumer side, the segment generated $63 million in revenue this quarter. We ended the third quarter with nearly 295,000 paid subscribers, exceeding our year-end target of 250,000. Revenue from subscriptions was up 43% year-over-year and now accounts for 19% of the segment's revenue. This is a 400-basis-point increase from the prior quarter. Our strategic pivot to subscription products is strongly supported by unit economics. Today, our Transactional business operates at about a onetime LTV to CAC ratio. In contrast, our subscription products currently deliver an LTV to CAC that is well above 3x. Given the compelling unit economics and strong demand signals we are seeing, we're accelerating our pivot to a subscription-first approach. Not only is this a more financially sound business model, it also allows us to deliver a fundamentally better value to learners as it encourages continuous engagement that is essential for achieving meaningful outcomes. Moving on, our total gross margin also continued to improve. It was 67% in Q3, up from 64% in the prior year. This 300-basis-point improvement demonstrates the inherent leverage in our business model as we scale our higher-margin revenue streams. Operating expenses were $112 million or 57% of revenue, a 400-basis-point improvement compared to the third quarter of 2024, reflecting our continued focus on operational efficiency. On the bottom line, we delivered GAAP net income of approximately $2 million. This is a meaningful improvement from a loss of $25 million in Q3 2024. Adjusted EBITDA was $24 million or 12% margin compared to 6% in the prior year. This 600-basis-point improvement reflects execution on our strategy, the continued shift upmarket, evolution of our revenue mix and our ongoing operational discipline. Our balance sheet remains strong with $372 million in cash and marketable securities at the end of the quarter. Free cash flow generation was $12 million or 6% of revenue. We expect our cash generation to continue to improve as our subscription revenue base scales and provides enhanced working capital dynamics. Also, we bought back 4 million shares under our new $50 million stock repurchase program. Now for our outlook. As we execute on our strategic pivot, we expect our consolidated subscription revenue for 2025 will grow in the high-single digits year-over-year. As mentioned, we are accelerating our consumer subscription-first approach due to compelling early signals, which is creating a short-term headwind for the Consumer segment's revenue growth. For the quarter, we expect total revenue of $191 million to $194 million. This brings our full year 2025 range to $787 million to $790 million. The midpoint of the full year guidance implies Udemy Business revenue will increase approximately 6% year-over-year, an improvement from our prior guidance, while Consumer revenue will decline about 9%. On the bottom line, Q4 adjusted EBITDA is expected to be $18 million to $20 million or 9% margin at the midpoint. We are, therefore, raising our full year 2025 adjusted EBITDA guidance to a range of $92 million to $94 million or 12% margin at the midpoint. Looking ahead to 2026, while we are not ready to issue formal guidance, we'd like to provide some directional insight on how our strategy will impact our outlook for next year. Ultimately, with our pivot to accelerate recurring revenue, we believe the consolidated subscription revenue growth in 2026 will be closer to double digits and will account for approximately 3/4 of total revenue. The momentum in Consumer subscriptions is strong, so we are accelerating that push. This means we are intentionally reducing Transactional core sales in favor of recurring subscription revenue, which will slow near-term segment growth. In addition, as we direct more customers toward annual subscription products, a meaningful portion of that revenue will be deferred to future periods. We believe this short-term impact is the right trade-off for building a more predictable, higher-value business that better serves our learners' long-term success. Finally, we are updating our profitability targets to reflect increased strategic investments in our transformation. At the same time, we are focused on maintaining strong cash generation and operational discipline. We have been significantly increasing adjusted EBITDA margin over the past 3 years and believe we have achieved a margin that is sustainable and provides the right balance between a strong bottom line and reinvesting in growth. We are on track to deliver more than $90 million in adjusted EBITDA this year and expect to deliver at least that amount in 2026 even with the additional investments. In summary, Q3 demonstrates the progress we're making in our strategic pivot towards higher quality, more predictable recurring revenue streams. We continue to execute a transformation that will create significant value for all stakeholders. The underlying fundamentals of our business are strengthening, and we have the flexibility to invest in strategic opportunities that will drive our future growth and ability to capture the massive AI sales opportunity ahead. So with that, we'll open up the call for your questions. Moderator?

[Operator Instructions] And your first question today will come from Ryan MacDonald with Needham.

