Note: This is an earnings call transcript. Content may contain errors.

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Date

Wednesday, Oct. 29, 2025, at 5 p.m. ET

Call participants

  • Chief Executive Officer — Hugo Sarrazin
  • Chief Financial Officer — Sarah Blanchard

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Risks

  • Sarah Blanchard said, "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."
  • The company anticipates ongoing pressure from down sells of "COVID-era contracts" in its enterprise segment as it works through the remainder of these agreements this year, with net dollar retention expected to stabilize by the fourth quarter of 2025.
  • Transitioning existing course purchasers to subscription offerings and prioritizing recurring over transactional revenue could delay consumer segment revenue stabilization, as management stated, "we are intentionally reducing transactional course sales in favor of recurring subscription revenue, which will slow near-term segment growth." This guidance was provided in the context of Udemy's outlook for full-year 2025.
  • Sarah Blanchard noted that "a meaningful portion of that revenue will be deferred to future periods," which affects near-term top line growth as the company directs more customers toward annual subscription products.

Takeaways

  • Total revenue -- $196 million (GAAP) for Q3 2025, landing above the high end of guidance.
  • Consolidated subscription revenue -- $144 million, up 8% year over year and now 74% of total, a 600 basis point increase from last year.
  • Unit business revenue -- $133 million, representing 5% year-over-year growth.
  • Annual recurring revenue (ARR) (non-GAAP) -- $527 million at quarter-end, with $7 million of net new ARR (non-GAAP) added during the period.
  • Consumer segment revenue -- $63 million, generated from nearly 295,000 paid subscribers, exceeding the year-end target of 250,000.
  • Consumer subscription revenue -- Up 43% year over year, now constituting 19% of consumer revenue, a 400 basis point increase sequentially.
  • Net dollar retention (non-GAAP) -- 93% for the total business; 97% among large customers, with noted headwinds from down sells and go-to-market transition.
  • Gross margin -- 67%, up 300 basis points from the previous year due to scaling higher-margin revenue streams.
  • Operating expenses (non-GAAP) -- $112 million, 57% of revenue, with a 400 basis point improvement in expense ratio compared to 2024.
  • GAAP net income -- $2 million profit, compared to a $25 million loss in Q3 2024.
  • Adjusted EBITDA -- $24 million, a 12% margin, up from 6% in the prior year, a 600 basis point margin expansion (non-GAAP).
  • Free cash flow -- $12 million, equating to 6% of revenue.
  • Cash and marketable securities -- $372 million at quarter-end.
  • Stock repurchase -- 4 million shares bought back under the $50 million repurchase authorization.
  • Q4 2025 revenue outlook -- Projected range of $191 million to $194 million (GAAP).
  • Full-year 2025 revenue guidance (GAAP) -- Expected range of $787 million to $790 million.
  • 2025 Udemy business revenue outlook -- Implies approximately 6% annual growth year over year, improved from previous guidance.
  • 2025 consumer revenue outlook -- Expected to decline about 9% for the full year.
  • Q4 2025 adjusted EBITDA (non-GAAP) outlook -- Projected range of $18 million to $20 million, or 9% margin at midpoint.
  • Full-year 2025 adjusted EBITDA guidance -- Raised to $92 million to $94 million, or 12% margin at midpoint (non-GAAP).
  • 2026 commentary -- Management expects consolidated subscription revenue to approach double-digit year-over-year growth and represent approximately three-quarters of total revenue in 2026.

Summary

Udemy (UDMY +0.71%) delivered revenue above guidance and achieved its fifteenth consecutive quarter of adjusted EBITDA (non-GAAP) above expectations. Management highlighted a rapid acceleration in subscription revenue as a core strategic focus, now accounting for 74% of total revenue. The company reported a marked expansion of gross margin, operating efficiency, and free cash flow generation, alongside a definitive GAAP net profit turnaround. Executives stressed that the pivot to a subscription-first approach intentionally creates near-term pressure on the consumer segment’s topline but positions the company for more durable, recurring revenue in future periods. This strategic shift was discussed in the context of Q3 2025 results and outlook, as well as management commentary on the ongoing transition.

