UDEMY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and our final prospectus filed with theSecurities and Exchange Commission , orSEC , pursuant to Rule 424(b) under the Securities Act onOctober 29, 2021 ("Final Prospectus"). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Part II, Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Form 10-Q and in our Final Prospectus. Overview Our mission is to create new possibilities for people and organizations everywhere by connecting them to the knowledge and skills they need to succeed in a changing world. Our marketplace platform, with thousands of up-to-date courses in dozens of languages, provides the tools that learners, instructors, and enterprises need to achieve their goals and reach their full potential. We believe traditional education and training methods are fast becoming outdated. Technological advancements and novel industries have significantly altered the types of skills required of workers, and lifelong training and continuous skills acquisition are becoming the norm. There is a clear need to expand access to learning across traditional barriers such as geography and social demographics.Udemy operates a two-sided marketplace where our instructors develop content to meet learner demand. Courses can be accessed through our direct-to-consumer or Udemy Business, or UB, offerings. Our platform provides over 46 million learners with access to over 175,000 courses in over 75 languages and 180 countries.Udemy courses address learning objectives such as reskilling or upskilling in technology and business, enhancing soft skills, and personal development. We analyze platform data to better determine our learners' needs, helping us match individuals with relevant courses and, within UB, learning paths for a more personalized experience. Our learners also receive access to interactive learning tools such as quizzes, exercises, and instructor questions-and-answers, or Q&A. Within our marketplace and UB catalog, we provide learners with high-quality content by prioritizing courses based on factors such as learner feedback and ratings, topic relevance, content quality, and instructor engagement. Recent Developments OnAugust 24, 2021 , we closed on the acquisition of CorpU, an online learning platform and content catalog focused on blended executive training. The addition of CorpU is intended to deepen our UB offerings through CorpU's cohort-based learning in scalable, virtual environments. The purchase price was$28.6 million , adjusted for working capital adjustments, of which$27.1 million was paid at closing. The remaining balance is recorded in the accrued expenses and other current liabilities caption of the accompanying condensed consolidated balance sheets OnOctober 19, 2021 , the Company entered into a preferred stock purchase agreement to make a strategic investment in a privately held online education platform technology company for up to$15.0 million in cash. The Company expects the investment to close in two tranches. The first tranche of$10.0 million was paid onOctober 20, 2021 , and subject to certain closing conditions, the second tranche of$5.0 million is expected to be paid during the fiscal year endingDecember 31, 2022 . OnOctober 29, 2021 , we completed our initial public offering ("IPO") of common stock, in which we sold 14,500,000 shares. The shares were sold at a price to the public of$29.00 per share for net proceeds of$397.4 million , after deducting underwriting discounts and commissions of$23.1 million . Underwriters were granted an 23 -------------------------------------------------------------------------------- Table of Contents option for a period of 30 days to purchase up to 2,175,000 additional shares of common stock. Upon the completion of the IPO,$6.2 million of deferred offering costs were reclassified into additional paid-in capital as a reduction of the net proceeds received from the IPO. Upon the closing of the IPO, all outstanding shares of our redeemable convertible preferred stock automatically converted into 85,403,933 shares of common stock on a one-for-one basis. OnNovember 24, 2021 , the underwriters exercised the right to purchase 650,000 additional shares of common stock, resulting in additional net proceeds of$17.8 million , after deducting underwriting discounts and commissions of$1.0 million . The remaining option to purchase additional shares expired unexercised at the end of the 30 day period. Key Factors Affecting our Performance We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, these factors also pose challenges that we must successfully address in order to sustain the growth of our business and enhance our results of operations. Ability to attract and engage new learners and Udemy Business customers To grow our business, we must attract new learners and UB customers efficiently and increase engagement on our platform over time. We acquire a substantial portion of our learners via organic channels and also use paid marketing to further enhance the growth of our learner base. Our organic channels include those outside of our paid market efforts, such as a Udemy brand name internet search. Once we bring new learners onto our platform, we work to create a best-in-class experience to encourage engagement and drive learning and career outcomes. Ability to retain and expand our existing learner and customer relationships Our business and results of operations will depend on our ability to continue to drive higher usage of our platform within our existing customer base and our ability to add new customers. Our efforts to grow our existing relationships with our consumer learners are focused on increasing their engagement and converting free learners into buyers. New learners to our platform typically begin to engage with our free courses, which serve as a funnel to grow our total learner base and drive referrals to our paid other offerings. Our efforts to grow our UB offering are focused primarily on corporate and government customers. Historically, we have expanded from individual to department to multi-department to enterprise-wide sales as our value is proven. Building upon this success, we believe a significant opportunity exists for us to acquire new UB customers and expand our existing UB customers' use of our platform by identifying new use cases and increasing the size of existing deployments. We often enter into customized contractual arrangements with our UB customers in which we offer more favorable pricing terms in exchange for larger total contract values that accompany larger deployments. As we drive a greater portion of our revenue through our deployments with UB customers, we expect that our revenue will continue to grow significantly, but the price we charge UB customers per seat may decline, which could reduce margins in the future. Ability to source in-demand content from our instructors We believe that learners and UB customers are attracted toUdemy largely because of the high quality and wide selection of content our instructors offer. Continuing to source in-demand content and credentials from our instructors will be an important factor in attracting learners and UB customers and growing our revenue over time. When we offer content as part of the UB and consumer subscription offerings, our instructors agree to contribute such content exclusively through our platform, which we believe demonstrates our ability to increase the value of our platform through unique content. 