Congrats on a nice quarter. Sarah, maybe -- and Hugo, maybe to start in the Consumer segment. Can you just put a little more color on to sort of what the initiatives you're taking as you're accelerating the transition to consumer subscription? How are you looking to incentivize existing Transactional customers to convert to the subscription? And then any update or are you still focused on finding other revenue -- ways to monetize that consumer revenue stream in terms of like advertising, I think that was talked about last quarter as well. But maybe just updates on that consumer segment strategy a bit more.

Perfect. Ryan, thank you for the question. As stated, we're really pleased with the 43% year-over-year growth of subscription. It is pretty comprehensive. Ranjit and team are really looking at where we are gathering customers. So changing the strategy from acquisition to -- all the way to retention. We're changing call to action. We're changing the positioning when we bring potential customers to the website, what they see, how they see. We've changed the way the shopping cart is optimized. We've changed the ways we are reactivating existing customers. We're expanding the number of established. So you get the idea, like a lot of things that are classic digital marketing strategy are being used to transform the efficiency of the engine end-to-end. So that's kind of one part of the answer. The second, we've pushed to diversify the sources of customer. The Indeed partnership is a really, really interesting example. We are capturing people at the moment of need. That's why we're seeing the conversion be so great. We think with the economy where it is, there's going to be a lot of transition, and that will play very, very nicely, and there's more partnerships to be announced. On the ad programs, we're very pleased with the progress to date. We're in 170 countries. As we discussed last time, we -- in our first step, we went for the freemium courses and inserted ads in the video. And now we're in the process of optimizing that. We're going to move to Phase 2 very soon, where we're going to monetize different parts of the experience. And then next year, we'll be into the sponsorship, which we've alluded to. So a lot of good progress on that. There is also really good news on our desire to create subscription that are targeted to specific outcome. And I'll just lean in on the one with certification. It is really, really exciting in August when we launched the CompTIA example partnership. It's the first one. We've mentioned 4x the kind of monetization versus the nonintegrated offer. We're about to do something similar with Pearson across more certification opportunity, and we think that's going to continue to accelerate this transition.

Excellent. Appreciate the color there. Maybe a follow-up on Udemy Business. I know there was a lot of excitement last quarter in terms of the state of the net new pipeline. It sounds like there's still that excitement there while you're managing through sort of the renewal process with some of the COVID contracts. Can you just provide an update on how you're feeling about sort of the balance of net new pipeline progression as we're heading into Q4 and into next year here and how the rate of renewal is trending on those renewals relative to your expectations in fourth quarter thus far?

Thanks for the question, Ryan. I'll take that one. So on net dollar retention, we saw what was expected in the third quarter as we continue to move through. Really, we're getting to the tail end of these COVID area contracts or era contracts. And so we are seeing stable gross dollar retention, which we have seen quarter after quarter after quarter. That is great. We are seeing that pipeline build continue. And importantly, what we're seeing is the percent of that pipe that is expansion deals within our existing customers, that has meaningfully improved over the past quarter, and that continues. So we do still have that pressure from some of these COVID contracts, but we're getting to the back of that. We have a lot of confidence in the fourth quarter and seeing that stabilization of net dollar retention as expected. We've got the new approach that our customer success team has brought into our customers to make sure that we're doing those implementations right, that we are aligning their outcomes that they're looking for with their business priorities with our implementation. And we also announced that on the SMB side, we are working now with an outside business process optimization firm. And so I would say we've made progress across all fronts. We're happy with where we are. And as we look into next year, the go-to-market team transition is complete. We have the new approach in place. The BPO will be fully ramped. We will work through the COVID deals. And so we're optimistic for next year.

And your next question today will come from Yi Fu Lee with Cantor Fitzgerald.

Congrats on the productive 3Q and strong pace Consumer subscriber acceleration. Hugo, maybe if I could kind of start with you on a macro high-level question. Can you kind of comment on the L&D budgets you are seeing in the field? We see all the innovations Udemy is upgraded across the platform. But at the beginning of the prepared remarks, you mentioned organization invested heavily into AI, but ROI has not materialized yet. So how has this dynamic impact Udemy and other AdTech peers? Like I guess the question I'm asking is what needs to happen to sort of cross the chasm to double down for both Enterprise and Consumer spending to accelerate this? And I also have a follow-up for Sarah later.