  • Hugo Sarrazin explained, "subscription customers are our best customers," providing measurable career-oriented outcomes that justify the business model shift.
  • Consumer paid subscribers reached nearly 295,000, exceeding the year-end target of 250,000, with subscription revenue up 43% year over year.
  • The firm's enterprise and consumer product development centers on AI-enabled role-play, assessment validation, and career-focused journeys, aiming for deeper workforce integration and measurable customer ROI.
  • Sarah Blanchard stated, "as we direct more customers toward annual subscription products, a meaningful portion of that revenue will be deferred to future periods," directly affecting near-term reported revenue.
  • New initiatives, such as partnerships with Indeed and Pearson and direct integration with AI tools, are driving both user acquisition efficiency and higher revenue per learner on new subscription journeys.

Industry glossary

  • LLM (Large Language Model): Advanced AI system that processes natural language and generates human-like responses or outputs. Used for adaptive learning solutions on Udemy's platform.
  • LMS (Learning Management System): Enterprise software platform for administering, documenting, and delivering educational courses and training programs.
  • LXP (Learning Experience Platform): Corporate learning environment focused on user experience personalization and individualized learning journeys.
  • MCP (Measurement Capability Platform): Udemy's proprietary analytics solution for tracking and validating company-wide skill proficiency and learning outcomes.
  • Net dollar retention: The percentage of recurring revenue retained from existing customers over a defined period after accounting for upgrades, downgrades, and churn.
  • ARR (Annual Recurring Revenue): A metric representing the value of contracted recurring revenue components on an annualized basis.

Full Conference Call Transcript

Hugo Sarrazin: 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 urge you to refer to our most recent Form 10-Ks 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 not to place undue reliance on forward-looking statements. 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 site. A replay of today's call will also be posted to the website.

With that, I will now turn the call over to Hugo.

Hugo Sarrazin: Thank you, Dennis. I'm proud of the Udemy, Inc. 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 our fifteenth consecutive quarter of better-than-expected adjusted EBITDA. Our team continues to execute with discipline while we make investments in our future growth. 5% year over year and we generated $7 million of net new ARR.

These results exceeded our expectations 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 two businesses, each independently compelling and highly complementary.

We combine the depth and stickiness of enterprise relationships with the 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 four critical pillars of Udemy, Inc.'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 roles. That's the traditional Udemy, Inc. value prop. Skill mastery through hands-on practice using lab workspace and role-play experiences. Third, skill validation through assessment and certification. Amplification through human connection and expert guidance. Our integrated approach is transforming learning from a one-time event into a continuous skill-building engine that delivers strong ROI and learner outcomes. Our platform features AI learning paths, AI assistant, AI-generated assessment, AI-assisted content creation, and MCP capabilities. Udemy, Inc. enables organizations to build their own content and custom paths, develop their own AI role plays, and deliver just-in-time reskilling through integration with their existing LLM, LMS, and LXP systems, creating stickiness.

We are in the midst of the most important workforce evolution in a generation, with nearly 60% of global professionals needing new skills by 2030. Udemy, Inc. 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, Inc. 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 learners cannot get from AI alone. We are building an enterprise-grade workflow integration that embeds seamlessly into how organizations actually operate, translating into business outcomes and career development.

Our comprehensive platform also enables organizations to manage their talent development strategies, track progress against their strategy, 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, Inc. to be an essential lifelong learning platform for professionals that drive career advancement with the structured support and validation that LLM 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 assessments, labs, and role plays that adapt 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's sales methodology, rehearsing difficult client conversations, or working through unique compliance scenarios. 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 true 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 four pillars in practice is Scientific, a leader in advanced AI solutions. Scientific is leveraging Udemy, Inc. to build a workforce fluent in collaboration with AI systems. By aligning training and strategic technologies like Snowflake, Microsoft, and NVIDIA with business priorities, Scientific significantly accelerated value creation. The results are impressive. Scientific reduced AI project onboarding time by 20%, increased AI-driven innovation by 40%, and enabled content creation to be 70% faster with generative AI.

