Duolingo Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 13 speakers on the call.

Operator

Good evening, everyone. If you haven't accidentally tuned into a replay of Duocon, this is actually Duolingo's Q3 earnings webcast. Today, after market close, we released this quarter's shareholder letter, a copy of which you can find on our IR website at investors. Duolingo. Comp.

Operator

On today's call, we have Luis Vonon, our Co Founder and CEO and Matt Scarruppa, our CFO. They will begin with some brief remarks before opening the call to questions. Analysts will be able to ask a question by using the raise hand feature. Please note that this event is being recorded and all attendees are in listen only mode. And just a reminder, we'll make forward looking statements regarding future events and financial performance, which are subject to material risks and uncertainties.

Operator

Some of these risks have been set forth in the risk factors in our filings with the SEC. These forward looking statements are based on assumptions that we believe to be reasonable as of today, and we have no obligation to update these statements as a result of new information or future events. Additionally, we'll present both GAAP and non GAAP financial measures on today's call. These non GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results. And we encourage you to consider all measures when analyzing our performance.

Operator

And now, I'll turn it over to Luis.

Speaker 1

Thank you, Debbie, and welcome, everyone. We had another fantastic quarter. We surpassed our expectations and had impressive user bookings and revenue growth. And it was a fun quarter too with the Barbie campaign and also preparing for our best Duocon yet. We also feel very good about the coming quarter, which is why we're raising our full year guidance to now reflect 40% year over year bookings growth.

Speaker 1

And we're also materially raising our full year adjusted EBITDA margin. Matt will share more details on our results and outlook shortly. Every year, we run thousands of experiments to make our products more fun, engaging and effective. A lot of these experiments result in small wins that add up over time. If you look back at the past 2 years, you can see evidence of this in action.

Speaker 1

In Q3 2021, we had about 10,000,000 DAUs and this past quarter, we had over 24,000,000. In Q3 of 2021, we had 2,200,000 subscribers. In this past quarter, we had nearly 6,000,000. The way we have done this has been through our process of making small changes, running a test to see how users react and then doubling down where we see gains. We've also hit some exceptional home runs.

Speaker 1

For example, our marketing has been a source of extraordinary wins that were fantastic for the business, Even though they are hard to predict. Think of our partnership with HBO's House of the Dragon and most recently our Barbie social campaign built around the inclusion of our trademark Ding In the Barbie movie, the campaign generated $140,000,000 organic social impressions, which is a record for us. To create the opportunity for both incremental improvement and home runs, every so often we make bolder moves that open up entirely new areas for experimentation. For example, last year, we redesigned the home screen of the app to give us more room to experiment with engagement, efficacy and monetization. And earlier this year, we set out to create a multi subject app experience by integrating our existing math course and a new music course into our flagship app.

Speaker 1

This change, adding math and music to the main app, is a good example to highlight. We did this to give our users an even more engaging experience. By adding new subjects into the main app, we believe we can more rapidly scale these new subjects with our gamification mechanics like streaks, leaderboards and quests that have been so effective in the language learning app. As more users access these new courses, we believe it will increase their commitment to our platform and that they'll be more likely to recommend us, Which will further drive organic user growth. It's clear that our strategy is working as demonstrated by our exceptional growth.

Speaker 1

As I've said before, we can't expect to accelerate forever, but it's very gratifying to see that our product improvements and creative marketing efforts are resonating with our learners. And I'm excited about our ongoing innovation and look forward to all the energy that a new year brings. And with that, I'll turn it over to Matt.

Speaker 2

Thanks, Luis. I'll walk through how we did this quarter in more detail and then I'll provide our Q4 and updated full year guidance. As Louise shared, we are extremely pleased with this quarter's performance, which exceeded our expectations, thanks to our team's continued strong execution. Our DAU increased 63% year over year to $24,200,000 and MAU increased 47% to $83,100,000 This growth continues to be not only rapid, but also high quality and broad based with strong growth from around the world With improving free to pay conversion as well. Our total paid subscribers increased by 60% to 5,800,000.

