Udemy, the online learning platform, paints a picture of optimism amidst a turbulent economic landscape. They champion the "skills-based organization" and the transformative power of generative AI, highlighting these as key drivers of future growth. However, a closer look at their Q1 2024 earnings transcript reveals a potential shift in strategy, one that might be a calculated gamble on the future of AI, even as they face declining enterprise demand.

The company proudly points to a surge in consumer interest in generative AI courses, with over 4 million enrollments since ChatGPT’s launch. This undoubtedly signifies a burgeoning market, and Udemy has been quick to capitalize, boasting the first course on ChatGPT and a rapidly expanding AI course catalog. But here's the curious part: while consumer interest in AI booms, Udemy Business, their enterprise arm, faces significant headwinds.

Despite more than doubling their enterprise customer base in the past three years, Udemy acknowledges “short-term execution challenges” impacting their 2024 outlook. These challenges include issues with reseller partners in the Asia-Pacific region and “softness” in Europe, the Middle East, and Africa (EMEA). Their net dollar retention rate (NDRR), a crucial metric for SaaS businesses, has declined for two consecutive quarters. While gross dollar retention remains stable, indicating customer loyalty isn't the issue, slower expansion and upsells point to a hesitation amongst enterprises to increase their Udemy Business investment.

This begs the question: is Udemy placing a strategic bet on the long-term potential of generative AI, even as enterprise demand falters? Could their "soft landing" strategy be an attempt to ride the wave of consumer AI enthusiasm, hoping it eventually translates into renewed enterprise confidence?

The numbers offer a glimpse into this hypothesis. Udemy has significantly increased its share repurchase program to $150 million, signaling confidence in the company’s future. This move, coupled with their continued investment in AI-driven product enhancements, suggests a focus on positioning themselves for a future where generative AI becomes even more deeply integrated into the workplace.

The timing of their Chief Revenue Officer (CRO) departure adds another layer to this intriguing narrative. With the current CRO leaving in June, Udemy is actively seeking a new leader with experience scaling global businesses from $500 million to $1 billion in revenue and beyond. This points to an ambitious growth strategy, likely hinging on capitalizing on the burgeoning AI market.

Here's where the gamble comes in. Udemy's success hinges on the widespread adoption of generative AI within enterprises. While their leadership academy programs aim to equip executives with the skills to navigate this shift, convincing companies to invest in AI training amidst economic uncertainty is a daunting task.

Furthermore, competition in the enterprise learning space is heating up. Accenture’s recent acquisition of Udacity, another online learning platform, signals a strategic move by global consulting giants into the skills-based learning market. Udemy will need to navigate this evolving competitive landscape while simultaneously convincing enterprises to embrace AI training, a potentially risky proposition in the current climate.

The stakes are high for Udemy. Their bet on generative AI could position them as the go-to platform for skills development in a future where AI literacy becomes essential. However, if enterprise adoption lags, they might find themselves overly reliant on a consumer market that may not fully translate into sustainable enterprise revenue.

Only time will tell if Udemy's calculated gamble will pay off. But one thing is certain: their strategic focus on generative AI amidst declining enterprise demand is a bold move, one that warrants close attention from investors and industry observers alike.

Hypothesis:

Udemy is prioritizing long-term growth in the generative AI market, even as it faces short-term challenges in its core enterprise business.

Their increased share repurchase program and leadership change indicate a strategic focus on positioning themselves for a future dominated by AI.

Numbers:

4 million+: Enrollments in Udemy’s AI courses since ChatGPT’s launch.

$150 million: Increased share repurchase program, indicating confidence in the company’s future.

NDRR decline: From 116% in Q4 2023 to 104% in Q1 2024, signaling hesitation among enterprises to increase investment.

Udemy Business Revenue Growth vs. Net Dollar Retention Rate

This chart compares Udemy Business revenue growth with its net dollar retention rate (NDRR), showcasing the diverging trends.

Source: Udemy Investor Relations

"Fun Fact: Udemy's name is a portmanteau of "you" and "academy," reflecting their mission to empower individuals and organizations through learning."