This skill-based approach underscores Scientific'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 relationships where we are invested in the learner's success, not just course completion. This aligns our business model with learner outcomes. To do this effectively, we are launching career-focused subscription offerings that validate learners with two specific outcomes. First, certification journeys and second, career journeys. Let me start first with certification journeys, which will help people prepare for professional exams with personalized learning paths, practice tests, and exam vouchers in order to achieve universally recognized skill validation.

When learners embark on the COMTTS certification journey, which we launched in August, the average revenue per learner increased by four times. Building on this success, we are partnering with Pearson to create a seamless certification journey for learners. On career journeys, we will structure paths for job readiness that integrate all four pillars through curated courses, hands-on projects, and assessments tied to specific roles. Many of these will be co-branded with partners, directly connecting what skills people learn to career growth and higher earning potential. The majority of Udemy, Inc.'s learners come to the platform to advance their careers. Our partnership with Indeed is already proving the strength of this alignment.

With learners showing materially higher subscription start conversion rates, we are seeing an average monthly conversion rate of Indeed job seekers to subscriptions that's 16 times better than the Udemy, Inc. 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 modern workforce. While AI democratizes access to information, Udemy, Inc. democratizes access to career transformation. We are the platform where ambition meets achievement, combining 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, Inc. 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, Inc.'s competitive position and expand our market opportunity. The future of work requires continuous learning, and Udemy, Inc. 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.

Sarah Blanchard: 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'll 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. Unit 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. UWE 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 two headwinds that were anticipated in this metric.

First, we are still seeing some pressure from down sells 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 transition, 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 one-time LTV to ratio. In contrast, our subscription products currently deliver an LTV to cap that is well above three times. 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 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 up market, 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, Inc. 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 would 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 three-quarters of total revenue.

The momentum in consumer subscriptions is strong, so we are accelerating that push. This means we are intentionally reducing transactional course 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 three 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 toward 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 skills opportunity ahead. So with that, we'll open up the call for your questions. Moderator,

Operator: Thank you. We will now begin the question and answer session. Then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. And your first question today will come from Ryan MacDonald with Needham. Please go ahead.

Ryan MacDonald: Hi, thanks for taking my question and congrats on a nice quarter. Sarah, maybe and Hugo, maybe to start in the Consumer segment, can you add 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 can 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. Thanks.

Hugo Sarrazin: 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 or 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 establish so you get the idea.

Like, a lot of things that are classic digital marketing strategy are being used to transform, know, 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 gonna 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 premium courses and inserted ads in the video. And now we're in the process of optimizing that. We're gonna move to phase two very soon, where we're gonna, you know, 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, you know, our desire to create subscriptions that are targeted to 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 four times the kind of monetization versus the non-integrated offer. We're about to do something similar with Pearson across more certification opportunities. And we think that's gonna continue to accelerate this transition.

Ryan MacDonald: Excellent. Appreciate the color there. Maybe a follow-up. On Udemy, Inc. 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 the fourth quarter thus far? Thanks.

Sarah Blanchard: 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 continued to move through. Really, we're getting to the tail end of these COVID-era contracts. Or era contracts. And so we are seeing stable gross salary 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 in to 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 a 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. Appreciate the color. Thanks. Thanks for the question.

Operator: And your next question today will come from Yi Fu Lee with Cantor Fitzgerald. Please go ahead.

Yi Fu Lee: Thank you for taking my questions, Hugo and Sarah. Congrats on the productive 3Q and strong pace. Consumer subscriber acceleration. Hugo, maybe if I could kinda start with you on a macro high-level question. Can you kindly comment on the L and D budgets you are seeing in the field? We see all the innovations Udemy, Inc. is upgrading across the platform. But in the beginning of the prepared remarks, you mentioned organizations invested heavily into AI, but all I have not materialized yet. So how has this dynamic impacted Udemy, Inc. and other ed-tech 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.

