Q4 2023 Udemy Inc Earnings Call

Participants

Dennis Walsh; Vice President - Investor Relations; Udemy Inc

Greg Brown; President & Chief Executive Officer; Udemy Inc

Sarah Blanchard; Chief Financial Officer; Udemy Inc

Stephen Sheldon; Analyst; William Blair & Company, L. L. C.

Curtis Nagle; Analyst; BofA Global Research

Ryan MacDonald; Analyst; Needham & Company Inc.

Josh Baer; Analyst; Morgan Stanley & Co. LLC.

Connor Passarella; Analyst; Truist Securities

Brent Thill; Analyst; Jefferies LLC

Noah Herman; Analyst; J.P. Morgan LLC

Brett Knoblauch; Analyst; Cantor Fitzgerald & Co.

Kevin Pollard; Analyst; Baird

Devin Au; Analyst; KeyBanc Capital Markets Inc.

Arvind Ramnani; Analyst; Piper Sandler

Presentation

Operator

Hello, and welcome to the Udemy fourth quarter 2023 earnings conference call. (Operator Instructions) I would now like to hand the call to Dennis Walsh, Vice President, Investor Relations. Please go ahead.

Dennis Walsh

Thank you, MJ. Joining me today are Udemy's Chief Executive Officer, Greg Brown, and Chief Financial Officer, Sarah Blanchard.
During this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements. We encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission are forward looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements except as required by applicable law.
In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operation in a more meaningful and consistent manner. As discussed in greater detail in the supplemental schedules to our earnings release a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information, are available on the Investor Relations section of our website. A replay of today's call will also be posted on the website.
With that, I will now turn the call over to Greg.

