Udemy IPO share profit margins are better than they appear

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Udemy (NASDAQ: UDMY) is an education market business that went public in October. Marketplace businesses provide a connection point for third-party buyers and sellers. Since these are companies with light assets, profit margins are often very good.

However, if you look at Udemy’s gross margin, it might not be as high as you might expect for this type of business. Still, there is a logical explanation. In this video by Motley Fool Pass behind the scenes, recorded October 25, Fool contributor Jon Quast explains that most markets distinguish third-party sales volume from revenue, which improves the appearance of gross profit margins. Udemy, on the other hand, does not present its financial statements in this way.

Jon Quest: Yeah. Thanks, Danny. The first one I want to talk about today is a company called Udemy. Udemy filed for an IPO on October 5, so earlier this month, and is looking to raise around $ 400 million on its IPO. It will not be made public via SPAC, but via the traditional route of the IPO. I have a few slides here that I will share. We’re going to be working on a few things that caught my eye with Udemy.

What Udemy does. Udemy is an educational marketplace. When you think of a market business, it is not about selling a product, but providing a place where those products and services can be sold. In the case of Udemy, it offers digital real estate for online courses, things you can learn about how to do different things. It has more than 44 million learners. It’s a very large user base there. These are the people who are registered and who register to acquire the various skills present on the Udemy platform.

Over 65,000 instructors. Now that looks like a lot out there. Keep in mind that only 5% of instructors generate 70% of revenue. It’s really a small subset of instructors who teach the courses that people sign up for, who sign up for them. However, it is a very large base of people trying to distribute their courses on Udemy.

Forty-four million learners, up from just 10 million in 2017. They’ve really seen rapid adoption there, more than quadruple their learner base in the past four years. Over 200 million course registrations in 2020. A user can register for multiple courses, over 200 million course registrations, and over 183,000 courses. There are other companies like Udemy on the stock exchange. But what you’re going to find is that in a lot of these cases they’re more limited in what they offer. Fewer instructors, fewer courses, and therefore, in some cases, fewer people on the platform.

Udemy’s strategies are a bit different. These are a bit more informal. They are 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 around the world by connecting them with the knowledge and skills they need to be successful in a changing world. I underlined the words I made in their mission statement because I wanted to highlight them. There are two parts to this business; people and organizations. They just have you and I can go to Udemy.com, sign up and sign up for classes. These are the possibilities for the people.

However, they have a growing part of their business which is a subscription service for large companies, organizations like Apple is a customer, Aflac is a customer, Volkswagen is a customer of Udemy. They pay a subscription to Udemy, giving their employees access to the various courses.

All over. It is a global business available in over 75 languages ​​around the world. They have courses and connect them. Again, this is about the market side of what Udemy does.

Financial. Udemy’s finances look pretty good. Can you still hear me well? Udemy 2020 revenue, $ 429 million, nearly $ 430 million, up 56% year over year, very good growth rate. However, this is no different than what we have seen for many educational technology companies in 2020. People at home were interested in trying new skills, in learning new things. It’s pretty much consistent with what we’ve seen from a lot of companies.

The first half of 2021, $ 250 million up 24% year over year, so continuing on, building on the gains they made last year during the pandemic, you’re loving it see this.

Gross margin, 51%. Now for those who are familiar with the companies in the market this may sound a bit weak and I will explain why. A company like Etsy, it’s a market. They don’t manufacture the products they sell on their website. They provide a space where sellers can bring their products and sell them to Etsy users. Because Etsy doesn’t have the merchandise, their gross margins are really high, 73%. Fiverr is another market company with gross margins of 83%.

Udemy they don’t create these courses why is their gross margin so low? This is because they don’t count income the same way as many companies in the market. If you go to Etsy’s financial talks, they’ll talk about their merchandise volume and then their income. Commodity volume is the dollar amount of what is bought and sold on their platform. Etsy doesn’t do all of that, they only do one part, that’s their revenue. They distinguish between volume and turnover. Most companies in the market do. Udemy does not. Payments from their instructors are included in their turnover.

If you adjust the money instructors make on the platform, Udemy’s gross margin actually looks a lot better, where have I got it, around 82%. Let’s go. If you adjust for it, that’s the difference in what we’re talking about.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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