Hugo Sarrazin: Okay. Yi Fu, thank you for the questions. Listen. You heard me the last two quarters. I love to be in the field. I love to go and all our territories spend a lot of time with customers. And I'm back from, last week at Unleashed, you know, went across Europe. It's it's an interesting dichotomy. It is a moment in time where the L and 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 you know, 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'd like what is happening because we have a solution an end-to-end solution that is broader than others. We do the, the technical stuff, and we do the non-technical stuff. We have a catalog that is way broader, and then we do things like the mass y with AI role play. We do the things with assessment and validations. We've 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 gonna it's gonna help us in general. The second thing I'll say is we've been on this go-to-market transformation to move up market.

As part of that, there are, you know, some bullets under the, you know, the heading. One of them is more value engineering. That we pitch the ROI case. The second is you need to, you know, pursue economic buyers in L and D and outside of L and D. And, we've done a lot of training around that, and we're seeing, and one of the reasons we have more 100 k deals than, in the past and you see it in the economic buyer data that we have, is we're now, you know, also doing a good job outside of L and 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. Six vendors, six L and D vendors. They did a consolidation and, you know, we increased our number of seats three times. That's the kind of

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

Hugo Sarrazin: Please? Yeah. So let me hit the second one. It is, know, 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 kinda give you an example. When we talk to a cell leader, we can say, by taking the following sets of learning paths and learning program on Udemy, Inc., 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 to a call center, is, you know, you're you've got attrition. You 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 and D. It's real you know, real business cases.

Yi Fu Lee: Mhmm. That makes sense. Just thank you for the extra color, Hugo, on that. Let me move on to the Sarah before I pass on the call. Hey, Sarah. On the economics, financial side, should we, you know, like, obviously, outperforming on the, gap net income, EBITDA, free cash flow profitability? So should like, Sarish, go going forward, should we get used to this trend, like, growing out a profitable growth rate? And the second part of the question, Sarah, is you know, like, you've mentioned your and you sound very confident. Net new ARR, we're gonna return to high single digit. The final quarter. What gives you confident? I think you kinda hit on it from the last caller.

Can you reiterate, like, what are the things that gives you confidence that like, by year end, you it's gonna reaccelerate and it's even better in 2020 And that's it for me. Thank you, Hugo and Sarah.

Sarah Blanchard: Yeah. Thanks for the questions. So let's start with our bottom line. We have continued to outperform in the bottom line. That's a huge testament to the partnership across the business. Really driving operational discipline. And as we look into, you know, 2026, it's a great moment. You heard Hugo talking about these companies are really undergoing these AI transformations. L and 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 ninety 3,000,000 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 it to continue to see a robust roadmap and some really exciting things coming out from us that will allow us to continue delivering growth on both UB and consumer subscriptions. A net new ARR from a net new ARR perspective, you know, we delivered two in the first quarter. We delivered one in the second quarter. We delivered seven 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 Lee: Oh, again, Hugo. I'll get back on the queue.

Hugo Sarrazin: Yi Fu. I wanna just I didn't answer your question. When we do consolidation play, you know, how from who and how does it look So there's two types of vendors we consolidate. Often, there's smaller vendors that are local and niche. And then, the real place, and that's how you get the example I gave you is three times increase in seats is when we take out know, 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, you know, tell me versions of this. We've gone beyond you know, 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 two, you can scale. If you're only doing prompt engineering and the very specific technical things, you're gonna, you know, remain in purgatory hell of these little pilots.

Yi Fu Lee: That makes sense. Thank you. Thank you again, Hugo, for extra color.

Operator: And your next question today will come from Josh Baer with Morgan Stanley. Please go ahead.