24 -------------------------------------------------------------------------------- Table of Contents Although we view the breadth and diverse expertise of our instructor base and the content they create as one of our competitive advantages, a significant portion of the most popular content on our platform, and as a result a significant portion of our revenue, is attributable to a limited number of our instructors. We experienced minimal turnover among top instructors during the nine months endedSeptember 30, 2020 and 2021. Impact of mix of consumer and enterprise segments Our mix of business among our consumer and enterprise segments is shifting, and this shift will affect our financial performance. Content costs for our enterprise segment are lower relative to our consumer segment. The mix of customer acquisition methods in our consumer segment will substantially impact our financial performance. We presently expect that revenue from our enterprise segment will grow faster than our consumer segment, which will be beneficial to our overall margins. Ability to expand our international footprint We currently generate a significant portion of our revenue outsideNorth America . We see a significant opportunity to expand our offerings into regions with large underserved adult learning populations. We have invested, and plan to continue to invest, in personnel and marketing efforts to support our international growth and expand our international operations as part of our strategy to grow our customer and learner base, particularly among our UB customers. Our investment in growth We are actively investing in our business as we believe that we are only beginning to penetrate our market opportunity, and we intend to continue to invest in our future growth. We anticipate that our operating expenses will increase as we continue to build our sales and marketing efforts, expand our course catalog, expand our employee base, and invest in our technology development. Any investments we make in our sales and marketing organization, in encouraging the development of new content, and in expanding our platform offerings and capabilities, will occur in advance of the benefits from such investments, making it difficult to determine if we are efficiently allocating our resources in these areas. Pace of adoption of cloud-based skill development solutions Our ability to grow our learner base and drive market adoption of our platform is affected by the overall demand for cloud-based skill development solutions. The market for cloud-based skill development is less mature than the market for in-person, instructor-led-training, and potential customers may be slow or unwilling to migrate from these legacy approaches. We believe that as technology becomes increasingly critical to business operations, the need for cloud-based skill development solutions, particularly an integrated enterprise-grade platform such as ours, will increase, and our customer base and the breadth and deployment of usage in our customer base will also increase. However, it is difficult to predict customer adoption rates and demand, the future growth rate and size of the market for cloud-based skill development solutions, or the entry of competitive solutions. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. With the COVID-19 pandemic, there has been a significant increase in the adoption of online learning solutions, a trend we believe will continue over the long-term. We believe that this heightened demand for online learning solutions from individuals and businesses contributed in part to the significant increase in revenue we experienced beginning in the second quarter of 2020. However, we are not able to quantify the proportion of the increase in revenue that is attributable to the COVID-19 pandemic as opposed to other factors contributing to our growth in recent periods. Furthermore, the circumstances that have accelerated the growth of our business during the COVID-19 pandemic may not continue in the future, and the growth rate of our revenue, as well as our learner and customer base, may decline in future periods as the effects of the COVID-19 pandemic abate.
We have taken precautionary measures intended to help minimize the risk of COVID-19 to our employees, including transitioning the majority of our employees to remote work and restricting business travel, which have contributed to immaterial decreases in our operating expenses, primarily travel and entertainment expense. We believe that our ability to meet the needs of our customers, end users and instructors has not been materially
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affected by these precautions. We have not incurred any material increases in
our operating expenses as a result of the COVID-19 pandemic.
The extent to which the COVID-19 pandemic impacts our business depends on future
developments that are highly uncertain and cannot be predicted at this time. For
more information, see "Risk factors-Risks related to our business and
operations-The COVID-19 pandemic could affect our business, financial condition,
and results of operations in volatile and unpredictable ways."
Components of Results of Operations
Revenue
We derive revenue from contracts with paid consumer learners and UB customers
from access to our online learning platform. We recognize revenue from both our
paid consumer learners and UB customers.
Consumer revenue consists of individual course content purchases made by
individual learners, as well as our consumer subscription offerings. Consumer
revenue includes the gross transaction value paid by the learner at checkout,
net of (a) actual and estimated refunds and (b) passthrough taxes collected from
learners and remitted to governmental authorities. After a successful checkout,
consumer learners receive a non-exclusive lifetime license to the digital course
content in addition to stand-ready access to the Udemy platform hosting services
needed to access the content. Access to the online content on the Udemy platform
represents a series of distinct services as we continually provide access to and
fulfill our hosting obligation to the learner. This series of distinct services
represents a single performance obligation that is satisfied over the estimated
service period. Revenue is recognized ratably over the estimated service period
for consumer marketplace revenue, which is four months from the date of
enrollment and over the contractual subscription term for consumer subscription
customers.
Enterprise revenue primarily relates to enterprise license subscription
contracts with annual or multi-year subscription terms. Enterprise subscriptions
are generally billed in advance on a quarterly or annual basis. Subscription
revenue excludes any taxes to be remitted to governmental authorities. Access to
the Udemy platform represents a series of distinct services as we continually
provide access to course content and fulfill our obligation to the UB customer
over the subscription term. Because the series of distinct services represents a
single performance obligation that is satisfied over time, we recognize revenue
ratably over the contractual subscription term.
We are the principal with respect to revenue generated from sales to consumer
and UB customers as we control the performance obligation and are the primary
obligor with respect to delivering access to content to our customers.
Cost of revenue
Cost of revenue primarily consists of content costs, which are the payments to
our instructors. Content costs are driven by the means by which we acquired the
learner consuming the content. For courses offered on Udemy's consumer
marketplace, instructors earn a specific percentage of the net sale amount when
a learner purchases the instructor's course. For courses offered through Udemy
Business or a consumer subscription offering, instructors earn a pro-rata share
of a monthly instructor payments pool for that subscription offering. Each
month, Udemy calculates the revenue for each subscription offering, with a fixed
percentage allocated as an instructor payments pool. Instructors whose content
is included in the collection earn a prorated portion of this pool based on the
number of minutes of consumption their courses achieved that month.
Content costs as a percentage of revenue for our UB and consumer subscription
offerings are lower relative to individual course content purchases in our
consumer offering. As a result, shifts in the mix between our two offerings is
expected to be a significant driver of future changes in gross margin. Content
costs are recorded as cost of revenue in the period earned by our instructors.
For consumer single course purchases, content costs are incurred at the time of
purchase. As consumer course content revenue is recognized ratably over an
estimated service period of four months, consumer gross margins are lower in the
period of purchase, and higher in the remaining periods of the estimated service
period over which revenue is recognized. For our subscription based UB offering,
content costs are incurred based on monthly subscription fees, and margins are
more stable from period to period.
