Udemy (UDMY 1.92%) is an education marketplace business that went public in October. Marketplace businesses provide a place for buyers and third-party sellers to connect. Because these are asset-light businesses, profit margins are often very good.

If you glance at Udemy's gross margin, however, it might not be as high as you might expect for this kind of business. Yet there's a logical explanation. In this video from Motley Fool Backstage Pass, recorded on Oct. 25, Fool contributor Jon Quast explains that most marketplaces distinguish third-party sales volume from revenue, which makes gross-profit margins look better. By contrast, Udemy doesn't report its financials that way.

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Jon Quast: Yeah. Thank you, Danny. The first one that I want to talk about today is a company called Udemy. Udemy filed to go public on October 5th, so earlier this month, and it's looking to raise around $400 million in its IPO. It's not going public via SPAC, it's going public via the traditional IPO route. I've got some slides here that I'm going to share. We're going to work walk through a couple of things that caught my eye with Udemy.

What Udemy does. Udemy is a educational marketplace. When you think about a marketplace business, it's not in the business of selling a product, but it's in the business of providing a place where those products and services can be sold. In Udemy's case, it's offering digital real estate for online courses, things that you can learn about how to do different things. It has over 44 million learners. That is a very big user base there. These are the people who are registered and signing up to learn the different skills that are on Udemy's platform.

Over 65,000 instructors. Now, that sounds like a big number there. Keep in mind that only 5% of instructors windup generating 70% of the revenue. It's really a small subset of instructors that are actually providing the courses that people are subscribing to, that are actually enrolling in. However, it's a very big base of people are trying to get their courses out there on Udemy.

Forty-four million learners, that is up from just 10 million in 2017. They've really seen the quick adoption there, more than quadrupling their learner base over the last four years. Over 200 million course enrollments in 2020. One user can enroll in multiple classes, over 200 million course enrollments and over 183,000 courses. There are other companies that are like Udemy on the stock market. But what you're going to find is in many of those cases, they are more limited in what they're offering. Fewer instructors, fewer courses, and consequently, in some cases, fewer people on the platform.

Udemy's strategies is a little bit differently. These are a little bit more informal. They're not for actual degrees or anything like that. It's just to learn the skill.

Mission, "our mission is to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world." I highlighted the words that I did in their mission statement because I wanted to highlight them. There's two parts of this business; people and organizations. They have just you and me can go onto Udemy.com, register, and enroll in courses. That is the possibilities for people.

However, they do have a growing part of their business that is a subscription service for big businesses, organizations like Apple is a customer, Aflac is a customer, Volkswagen is a customer of Udemy. They are paying a subscription fee to Udemy, giving access to their employees to the different courses.

Everywhere. It is a global business available in over 75 languages around the world. They have courses and connecting them. Again, this is the marketplace aspect of what Udemy does.

Financials. Udemy's financials are looking pretty good. You guys still hear me all right? Udemy's financials 2020 revenue, $429 million, almost $430 million, up 56% year-over-year, very good growth rate. However, that's not unlike what we saw for many educational technology companies during 2020. People were at home interested in trying new skills, learning new things. That's pretty in line from what we saw from a lot of companies.

The first half of 2021, $250 million up 24% year-over-year, so continuing, building upon those gains that they had last year during the pandemic, you love to see that.

Gross margin, 51%. Now, for those who know marketplace businesses, this might seem a little bit low and I'm going to explain why. A company like Etsy, that is a marketplace. They do not make the products that they sell on their website. They provide a space that sellers can bring their products and sell to Etsy users. Because Etsy doesn't have the merchandise, their gross margins are really high, 73%. Fiverr is another marketplace business with gross margins of 83%.

Udemy, they're not creating these courses, why is their gross margin is so low? It's because they actually don't count revenue the same way that many marketplace businesses to do. If you go to Etsy's financial discussions, they'll talk about how they have merchandise volume and then they have revenue. Merchandise volume, that is the dollar amount of what is being bought and sold on their platform. Etsy isn't making all of that, they are only taking a cut, that's their revenue. They distinguish volume and revenue. Most marketplace businesses do that. Udemy does not. Their instructor pay outs are included in their revenue figure.

If you adjust for the money that the instructors are making on the platform, Udemy's gross margin actually looks a lot better at, where do I have it, around 82%. There we go. If you adjust for that, that's the difference in what we're talking about.