Okay. Thank you for the question. You heard me the last 2 quarters, I love to be in the field. I love to go in all our territories, spend a lot of time with customers. And I'm back from last week at unleashed, went across Europe. It's an interesting dichotomy. It is a moment in time where the L&D teams are being asked to do more, all this AI transformation. They're asked to respond to a lot of uncertainty. And at the same time, they're being told to do with less. So there is pressure. There's real pressure. This is a group that's very anxious. And at the same time, I like what is happening because we have a solution, an end-to-end solution that is broader than others. We do the technical stuff and we do the nontechnical stuff. We have a catalog that is way broader. And then we do things like the mastery with AI Role Play, we do the things with assessment and validations. We got more to offer. So our ROI is better. And therefore, when they need to consolidate, we -- those are -- our win rate goes up. So I am liking that dynamic macro. It's going to help us in general. The second thing I'll say is we've been on this go-to-market transformation to move upmarket. As part of that, there are some bullets under the heading. One of them is more value engineering so that we pitch the ROI case. The second is you need to pursue economic buyers in L&D and outside of L&D. And we've done a lot of training around that. And what we're seeing and one of the reasons we have more $100,000 deals than in the past, and you see it in the economic buyer data that we have is we're now also doing a good job outside of L&D. So we're diversifying, and that's really good. And I'll give you -- just to bring this to life, an example from Europe, a leading retailer, 6 vendors, 6 L&D vendors. They did a consolidation, and we increased our number of seats 3x.

Could you give us more color on like what are the type of L&D vendors you're consolidating? And when you say outside of L&D budget, right, who are you taking -- like are these like the business lines you're taking the budgets from, the extra budget, please?

Yes. So let me hit the second one. It is IT leader, engineering leader. It is marketing leader, it is sales leader, it is enablement leader. It's all of the above. So we need to have conversation with people who have business issue and be able to articulate our value in terms of the business outcome. So let me kind of give you an example. When we talk to a sales leader, we can say by taking the following sets of learning paths and learning program on Udemy, your ramp to have a salesperson productive is shortened in half, and this is how much it's worth to you. Or when we call a call center is you've got attrition, you've got all these people that you need to train up on new accounts and on new policies, we can speed the time it takes for you to have these agents be more productive or we can reduce the average handle time. That's what I mean by going outside of L&D, it's real business cases.

That makes sense. Thank you for the extra color, Hugo, on that. Let me move on to just Sarah before I pass on the call. Sarah, on the economics financial side, should we -- like obviously outperforming on the GAAP net income, EBITDA, free cash flow profitability. So should -- like Sarah, going forward, should we get used to this trend like growing at a profitable growth rate? And the second part of the question, Sarah, is like you've mentioned -- and you sound very confident net new ARR, we're going to return to high-single digit, the final quarter. What gives you confidence? I think you kind of hit on it from the last caller. Can you reiterate like what are the things that give you confidence that like by year-end, it's going to reaccelerate and it's even better in 2026? And that's it for me.

Yes. Thanks for the questions. So let's start with our bottom line. We have continued to outperform on the bottom line. That's a huge testament to the partnership across the business and really driving operational discipline. And as we look into 2026, it's a great moment. You heard Hugo talking about these companies are really undergoing these AI transformations. L&D leaders are under pressure, but business leaders are under pressure to ensure that their teams are adopting AI. And so we are going to invest on the back of that. We will deliver -- we're on pace to deliver about $93 million for 2025. We will deliver more than that next year, but we are investing in really further differentiating our offering in the world of AI and LLMs. And so you can expect to continue to see a robust road map and some really exciting things coming out from us that will allow us to continue delivering growth on both UB and consumer subscriptions. From a net new ARR perspective, we delivered 2 in the first quarter. We delivered 1 in the second quarter. We delivered 7 this quarter, a huge testament to the work to transform that go-to-market team. Very, very happy with the progress that team has made. We continue to see our pipeline grow, the pipeline for $100,000-plus deals grow. Our deal sizes are up. And so when we look into next year, that really gives us the confidence that we're through that transformation and that we're bringing some really exciting capabilities to market at a time when the market is looking for them.