Speaker 2

This continued strength in user and subscriber growth drove bookings and revenue growth of 49% 43% year over year, respectively, For 48% 42% on a constant currency basis. Turning to profitability, we've made tremendous progress Expanding the bottom line as we continue to see very strong top line growth, coupled with cost discipline. Our net income Totaled $2,800,000 compared to a net loss of $18,400,000 in the year ago quarter. We also posted an adjusted EBITDA of 22,500,000 For a 16.3% adjusted EBITDA margin, this is a roughly 14 point expansion year over year. This quarter, we capitalized additional R and D expenditures compared to Q3 last year as we continue to innovate on MAX and math and music.

Speaker 2

Excluding this would have led to an adjusted EBITDA margin expansion of about 12 points year over year. Based on our strong results and the trends we're seeing so far, we feel confident about raising our full year outlook and issuing the following Q4 guidance. For Q4 2023, we are guiding to $167,000,000 to $170,000,000 in total bookings, $145,000,000 to $148,000,000 in revenue and an adjusted EBITDA margin of 19.8% to 20.8%. For the full year 2023, we are raising our guidance to $598,000,000 to $601,000,000 in total bookings, $525,000,000 to $528,000,000 in revenue, and we are updating our adjusted EBITDA margin range to 16.6% to 16.9%. Our full year guidance calls for 40% 42% year over year bookings and revenue growth, respectively, at the As a reminder, at the end of every December, we start a promotion that discounts our annual subscription.

Speaker 2

Since we offer this promotion only once a year, Q4 bookings performance has more seasonal variance than other quarters. Note that our guidance assumes current prevailing foreign exchange rates as well. And because we've achieved significant operating leverage this year across the business, we feel good about raising our full year adjusted EBITDA margin guidance by about 2 25 basis points at the midpoint Now I'll provide some color on average revenue per subscriber, OpEx and share count. Our average revenue per subscriber has declined by about 7% to 8% for each of the past 3 quarters, driven by a combination foreign exchange impacts and regional mix shifts. Q3 saw higher than expected conversions in non U.

Speaker 2

S. Countries, which kept a year over year change in that same range. We expect the year over year change in ARPU to improve in the coming quarters. As to OpEx compared to Q3 of this year, In Q4, we expect non GAAP R and D as a percentage of revenue to decrease by 2 points and non GAAP sales and marketing to decrease by almost 2.5 points. We expect non GAAP G and A to be roughly flat as a percentage of revenue in Q4.

Speaker 2

We ended the quarter with Approximately 48,800,000 fully diluted shares outstanding using the quarter end closing price. And we expect to end the year with about 1% to 1.5% dilution from equity issued to employees. Finally, as Louis said a few moments ago, the last years have been extraordinary for our business. Our user growth has benefited from compounding continuous product improvements, including home run improvements like we've seen with our Street Mechanic. We have unlocked social first marketing and have had some big brand moments like the Barbie movie.

Speaker 2

And we've also seen large increases in conversion from free To bake conversion. Looking ahead, we feel very good about next year. But as Luis has already reminded you, our user growth is unlikely to accelerate forever And it may be hard to repeat some of the one time events that have happened this year. Even so, we feel good about our ability to continue our strong top line growth And make progress towards our long term margin. And with that, I'll turn it back to Luis.

Speaker 1

Thanks, Matt. I just want to thank the team for all their hard work and dedication. We know we've only made a tiny dent in the massive market opportunity ahead of us And now we would be happy to take your questions. I'll turn it back to Debbie to manage the queue.

Operator

All right. Thanks, Luis. As I mentioned earlier, if you have a question, you can use the raise hand feature. And your first question comes from Ralph Schackart at William Blair.

Speaker 3

Good afternoon. Thanks for taking the question. Let me start with you. You've been in public for a couple of years now and you've seen some pretty Extraordinary growth. And I'm sure some of this has been based on conservatism and the outperformance and then the business is obviously doing really well.

Speaker 3

Maybe just kind of taking a step back, if you would isolate Maybe the top 1, 2 or 3 things that have really driven this significant outperformance. That'd be really helpful, I think, for investors. And I have a follow-up for Matt.