Greg Brown

Thank you, Dennis, and good afternoon to everyone on the call. I'll start today with comments on our results, highlight some achievements from 2023, and then provide an update on our strategic priorities for 2024.
Udemy closed out 2023 with strong results that exceeded expectations for both revenue and adjusted EBITDA margin. Despite the challenging macroeconomic environment due to the increased full year revenue by 16% year over year. Within that, our leading growth engine YuMi business delivered impressive 34% year over year revenue growth as companies around the world are prioritizing investment and the upskilling and reskilling of their talent.
From a profitability perspective, we delivered our first full year of positive adjusted EBITDA, well ahead of plan. As a company, we made meaningful progress in 2023. I stepped into the CEO role last February, and we further bolstered our leadership team with new chief marketing people and product officers who all bring deep experience within the respective functions to you.
To me on our Q4 call last year, we laid out our strategic priorities for investors and other stakeholders. I'm proud to say that we delivered on each of those priorities, which included first establish new to me as the platform of choice for professional learners and increasing skills development through new learning modalities.
Last year, we significantly grew our learner base, adding 10 million new learners to our platform and more than 1,800 net new unique business customers. We leveraged generative AI technology to create more personalized learning experiences, including capabilities and enable micro learning. We empowered our instructor partners with tools that help create high-quality, on-demand and immersive content faster and more efficiently. Further, we shared our generative AI product roadmap that will transform how professionals develop skills, organizations, recruit and manage talent and instructors, create content.
Second, introduce validation of skills acquisition through badging and professional certification We partnered with one ad tech to bring the open badges standard to our platform. We introduced curated learning fast hands-on labs and assessments to support utility business learners preparation for nearly 200 branded third-party certifications and badges. We also enabled learners to import those badges and certifications onto our platform to signal skills proficiency and to empower organizations with valuable data about their workforces capabilities. Later this year, we would be extending our professional badging and certification capabilities to our consumer marketplace.
Third, accelerate global expansion. We leaned into our partner strategy, further developing our relationships with AWS, SNSA and other technology and regional reseller partners that extend our reach domestically and internationally. Further, our commitment to upskilling and reskilling YuMi also entered into new partnerships with Docker, a leading provider of development tools and service, now a leading digital workflow company, and finally, increased company-wide operational efficiency and progress toward profitability. Thanks to our disciplined approach to driving efficiencies throughout the organization, we delivered positive adjusted EBITDA for the full year ahead of plan.
Building on that momentum, we enter 2024 well positioned to capitalize on a large and growing opportunity. Ai is changing the way the world works and is expected to have a $4 trillion impact on organizations. This unprecedented transformation driven by rapidly evolving technology is expected to affect nearly every professional role in every industry and region. This represents a massive long-term opportunity for you to make since skills are at the heart of this revolution.
More than ever, employers are recognizing the importance of prioritizing proficiency in specific skills rather than solely looking at traditional degrees and job histories. A recent study found that more than 90% of companies believe skills-based hiring is more effective than traditional resume-based approaches, leading to a reduction in miss hours by nearly 90%.
This shift to skills-based practices is becoming increasingly necessary to support workforce retention, facilitate internal mobility and enhanced workplace diversity. In addition, corporate leaders around the world are concerned about a pending talent shortage. A new study found that by 2030 less than six years from now, there will be a global talent shortage of more than 85 million people.
This could significantly restrained companies' growth resulting in trillions of dollars of unrealized annual revenues in the technology space alone, the US could lose out on more than an estimated $160 billion worth of revenues annually unless more adequately skilled high-tech workers are found. As the business landscape further evolves. So to the skills required as demonstrated by the powerful impact of generative AI in just one year. In this current environment, developing workforce skills, especially AI proficiency, is essential for organizations to remain competitive over the long term.
The number one topic we're discussing with leaders in almost every company is how unique and help them develop a digital transformation strategy. As an example, Genpact, a leading global professional services company committed to leveraging data tech and AI services recently expanded their relationship with unique Genpact collaborated with UCB to develop its Gen-i talent Academy, a comprehensive 12 week program focused on developing AI skills with the introduction of this innovative learning program, Genpact not only achieved its goal of upskilling and specialized workforce in generative AI, but it also emerged. It's one of the pioneering entities in the industry. Genpact achieved this goal two times faster than expected equipping their team with the essential readiness to address escalating clients.
Another example is Marriott International, which expanded their relationship with you to me this quarter as they are in the midst of a similar transformation, very out re-leverage the Unum learning platform, including our unique Pro offering and local language collections as they further invest in growing our global digital and technology workforce. Forward-thinking companies like Genpact and Mary are recognized the importance and value of investing in employee, upskilling and reskilling those that don't risk falling behind. We believe skills-based organizations with robust internal R&D programs, see increased employee retention and also achieve better business outcomes for these reasons that many companies today are redefining jobs as collections have required skills considering etrials evolution over the long term.
During the fourth quarter, one of the largest financial institutions in the world engaged me to provide a comprehensive learning solution that supports their goal of upskilling across the organization. This new customer entered into a seven-figure multiyear multiproduct deal, partnering with our team to accelerate the development of cloud and other technology skills with high quality and immersive learning experiences. We continue to see a trend of financial institutions becoming early adopters of AI technology, thus driving meaningful demand from that sector.
Another new customer that engage you to me during Q4 to support their LND. efforts is Airbus, a global aerospace and defense company as Airbus is shifting, focus towards becoming a technology company, reskilling and upskilling existing employees is fundamentally due to me was selected as their partner due to our agile content model that aligns with their shift towards becoming a skills-based organization with emphasis on digital badges and professional certifications.
An initial focus is on digital profiles via the Airbus digital academy, a central hub for all data and tech content where union provides the skills development. It helps their employees keep up with the accelerated pace of technology change. Taking all that into account truly illustrates the importance of creating a culture of continuous learning as central to the future of work traditional R&D models, which were primarily in person as well as publishing models, can't keep pace with today's ever evolving skills needs with our on-demand, immersive and corporate based learning modalities Unum is well-positioned to become the exclusive partner to support any company's transition to a skills-based organization.
Looking ahead, we are refreshing our strategic priorities for 2024, which include first establish MuniMae as the skills development platform of choice for professional learners and organizations. Second, elevate the YuMi brand globally so that it becomes synonymous what skills third support, YuMi business growth through strategic partnerships, strengthening our global distribution capabilities, opening up new routes to market and additional ways to access the unique platform, fourth, accelerate global expansion, and finally, further transform the Lumi platform from an on-demand learning content provider to the most innovative skills development platform, utilizing AI power capabilities to accelerate skills, acquisition and validation for already off to a great start delivering on those priorities.
Two weeks ago, we unveiled our near term generative AI product roadmap and a unique intelligence skills platform and next-generation software solution powered by our rich content model. Unum is comprehensive platform is set to redefine the L&D software landscape by incorporating a suite of cutting edge AI powered capabilities, including a learning assistant skills mapping and several new content creation enhancements for instructors. At the same time, utilize platform will serve as a rich repository of learning data and actionable insights, enabling YuMi business customers to make informed talent management decisions.
Regarding internal mobility and recruitment strategies. Ultimately, Unisys platform will revolutionize the way organizations future-proof their workforce by fast-tracking the acquisition and validation of critical professional skills required to more efficiently develop talent and thrive over the long term. We are excited about the prospects of our product roadmap and are committed to continuing our journey of innovation and transformation. All of this progress sets the stage for 2024.
Although the demand environment hasn't changed meaningfully since our last call in November, we are confident in our ability to grow our business and continue capturing market share. We believe the investments we're making in brand product and our go-to-market capabilities will support our long term performance, giving us confidence that we will reaccelerate ARR growth this year Sarah will provide more details on our outlook in a moment.
One final point before I close. In conjunction with today's results announcement, we also shared that our Board of Directors has approved a stock repurchase program to acquire up to $100 million of the Company's outstanding common stock. This repurchase program not only underscores the confidence that our Board and management team have in the future of MuniMae, but it also allows us to leverage the strength of our balance sheet and deliver returns back to shareholders.
In closing, we remain focused on executing our strategy as we help enterprises around the world transition to skills-based organizations. I want to thank all Unisys employees for their hard work and contributions to the results we delivered in 2023, as well as to our valued instructors, customers, partners and shareholders for your continued support.
Now I'll turn the call over to Sarah for a financial review.