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Cost of revenue also includes payment and mobile processing fees, costs
associated with hosting digital content, and employee related expenses for our
customer support organization, including salaries, benefits, stock-based
compensation, facilities and other expenses, depreciation of network equipment
amortization of capitalized software, and amortization of vendor relationships
and developed technologies acquired through business combinations. We expect
cost of revenue to generally decrease as a percentage of revenue as we increase
the percentage of revenue derived from our UB offering.
Operating expenses
Operating expenses consist of research and development, sales and marketing, and
general and administrative expenses. Personnel costs are the most significant
component of our operating expenses and consist of salaries, benefits, bonuses,
stock-based compensation, and commissions. Our operating expenses also include
allocated costs of facilities, information technology, depreciation, and
amortization. Although our operating expenses may fluctuate from period to
period, we currently expect our operating expenses to increase in absolute
dollars over time.
Sales and marketing
Our sales and marketing expenses consist primarily of marketing costs, as well
as personnel-related costs, including stock-based compensation and costs related
to customer and instructor acquisition, customer support efforts, amortization
of tradenames and customer relationships acquired through business combinations,
and brand marketing. Sales and marketing expenses also consist of costs incurred
for hosting and customer support services related to providing our platform to
free learners. We expect sales and marketing expenses to increase in absolute
dollars as our business grows. In addition, we expect sales and marketing
expenses as a percentage of revenue to vary from period to period but generally
decrease over the long term.
Research and development
Our research and development expenses consist primarily of personnel-related
costs, including stock-based compensation and costs related to the ongoing
management, maintenance, and expansion of features and services offered on our
platform. Research and development costs also include contracted services,
supplies, and other miscellaneous expenses. We believe that continued investment
in our platform is important to our future growth and to maintain and attract
learners to our platform. As a result, we expect research and development
expenses to increase in absolute dollars. In addition, we expect research and
development expenses as a percentage of revenue to vary from period to period
but generally decrease over the long term.
General and administrative
Our general and administrative expenses consist primarily of personnel-related
costs, including stock-based compensation and costs related to our executive,
legal, finance, and human resources departments, as well as charges for indirect
tax reserves, bad debt expense, professional fees, and other corporate expenses.
We expect to incur additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations, and increased expenses for insurance, investor
relations, and professional services. We expect general and administrative
expenses to increase in absolute dollars as our business grows. In addition, we
expect general and administrative expenses as a percentage of revenue to vary
from period to period but generally decrease over the long term.
Interest income (expense), net
Interest income (expense), net consists primarily of interest income earned on
our cash and cash equivalents. Interest income varies each reporting period
based on our average balance of cash and cash equivalents during the period and
market interest rates. Interest expense consists primarily of interest expense
recorded related to certain indirect tax reserves. Interest income and interest
expense were each immaterial for the periods presented.
Other income (expense), net
Other income (expense), net consists primarily of foreign currency transaction
gains and losses.
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Income tax (provision) benefit
Our income tax provision consists primarily of income taxes in certain foreign
jurisdictions in which we conduct business. We have a full valuation allowance
against our U.S. federal and state deferred tax assets as the realization of the
full amount of these deferred tax assets is uncertain, including net operating
loss carryforwards and tax credits related primarily to research and
development. The valuation allowance is driven by our overall loss position, and
we will not be able to utilize any of these favorable tax attributes until we
are in a taxable income position. When we begin to consistently operate in a
taxable income position, we may lift portions of the valuation allowance to
recognize and use those tax attributes. Until then, we expect to maintain this
full valuation allowance until it becomes more likely than not that the deferred
tax assets will be realized.
Results of Operations
The following table summarizes our results of operations for the periods
presented. The results below are not necessarily indicative of results to be
expected for future periods.
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
(in thousands, except per share amounts)
Revenue $ 118,436 129,563 $ 319,804 380,206
Cost of revenue (1)(2) 48,926 57,986 153,596 171,902
Gross profit 69,510 71,577 166,208 208,304
Operating expenses (1)(2)
Sales and marketing 46,045 52,258 142,221 156,399
Research and development 11,945 16,703 36,240 46,898
General and administrative 8,996 12,166 35,031 41,969
Total operating expenses 66,986 81,127 213,492 245,266
Income (loss) from operations 2,524 (9,550) (47,284) (36,962)
Other income (expense)
Interest expense, net (64) (61) (1,078) (452)
Other income (expense), net (100) (196) 38 (714)
Total other expense, net (164) (257) (1,040) (1,166)
Net income (loss) before taxes 2,360 (9,807) (48,324) (38,128)
Income tax (provision) benefit (495) 545 (2,261) (514)
Net income (loss) attributable to 1,865 (9,262) (50,585) (38,642)
common stockholders
Net income (loss) per share
attributable to common stockholders
Basic $ 0.05 $ (0.25) $ (1.54) $ (1.04)
Diluted $ 0.02 $ (0.25) $ (1.54) $ (1.04)
Weighted-average shares used in
computing net income (loss) per share
attributable to common stockholders
Basic 34,016,248 37,740,586 32,746,492 37,068,570
Diluted 123,842,757 37,740,586 32,746,492 37,068,570
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(1)Includes stock-based compensation expense as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
Cost of revenue $ 62 $ 350 $ 253 $ 888
Sales and marketing 509 2,149 5,931 5,784
Research and development 733 1,304 3,917 4,445
General and administrative 1,545 3,417 13,351 12,587
Total stock-based compensation $ 2,849 $ 7,220 $ 23,452 $ 23,704
expense
(2) Includes amortization of intangible assets as follows (in thousands):
Three Months Ended September 30 ,