Speaker 1

Well, thank you for the great question. Yes, we've had a really good growth and honestly it's exceeded our expectations. The main two things that have made us grow so fast. The first one is just Product improvements. I mean, we run hundreds of AB tests every quarter and they compound.

Speaker 1

And so our product is just significantly better than it was 2 years ago. And so that's the biggest thing. Then the second biggest thing is we just got a lot better with our marketing. And the combination of getting much better with marketing and the product getting better has made it so that Duolingo has really struck a chord with this it's like now part of the zeitgeist. And part of the reason that we've exceeded our expectations is because things have happened that we didn't there was no way for us to expect.

Speaker 1

We could not expect that The Barbie movie was going to add Duolingo in there. We could not expect that there would be SNL skits and stuff like that. So that I think that's the combination of what has happened. I mean, we're very happy, But it's been hard to also forecast.

Speaker 3

Great. And then maybe, Matt, in the prepared remarks, you talked about the potential for ARPU to improve. And I think You'll be coming up on 2 years since you did some of the price adjustments in Europe. Just maybe give some color on how ARPU may improve going forward? Thank you.

Speaker 2

Yes. Thanks, Ralph. So ARPU has been impacted by foreign currency. That's hard to predict. But the other thing was the regional pricing that you mentioned.

Speaker 2

So we did that about a year ago. So it was Q2 of 2022. So that impacted bookings in that quarter and then going forward and has flowed through to revenue. So that was expected and that's what we mentioned on the last call. In terms of this quarter, there was some experiments we ran that were really effective at driving free to pay conversion outside the U.

Speaker 2

S. So that kept it range bound this quarter. I think the reason we continue to think we'll see improvements is the Starting to lap the pricing changes that we did in Q2 of last year. And also, our pricing philosophy is one that we continue to experiment with pricing. And You've added a lot of value to the product over time.

Speaker 2

So, we'll experiment with raising prices over time as well.

Speaker 3

All right. Thanks, Luis. Thanks, Matt.

Speaker 1

Thanks, Rob.

Operator

All right. Next question comes from Justin Patterson of KeyBanc.

Speaker 4

Great. Thank you very much and good afternoon. I appreciate the call out on experiments in the letter. Luis, as you've expanded the range of Products in the core app to music and now math. How should we think about just the pace of experiments and AB tests really ramping to really kind of optimize these new elements within the app.

Speaker 4

And then for Matt, the incrementals on the business remain very attractive, north of 50% margins within the Q4 guide. Since you're sitting here today thinking about 2024 budgets, but what are really the key investment areas that you're thinking about to keep driving this healthy growth going forward. Thank you.

Speaker 1

Thank you, Justin. And excellent shirt. So you asked about math and music and what that's going to do to our experiment. So I think it's worth just saying What we did what we had well, we still have a math app and we've been developing a music course. We decided The best strategy was to put both the math and music course inside our main app.

Speaker 1

There's many reasons for this. But the biggest reason Is that we can immediately take advantage of any positive change that we do in the main app for engagement or for monetization or for anything immediately. You take advantage of those because math and music are just going to be other courses in the app, just like French or Spanish. It's just it's as if we were adding another language. So that will what that will do is it will allow us to grow these courses or these subjects a faster than if they were independent apps.

Speaker 1

We're very happy with that. Now, I should mention and I should caution, The main thing that we are concentrated on for the short term is really making both the math and music courses More comprehensive and really work on them a lot. We haven't even launched them. And technically, they are going to be launched to all our users on iOS Starting tomorrow. So once we launch them, we're going to be working specifically on the courses.

Speaker 1

So I would not expect too much increasing revenue in the short term. But over the long term, the hope is that the Duolingo gets known not just as a language learning app, but also as an app where you can learn math Music, so it will start attracting users for that. And a lot of the monetization experiments that we run will apply to math and music. So that's the idea. My sense is that it will probably slightly increase the pace of experimentation.

Speaker 1

And so that yes, it basically Answers your

Speaker 3

question. Great. Yeah.

Speaker 2

And to follow-up on budgeting in 2024, The amazing thing about the business right now is that the core business, we're still early in the opportunity. So we have tons of room to run. So The vast majority of our investment next year will be in the core business. Just to remind everyone how we invest in that. There's really three areas we invest in.