Sarah Blanchard

Thank you, Greg. I'll start with comments on the key financial highlights and then provide our outlook for Q1 and full year 2024. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website.
We outperformed our full year 2023 guidance for both revenue and adjusted EBITDA margins. Revenue of $729 million increased 16% year-over-year, including the negative impact from foreign exchange or FX of three percentage points. While we delivered our first full year of positive adjusted EBITDA ahead of plan. We could not be more proud of our team for their hard work over the past year to deliver these results in a challenging environment. I will focus the rest of my comments on the fourth quarter results.
For the fourth consecutive quarter, our results exceeded guidance on both the top and bottom line. Revenue increased 15% year over year to $190 million or nearly $3 million above the high end of our guidance range through year-over-year growth included a negative impact from FX of one percentage points. Contribution from regions outside of North America was 60% of total revenue, an increase from 59% in Q4 prior year. Similar to previous quarters, our enterprise business continues to deliver best-in-class software company performance. Uv business revenue increased 27% year over year to $115 million. Included in that growth was a two percentage point headwind from changes in FX rates.
We ended the year with annual recurring revenue or ARR of $466 million, up 25% from a year ago. From a macro perspective, the current environment remains volatile and sales cycles remain elongated, contributing to slower than expected conversions across most regions. While we were generally pleased with Q4 ARR, we did have softer than expected performance in Vietnam and South Korea, where we have reseller partnerships and saw continued weakness in the EMEA region.
Encouragingly, we are seeing higher quality leads coming through the pipeline and deal size and term lengths are up with a number of $100,000 plus deals and multiyear contracts in air are showing meaningful year-over-year growth as of the end of 2023, we signed 80% year-over-year increase in seven-figure deals in air are a testament to the value of large corporations are assigning to L&D investments globally. Our consolidated net dollar retention rate at year end was 106%, flat compared to the prior quarter. The rate was 113% for large customers, are those with 1,000 or more employees, just one point lower than the prior quarter.
It is encouraging to see net dollar retention showing signs of stabilization as we enter our new year. On top of that, gross dollar retention was unchanged. Once again in aggregate, we grew our customer base by 13% year over year to nearly 16,000 customers globally. Our consumer marketplace continues to be vibrant. Approximately 34 million average monthly unique visitors came to our site during the quarter, and instructor engagement remained strong, more than 5,000 new courses were added each month on average, and 60% of our top courses were updated in the past 90 days.
For the quarter, consumer revenue was flat on a year-over-year basis, and the impact from FX was not meaningful as we move down the P&L. Note that all financial metrics are non-GAAP. Unless stated otherwise, Q4 gross margin was 59%, a 200 basis point improvement from Q4 2022, driven by the continued revenue mix shift to the business, which accounted for 61% of total revenue in Q4, an increase of 600 basis points year over year.
Gross margin for our Unity business segment came in at 69% for the fourth quarter, up 200 basis points from the prior year. Total operating expense was $114 million or 60% of revenue and 1,200 basis points lower than Q4 of last year. Thanks to our focus on company-wide cost efficiency. Sales and marketing expense represented 40% of revenue, down 700 basis points. R&d expense was 12%, down 200 basis points and G&A expense was 8%, down 300 basis points.
On the bottom line, we delivered net income of approximately $4 million or 2% of revenue. Adjusted EBITDA was positive for the third consecutive quarter at approximately $4 million or 2% of revenue, representing a 1,400 basis point expansion year over year and 100 basis points above the high end of our guidance range.
Better than expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to ensuring operational efficiency throughout the organization.
Moving on to key cash flow and balance sheet items. We ended the quarter with $481 million of cash, cash equivalents, restricted cash and marketable securities. Free cash flow for the quarter was negative $11 million, driven by timing related to bookings and collections.
Now to introduce our outlook for Q1 and full year 2024. We are cautiously optimistic about 2024. Given the lingering uncertain macroeconomic conditions, the environment is beginning to show early signs of stabilization. Our approach is unchanged. We are monitoring the environment closely and are taking prudent steps to position ourselves to move fast once green shoots start to materialize.
On our last call, we shared that 2024 will be a heavier investment year than future periods. We have aligned our strategy as well as our investments in product innovation, brand and go-to-market capture the increasing global demand for skills development. For modeling purposes, we anticipate that OpEx as a percent of revenue will be greater in the first half of the year. We expect our strategic investments in brand and product to begin delivering returns in the back half of the year, which we're confident will result in a reacceleration of ARR. Growth follows the UV business revenue growth. With that, we expect Q1 revenue to be between $193 million and $196 million. Assuming foreign currency exchange rates remain constant, FX is not expected to meaningfully impact to Q1 revenue growth.
On the bottom line, we are targeting breakeven for Q1 adjusted EBITDA margins. For the full year, we expect revenue to be within a range of $795 million and $810 million or 10% year-over-year growth at the midpoint, including an estimated three percentage point negative impact from FX, assuming no further changes in rates. Further, we expect EUV business revenue will account for more than 60% of total revenue for the full year.
On the consumer side, we remain focused on maintaining a vibrant marketplace in 2024, which will continue to fuel the flywheel that powers the UTV business's growth. As a reminder, we are not currently investing behind consumer revenue growth. Therefore, we anticipate it to be down 3% to 5% year over year in Q1 and on a full year basis. On the bottom line, we expect full year adjusted EBITDA margin of 150 to 200 basis points going forward, we will continue executing on our strategic initiatives as we progress toward our long-term financial targets.
Although it won't be a straight line, we are confident that we will achieve our adjusted EBITDA margin target of 15% to 20% by 2027, driven by the revenue share change, continued revenue mix shift to utility business and OpEx leverage primarily from sales and marketing as we scale globally, we plan to make significant investments in brand and product innovation, while also focusing on expanding operating and free cash flow margins with the introduction of our share repurchase program. We can opportunistically return capital to our shareholders throughout the year as we execute on our long-term initiatives. And as the macroeconomic environment improves, we are well positioned to create significant shareholder value.
In closing, 2023 was a transformative year for us, and we are proud of the milestones we achieved our outlook for 2024 does reflect challenges we experienced in Q4 that flow into the first half of this year. However, the long-term growth opportunities in this space are significant. It to me provides a comprehensive solution that addresses increasing demand to support companies as they transition to becoming skills-based organizations and develop strategies around generative AI. With all of that in mind, we are as excited as ever about the future and look forward to keeping you updated on our progress.
So with that, we'll open up the call for your questions. Moderator?