Yi Fu, I want to just -- I didn't answer your question. When we do consolidation play from who and how does it look? So there are 2 types of vendors we consolidate. Often, there's smaller vendors that are local and niche. And then the real play, and that's how you get the example I gave you, 3x increase in seats is when we take out our major competitors. Because we're both technical and nontechnical, we have a good value proposition against the folks who are purely or mostly technical. And vice versa, we have a good value proposition vis-a-vis people who are mostly business or more broad, and we can come in and offer more specific technical expertise. And by the way, in the world of AI, this is a super, super, super, super important point. And all the leaders I've spoken to tell me versions of this. We've gone beyond turning ChatGPT and Claude and Copilot on and doing a bunch of experiments. They want to scale. And the only way you scale is if you can package the technical training around AI, and we have 4,000 classes, it's more than anybody else with the adaptive skills. And if you combine the 2, you can scale. If you're only doing prompt engineering and the very specific technical things, you're going to remain in purgatory hell of these little pilots.

And your next question today will come from Josh Baer with Morgan Stanley.

Congrats on some really strong subscription revenue numbers. I wanted to ask on the EBITDA side. We have seen really strong performance this year, guidance raised for the year. But when thinking about '26 now, we're kind of anchored toward where you're going to end up for this year. Not too long ago, we were looking for $130 million to $150 million. So a big change there. I was hoping you could provide any sort of context or a bridge. Just wondering how much is from the transition to consumer subscription like within the Consumer, some impacts from that versus other top line headwinds versus increased investments? And then the follow-up would be where specifically are those investments going?

Yes. Great question. Thanks, Josh. So a lot has happened in the past, let's say, 12 months that puts us in a place where we are laying out next year being more EBITDA than we're delivering this year, but really shifting away from the continued very significant margin expansion quarter after quarter after quarter to doing some more investments. We have a new CEO, we have a new strategy, and we've gone through a go-to-market team transition. So there's a lot within that 2026 expectation of the bottom line. You're right that we do have some headwinds that we're speaking about because we've pivoted very quickly to subscriptions first. And because it's going so well, we're accelerating that. And that is a few points of growth on the consumer side that we're giving up. But what we expect to see is towards the middle of next year, that inflection point where the subscription revenue growth will start to outpace that decline we're seeing on the Transactional side. But we did -- that did impact our top line, that subscription-first and the go-to-market team transition. When it comes to our investment priorities, like I said, really further differentiating in a world now that is AI and LLM and it's very different than it was 18 months ago and 24 months ago, as we all know. And some of those things that we are looking to invest in, first is this platform that we're talking about that's end-to-end delivering skills acquisition, mastery and validation and allowing organizations to monitor the progress of their teams across the skills that they need to hit their business priorities, deliver even more ROI and create that stickiness. We're investing in the personalization engine that you heard us talking about. We have AI tools and role playing assessments, and there's more that we can do to really bring to life this personalized journey to help individuals hit their career goals, get their certifications and then amplify that with the human plus AI. So bringing our instructors across the globe close to the learners, allowing not only better learning outcomes, but those instructors to monetize in new ways across our platform. And the last thing I'll say is you've heard us talking about partnerships over the last few quarters, investing in building out that ecosystem on both the Udemy Business side and the Udemy Consumer side. Hugo, anything you'd want to add on the partnership side?

Thank you, Sarah. In general, I'll make a point before I go on the partnership. We also are making a deliberate EBITDA versus growth trade-off right now. We see a very big market opportunity around reskilling the whole workforce. We need to be playing offense, and we need to be growing the business really fast. So that's just kind of a macro theme. And we're using the opportunity to build our moat, and our moat as this platform end-to-end in a way that no other online catalog has today, and we think it's really, really important to do that. And to do that, we'll need some investment. We've done some already. We'll do more. In terms of partnership, there's some really exciting stuff that's happening. You've heard me mention Pearson, which helps deliver some of these end-to-end validation as part of the platform and some of these new subscription. We have things with Workera around assessment, Glean around enterprise AI. We've also done a partnership to expand the reach of our offering with Emtrain. We offer compliance now. So we become a one-stop shop on some of the things. And in some cases, it creates a nice defensive play for us. So we're tweaking, adapting. We're going to be smart about it. And that's why we're signaling that no less than is what you heard, and we're being smart about it.