Speaker 2

We invest in growth, A bunch of engineers and product managers and designers who help design experiments to drive things like Innovations in the Street Mechanic or make the app more social. We invest in monetization. So driving free to pay conversion and then we invest in learning to make our app more effective. That's going to make up the vast majority of our investment next year just like it is this year. We have incremental layers on top of that, that we add.

Speaker 2

So we're investing in Max. We're investing in math and music, like Luis just mentioned. But I don't want folks to lose sight of the fact that the investment we're going to make next year is going to be like this year, which is in that core app, which has great growth momentum And a huge market that we're still growing into.

Speaker 5

Thank you,

Operator

both. Thanks, Justin. And this question comes from Ryan McDonald of Needham.

Speaker 5

Thanks for taking my question. Congrats on Luis, I'm curious with the integration of math and music into the core app, how do you start to think about moving forward about the experience For the learner based on whether you're a paid subscriber versus a free user on math and music in the core app and How do you think about moving forward incentivizing more consistent engagement or moving that MAU to a DAU over time?

Speaker 1

Yes. So thank you for the question, Ryan. So in terms of monetization for math and music, Really, the way to think about them for now is it's as if they were another language course. All that applies to language courses or Applies to math and music. So for example, if you are a free user and you do the Spanish course at the end of a lesson, you have to see an ad.

Speaker 1

Similarly, if you're a free user and you're doing the math course at the end of a lesson, you have to see an ad. There's also a notion of, also hearts where whenever you make a mistake, you lose a heart. That happens in math, that happens in music, that happens in the language courses. So they're very similar in that respect. And We're going to continue working on trying to monetize our users better by basically offering extra things in the premium subscription.

Speaker 1

So there may be just like with languages, we have things like the Practice Hub or certain extra things. We're going to have extra things for both math and music. Now I should remind, there's a lot of questions about math and music, which is great. We're very excited about math and music. But I should remind, for the foreseeable future, the vast majority of our business in language learning.

Speaker 1

There's still a lot of room to grow in language learning. So the majority of the experimentation is still going to be there. So, yes, I think that's that.

Speaker 5

That's helpful. And maybe I'll follow-up, and this could be for Matt or Luis. I thought it was interesting in the shareholder letter about The experimentation you did on paid advertising this year and how that drove sort of a 50% increase in users on the platform, Just to love to hear a little bit more color on maybe what you did differently this year that drove such a notable increase? Thanks.

Speaker 1

So there's a number of things that I mean, we've just gotten a lot better at figuring out what to say in our ads. And also, we are in a really interesting position where we are a company that has users in Essentially every single country in the world. And we don't have to deal with things like licensing music or anything like that. We don't have to deal with stuff. We just Conserve the app to any country in the world.

Speaker 1

So one of the things that we've gotten really good at is being able to shift budget between countries. If prices get higher in one country and lower in another, we just shift budget. Because for us, it doesn't matter all that much whether a user Comes from Vietnam or from Thailand or something. I mean, it matters in the conversion rate, but we have the math to figure out when it makes sense To ship budget from one country to another. And so we've gotten very effective by that.

Speaker 1

And that's something that not many apps can do because for us, it's just really we have users in every single country in the world. So stuff like that that we just over time have gotten smarter at. I should mention though, we did that, but it is still it is the case that the overwhelming majority of our users come in organically. I mean, this is we have relatively small marketing budgets where we're doing that. But yes, we've gotten

Speaker 3

a lot better at it.

Operator

Thanks, Ryan. Your next question comes from Zack Morrissey of Wolfe Research.

Speaker 6

Great. Thanks. So I just wanted to, I guess, Double click on the user growth side of things. You've talked about the improvement in retention in prior years and quarters, specifically the current user retention rate. As you kind of think about the growth we've seen this year, it's obviously been very impressive.