Question and Answer Session

Operator

Thank you very much. We will now begin the question-and-answer session. (Operator Instructions) Stephen Sheldon, William Blair.

Stephen Sheldon

Hey, thanks for taking my questions. First here, just on the revenue guidance, would be great to get some color on the growth assumptions you've made between consumer and utility business.
And then just generally, I guess at a high level, how you factored in broader macro trends and your guidance seems like you maybe have taken a conservative approach there. But are you are you kind of assuming that the budgetary pressure from organizations continues throughout the year on the business side? Just the Bussmann detail there?

Sarah Blanchard

Thanks for the question, Stephen. So first, we're very pleased with the quarter delivering UV revenue up 27% year over year and million-dollar-plus customers up 80%. And our full year, our EBITDA profitable ahead of schedule. But our guidance really took into consideration a few things. One is there is still this macroeconomic volatility, and we expect that to continue for some period of time. And as we spoke about, we did see some execution issues in the second half of Q4. And specifically, that was with some of our reseller partners in Korea and Vietnam, and we saw extended softer performance in Amea.
On the consumer side of things. The focus for us has been marketplace vibrancy, and we are seeing an increase in customer acquisition cost while at the same time our ASPs are up, but putting those two things together along with the pullback that we've had over the past two years in performance marketing spend our focus really is on continuing to see 5,000 courses, you know, a month being published and that constant stream of high-quality, fresh, broad content. We are not going to be reinvesting behind consumer until we're reporting some of the UV capabilities for our learners over to our consumer side of things. What we're looking at for the year is we are in the process of taking some actions to address the performance and execution issues we saw in the back half of Q4. And so we've set prudent expectations for the first half because those initiatives will take some time to take hold, but we do expect ARR growth while it will be down a bit in the first half. Does that accelerate in the back half.

Stephen Sheldon

Got it. And is there any way to frame it for Korea and Vietnam? I guess, is there any way to frame roughly how big those countries are in terms of from the contribution to ARR?

Greg Brown

Hi Stephen's a good question. So I won't get into the specific numbers or economics around it, but we did get surprised and material enough for us to call it out to you. And the actions we're taking is we're putting GMs in the process of we've only got one of these hires in both countries in Korea and Vietnam to bolster leadership as well as ensuring that from an enablement perspective, we're taking all the knowledge and best practice we've learned on a global basis.
And then specifically in Japan, where we've seen continued growth and acceleration and porting that over to Korea and Vietnam. And that leadership is going to is going to help with that. So those are the actions we've taken and Sarah also mentioned it wasn't just exclusive to Vietnam and Korea. We did see our execution issues in other segments, and we're taking similar action in those areas. So the net of it is we're confident that we know what we need to do to address the execution issues. The plans are in flight. And as Jerry mentioned, we are confident that we will see acceleration and ARR growth in the back half of the year.

Stephen Sheldon

Got it. That's helpful. Just maybe then switching to the margin guidance, you're not assuming much expansion relative to where you ended up at 2023, even with the upward trend in gross margin that you talked about that in the right expectation last quarter. So kind of Express, but be great to get some detail. It seems like you're maybe ramping the strategic investments. I'm just some more detail on specifically kind of what your where you're making those investments?