Nine Months Ended
2020 2021 2020 2021
Cost of revenue $ - $ 293 $ - $ 293
Sales and marketing - 97 - 97
Total amortization of intangible $ - $ 390 $ - $ 390 assets
The following table summarizes our results of operations as a percentage of revenue for each of the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 41 45 48 45
Gross profit 59 55 52 55
Operating expenses - - - -
Sales and marketing 39 40 44 41
Research and development 10 13 11 12
General and administrative 8 9 12 12
Total operating expenses 57 62 67 65
Income (loss) from operations 2 (7) (15) (10)
Other income (expense) - - - -
Interest expense, net - - - -
Other income (expense), net - - - -
Total other expense, net - - - -
Net income (loss) before taxes 2 (7) (15) (10)
Income tax (provision) benefit - - (1) -
Net income (loss) attributable to 2 % (7) % (16) % (10) %
common stockholders
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Table of Contents Comparison of the three and nine months endedSeptember 30, 2020 and 2021 Revenue Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2021 $ % 2020 2021 $ % Revenue (in thousands, except percentages) Consumer$ 91,077 $ 79,198 $ (11,879) (13) %$ 248,334 $ 251,035 $ 2,701 1 % Enterprise 27,359 50,365 23,006 84 % 71,470 129,171 57,701 81 % Total revenue$ 118,436 $ 129,563 $ 11,127 9 %$ 319,804 $ 380,206 $ 60,402 19 % Revenue for the three months endedSeptember 30, 2021 was$129.6 million , compared to$118.4 million for the same period in the prior year, which represents an increase of$11.1 million , or 9%. For the three months endedSeptember 30, 2021 , consumer and enterprise revenue were$79.2 million and$50.4 million respectively, representing 61% and 39% of total revenue, respectively, compared to$91.1 million and$27.4 million , respectively, representing 77% and 23% of total revenue, respectively, for the same period in the prior year. The increase in revenue for the three months endedSeptember 30, 2021 was primarily driven by the significant growth in our UB segment base, which was partially offset by a decrease in consumer revenue during the same period. For the three months endedSeptember 30, 2021 total consumer revenue decreased by$11.9 million , or 13%, compared to the same period in the prior year. Due to the ratable recognition of our consumer revenue over a four month estimated service period, decreases in monthly average buyers are generally not reflected in our reported revenue until the following quarter. We experienced a significant acceleration of our monthly average buyers in the second quarter of 2020 due to the impacts of the COVID-19 pandemic, which is the primary driver for the decrease in consumer revenue compared to the same period in the prior year. This resulted in an$11.1 million decrease in revenue recognized in the period from course purchases in the respective prior fiscal quarter. Additionally, the decrease in consumer revenue was impacted by a 6% decrease in monthly average buyers. For the three months endedSeptember 30, 2021 , total enterprise revenue increased by$23.0 million , or 84%, compared to the same period in the prior year. The increase in enterprise revenue was primarily driven by an increase in the number of UB customers, as well as an increase in the average deal size per new customer and net expansions in our existing UB customer base. Pricing was not a significant driver of the increase in revenue. Revenue for the nine months endedSeptember 30, 2021 was$380.2 million , compared to$319.8 million for the same period in the prior year. Revenue increased by$60.4 million , or 19%, compared to the same period in the prior year. For the nine months endedSeptember 30, 2021 , consumer and enterprise revenue were$251.0 million and$129.2 million , respectively, representing 66% and 34% of total revenue, respectively, compared to$248.3 million and$71.5 million , respectively, representing 78% and 22% of total revenue, respectively, for the same period in the prior year. The increase in revenue for the nine months endedSeptember 30, 2021 was primarily driven by the significant growth in our UB customer base. For the nine months endedSeptember 30, 2021 , total consumer revenue increased by$2.7 million , or 1%, compared to the same period in the prior year. The increase in consumer revenue is primarily due to a$10.5 million increase in revenue recognized in the period deferred from course purchases in the prior fiscal year, partially offset by a 9% decrease in monthly average buyers. For the nine months endedSeptember 30, 2021 , total enterprise revenue increased by$57.7 million , or 81%, compared to the same period in the prior year. The increase in enterprise revenue was primarily driven by an increase in the number of UB customers, as well as an increase in the average deal size per new customer and net expansions in our existing UB customer base for the nine months endedSeptember 30, 2021 . Pricing was not a significant driver of the increase in revenue.
Cost of revenue, gross profit and gross margin
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Three Months Ended September 30, Change Nine Months Ended September 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Cost of revenue 48,926 57,986 $ 9,060 19 % $ 153,596 $ 171,902 $ 18,306 12 %
Gross profit 69,510 71,577 $ 2,067 3 % $ 166,208 $ 208,304 $ 42,096 25 %
Gross Margin 59 % 55 % 52 % 55 %
Cost of revenue for the three months ended September 30, 2021 was $58.0 million ,
compared to $48.9 million for the same period in the prior year, which
represents an increase of $9.1 million , or 19%. Content costs for the consumer
and enterprise segments were $30.6 million and $11.9 million for the three
months ended September 30, 2021 , respectively, compared to $31.0 million and
$6.7 million for the same period in the prior year, respectively. Content costs
as a percentage of segment revenue for the consumer and enterprise segments were
39% and 24% for the three months ended September 30, 2021 , respectively,
compared to 34% and 24% for the same period in the prior year, respectively. In
our consumer segment, payment processing fees decreased by $0.3 million compared
to the same period in the prior year. In our enterprise segment, customer
support costs increased by $2.8 million in the three months ended September 30,
2021 as compared to the same period in the prior year. Additionally, for the
three months ended September 30, 2021 , there was an increase of $0.8 million in
amortization of capitalized software, an increase of $0.3 million of
amortization of intangible assets, and an increase of $0.3 million related to
stock-based compensation expense when compared to the same period in the prior
year.
Gross margin was 55% for the three months ended September 30, 2021 , compared to
59% for the same period in the prior year. The decrease in gross margin was
primarily due to comparatively lower content costs as a percentage of revenue
for the three months ended September 30, 2020 , due to the ratable recognition of
our consumer revenues discussed above.