Josh Baer: Great. Thanks for the question and congrats on some really strong subscription revenue numbers. 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 gonna end up for this year. Not too long ago, we were looking for $1.30 to $1.50. So a big a big change there.

I was hoping you could provide any sort of context or 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 going?

Sarah Blanchard: Yeah. Great question. Thanks, Josh. So a lot has happened in the past let's say, twelve 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, two, doing some more investments. We have a new CEO. We have a new strategy. 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, 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 at 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 is very different than it was eighteen months ago and twenty four 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 play and 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 closer 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 and building out that ecosystem on both the Udemy, Inc. business side and the Udemy, Inc. consumer side. Hugo, anything you'd want to add on the partnership side?

Hugo Sarrazin: Thank you, Sarah. In general, I'll I'll make a point before I go on the partnership. We also are making a deliberate you know, 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 team. And we're using the opportunity to build our moat. And our moat is this platform end to end in a way that no other, you know, 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. Terms of partnership, there's some really exciting stuff, that's happening. We've we 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're we've also done a partnership to expand the reach of our offering with mTrain. So we offer compliance now, so we become a one-stop shop on some of the things. In some cases, it creates a nice defensive play for us. So we're tweaking, adapting. We're gonna be smart about it, and that's why we're signaling that you know, no less than is what you heard.

And, you know, we're being smart about it.

Josh Baer: Great. Thank you for the answers.

Operator: And your next question today will come from Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon: Hey. Thanks. Just wanna start, with within Udemy, Inc. business and 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's a sequential ARR dollar increase, or was that a year-over-year growth expectation?

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

Stephen Sheldon: Okay. Perfect. And then on consumer, yeah, great to see the traction on subscription. So just wanted to ask you know, 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 ConsumerWorks subscription revenue more than offsets the non-sub revenue. Or was that more, I guess, more for the total company including you, Bee? I guess, just high level, when could we the potential return to consumer revenue growth overall? Is that next year? Is it still a couple of years out? Just any detail there.

Sarah Blanchard: Yeah. So, you know, we are expecting to see the decrease in transactional be overtaken by the increase in subscription mid next year sometime. We have you know, there's we're still optimizing as we are building out this subscription first. You heard Hugo talk about all the things we're doing in 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 gonna 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.

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

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

Stephen Sheldon: Thank you.

Operator: And your next question today will come from Jason Tilchin with Canaccord Genuity. Please go ahead.

Jason Tilchin: Good afternoon. Thanks for taking my question. Wondering in the deck, referenced hundreds of enterprise customers that have started to 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 a greater wallet share at some of these customers? Thanks.

Hugo Sarrazin: Yes. So 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 you know, variation of the, out of the box ones. Let me give you a couple of examples. The first one is performance reviews. Practice difficult conversations 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 as two. Just as, you know, to help with the 10,000 We have example, where, you have I'll give you a an example of a consulting company that is building with their own internal LLM know, there was 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, you know, have a rehearsal in advance of a difficult or challenging, customer. So that's that's the 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 gonna monetize different behavior.

I'm not gonna go into too much what it is, but you can imagine typical SaaS model, where, you know, there's a minimum that you can do without you know, more, and then you get to pay if you use it more. It's gonna you know, allow us to monetize this more with the usage. And the, value that the customer is gonna get. The last thing I'll say is we are building specific version of AI role play that can be offered standalone. Targeted at different non L and 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.

Jason Tilchin: Great. That's really helpful. And one quick follow-up for Sarah. In terms of the increased investments that you referenced, just want to make sure I sort of understand. 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?

Sarah Blanchard: Yeah. It's a great question. It's primarily focused on product. There will be some investments on the partnership side, although those do detail in comparison to the product investments.

Jason Tilchin: Great. Thank you.

Operator: Star and then one. And your next question today will come from Nafisa Gupta with Bank of America. Please go ahead.

Nafeesa Gupta: Hi. Thank you. Hi, Sarah and Hugo. My first question is, with this focus on subscriptions, and the UB, but there is also 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 two?