Sarah Blanchard

Yeah, it's a great question. As you said, we have shared that this year is going to be an investment year for us. So while we expect about 300 basis points of expansion from a gross margin perspective from both the instructor revenue share changes and from the continued mix shift to UB., we are reinvesting the majority of that back in the business such that this year, we expect about 150 to 200 basis points in the bottom line. Those investments are in three areas, mainly the first is brand. You to me historically has not invested in brand and now is the time the second is in product investments, specifically, Sam AI enabled capabilities that are going to be complete game changers for the value that we can deliver to our customers. And I'll let Greg share a little bit more on that on.
But the last thing is in specific areas where we did see great performance in certain segments, we will be continuing to expand the go-to-market teams there.

Greg Brown

I'll just add, Steven, that we could not be more excited about the investments we're making and the impact these investments will have in terms of the intelligence skills platform. We just talked about it a little bit, but it is going to be a game changer for us and most importantly for our customers as we begin delivering skills mapping, which is going to save LND. teams, hundreds of hours and the learning assistant, which is going to develop excuse me, going to deliver a personalized learning experience that is transformative and something that we have not been able to accomplish without the addition of generative AI into our tool kit and then automated Q&A for instructors. Today, many of our instructors spent hours answering Q&A has enabled us to answer those questions in seconds and then instructors validate the answer and then often go. So this is just the beginning.
And one of the things we're probably most excited about now that we have the ability to leverage is the data that we get from 69 million learners on the platform, our cross 220,000 courses that gives us ability to feed that data into our LOM and then be able to produce insights back to our customers about the most valuable resource, which is their people that can enable them to transform how they run their businesses and leverage those that those valuable resources. So we're at the front end of this. We're making some big investments right now. We're already starting to see as these investments start to have an impact and we'll be talking more about this as the year progresses.

Stephen Sheldon

Very helpful. Thank you.

Operator

Curtis Nagle, Bank of America.

Curtis Nagle

Terrific. Thanks very much for taking the question up one, maybe just more of a clarification in terms of, I guess the pullback or decision not to invest more in marketing to, I guess, stabilize the consumer revenues. It sounds like the return hurdles are quite high and just are too high to justify the investment. Is that the case or anything else you'd, I guess, elaborate on.

Sarah Blanchard

Yes. Really what we're looking for before we start to invest more than we are currently from a marketing perspective behind consumer is getting some of the functionality that we're launching and UB first on the consumer platform, such that the LTVs of those consumers make those learners make sense. And so for us, it's all about balancing where you're investing, balancing growth and profitability to the business is the growth engine of our business.
And so we're focused our investments there first. So we will be putting some of those capabilities like badging and certifications onto the consumer platform and then making some decisions about how we invest behind it.

Curtis Nagle

Okay. And then just one on UB. in terms of the accelerating revenue for AAR. Sounds like that's a 2H events. I guess aside from maybe a clear macro and maybe more importantly, new product rollout and what are the catalysts and what really gives you the confidence to say that you think that's going to happen from this point right now?

Greg Brown

Yes, good question. Thanks. Is in terms of forward, look, are those the look forward as far as UB and our confidence with respect to the ARR growth and expansion in the back half of the year really comes down to three primary areas. The international expansion that we're leaning into and investing in is a massive opportunity for us based on the brand awareness we have in countries like India and Brazil and the legal intends that we've already knocked down in these markets.
It gives us a lot of confidence that we can we can run the run the table with the right investments and the right programmatic approach. Second is the leverage that we believe we will get through the investments we're making in strategic partnerships with the likes of AWS, service now Docker and many others that we're engaged with, and there'll be more to come as we start to progress throughout the year. But we absolutely believe that we're going to see material leverage from these partnerships.
And then finally, it's brand and product investments. We've talked quite a bit about the product investments already as we're making equally important investments in brand and those AI related product investments of which I just highlighted are really are going to transform learning in organizations. And again, we're at the front end of this. And so we're making some big bets those bets are well-placed, and we expect those bets start to materialize in the back half of the year, which it gives us a lot of confidence that that ARR growth will happen.

Curtis Nagle

Okay, very clear. Appreciate that.

Operator

Ryan MacDonald, Needham & Company.

Ryan MacDonald

Thanks for taking my questions. Maybe first, starting on the investments. Can you help me understand the investment in brand on obviously wouldn't be a very large marketplace. You know, millions of learners are coming from onto the platform. You have had a pretty good B2B business in terms of gaining share. Help me understand where you feel like you need to invest incrementally to build out the brand. And I mean, are there opportunities that your or best that you think you're not getting still? Or maybe just help provide some more context around that? Thanks.

Greg Brown

Yes, happy to right. So like most organizations, we do brand surveys on a fairly frequent basis. And our unaided and aided brand awareness in a number of our key markets is much lower than we would have thought and much lower than you would expect. And so yes, we believe that there will be a halo effect and we will get significant lift and by investing in developing new demands to have a household name synonymous with skills and skills development within organizations, large and small. And so we're underway and the investment we're making in McLaren and the partnership there and multiyear investment is just one of many investments we're making to start to elevate the brand and give us an opportunity to make it much easier for our sales organization to have that first conversation in terms of just the awareness of the value and impact a relationship with you to make can bring.
So, yes, yes. Top funnel without question is quantified impact. Ryan, is a goal and focus. And we are quantitatively measuring the investments in brand in a variety of different ways and that we're excited about the yes, the early impact we're starting to see and the programs are just kicking off. So yes, there's a big opportunity for us there, really.

