Udemy, the popular online learning platform, is making significant changes that are attracting attention from instructors and investors alike. With the power to reduce instructor earnings, Udemy plans to make substantial cuts. Additionally, the rise of generative AI is transforming the industry, potentially commodifying instructors and generating more content. While revenue has exceeded expectations, there are major shifts on the horizon for Udemy and similar platforms.
In the financial report, Udemy announced a 17% year-over-year increase in revenue, reaching $185 million. This figure surpassed the high end of their projected guidance range by almost $5 million. However, the foreign exchange impact caused a 1% decrease in overall growth.
Despite the foreign exchange effects, the demand for Udemy’s courses has been primarily driven by their business-focused per-seat model. Many companies are utilizing Udemy to train and upskill their employees, particularly in response to the growing need to address generative AI in the workforce. As businesses navigate the implications of this technology, the demand for related courses has surged.
On the consumer side, demand has been slower due to cautious discretionary spending. However, Udemy has managed to maintain its current level of revenues.
As a platform, Udemy’s strength lies in its ability to grow and increase its bargaining power with stakeholders. This, in turn, leads to a more competitive environment for instructors and a wider range of high-quality courses for users. However, the accelerated growth of generative AI poses a potential threat to instructors’ value proposition. While Udemy currently uses generative AI to help address student questions, there is scope for it to reduce the role of human instructors in other ways.
One particularly significant change announced by Udemy is a new revenue-sharing structure. Under the current payment system, instructors earn 37% of revenue for each individual course purchased on the marketplace. However, for Udemy Business in their Personal Plan subscription offerings, that figure drops to 25%.
However, beginning January 1, 2024, Udemy plans to gradually decrease the instructor share of subscription revenue. The first adjustment will lower the share to 20%, followed by further reductions to 17.5% in 2025 and 15% in 2026. These changes will have a considerable impact on gross margins, as the costs of instructor compensation for the subscription plans will be significantly reduced. Udemy expects to increase gross margins from the current 59% to 70% by the end of 2026, resulting in a 300 basis points annual improvement. While EBITDA will remain flat for now, these changes could lift margins to 20% in 2027.
Despite Udemy’s potential, there are some factors to consider. The company has a 20% dilution overhang from reserved internal options that may limit its upside. Furthermore, Udemy is currently burning cash, although it is expected to have around 2-3 years based on normalized cash burn from the previous year.
All in all, Udemy presents an intriguing structural opportunity. Trading at approximately 11x EV/2027 EBITDA, accounting for dilution effects and assuming dwindling cash balances by then, it may prove an affordable investment. However, this estimation does not consider any future growth in the consumer segment. Regardless, Udemy is positioned for significant changes in the online learning industry, making it a compelling choice for investors at present.