And your next question today will come from Stephen Sheldon with William Blair.

Just want to start within Udemy Business and just a clarification. Just wanted to clarify the fourth quarter ARR comments that you made, Sarah, for the high-single digit increase. I'm assuming based upon a prior answer that that's a sequential ARR dollar increase? Or was that a year-over-year growth expectation?

That's right. That's net new ARR, so sequential dollar increase.

Okay. Perfect. And then on Consumer, yes, great to see the traction on subscription. So just wanted to ask how long it might take before you see overall consumer revenue stabilization and a return to growth. I guess based on a prior answer, it sounded like you could potentially hit that inflection in 2026 in Consumer where subscription revenue more than offsets the non-sub revenue. Or was that more, I guess, more for the total company, including UB? I guess just high level, when could we expect a potential return to consumer revenue growth overall? Is that next year? Is it still a couple of years out? Just any detail there?

Yes. So we are expecting to see the decrease in Transactional be overtaken by the increase in subscription mid next year sometime. We have -- there's -- we're still optimizing as we are building out the subscription-first. You heard Hugo talk about all the things we're doing on the subscription side of things. And so that is impacting. But again, the unit economics of that business are so much more compelling. And in addition to that, the learner journey and the experience for those learners is going to be so much stickier as we really look to build this continuous skill building engine in this companion for our learners, and that's the trade-off we're making.

And so would that imply a return to consumer growth at some point next year?

We're not ready to put an exact date on that yet, but we'll be getting close.

And your next question today will come from Jason Tilchen with Canaccord Genuity.

I'm wondering, in the deck, you referenced the hundreds of enterprise customers that have started adopting the AI Role Plays. Hoping you could just talk a little bit about both some of the unique use cases where this is being deployed and also how this is translating into greater wallet share at some of these customers.

Yes. Why don't I get us started? The imagination of people never seems to amaze me. It's kind of like my starting point. We have more than 10,000 Role Plays. I don't claim to say that these are all unique. There's a lot of overlap. We've also provided the ability for Enterprise to build their own unique Role Play. Some of them will be variation of the out-of-the-box ones. So let me give you a couple of examples. The first one is performance reviews, practice difficult conversation during performance reviews. There's the out-of-the-box version or if you're PepsiCo, you can load the policy document of PepsiCo and the role play will be done in a way that is consistent with the language used and the grid used at PepsiCo. So that counts us too, just to help with the 10,000. We have example where you have -- I'll give you an example of a consulting company that is building with their own internal LLM, their decks, their customer-facing PowerPoint documents, and they're loading that up in AI Role Play to do a practice in advance of going to a customer. So again, very, very specific, very in the moment, very valuable to them to have a rehearsal in advance of a difficult or challenging customer. So that's the range of things. I keep going, but I'll answer the second part of your question. Right now, what we have done is we've made this available to our customer as part of these different offerings. We will, next year, have a tiered offer where we're going to monetize different behavior. I'm not going to go into too much what it is, but you can imagine typical SaaS model where there's a minimum that you can do without more and then you get to pay if you use it more. It's going to allow us to monetize this more with the usage and the value that the customer is going to get. The last thing I'll say is we are building specific version of AI Role Play that can be offered stand-alone, targeted at different non-L&D buyers because it is solving a very specific use case. The pricing of that will be matched to the value that is being delivered to that economic buyer.

Great. That's really helpful. And one quick follow-up for Sarah. In terms of the increased investments that you referenced, I just want to make sure I sort of understand it. Is this primarily focused on product? Or are there any other areas where there will be some incremental investments as we head into next year?

Yes, it's a great question. It's primarily focused on product. There will be some investments on the partnership side, although those do tail in comparison to the product investments.

[Operator Instructions] And your next question today will come from Nafeesa Gupta with Bank of America.

My first question is with this focus on subscriptions and UB, but there is also a lower revenue share for instructors in both of them and which will further go down to 15% next year. So are you seeing any kind of increased churn amongst instructors because of your focus on these 2?