Ryan MacDonald

Yes. Appreciate the color there. And maybe for a follow-up. On the product side, obviously great to see the investments on AI. generative AI and then obviously skills mapping from that from the checks that we've had out in the marketplace. It seems like that with a I know a lot of interesting functionality out there early days, but there's still a hesitancy, you know, with heads of LND, `CHRO.'s, you know, to invest in this area or maybe just not sure where to start on skills mapping. It's something that seems like most organizations we speak you wants to move towards, but it's not an easy fix. So as you think about some of these product investments and then commercializing those, how do you start to get customers over the hump this year? Was you as you know, more broadly go to market with that functionality? Thanks.

Greg Brown

And that's really going on. So first, I'll say that the example we gave the Genpact example Genpact, creating their own AI Academy. We're seeing that type of scenario play out in a number of our engagements.
Another one is just to give you a little bit more color and bring this to life, Emirates, integrated telecom, Middle East and for I think this is one of the first large organizations in the Middle East has developed their own version of an academy. They call checkup and they partnered with us specifically to up-level the AI. literacy in the organization with respect to chat GPT. and a key component of that was being able to validate that their employees that acquire those skills through our validation capability, how they started with tech skills first, and they're in the process of putting the plan in place to expand to management leadership coaching and then the sales organization.
/So although it may feel like you're doing some market tests and touch points that a lot of organizations and are are in the exploratory stage. There's also the progressive organizations that are much beyond that, their movement. And we believe that those are the organizations that are truly going to get a leg up and have the ability to distance themselves in their category. And so again, we're enabling that and our content and the focus we're putting on enabling our customer success organization to help these companies develop the right strategy.
In addition to the platform that we provide, it really is one of the key components because in a ride platform without the threat of what most organizations don't have to do this, right. They're looking for it from from us are looking for as much of the strategic value and insight in terms of how to think about developing have a capability around AI in their company as much as they are the platform to do it. And we've invested heavily to enable our customer success organization to provide that strategic level of service and support upfront to enable the organization to get comfortable with making that investment starting that transition. So there's a lot that goes into it you're absolutely right. And we've made some big investments and we'll continue to make those big investments to help organizations take that step. And the ones that have we are already starting to reap rewards as a result. And we're doing that ourselves by the way, right? We put everybody in our organization through a boot camp and a lot of the progressive companies are doing just that .

Ryan MacDonald

Look forward to seeing the progress. Thanks, Greg.

Operator

Josh Baer, Morgan Stanley.

Josh Baer

Great. Thanks for the question. I wanted to stick with growth and margins and thinking about it from a Rule of 40 basis, I think in '23, it was close to 17%. And then guidance implied is closer to 12%. And so with that in mind, two areas of questions. First, what is your growth margin framework and how should investors and what should we say what should we expect from Rule of 40 metric from a philosophy standpoint? And a second, if you could talk through any areas of conservatism that are embedded in this initial guide?

Sarah Blanchard

Yes, thanks for the question. Our philosophy around Rule of 40 is we are working toward achieving that for this year. What we see is at the midpoint, it's about 10% revenue growth, then that includes about three percentage point headwind from FX. What you have to remember is we are sitting in front of a massive opportunity and organizations have to transform how they upskill and reskill their employees to stay up with the pace of change and to embrace AI technology and other things that can actually really help their businesses. And so you as you're thinking about the long-term opportunity, this is an investment year because of our position because of the opportunity in front of us.
`We are always thinking about balancing that growth balancing profitability with the long term, our long-term expectations around EBITDA margins have not changed. We are still committed to achieving long-term or long or EBITDA margin of 15% to 20% by 2027. And so while we work through some of these short-term execution issues that are impacting the top line in the first half, we continue to invest in the say the things that are going to drive that long-term growth continue to deliver UV growth at scale above 20%. And at the same time, we are committed to continuing to pursue areas of operational efficiency, which you saw us deliver against very meaningfully in 2023.

Josh Baer

Great. Very helpful.

Operator

Terry Tillman, Truist.

Connor Passarella

I'd say and this is Connor on for Terry's question. Taking the question. I just wanted to ask one as it relates to you'd be curious on the uptake of badging and certification and how the adoption curve is so strong that there hasn't been coming mostly from the advanced L&D organization so far? Or has it actually been more mainstream with adoption coming from, I guess, with a variety of organizations. Thank you.