Cost of revenue for the nine months ended September 30, 2021 was $171.9 million ,
compared to $153.6 million for the same period in the prior year, which
represents an increase of $18.3 million , or 12%. Content costs for the consumer
and enterprise segments were $97.9 million and $31.3 million for the nine months
ended September 30, 2021 , respectively, compared to $101.2 million and $17.6
million for the same period in the prior year, respectively. Content costs as a
percentage of segment revenue for the consumer and enterprise segments were 39%
and 24% for the nine months ended September 30, 2021 , respectively, compared to
41% and 25% for the same period in the prior year, respectively. In our consumer
segment, payment processing fees decreased by $2.3 million in the nine months
ended September 30, 2021 as compared to the same period in the prior year. In
our enterprise segment, customer support costs increased by $6.5 million in the
nine months ended September 30, 2021 as compared to the same period in the prior
year. Additionally, for the nine months ended September 30, 2021 , there was an
increase of $1.7 million in amortization expense of capitalized software, an
increase of $0.3 million of amortization expense of intangible assets, and an
increase of $0.6 million related to stock-based compensation expense when
compared to the same period in the prior year.
Gross margin was 55% for the nine months ended September 30, 2021 , compared to
52% for the same period in the prior year. The increase in gross margin was
primarily due to a shift in mix of revenue toward our enterprise business, which
has comparatively lower content costs as a percentage of revenue relative to the
consumer segment.
Operating expenses
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Three Months Ended September
30, Change Nine Months Ended September 30, Change
2020 2021 $ % 2020 2021 $ %
Operating expenses (in thousands, except percentages)
Sales and marketing $ 46,045 $ 52,258 $ 6,213 13 % $ 142,221 $ 156,399 $ 14,178 10 %
Research and development 11,945 16,703 4,758 40 % 36,240 46,898 10,658 29 %
General and administrative 8,996 12,166 3,170 35 % 35,031 41,969 6,938 20 %
Total operating expenses $ 66,986 $ 81,127 $
14,141 21 %
15 %
Sales and marketing. Sales and marketing expenses for the three months endedSeptember 30, 2020 were$46.0 million , compared to$52.3 million for the three months endedSeptember 30, 2021 . The$6.2 million increase in sales and marketing expense was primarily due to higher personnel-related expenses of$4.7 million driven by headcount growth in our sales force to support additional demand for our platform, increased amortization expense related to deferred contract acquisition costs of$2.7 million , driven by an expansion of our UB customer base over time, increased stock-based compensation expense of$1.6 million , and a$1.2 million increase in facility- and IT-related overhead costs due to additional headcount. These changes were partially offset by a decrease of marketing costs of$4.7 million . Sales and marketing expenses for the nine months endedSeptember 30, 2020 were$142.2 million , compared to$156.4 million for the nine months endedSeptember 30, 2021 . The$14.2 million increase in sales and marketing expense was primarily due to higher personnel-related expenses of$15.6 million driven by headcount growth in our sales force to support additional demand for our platform, increased amortization expense related to deferred contract acquisition costs of$7.0 million , driven by an expansion of our UB customer base over time, and a$2.5 million increase in facility- and IT-related overhead costs due to additional headcount. These changes were partially offset by a decrease of direct marketing costs of$11.4 million . Research and development. Research and development expenses for the three months endedSeptember 30, 2020 were$11.9 million , compared to$16.7 million for the three months endedSeptember 30, 2021 . The$4.8 million increase was primarily due to higher personnel-related expenses of$2.6 million , mainly driven by additional headcount, increased stock-based compensation expense of$0.6 million , and increased software costs of$0.6 million . Research and development expenses for the nine months endedSeptember 30, 2020 were$36.2 million , compared to$46.9 million for the nine months endedSeptember 30, 2021 . The$10.7 million increase was primarily due to higher personnel-related expenses of$6.7 million , mainly driven by additional headcount, and increased software costs of$1.3 million . General and administrative. General and administrative expenses for the three months endedSeptember 30, 2020 were$9.0 million , compared to$12.2 million for the three months endedSeptember 30, 2021 . The$3.2 million increase in general and administrative expense was primarily due to an increase of$2.4 million in personnel-related expenses, mainly driven by additional headcount, a$1.9 million increase in stock-based compensation expense, and a$2.2 million increase in professional services, mainly related to accounting and tax services to support the growth of our business. These changes were partially offset by a decrease of$3.8 million related to changes in our Instructor Withholding tax reserve. General and administrative expenses for the nine months endedSeptember 30, 2020 were$35.0 million , compared to$42.0 million for the nine months endedSeptember 30, 2021 . The$6.9 million increase in general and administrative expense was primarily due to an increase of$5.8 million in personnel-related expenses, mainly driven by additional headcount, a$5.1 million increase in professional services, mainly related to accounting and tax services to support the growth of our business, offset by a decrease of$3.8 million related to changes in our Instructor Withholding tax reserve. Total other income (expense), net 32
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Three Months Ended September Change Nine Months Ended September Change
30, 30,
2020 2021 $ % 2020 2021 $ %
Other income (expense) (in thousands, except percentages)
Interest expense, net $ (64) $ (61) $ 3 (5) % $ (1,078) $ (452) $ 626 (58) %
Other income (expense), (100) (196) (96) 96 % 38 (714) (752) (1979) %
net
Total other expense, net $ (164) $ (257) $ (93) 57 % $ (1,040) $ (1,166) $ (126) 12 %
Total other income (expense), net for the three months ended September 30, 2020
was $0.2 million , compared to $0.3 million for the three months ended September
30, 2021 . Total other income (expense), net for the three months ended September
30, 2020 and 2021 was primarily attributable to interest expense on indirect tax
reserve liabilities.
Total other income (expense), net for the nine months ended September 30, 2020
was $1.0 million , compared to $1.2 million for the nine months ended September
30, 2021 . Total other income (expense), net for the nine months ended September
30, 2020 and 2021 was primarily attributable to interest expense on indirect tax
reserve liabilities and foreign currency transaction losses.