Speaker 6

Can you kind of parse through how much of that has come from kind of improvement in the retention? And as we kind of look ahead to next year, how do we think about kind of room for further improvement in retention kind of supporting user growth? And then second, just on competition. Obviously, the growth you guys are posting kind of speaks to your ability to kind of execute well. But obviously, Google last month kind of grabbed some headlines, kind of entering the space.

Speaker 6

So if you could just kind of talk about your views on kind of the evolving competitive landscape and more specifically how Duolingo's kind of competitive modes can kind of Last relative to a larger platform such as Google, which has scale, data, technology, etcetera.

Speaker 1

That's a great question. For user growth, we believe that the main thing that has affected user growth is improvements in free user retention. That's it. I mean, it's not 100%. Like I said, a lot of our marketing has helped too, but I would say more than 50% is just improvements in user retention.

Speaker 1

Current user retention rate is probably the biggest lever that we've had. It's not the only one, but it's the biggest lever that we have to move. We expect there's still a lot of room there for us to improve. I mean, obviously, again, just like with user growth, I mean, you cannot improve user retention forever. You also cannot improve user growth forever.

Speaker 1

But we still think there's room there. So we're happy with that. In terms of competition, There was the headline about Google. Google, of course, is a company that we all admire. I spent a couple of years at Google.

Speaker 1

A lot of us have spent time at Google. The particular feature that made headlines is we actually the team that has That's working on this feature, which is a small research team, has been in contact with us. They are trying to do something to just make the search experience Better for people who are in the language learning ecosystem and one of the things that they want to do is start sending those users to apps like ours. So we don't see them really as competitive and that's kind of one thing. The other thing is and just in general for competition, We have a strong belief that the hardest thing about learning a language is staying motivated.

Speaker 1

And that is something that we really excel at And we just don't see our competition spending much effort and that's certainly not Google, but kind of the rest of our competition. And I think that's really Probably the biggest thing that has made us grow a lot is because a lot of our users, we give them motivation to continue going. And that has done things, for example, we've quoted this stat before. In the U. S, 80% of our users were not learning a language before Duolingo.

Speaker 1

So the reason we're getting so many of these users is because we have made learning a language so easy and so engaging that they just come. And so to me, that's the biggest moat. I mean, we have other things. The streak is a big moat. For example, people don't want to lose their streak when they go to another app.

Speaker 1

That's a big moat. Our brand has essentially become synonymous with language learning, particularly with younger users. So there's a lot of modes like that. But I would say the biggest one is just that We have a product that is more engaging and is getting more and more engaging the more users we have because we can run more experiments. So that's kind of our view on it.

Speaker 6

Very helpful. Thank you.

Operator

All right. Next question comes from Alex Sklar, Raymond James.

Speaker 7

Great. Thank you. Luis, first for you, this is a bit of a follow-up to Justin's question, and it's a bit early given you just launched music. But How do you think about the ideal content or course footprint within the main app? Is more always better?

Speaker 7

Is there an optimal level of choice that you found? And As you think about kind of future organic or inorganic content, do you think it will always make sense now to keep it in the one primary app?

Speaker 1

I'm not sure I fully understand your question. I mean, in terms of more, you mean more subjects or more general kind of Hours of content? I'm not sure I fully understand.

Speaker 7

More subjects, more subjects, more languages or more Expansions into things like math or music or etcetera.

Speaker 1

Yes. Yes. I mean, you're not going to see us And every single subject, at least not for the time being. I mean, in fact, you're not going to see us be adding more subjects other than math and music. Maybe we'll add a few other languages, Yes, like foreign languages, but you are not going to see us add other subjects in the short to medium term.

Speaker 1

We're very committed To making math and music succeed. I mean, we haven't even launched them. So you cannot possibly say they are successful yet in the main app because we haven't even launched them. So we're very committed to making them succeed. Our belief is that there are things that Make a lot of sense to learn with the Duolingo app.

Speaker 1

They're usually things that you can learn on your own that take a long time to learn Where the thing that you're learning requires a lot of repetition. I mean, certainly a lot of the arithmetic and a lot of the parts of math, the way you learn them is through a lot of repetition. That's true for music and that's also true for languages. So things that require a lot of repetition that take a long time to learn and also that we think will have a very large audience. These are the types of things that we will be adding to the app, although for the time being, we're going to stay just with math and music.