Yes. Thank you for the question. Our strategy is very, very, very focused on human plus AI. So we remain committed to the instructor community. We've engaged them in very constructive conversation. They understand that the world around them is also changing. They're feeling it from their business point of view. What we're doing is a few things. One, we're working with them to create new sources of revenue monetization. Some of it is taking stuff that they do off platform and moving it to Udemy. That's why you heard reference to one-on-one coaching, some of the cohort work. Those are going to be done at a different revenue share than the one that you referenced. So that's kind of one thing. The second thing is we've introduced a new production hub, a series of tools and services to make their lives easier in this AI world where they can kind of participate and get some efficiencies, and we have more to come on that front. And then there's a few other conversations. They're very active. They're very clear about their needs, their desire, and we want to grow the business with them.

Got it. I have a follow-up. So any thoughts on acquiring traffic through AI platforms? I mean, a couple of your competitors and peers are integrating with large platforms to acquire more traffic. Any thoughts you have on that?

Yes, great question. Thank you. Well, let me first say, this is a validation of our strategy. We were very excited to see that move. For 2 quarters in a row, we've been very clear that an online catalog is not sufficient in this world, and we were moving to these different ways of competing, which included AI and then being an AI platform. We've initially focused on the B2B space, which is plays to our strength where we already have moat, and that's why we've introduced the MCP. The good news is given that we've got all the MCP, we've got the ability if we want to on the Consumer side to also be part of ChatGPT or Perplexity or Claude. But we need to step back a bit and think about what is happening. Every technology evolution, whether it's the Internet, mobile, social, introduced not only a set of new technology, new protocols, but a new set of distribution platform. For search, it was Google, for mobile, it was Apple, which created the Apple Store. And we need to kind of make sure that we are very thoughtful in how we're going to play. Nobody remembers who was the first one on the Apple Store, not relevant. There will be choices. And what we're focused on is on building a really, really, really distinctive experience on that chat consumer experience that plays to our consumer strategy. And again, we're very happy. We're growing 43% year-over-year. We're focused on careers and certification. We're linking this to job outcomes. And we want to make sure that beyond top of the funnel name recognition and branding, which we are clear on the monetization. And right now, nobody has a monetization answer. So we don't feel the rush to kind of put ourselves in the middle of that.

And your next question today will come from Devin Au with KeyBanc Capital Markets.

Maybe just one quick one on UB. The commentary around the large customer pipeline sounded encouraging. I think you mentioned the pipeline for that segment is up quarter-over-quarter. But when I look at kind of the net add for that customer segment, it has stepped down quite a bit from last quarter. Is that just like a timing thing, perhaps maybe deals shifting out? Or did you see perhaps increased churn? Maybe just help us reconcile the strong commentary versus the step down in net add.

Yes, it's a great question. And I did also mention that the portion of that pipeline growing is on the expansion side. And so there's a combination of adding new logos and expansion. And we are so excited when we continue to build on the value that we're already delivering with existing customers. And so what you're seeing there is the expansion dynamic that's happening.

And the consolidation.

And your final question today is a follow-up from Yi Fu Lee of Cantor Fitzgerald.

Hugo and Sarah, just one quick follow-up on the -- when you mentioned subscription online learner outcome, that 2 products, right? I know it's still new, you're still going through it, certification journey and career journey. Can you tease us a little bit more like what are you thinking in terms of like partnership with like educational institution, university, et cetera? Are you going with like, let's say, partnership with like leading institutions like in America, et cetera? And in the career journey, are you partnership with like large tech firms like, let's just say, Google, Microsoft of the world for the certification? Just want to get some understanding on that. I know it's still new.

Yes. So let me take that. On certification, the big unlock is historically, players like Udemy have worked on certification prep. And you get millions of people getting into our platform to do certification prep. Then the process of getting certified was a different process, a disconnected process. And what we are now doing is we're connecting the 2 in a very, very, very tight way. And we're embedding it in the process of taking a class to kind of bring you along and encourage you to get to that certification. So instead of having 1 out of 10 learners really completing, we have a much higher number. And this is a big pain point, not only on the Consumer side, but on the Enterprise. The number of L&D leaders who have told me, it's great. I get all these wonderful numbers that XY

This concludes our question-and-answer session. I would like to turn the conference back over to Hugo Sarrazin for any closing remarks.

I just want to say thank you, and see you next quarter.