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UDEMY INC UDMY
September 21, 2022 - 7:47am EST by
SumerianResearch
2022 2023
Price: 13.23 EPS 0 0
Shares Out. (in M): 141 P/E 0 0
Market Cap (in $M): 1,856 P/FCF 0 0
Net Debt (in $M): -513 EBIT 0 0
TEV (in $M): 1,344 TEV/EBIT 0 0

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Description

Company background
Udemy is an online learning platform offering free and paid courses to consumer and enterprise customers. It currently trades at an enterprise value of $1,344mm with $627.5mm midpoint revenue guidance for FY'22 for a 2.14x EV/ FY'22 Sales multiple. They have $512mm in cash left from their IPO
 
The vast majority of content on the platform is created by "instructors" who create paid courses and earn a percentage of the value of their courses sold. This is 97% when a referral link is used to access the course and 37% otherwise. There's an engagement based payout if the course is on the Udemy Business catalogue(explained below). These instructors are incentivised by the company's algos to consistently produce and maintain content. These courses are taught in every major language and are reviewed regularly by consumers. Recommendation algo's are used to suggest courses to consumers based on popularity, rating etc
 
Revenue from consumers is earned from a fixed amount paid for courses which gives lifetime access to the paid course or the recently introduced subscription service where a fixed subscription payment gives unlimited access to a catalogue of selected courses. 
 
For enterprises(marketed as Udemy Business or UB), revenue is done on a contractual basis based on volume or number of seats(5-20 seats starting at $360 per seat). The Udemy Business subscription gives access to a handpicked catalogue of the highest quality courses on the platform. The company markets their "land and expand" strategy which aims to increase the number of seats in existing enterprises and upsell using other features: cohort-based learning, labs, assessments etc. This led to annual recurring revenue in UB increasing from $49.1mm in Q1'19 to $316.1mm in Q2'22 (86% CAGR). ARR per UB customer also increased from $12,040 in Q1'19 to $24,097 in Q1'22. 
 
They went public in October and have been dragged down with the overall market certainly not helped by the small float and limited coverage.
 
Financials
Quarter Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22
Revenue 72.8 64.3 64.7 74.5 91.8 109.5 118.4 110.1 124.6 126.1 129.6 135.5 152.2 153.1
Consumer 63.1 52.8 51.4 58.1 71.2 86.1 91.1 78.119 87.9 84.0 79.2 77.7 87.3 78.5
Enterprise 9.6 11.5 13.3 16.4 20.6 23.5 27.4 32.0 36.7 42.1 50.4 57.8 64.9 74.6
COGS 34.6 31.3 34.6 43.1 45.3 59.4 48.9 55.7 57.9 56.0 58.0 64.1 66.4 65.8
Consumer 29.4 25.7 27.9 35.6 36.3 49.5 37.8 42.2 42.5 38.9 37.2 40.7 39.8 36.2
Enterprise  4.0 4.1 5.1 5.7 7.1 8.0 9.2 11.3 13.0 14.5 17.4 19.1 22.2 24.7
                             
Gross Profit 38.2 33.0 30.1 31.5 46.5 50.2 69.5 54.4 66.6 70.1 71.6 71.3 85.8 87.3
                             
                             
S&M 29.8 26.9 27.6 42.1 46.1 50.1 46.0 50.4 53.2 50.9 52.3 70.6 66.9 68.4
R&D 8.1 8.7 8.9 8.6 12.6 11.7 11.9 14.4 15.4 14.8 16.7 19.2 22.6 24.0
G&A 10.1 8.4 8.9 12.6 9.4 16.6 9.0 15.8 14.4 15.4 12.2 22.4 21.7 23.4
Operating Expenses 48.1 44.1 45.4 63.3 68.1 78.4 67.0 80.5 83.1 81.1 81.1 112.3 111.1 115.8
Operating Income -9.9 -11.1 -15.3 -31.8 -21.6 -28.2 2.5 -26.1 -16.4 -11.0 -9.6 -40.9 -25.3 -28.5
                             