Speaker 1

But Yes. I think that was your only part of your question, right?

Speaker 7

Yes. No, perfect. Great color there. And then maybe just as a follow-up, in terms of kind of tracking The tracking of at risk paid subscribers, what did you see in kind of the month after you announced Math and music in the main app in terms of kind of the usage of that cohort?

Speaker 1

Of people who are at risk?

Speaker 7

Yes. Perhaps they're paid subscribers, they're using it less and kind of did that bring them back?

Speaker 1

I don't I actually don't know the answer to your question. I don't know if we've kept track. My sense is that if there had been a big change, I would have heard about it. So there probably wasn't a very big change, although I am answering here, I don't actually know the answer to your question.

Speaker 7

All right. Great. Thank you, Uwe.

Operator

Next question comes from Andrew Boone of JMP.

Speaker 8

Hi, guys.

Speaker 9

Thanks for taking my question. Luis, can you provide us an update on Max? And what I really want to also dig in on for this Is just anyone that watched OpenAI's dev day and understood your partnership there. But text to speech is just it feels like it's coming. And so talk to us about, A, what prevents that from coming to Duolingo?

Speaker 9

And how does Max start to evolve as just more of these tools become available?

Speaker 1

Okay. Well, thank you for asking about MAX. Okay. So just to provide color about MAX. So we announced Max earlier this year.

Speaker 1

When we announced it, it is a higher tier of subscription. So we had free Duolingo, Super Duolingo and then Max. What we put into MAX in this higher tier were 2 features based on generative AI and in particular OpenAI, generative AI. One was role play and the other one was explain my answer. What we've been doing and when we announced it, we said, Look, this is a large feature.

Speaker 1

Usually for large features, it takes us about a year to roll it out to all our users because in that time, what we're doing is we're It's giving it to a fraction of our users, typically at first a very small fraction of our users. We improve the feature and then we give it to a larger and larger fraction, etcetera. By now, we're kind of halfwayish from this. We have increased the rollout. By now, A significant fraction of our users on iOS that are learning either French or Spanish have access to Macs, At least can buy it, so we present it to them.

Speaker 1

And the reason we've increased the rollout is because we feel good about The features themselves, we've improved both role play and explained my answer to the point where people are using them more, etcetera. So that's kind of one thing. Another thing that I think is important to mention is when we announced Max, we said, well, we're putting these AI features in a higher tier subscription In part because we have to pay for them. But we also said we believe that the cost of using this or for putting these features on our app is actually going to go down because Accessing large language models like OpenAI, the price is going to go down. And we have already seen that.

Speaker 1

I mean, the price is actually going down. So So what you're going to see us do over the next few months is I think it's important to start talking separately about The fact that we have a 3 tier subscription and AI features because what you're going to see us do is we're probably going to be shuffling features to see And experimenting each time, of course, to see what is the best place to put our features. So it may be the case that explain my answer goes into Super as opposed to Max. And then we take some features from Super and put them into Max. So you're going to see us do that.

Speaker 1

And the idea is really to maximize The revenue that we can make and also to maximize the amount of features that we give to our users or a value that we give to our users In a 3 tier strategy without necessarily saying, well, the highest tier is AI. On the other side, for AI, we're going to continue developing these features because we're very happy with them. And so that's kind of what we're going to see. We don't have anything to say specifically yet about how much contribution The 3 tier system is going to have, for example, for 2024 bookings, because there's just a lot of stuff there, a lot of moving parts. But we knew this that when we introduced the 3 tiered system, it was going to take us a while to figure this out.

Speaker 1

Your next question was about text to speech, which is basically speech synthesis from OpenAI. We have our own speech synthesizer. We're very happy because we made our voices for our own characters. So for now, we're probably going to continue with that because each one of It has its own voice, etcetera. Over time, if we see that OpenAI speech synthesis is very good, of course, we may evaluate it.

Speaker 9

I'll use my follow-up to follow-up on that. In terms of just their capabilities though, Right. Like you clearly see somebody else that is now becoming conversational in terms of language. And so how do we port that progress Back to Duolingo.

