UDMY Q3 Deep Dive: Subscription Shift Drives Mixed Outlook Amid AI Investment

Online learning platform Udemy (NASDAQ:UDMY) beat Wall Street’s revenue expectations in Q3 CY2025, but sales were flat year on year at $195.7 million. On the other hand, next quarter’s revenue guidance of $192.5 million was less impressive, coming in 2% below analysts’ estimates. Its non-GAAP profit of $0.13 per share was 38.7% above analysts’ consensus estimates.

Is now the time to buy UDMY? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Udemy’s third quarter was marked by a positive market response, as the company’s subscription-based pivot fueled recurring revenue growth and margin improvement. Management cited the 8% year-over-year increase in consolidated subscription sales as a key driver, with CEO Hugo Sarrazin emphasizing, “Subscription customers are our best customers.” Progress in enterprise upskilling initiatives and strong consumer subscriber trends offset ongoing transactional revenue declines. CFO Sarah Blanchard also noted that operational discipline and the shift to higher-margin subscription products supported the company’s improved profitability.

Looking forward, Udemy’s guidance reflects management’s decisive push toward subscription revenue, which is expected to comprise a larger share of total sales. The company is accelerating investments in AI-powered learning tools, career-focused journeys, and partnerships to drive long-term growth. Blanchard explained, “We are intentionally reducing Transactional core sales in favor of recurring subscription revenue, which will slow near-term segment growth.” Management cautioned that these moves may create short-term headwinds for revenue, but believe they will position the business for greater stability and upside as AI adoption and workforce reskilling accelerate.

Key Insights from Management’s Remarks

Management attributed the quarter’s margin gains to the ongoing shift toward recurring subscription revenue and improvements in both consumer and enterprise engagement.

• Enterprise upskilling momentum: Udemy Business saw renewed demand from companies investing in AI transformation, with Sarrazin highlighting robust engagement in technology, manufacturing, and financial services sectors.
• Consumer subscription acceleration: The consumer segment exceeded its paid subscriber target, supported by marketing optimization, a revamped call-to-action strategy, and partnerships—most notably with Indeed, which drove higher conversion rates.
• AI-driven product enhancements: Management showcased new platform features including AI learning paths, role play technology, and integrated assessment tools, designed to improve skill mastery and provide measurable outcomes for learners and enterprises.
• Instructor engagement and monetization: The company is introducing new ways for instructors to earn through live coaching and cohort-based experiences, aiming to counterbalance reduced revenue shares and strengthen platform stickiness.
• Operational efficiency: Gross margin and operating margin improved year over year as the subscription-first approach scaled, with Blanchard indicating that ongoing cost controls and higher value sales contributed to the stronger financial profile.

Drivers of Future Performance

Udemy’s forward guidance is shaped by its accelerated shift to subscriptions, AI investment, and evolving enterprise and consumer learning needs.

• Subscription-first strategy: Management expects recurring revenue to account for approximately three-quarters of total sales next year, but acknowledges that reducing transactional sales will weigh on near-term growth, particularly in the consumer segment.
• AI and product investment: The company is increasing spending on platform personalization, AI-driven content, and partnerships with certification providers, aiming to enhance learner outcomes and expand addressable markets. Blanchard noted these investments will moderate margin expansion but are deemed necessary for future differentiation.
• Enterprise demand and market risks: While the enterprise pipeline remains strong, management cited persistent pressure on learning and development budgets. Sarrazin described a “dichotomy” where organizations face uncertain macro conditions, requiring Udemy to demonstrate clear ROI to win larger deals and consolidate vendor relationships.

Catalysts in Upcoming Quarters

Going forward, our analyst team will monitor (1) the pace at which subscription revenue overtakes transactional declines in the consumer segment, (2) progress in monetizing new AI-powered tools and features such as role play and assessments, and (3) further expansion in large enterprise accounts and strategic partnerships. The impact of ongoing investments in product innovation and the stabilization of net dollar retention rates will also be crucial for Udemy’s long-term trajectory.

Udemy currently trades at $6.50, up from $6.40 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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