Hugo Sarrazin: Yeah. Thank you for the question. Yeah. We 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, you know, 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, Inc. That's why you heard a 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 kinda one thing The second thing is we're, you know, 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 kinda, participate and get some efficiencies, and we have more to come on that front. And then there's a few other conversation. They're very active. They're very clear about their needs. Their desire, and, you know, we wanna grow the business with them.

Nafeesa Gupta: 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? Yeah. That's a great question. Thank you.

Hugo Sarrazin: Well, let me first say, this is a validation of our strategy. We were very excited to see that move For two quarters in a row, we've been very clear that an online catalog is not sufficient in this world. And we were moving to move into, you know, these, different ways of competing, which included AI and then being an AI platform. We've initially focused on the b to b space, which is you know, placed 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 you know, CHED GPT or Perplexity or cloud. But I mean, 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 and new protocols, but this 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 kinda make sure that we are very thoughtful in how we're gonna 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 you know, 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 wanna make sure that, you know, 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.

Nafeesa Gupta: Thank you.

Operator: Your next question today will come from Devin Au with KeyBanc Capital Markets. Please go ahead.

Devin Au: Hey, thank you. Thanks for taking my question. Maybe just one quick one on UB. Commentary around the large customer pipeline sounded encouraging. You mentioned the pipeline for that segment is 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 Thank you.

Sarah Blanchard: Yeah, 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.

Devin Au: Great. Thank you.

Sarah Blanchard: Thanks for the question.

Operator: And your final question today is a follow-up from Yi Fu Lee of Cantor Fitzgerald. Please go ahead.

Yi Fu Lee: Thanks. Hey, Hugo and or Sarah, just one quick follow-up on the subscription you mentioned subscription on live learner outcomes, that two products. Right? I know it's still new. You're still going through it. Certification journey and career journey. Can you, you know, tease us a little bit more? Like, what are you thinking in terms of, like, partnership with, like, educational institution, university, etcetera? Are you going with, like, let's say, partnership with, like, leading institutions, like, in America, etcetera. And in the career journey, are you partnership with, like, you know, large tech firms, like, let's just say, you know, Google, of the world for the certification. Just wanna get some understanding on that.

I know I know it's still new,

Hugo Sarrazin: Yeah. So let me let me take that. On certification, the big unlock is historically players like Udemy, Inc. have worked on certification prep. And you get you know, 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 two. In a very, very, very tight way. And we're embedding it in the process of taking a class to kinda bring you along and encourage you to get to that certification So instead of having one out of 10 you know, 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 and D leaders who have told me it's great. I get all these wonderful numbers that x y z, did the certification prep I have no data to confirm. And you would think the learner, the employees, would be incented to tell their employer that they completed an AWS architect certification. It doesn't happen all the time. So we're closing the loop and we're validating the outcome. This is what they wanted to see.

So that's that's an example of why we're kind of, like, trying to you know, align ourself more closely to close the loop and make it clear. On the career outcome, you know, in the past, we would create you know, quasi bundle, and others do the same of, like, these are the classes that, you need to take to become a data scientist.

That's cool, interesting, But now if we can link it to the coaching you need, to be able to become a great data scientist, to if we introduce you to a community of other peers if we link you to jobs offer from different sources, to get to the outcome that you're looking we can more credibly say that our product has a better ROI. That's that's that's the direction of travel, and that's why we think also we're gonna create some moat in a very, very, very interesting way because we're helping solve people's problem. And at this moment in time, you know, you're you're seeing all these new grads that are, finishing university, not getting jobs.

We're seeing a lot of them come to our platform you know, almost as a finishing school. They're, like, they're building their portfolio of projects. They're they're, and they're getting the coaching that they need to get the outcomes that they're hoping, which is a job, and be part of the workforce. Where you wanna be that solution?

Operator: Concludes our question and answer session. I would like to turn the back over to Hugo Sarrazin for any closing remarks.

Hugo Sarrazin: I just want to say thank you and see you next quarter.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.