Speaker 1

Sorry, I'm not quite sure I understand.

Speaker 9

Within Chat GPT, it feels like it's becoming more conversational as you use it sort of within like the premium tiers, right? And so the question is, How do we think about language learning starting to become conversational and really more advanced in terms of 1 on 1 tutoring?

Speaker 1

Oh, yes. We are definitely working on features that are related to that. You will see us you will see I mean, I don't have anything specific to announce, but We are definitely working on features that will feel a lot more like that and you'll see us, in the next few months start experimenting with them.

Speaker 3

Thank you.

Operator

Thanks, Andrew. And the next question comes from Arvind Ramnani at Piper with an awesome Zoom background.

Speaker 1

Love it.

Speaker 10

Thanks. I had to kind of Kind of compete with Justin, right? But, so I guess my first question is, you have these very creative intros When you open up your prepared remarks, what time at what point do you take the group of analysts out here and you convert this into a whole video? We've been showing up for our conference calls. You had Meghan Marker last quarter.

Speaker 10

When did we get our time?

Speaker 2

We're working on it, Arvind.

Speaker 1

Wait, wait, Arvind, do you want to be in one of our TikToks? Is that what you're saying?

Speaker 10

Yeah. Yeah. That's a shame that has.

Speaker 2

Throw that in the hopper, Arvind. We'll tell you.

Speaker 10

Perfect. So I wanted to ask Product development roadmap, right? Like there are many ways you can go. You have you take your core language and You come up with Duolingo Max, Duol Radio, and you have that kind of enhancing the core sort of language. And then, of course, like math and music is another very interesting vector.

Speaker 10

How are you sort of like making the choices between like product enhancements on your core versus kind of expansion?

Speaker 1

Yes, it's an excellent question. The majority of the effort is going into the core. We believe The language learning is a very big business that we are only scratching the surface on and that is where we are the category leaders. We are not yet the category leaders for math or music education. We are the category leaders for language education.

Speaker 1

So we're spending the majority of effort on that. That said, what's nice about putting math and music into the main app is that a lot of the changes that we make to improve the core Immediately help math and music. So for example, we may make a change to make the leaderboards more exciting. Well, math and music are already in the app, so It will immediately go into math and music. So most of the effort goes into the core, but some of that goes into math and music.

Speaker 1

And then just to give you an idea, math and music, I mean, the total number of people working on math and music is like 50, Which is a small fraction of our whole product team. So that's just to give you an idea.

Speaker 10

Right. And I guess like, are there any gating factors in terms of kind of investing? Is it like you're trying to balance like Profitability, Eric. Matt's kind of keeping the postings a bit tight to kind of say that, hey, let's get profitability. And is it Or is it more like the people like what's the gating factor that will allow you to kind of push on both?

Speaker 1

Yes, it's a great question, Arvind. The truth of the matter is that the gating factor is I don't know why. I cannot explain this. But the gating factor For any kind of product development ends up being time. It's this funny thing where it takes like 2 years to make a good product.

Speaker 1

I've never been able to see something goes faster. And it doesn't help if you throw a ton of people into it because they just kind of step on each other's toes. The right way I think to grow a product is to start with a small team. And when the product is gaining traction, you put more and more people. That is the right way to grow a product.

Speaker 1

And so we're not it's interesting. I mean, we really do we have increased our profitability quite a bit. But in the day to day conversations, We don't find ourselves being like, oh my God, I wish I had 30 more people to throw at this problem. It's more just getting our act together on really What it means to scale the content for math? What exactly do we want to teach for math next?

Speaker 1

And usually throwing more people at this just Has not helped us in the past. So that the gating factor is just it's kind of like it has to be a certain time in the oven. It's like you can't cook a cake much faster Or bigger cake much faster. That's it.

Speaker 10

Yes. Terrific. Yes, that's really helpful and phenomenal results this spring. Thanks, Arun. Thank you.

Operator

All right. Next question comes from Mark Mahaney at Evercore.