Greg Brown

Yes, Conor, good question. Yes, we continue to remain that remain very bullish and excited about the adoption of badging and certification as well as the probably most importantly, the value and impact that is starting to have I give an example. We've got a large large multinational tech company that decided to run a side-by-side A/B test with 200 consultants and the A/B tests was around AWS certification. First, 100 ran through the process of educating themselves and then taking the certification way. They always had in the second group leverage our content and you have to meet a pro our immersive learning capability to prepare them for that test the group that use our technology, our platform and our approach on net certification and half the time and at half the time equated saving 15 hours per person for the prep along the of the path of acquiring a certification. So we're starting to see meaningful impact.
The combination of UTM ePRO and our validation capability around badging and certification. That's just one example of many that are like that. And we are starting to see even more velocity and impact around us winning new business as a result of having the full complement on our platform of tech content, soft skills, power skills, content management, leadership, development content, all with the ability to to validate and form of badging and certification and skills have been acquired again, coming back to our approach around skills development and developing that intelligence skills platform. So I'll just say really excited about what we're seeing and we expect it to continue.

Connor Passarella

Really helpful. Thanks, guys.

Operator

(Operator Instructions) Brent Thill, Jefferies.

Brent Thill

(technical difficulty) thanks for taking the question. I wanted to ask you an automated Q&A. I'm going to talk a little bit more about the strategy about how you guys are building that and going about it. I guess, what are you building your own LM. four U. partnering. And um, I know you talked about it being used for answering and structure instructor questions quicker for instructors to them, book, adding and know validate how, but is there an opportunity to roll this out more broadly to the consumer in a way where it's not necessarily correlated, but can help someone who's just trying to understand any question.

Greg Brown

Yes, good question. So effectively how it works and I'll keep this very brief is we have trans We automating have we developed that we've automated the ability to develop transcripts associated with all 200, 20,000 courses that are on our platform. We feed those into the LM, and that gives us the ability as obviously AI enabled to light up the ability to answer questions as they come through instantaneously because we've got all the insight and information the transcripts from all of the courses that our learners would take. And so really what that does, and we've got many instructors to spend upwards of 50% of their time of day four hours a day, either themselves or their TA.s.
Please transition assistance answering questions so that removes all of that time and energy that goes in answering those questions now, all they have to do is validated. The answers are accurate, make any adjustments hit send an offer goes, and we're really excited about the level of accuracy we're seeing in early days. We know as we continue to educate DLM. and that happens automatically that the accuracy is going to improve over time and do we have the ability to port this type of capability to the consumer experience? The answer is yes. And in a variety of ways, and we're really excited about that. I mean, I'd say one of the things we're most excited about in the short to midterm is porting the badging and certification capability to the consumer experience so that all of that validation opportunity is now made available in that environment.
In addition to all that the capabilities we're talking about now that we're initially launching into the enterprise segment, everything that's applicable. We're going to port down to the consumer experience. So you can surely expect the enhancements to flow down and that process will not be elongated. We expect that to be a fairly quick process.

Operator

Noah Herman, JPMorgan.

Noah Herman

Hey, guys, thanks for taking the question. With respect to linearity in the quarter, can you provide just some color on the top of funnel demand and conversions throughout the quarter? Th////anks.

Sarah Blanchard

Yes, I'll take that. Thanks for the question, Noah, on. So very typical with a fourth quarter and any quarter, but you see this more. So in the fourth quarter, the bookings come in the last month. And so from a linearity perspective, you book a small portion. That's one a small portion in month two and then the most significant portion in the last month. And that's exacerbated in Q4 as companies are figuring out their budgets for the next year. And so that's what we saw and expected again in this quarter. And when we got down to the last that last month. That's where we identified some execution issues with the bookings that come in as expected. And in some respect, it was some masked a little bit by the macro, but we are taking actions against that and we expect to see that those initiatives take hold in the back half as we continue to invest in all the areas that are targeted drive our long-term growth.

Operator

Brett Knoblauch, Cantor Fitzgerald.

Brett Knoblauch

Yes, thanks for taking my question. Maybe just on the broader budgetary commentary I think JNI has been making waves for over a year now. And I think this is supposed to lead to increased reskilling and upskilling by organizations. And so I guess what's the holdup or hesitancy hesitancy on the organization's part? And what do you think is going to be the cause for an inflection and what they're willing to spend money on from a risk perspective? Thank you.