Income tax (provision) benefit
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)Income tax (provision) (495) 545 1,040 (210) % (2,261) (514) 1,747 (77) % benefit For the three months endedSeptember 30, 2020 , we recognized income tax expense of$0.5 million , compared to a$0.5 million benefit for the three months endedSeptember 30, 2021 . The tax expenses for the three months endedSeptember 30, 2020 were primarily due to foreign taxes. The filing of foreign tax returns resulted in the recognition of a foreign income tax benefit during the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2020 , we recognized income tax expense of$2.3 million , compared to$0.5 million for the nine months endedSeptember 30, 2021 . The tax expenses for the nine months endedSeptember 30, 2020 and 2021 were primarily due to foreign taxes. Certain Key Business Metrics and Non-GAAP Financial Metrics In addition to the measures presented in our condensed consolidated financial statements, we use the key business metrics identified below to help us assess the health of our community, evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. Monthly average buyers A buyer is a consumerwho purchases a course or subscription through our direct-to-consumer offering. Monthly average buyers is calculated as the average of monthly buyers during a particular period, such as a fiscal year. Our monthly average buyer count is not intended as a measure of active engagement, as not all buyers are active at any given time or over any given period. We believe that the number of monthly average buyers in a given period is an important indicator of the growth of our business and potential future revenue trends. The 33 -------------------------------------------------------------------------------- Table of Contents decrease in monthly average buyers was primarily driven by the significant acceleration of our monthly average buyers experienced in the comparable periods of the prior year due to the impacts of the COVID-19 pandemic. Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % 2020 2021 % (in thousands, except percentages)
Monthly average buyers 1,340 1,263 (6) % 1,460 1,330 (9) % Udemy Business customers We count the total number of UB customers at the end of each period. To do so, we generally count unique customers using the concept of a domestic ultimate parent, defined as the highest business in the family tree that is in the same country as the contracted entity. In some cases, we deviate from this methodology, defining the contracted entity as a unique customer despite existence of a domestic ultimate parent. This often occurs where the domestic ultimate parent is a financial owner, government entity, or acquisition target where we have contracted directly with the subsidiary. We define a UB customer as a customerwho purchasesUdemy via our direct sales force, reseller partnerships or through our self-service platform. We believe that the number of UB customers and our ability to increase this number is an important indicator of the growth of our UB and future revenue trends. The increase inUdemy Business customers is primarily attributable to the continued pursuit of our global land and expand strategy, as well as growth of our enterprise sales force. September 30, 2020 2021 % Udemy Business customers 6,752 9,592 42 %
Udemy Business Annual Recurring Revenue
We disclose our UB Annual Recurring Revenue, or ARR, as a measure of our
enterprise revenue growth. ARR represents the annualized value of our UB
customer contracts on the last day of a given period. Only revenue from closed
UB contracts with active seats as of the last day of the period are included.
The increase in UB Annual Recurring Revenue was primarily driven by an increase
in the number of UB customers, as well as an increase in the average deal size
per new customer and net expansions in our existing UB customer base. Pricing
was not a significant driver of the increase in UB Annual Recurring Revenue.
September 30,
2020 2021 %
(in thousands, except percentages)
Udemy Business annual recurring revenue 115,142 207,447 80 %
Udemy Business Net Dollar Retention Rate
We disclose our UB Net Dollar Retention Rate, or NDRR, as a measure of our
enterprise revenue growth. We believe NDRR is an important metric that provides
insight into the long-term value of our subscription agreements and our ability
to retain, and grow revenue from, our UB customers. We calculate NDRR as the
total annualized recurring revenue, or ARR, at the end of a trailing
twelve-month period divided by the total ARR at the beginning of a trailing
twelve-month period for the cohort of UB customers active at the beginning of
the trailing twelve-month period. Total ARR at the end of a trailing
twelve-month period is calculated as ARR at the beginning of a trailing
twelve-month period that is then adjusted for upsells, downsells, and churns for
the same cohort of customers during that period. ARR is the total annualized
run-rate revenue of all UB customers with active licenses. Our NDRR is expected
to fluctuate in future periods due to a number of factors, including the
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growth of our revenue base, the penetration within our learner base, expansion
of products and features, and our ability to retain our UB customers.
September 30,
2020 2021 %
Udemy Business net dollar retention rate 119 % 118 %
(1) %
Segment Revenue and Segment Gross Profit Our revenue is generated from our consumer and UB offerings, each of which is an individual segment of our business. Segment Revenue represents the revenue recognized from each of these offerings and is a key measure of the performance of our platform, and in turn drives our financial performance. We also monitor Segment Gross Profit as a key metric to help evaluate the financial performance of our individual segments and our business as a whole. Segment Gross Profit is defined as Segment Revenue less Segment Costs of Revenue, which include content costs, hosting and platform costs, customer support services, and payment processing fees that are allocable to each segment. Segment Gross Profit excludes amortization of capitalized software, amortization of intangible assets, depreciation, and stock-based compensation allocated to cost of revenue as our chief operating decision maker does not include the information in his measurement of the performance of the operating segments. Content costs, which are payments made to our instructors, are the largest individual component of Segment Cost of Revenue. We expect to increase the percentage of our revenue derived from our enterprise segment over time, which we expect will improve our gross margins. For the three months endedSeptember 30, 2021 , the decrease in the consumer segment gross margin was primarily driven by the COVID-19 pandemic impact on the second quarter of 2020, which drove an increase in Consumer Segment Gross Margin in the third quarter of 2020, since consumer revenue is recognized ratably over an estimated service period of four months, whereas content costs are incurred in the period of purchase. For the nine months endedSeptember 30, 2021 , the increase in the consumer segment gross margin was primarily due to a reduction in consumer content costs and payment processing fees as a percentage of consumer revenue. For the three months endedSeptember 30, 2021 , the increase in the enterprise segment gross margin was primarily driven by an increase in UB customer support costs as a percentage of UB revenue as we have increased our investment in our UB customer success organization. This increase was partially offset by a reduction in UB content costs as a percentage of UB revenue. For the nine months endedSeptember 30, 2021 , the increase in the enterprise segment gross margin was primarily driven by an increase in UB customer support costs as a percentage of UB revenue, partially offset by reductions in UB content costs and payment processing fees as a percentage of UB revenue. Three Months EndedSeptember 30 ,
Nine Months Ended
2020 2021 2020 2021
Consumer Segment Revenue $ 91,077 $ 79,198 $ 248,334 $ 251,035
Consumer Segment Gross Profit $ 53,298 $ 41,955 $ 124,692 $ 132,429
Consumer Segment Gross Margin 59 % 53 % 50 % 53 %
Enterprise Segment Revenue 27,359 50,365 71,470 129,171
Enterprise Segment Gross Profit $ 18,160 $ 32,936 $ 47,230 $ 84,329
Enterprise Segment Gross Margin 66 % 65 % 66 % 65 %
Non-GAAP financial metrics
In addition to the measures presented in our condensed consolidated financial
statements, we use the following non-GAAP financial metrics identified below to
help us evaluate our business, formulate business plans, and make strategic
decisions.