Interest Income 0.2 0.0 0.0 -0.1 -0.9 -0.1 -0.1 -0.1 -0.2 -0.2 -0.1 0.4 0.2 0.1
Other Income -0.1 -0.1 -0.3 0.1 -0.2 0.4 -0.1 0.0 -0.4 -0.1 -0.2 -0.2 -0.2 -0.7
Income Tax 0.0 -0.2 -0.8 -0.4 -0.6 -1.1 -0.5 -0.9 -0.9 -0.2 0.5 -0.7 -0.3 -0.3
                             
Net Income -9.9 -11.3 -16.4 -32.2 -23.4 -29.1 1.9 -27.0 -18.0 -11.4 -9.3 -41.4 -25.6 -29.4
                           
 
Key Business Metrics
 
Quarter Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22
Monthly average Buyers(mm) 0.9 0.8 1.0 1.1 1.3 1.8 1.3 1.4 1.4 1.3 1.3 1.4 1.4 1.3
UB Customers 3479 3996 4542 5174 6009 6396 6752 7300 7783 8669 9592 10500 11605 12514
UB Net Dollar Retention Rate 140% 135% 135% 132% 125% 123% 119% 118% 119% 121% 118% 118% 120% 118%
UB ARR(mm) 41.9 49.1 58.8 75.1 85.3 100.8 115.1 137.6 155.2 181.9 207.4 239.0 279.6 316.1
UB Customer Growth   15% 14% 14% 16% 6% 6% 8% 7% 11% 11% 9% 11% 8%
UB ARR/UB Customers($) 12040 12292 12954 14511 14197 15762 17053 18852 19946 20979 21627 22762 24097 25260
                 
 
 
Trends/Future Investment opportunities
The company benefited from the digital transition during COVID and seems to be transitioning more and more towards becoming a sales organization by leveraging the existing content on the platform and focusing on the higher margin and growth Udemy business segment. This segment overtook consumer sales for the first time in June this year and had 66% gross margin vs 54% for consumers in Q2'22. My model has it reaching 70%+ of sales by 2030. Consumer growth has been relatively stagnant due to macro headwinds tightening consumer purchases and is projected to remain so for FY'22.
 
They are frequently hiring account/sales executives to fuel this growth and this seems to be their best opportunity for re-investment into the business. Intuitively, a cumulative sales and marketing spend of $651mm from Q2'19 to Q2'22 led to ARR of $49mm, $100.8mm, $181.9mm and $316.1mm in Q2'19, Q2'20, Q2'21 and Q2'22 with consumer revenue of $52.8mm, $86.1mm, $84mm and $78.5mm and a net dollar retention rate of 118%+ over that period. 
 
Segmented margins for each business division below
Business Margins as % of Sales Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22
Gross Margin 52% 51% 47% 42% 51% 46% 59% 49% 53% 56% 55% 53% 56% 57%
Operating Margin -14% -17% -24% -43% -24% -26% 2% -24% -13% -9% -7% -30% -17% -19%
Consumer Margin 53% 51% 46% 39% 49% 42% 59% 46% 52% 54% 53% 48% 54% 54%
Enterprise Margin 58% 64% 62% 66% 66% 66% 66% 65% 65% 66% 65% 67% 66% 67%
                 
 
 
Risks
Their seem to be a lot of negative reviews complaining about their refund policy. Many of the popular courses are taught by instructors who are not exactly experts in their field vs Coursera where professors are often experts on the subject matter. The CEO: https://www.linkedin.com/in/gregg-coccari-2bb43110a/ does not seem to have experience scaling a SAAS education business and previously ran a pet food company.The CFO has only been working at the company since April 2021: https://www.linkedin.com/in/sarahwblanchard/. 
 