Greg Brown

Yes, good question. I'll take that. So amidst the guidance that we provided, I think it's important to call out that we are seeing strength in our enterprise segment, North America and around the world. And we're seeing accelerated and expansion opportunities start to come to life and get executed and the pace of those starting to increase and given example, Mccotter Libra as the largest e-com fintech company in Latin America just expanded significantly expanded their relationship with us this last quarter from initially Argentina, Brazil to all of Latin America based on our ability to connect to us to help them execute their strategy with respect to upskilling and reskilling their tech teams and beyond, including AI, which was a key component of that on an ongoing basis. And that's as a result of the success. We had an initial two countries and you look at a government entity by County, Los Angeles 100,000 employees been a customer since 2021 based on the success that they saw an over 90% of their supervisors, seeing an increase in productivity and employee engagement who's a quantifiable impact.
We made a decision to deploy 200,000, proud of that as a subset. So we are seeing acceleration. We are seeing organizations spend money. We are seeing organizations leaning into the notion of we have to develop the skills necessary for us to be competitive and win in this environment where the pace of change is increasing every day. So it's as much as I know right now, based on the guide, it may appear that we are taking a conservative approach to the year. There's no doubt about it, but it may appear that that's up. The velocity of the business is not necessarily where we would like it to be. And the reality is we already talked about it some of the execution issues. But what we're really excited about is the impact we're starting to see in the enterprise. We're starting to see dollars be spent at an accelerated pace consolidations continue to happen.
The myriad opportunities we talked about was a consolidation to our platform for multiple large multinational financial institution that we talked about. Seven-figure deal consolidation from multiple to our platform. So momentum is building in our enterprise segment, which by the way, is 80% of our revenue. But that's hidden a little bit based on the guide and based on some of the execution issues we did see coming out of Q4, which we absolutely are confident will be rectified. So I know that's probably a little bit more color and you were looking for, but I think it warrants it because the reality is this business is very healthy and on really solid footing. Don't forget UB is projected to exit the year at $0.5 billion in revenue, growing over 20% year over year with a massive TAM and significant tailwinds. So the opportunities in front of us, we've got a very solid foundation that we're growing from. And the economic climate we believe throughout the year is going to enable us to execute at the level we've talked about. So I'll leave it at that.

Operator

Jeff Meuler, Baird.

Kevin Pollard

Yes, thank you. It's [Kevin Pollard] on for Jeff. You mentioned that sales cycles remain elongated. Maybe just put that into context, are you seeing incremental elongation in the sort of stable at higher levels? And how much longer are they than you would expect for a normal sales cycle.
And then sir, I think you had mentioned something about higher quality leads in the pipeline. Just any color there around what makes sense? Maybe you characterize them that way?

Sarah Blanchard

Yes, thanks for the question. So sales cycles have did not elongate further in Q4. We did see some pockets in Q's three where the sales cycle pulled in a little bit, but we are nowhere near historic levels. Still. Those sales cycles are they're pretty stable. That elongation continues, but did not get worse from a quality of leads in the pipeline there has been a lot of work done on our funnel and ensuring that we are capturing the leads and then spending our resources on following up on the lease that are more likely to convert. So we have seen our win rates go up and that is a function of the quality of the leads that then get converted and opportunities for us are those parties that are more interested that know more and understand more about our business because of the upfront work that we've done on the marketing, the outbound side.

Operator

Jason Celino, KeyBanc Capital Markets.

Devin Au

Hi, Greg. This is actually Devin on for Jason today. Thanks for taking our question. I just wanted to ask a follow-up on your expectation of ARR growth to pick up in the second half. Are you also assuming net retention to improve and also new customer growth can accelerate in the second half. Just any additional color you can provide on your confidence that? Thanks.

Sarah Blanchard

Yes, great question. From a net dollar retention, we don't give out guidance on that, but what we expect is once that net new ARR starts to pick up in the back half, that will, over time translate into an improvement in net dollar retention, which again, is still strong in this macro, 113% for our large customers and stable at 106% overall from a logo perspective, because I heard you talking a little bit about customer count there. What we did in Q4, you see some of the the smaller side of our estimate the business on not renew at year end, but that is something typical that we also saw last year where we add more logos in the third quarter than we do in the fourth quarter, where that enterprise business continues to chug along and drive that growth, but you see some attrition on the low side.

Operator

Arvind Ramnani, Piper Sandler. Please go ahead.

Arvind Ramnani

Hi. Thanks for taking my question. I wanted to ask about some kind of kind of staying disciplined on on on going to operational efficiencies and you kind of being prudent and on real spend money but also at the same time and making investments that I had heard both of them through the call. So I just wanted to kind of reconcile those. There's two dynamics on the expense side?

Sarah Blanchard

Yes, I'll take that question. Things, Arvind. So if you just look across '22 and '23 from a percentage of revenue, what we are spending on the different functions in the organization that has come down dramatically. And that is because of the operational efficiencies, the systems that we're investing in, the processes that we're investing in to drive that operational efficiency, and we're going to continue doing that. You heard Greg say that we have done in a boot camp across the organization.
There are AI investments that we can make for our operations, not just our platform, but for our operations that will continue to drive operating efficiency. At the same time, we are going to be investing in the R&D capabilities that we spoke about and our brand spend that is new. And so those two things are balanced out. And that's why you're seeing we had significant margin expansion in the bottom line in 2023, but it's only going to be modest in 2024 as we make those investments and continue to focus on capturing long-term growth.

Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the call back to Greg Brown for closing remarks.

Greg Brown

Thank you. And I would just like to thank you all for joining the call today, and we look forward to connecting again in May for the Q1 update. So thank you again. Have a great afternoon.

Operator

The conference has now concluded Thank you for attending today's presentation. You may now disconnect your lines.