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Adjusted EBITDA and Adjusted EBITDA Margin
As Adjusted EBITDA facilitates internal comparisons of our historical operating
performance on a more consistent basis, we use this measure for business
planning purposes. Accordingly, we believe that Adjusted EBITDA provides useful
information to investors and others in understanding and evaluating our
operating results in the same manner as our management team and board of
directors. In addition, it provides a useful measure for period-to-period
comparisons of our business, as it removes the effect of certain non-cash
expenses and certain variable charges.
We define Adjusted EBITDA as net loss attributable to common stockholders,
adjusted to exclude:
•interest expense (income), net;
•provision (benefit) for income taxes;
•depreciation and amortization;
•stock-based compensation expense; and
•other expense (income), net.
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue for the
same period.
The following table provides a reconciliation of net loss, the most directly
comparable GAAP financial measure, to Adjusted EBITDA (in thousands):
Three Months Ended September 30,
Nine Months Ended
2020 2021 2020 2021
Net income (loss) $ 1,865 $ (9,262) $ (50,585) $ (38,642)
Adjusted to exclude the following:
Interest expense, net 64 61 1,078 452
Provision (benefit) for income 495 (545) 2,261 514
taxes
Depreciation and amortization 2,741 3,943 7,812 10,400 Stock-based compensation expense 2,849 7,220 23,452 23,704 Other expense (income), net 100 196 (38) 714 Adjusted EBITDA $ 8,114$ 1,613 $ (16,020) $ (2,858)
The following table provides a reconciliation of net loss margin, the most directly comparable GAAP financial measure, to Adjusted EBITDA Margin (in thousands, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
Revenue $ 118,436 $ 129,563 $ 319,804 $ 380,206
Net income (loss) $ 1,865 $ (9,262) $ (50,585) $ (38,642)
Net loss margin 2 % (7) % (16) % (10) %
Revenue $ 118,436 $ 129,563 $ 319,804 $ 380,206
Adjusted EBITDA $ 8,114 $
1,613
7 % 1 % (5) % (1) %
Net income decreased by $11.1 million in the three months ended September 30,
2021 compared to the same period in the prior year, and adjusted EBITDA
decreased by $6.5 million in the three months ended September 30, 2021 compared
to the same period in the prior year primarily due to increased operating
expenses as we scale and grow our business. Net income increased by $11.9
million in the nine months ended September 30, 2021 compared to the same period
in the prior year, and adjusted EBITDA increased by $13.2 million in the nine
months ended September 30, 2021 compared to the same period in the prior year
primarily due to strong revenue growth in both our consumer and UB offerings in
excess of the growth of our expenses.
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Liquidity and Capital Resources
We have historically financed our operations primarily through revenue, as well
as proceeds from issuances of our capital stock. We have generated significant
net losses from our operations as reflected in our accumulated deficit of $378.5
million as of December 31, 2020 and $417.1 million as of September 30, 2021 . We
have incurred operating losses and generated negative cash flows from operations
as we have invested to support the growth of our business. In October 2021 , we
received net proceeds of $397.4 million , after deducting underwriting discounts
and commissions of $23.1 million , from our IPO. In November 2021 , underwriters
exercised their option to purchase additional shares of our common stock,
resulting in net proceeds of $17.8 million after deducting underwriting
discounts and commissions of $1.0 million .
We believe that our existing cash and cash equivalents and our expected cash
flows from operations will be sufficient to meet our cash needs for at least the
next 12 months. Our remaining non-U.S. cash and cash equivalents have been
earmarked for indefinite investment in our operations outside the U.S. , thus no
U.S. current or deferred taxes have been accrued. Over the longer term, our
future capital requirements will depend on many factors, including our growth
rate, the timing and extent of our sales and marketing and research and
development expenditures, the continuing market acceptance of our offerings, and
any investments or acquisitions we may choose to pursue in the future. To
execute on our strategic initiatives and continue to grow our business, whether
organically or inorganically, we may incur operating losses and generate
negative cash flows from operations in the future, and as a result, we may
require additional capital resources. If we need to borrow funds or issue
additional equity, we cannot assure you that any such additional financing will
be available on terms acceptable to us, if at all. In addition, any future
borrowings may result in additional restrictions on our business and any
issuance of additional equity would result in dilution to investors. If we are
unable to raise additional capital when desired and on terms acceptable to us,
our business, results of operations, and financial condition could be materially
and adversely affected.