How large is their capacity to expand the existing higher growth and margin SaaS business? The company touts a $200bn market opportunity with $71bn on the corporate side and $152n in the consumer business. Most publications put the growth of the online education business at 8-10% per year. Consumer growth has slowed in recent quarters but enterprise remains robust with ARR per UB customer doubling since Q1'19. The company has a strong operating history of expanding margins and growing revenue so we view these risks as mostly contained but worth exploring further.
 
The name is still relatively new to public markets so may not receive as much attention until it expands revenue further.
 
Modelling
We see significant capacity for costs to reduce as a % of revenue with continuously growing recurring revenue from the higher growth and margin UB SaaS business. We assume they will not make any return from their cash(overly conservative especially given the unit economics of the expanding sales force) and model various assumptions with the implied stock price. Overall the risk reward looks compelling although it is highly contingent on continued growth and margin expansion of UB. 
 
Assumptions Discount Maturity Consumer Growth Enterprise Growth Enterprise Margin Consumer Margin S&M % of Sales R&D % of Sales G&A % of Sales Implied Stock Price Current Stock Price Difference
Conservative Margins, Opex Reduction 8% 2% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 70%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 35.34 13.2 168%
Conservative Margins, Opex Reduction 8% 5% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 70%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 27.75 13.2 110%
Conservative Margins, Opex Reduction 10% 2% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 70%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 26.19 13.2 98%
Conservative Margins, Opex Reduction 10% 5% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 70%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 21.46 13.2 63%
                      13.2  
High Enterprise Margin, Opex Reduction 8% 2% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 40.79 13.2 209%
High Enterprise Margin, Opex Reduction 8% 5% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 32.09 13.2 143%
High Enterprise Margin, Opex Reduction 10% 2% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 30.23 13.2 129%
High Enterprise Margin, Opex Reduction 10% 5% 5%/year 2022-2030 then declining at maturity 30%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 24.8 13.2 88%
                      13.2  
Conservative Enterprise growth, Opex Reduction 8% 2% 5%/year 2022-2030 then declining at maturity 20%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 24.17 13.2 83%
Conservative Revenue growth, Opex Reduction 8% 5% 5%/year 2022-2030 then declining at maturity 20%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 19.23 13.2 46%
Conservative Revenue growth, Opex Reduction 10% 2% 5%/year 2022-2030 then declining at maturity 20%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 18.19 13.2 38%
Conservative Revenue growth, Opex Reduction 10% 5% 5%/year 2022-2030 then declining at maturity 20%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 15.11 13.2 14%
                      13.2  
Aggressive Revenue Growth, Opex Reduction 8% 2% 10%/year 2022-2030 then declining at maturity 35%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 54.32 13.2 312%
Aggressive Revenue Growth, Opex Reduction 8% 5% 10%/year 2022-2030 then declining at maturity 35%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 42.48 13.2 222%
Aggressive Revenue Growth, Opex Reduction 10% 2% 10%/year 2022-2030 then declining at maturity 35%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 39.97 13.2 203%
Aggressive Revenue Growth, Opex Reduction 10% 5% 10%/year 2022-2030 then declining at maturity 35%/year 2022-2030 then declining at maturity Linear increase 66% to 75%(2022-2030) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 32.59 13.2 147%
                      13.2  
Stagnant Consumer, Conservative Enterprise, Opex Reduction 8% 2% Flat until maturity 15%/year 2022-2030 then declining at maturity Linear increase 66% to 73%(2022-2029) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 17.23 13.2 31%
Stagnant Consumer, Conservative Enterprise, Opex Reduction 8% 5% Flat until maturity 15%/year 2022-2030 then declining at maturity Linear increase 66% to 73%(2022-2029) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 13.9 13.2 5%
Stagnant Consumer, Conservative Enterprise, Opex Reduction 10% 2% Flat until maturity 15%/year 2022-2030 then declining at maturity Linear increase 66% to 73%(2022-2029) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 13.19 13.2 0%
Stagnant Consumer, Conservative Enterprise, Opex Reduction 10% 5% Flat until maturity 15%/year 2022-2030 then declining at maturity Linear increase 66% to 73%(2022-2029) then constant Linear Increase 53%-57%(2022-2026) then constant 44%-34%(2022-2030), 30% thereafter 13% to 2030 then 7% thereafter 16%-7%(2022-2030) then constant 11.12 13.2 -16%
                         
 
 Competitors
There are many online learning platforms and education companies. The largest and closest public competitor being Coursera(COUR). Coursera also has consumer and enterprise segments and also offers degrees from universities on its learning platform. It boasts better margins than Udemy but trades at a cheaper multiple. The main difference between the platforms being that Coursera has the backing of large universities and offers courses taught by certified professors and experts in their respective fields and pays instructors using contracts wheres Udemy's content production is much more commoditized. We believe this actually gives Udemy a competitive advantage as more courses can be created and rated in a shorter amount of time allowing higher quality content to be surfaced sooner. Anecdotally I've found courses on Udemy to get to the point a lot faster and give more substance while Coursera's feel more like a college lecture. A key issue with Coursera is that it is categorised as a Delaware Public Benefit Corporation. Essentially, the company is still for-profit but must "produce a public benefit and to operate in a responsible and sustainable manner". Probably not ideal for shareholders and a big part of why it trades at a discount to Udemy.
 
This is certainly not a winner take all market. We pitch Udemy due to our experience with the platform and because we perceive it to be more shareholder friendly. Other Delaware Public Benefit Corporations have historically had poor stock performance. See Laureate Education Inc, Lemonade Inc and Vital farms Inc.
 
Some other competitors below from Coursera's filing if interested:
D2C: 2U Inc through edX Inc and FutureLearn Inc
Education Technology Solution providers: 2U Inc, Eruditus Learning Solutions, Noodle Partners, upGrad Education Private Ltd
Corporate Training Companies: Degreed Inc, LinkedIn thought LinkedIn Learning, Pluralsight, Udemy, Udacity
Free Educational Providers: Khan Academy, Wikipedia Foundation, Youtube
Internal Degree Platforms developed in-house by universities
 
Conclusion/Follow Ups
A 2x FY'22 sales multiple, strong margin expansion and historically robust growth/margin expanion/monetisation levels for a SaaS company with a lot of room for market expanion strikes us very cheap at the current valuation. It's possible that we are overestimating the potential market size, the capacity to cut costs and/or the shareholder friendliness of management. For thos interested in deeper research, a few aspects of the business worth digging into further are
  • Unit Economics of the expanding sales force
    • Speak with account executives in various regions to get their thoughts on targets/bonus structure etc to deduce potential margins and capacity for expansion
    • Fundamentally, is the existing platform compelling enough for large enterprises to consistently pay for and use it to train their new/existing employees vs competitors to the extent that massive sales expansion makes sense for creating shareholder value?
  • Large enterprise view of Udemy vs other platform
    • How important is the accreditation that Coursera offers vs Udemy? There seems to be a shift away from degrees towards online education as the cost of college tuition fees continue to rise but the branding of universities remains important.
    • Is the content quality a problem? Are they prioritising volume of content over quality? Anecdotally, the quality from our experience is generally good but will they be trusted by large corporate clients for many years and become a staple of corporate education
  • Quality of CEO
    • Q1'22 guidance for Q2 was quite conservative vs results which is a positive
    • How focused on shareholder value is the CEO?
    • Performance at previous companies?
    • His 5-10 year view on the business? Composition of UB vs consumer etc
  • Consumer view of the company
    • Mixed reviews on this are worth looking over
    • Preference of different consumer demographics for Udemy vs other platforms
    • Willingness  to buy new material and overall retention vs other platforms
  • Potential Enterprise and consumer margins? Similar companies with better margins apart from Coursera?
 
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Continued UB Customer and monetisation growth

Earnings guidance/reported

Increased coverage from analysts

 

 

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