Cash flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine Months Ended September 30,
2020 2021
Net cash provided by (used in):
Operating activities $ (9,643) $ (9,421)
Investing activities $ (10,694) $ (38,811)
Financing activities $ 47,892 $ 3,379
Net increase (decrease) in cash, cash equivalents and $ 27,555 $ (44,853)
restricted cash
Operating activities
Cash used in operating activities mainly consists of our net loss adjusted for
certain non-cash items, including stock-based compensation, depreciation and
amortization, amortization of deferred sales commissions, as well as the effect
of changes in operating assets and liabilities during each period.
Our main source of operating cash is payments received from our customers. Our
primary use of cash from operating activities are for personnel-related
expenses, instructor payments, advertising expenses, indirect taxes, and
third-party cloud infrastructure expenses.
For the nine months ended September 30, 2020 net cash used in operating
activities was $9.6 million , primarily consisting of our net loss of $50.6
million , adjusted for non-cash charges of $36.4 million and net cash inflows of
$4.5 million provided by changes in our operating assets and liabilities. The
main drivers of the changes in operating assets and liabilities were a $22.7
million increase in deferred revenue, resulting primarily from our enterprise
business growth, which was partially offset by a $6.9 million increase in
accounts receivable, prepaid expenses and other assets and a $10.4 million
increase in deferred contract costs.
For the nine months ended September 30, 2021 , cash used in operating activities
was $9.4 million , primarily consisting of our net loss of $38.6 million ,
adjusted for non-cash charges of $46.4 million and net cash outflows of $17.2
million provided by changes in our operating assets and liabilities. The main
drivers of the changes in
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operating assets and liabilities were a $23.2 million increase in deferred
revenue, resulting primarily from our enterprise business growth, offset by a
$13.5 million decrease in accounts payable, accrued expenses and other current
liabilities, and a $25.5 million increase in deferred contract costs.
Cash used in operating activities decreased by $0.2 million during the nine
months ended September 30, 2021 , compared to the nine months ended September 30,
2020 , primarily due to our business growth.
Investing activities
For the nine months ended September 30, 2020 , cash used in investing activities
was $10.7 million , primarily as a result of capital expenditures for property
and equipment and capitalized software costs.
For the nine months ended September 30, 2021 , net cash used in investing
activities was $38.8 million , primarily as a result of our acquisition of CorpU,
capital expenditures for property and equipment, and capitalized software costs.
Financing activities
For the nine months ended September 30, 2020 , net cash provided by financing
activities was $47.9 million , primarily as a result of proceeds from our
issuance of redeemable convertible preferred stock and issuance of common stock
following employee stock option exercises.
For the nine months ended September 30, 2021 , net cash provided by financing
activities was $3.4 million , primarily as a result of proceeds from issuance of
common stock following employee stock option exercises, offset by payments of
redeemable convertible preferred stock issuance costs and deferred offering
costs.
Contractual Obligations and Commitments
Except as discussed in Note 8, Commitments and Contingencies, in the notes to
our unaudited condensed consolidated financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q, there were no material changes
outside of the ordinary course of business in our commitments and contractual
obligations for the three and nine months ended September 30, 2021 from the
commitments and contractual obligations in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", set forth in our Final
Prospectus.
Off-balance Sheet Arrangements
During the period presented, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q have been
prepared in accordance with generally accepted accounting principles in the
United States ("GAAP"). The preparation of these condensed consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses, and related
disclosures. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. We evaluate
our estimates and assumptions on an ongoing basis. Actual results may differ
from these estimates. To the extent that there are material differences between
these estimates and our actual results, our future financial statements will be
affected.
There have been no material changes to our critical accounting policies and
estimates as compared to those described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth in the
Final Prospectus, other than the policies listed below.
Business Combinations-In accordance with applicable accounting standards, the
Company estimates the fair value of acquired assets and assumed liabilities as
of the acquisition date of business combinations. The purchase consideration is
allocated to the tangible assets acquired, liabilities assumed, and intangible
assets acquired based on their estimated fair values. The purchase price is
determined based on the fair value of the
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assets transferred, liabilities assumed, and equity interests issued, after
considering any transactions that are separate from the business combination.
The excess of fair value of purchase consideration over the fair values of the
identifiable assets and liabilities is recorded as goodwill. Such valuations
require management to make significant estimates and assumptions, especially
with respect to intangible assets and deferred revenue. Significant estimates in
valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired customer bases, acquired technology and
acquired trade names, useful lives, royalty rates, and discount rates.
Significant estimates in valuing deferred revenue include, but are not limited
to, cost to service plus a profit markup.
The estimates are inherently uncertain and subject to revision as additional
information is obtained during the measurement period for an acquisition, which
may last up to one year from the acquisition date. During the measurement
period, management may record adjustments to the fair value of tangible and
intangible assets acquired and liabilities assumed, with a corresponding offset
to goodwill. After the conclusion of the measurement period or the final
determination of the fair value of assets acquired or liabilities assumed,
whichever comes first, any subsequent adjustments are recorded to earnings.
Goodwill represents the excess purchase price over assets acquired in the Company's business combinations. The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable. Recent Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements. JOBS Act Transition Period We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest rate sensitivity As ofSeptember 30, 2021 , we had$130.2 million of cash and cash equivalents, which include on demand deposits and amounts in transit from certain payment processors for credit and debit card transactions. In addition, we had$2.9 million of restricted cash as ofSeptember 30, 2021 , primarily due to the outstanding letter of credit related to the operating lease agreement for our corporate headquarters. Our cash and cash equivalents are held for working capital purposes. We did not hold any marketable securities or carry any fixed or variable rate debt as of and during the nine months endedSeptember 30, 2020 and 2021. Given the above facts and circumstances, hypothetical changes in interest rates of 10% would not result in a material impact to our condensed consolidated financial statements.
Foreign currency risk
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The reporting currency and functional currency of our foreign subsidiaries is theU.S. dollar. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our condensed consolidated statement of operations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. As such, a hypothetical 10% increase or decrease in current exchange rates would not have had a material impact on income or expense for the nine months endedSeptember 30, 2021 . We have operations both withinthe United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.
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