Speaker 11

Hey, thanks. Two questions, please. First, I know you've had a lot of questions on math and music, so maybe something a little bit more nichey. There was some news article about chess and it just made us think about what about skilled gains of Skill categories like that. Long term, is there an interesting appeal to including those somehow in the app.

Speaker 11

And then secondly, these bookings growth in the MAU and the sub growth It's super impressive, but could you give us some color on where these new MAUs, these kind of almost record levels of MAUs and max record level of New subs where they're coming from. Is this are you just getting a flood of new people coming in from China or from India? Just Help us realize what the source of these new subs and MAUs is, particularly from a geographic perspective. Thank you.

Speaker 1

Yes. Okay. Well, in terms of the adding content to teach things like chess or things like games, You're unlikely well, for 1, you're unlikely to see us do that. For 1, in the next again, in the short to medium term, we're not going to be adding more subjects other than math and music because we want to make those really succeed. But in the long term, just me personally and I think that's For a lot of people that work at Duolingo, we're just a lot more interested in pure education.

Speaker 1

And so that's there's nothing wrong with teaching How to play chess or games or anything like that. Love that, love chess. But it's just I think we're a lot more interested in just kind of pure education. So that's probably where you're going to see. For the second question, I'll let Matt take that one.

Speaker 2

Yeah. So as I mentioned in my prepared remarks, Mark, the Beauty of our growth has been broad based. So when you look at kind of the countries with the biggest MAU or DAU around the world, Can you try to see, user growth has been DAU growth has been around 60% for the past several quarters. What's the variation? Like, is the U.

Speaker 2

S. Growing fast? It's growing close to average. And then there's other countries that are growing above average, but it's broad based. It's around the world.

Speaker 2

So the user growth is really, yes, it's super geographically diverse. And we're glad about that. In terms of subscribers, We look at where our subscriber growth is coming from, and it hasn't changed. I mean, every quarter, the stack rank of countries kind of fluctuates every so little bit, but It's not really fundamentally changed over the past couple of quarters. So that's why we mentioned we felt like the user growth has been broad based and high quality.

Speaker 2

So we feel good about it.

Speaker 11

And then maybe one question just on the level of investments going forward. You're obviously ramping up margins very aggressively. That sounds that is fundamentally a good thing. Just kind of address like they is there any risk that you just have a lack of investment opportunities? I know that doesn't sound right, but

Speaker 3

No. How do you make

Speaker 11

how do you balancing like you're ramping up profitability, how do you balancing that with kind of the need for whatever To invest in Duolingo for the next 3 to 5 years.

Speaker 2

Yeah. I think it's a great question. I'm sure Luis has some thoughts as well. But just from the raw mechanics of the math, We mentioned on the last call that I think it's if you look at other tech companies, certainly ones that we respect and that you guys follow, in In their 1st year of real profitability, they typically see a pretty big jump in profit margin. And then they see steady progress towards their long term margin.

Speaker 2

That's kind of what we expect. As we said on last call, it's what we expect on this call. And while we've been doing this path towards increased profitability this year. We've been hiring and we've been investing in the product and the business. So I think we feel good about our balancing long term growth with long term profitability over time.

Speaker 2

And so I think Luis mentioned on the last One of the last questions. The gating factor so far has not been investment in our product cycle, our product journey. So I don't know, Luis, if you have anything else to add to that.

Speaker 1

Matt will not let us eat lobster every day anymore. And we are upset about that. I'm kidding.

Speaker 2

We've always been with the business with a fast discipline, it turns out.

Speaker 1

I'm kidding. No, I mean, just I don't think that we've been really there has never been a product initiative that we haven't done Because we can't hire the people. There's been we have not done it because we don't think it's a good idea or because we don't think we're ready to do it, etcetera. I think we keep investing really well at least in R and D.

Speaker 3

Okay. Thank you, Louise. Thank you, Matt.

Operator

Next question comes from Curtis Nagle at BofA.

Speaker 8

Awesome. Thanks very much for taking the question. So, Luisa, I thought you made kind of an interesting point in terms of the free to pay conversion in some of the regions. I think it was last call you talked about how it can be very difficult to drive that whether you're lowering prices or whatever you're trying to do. So Obviously, something changed.

Speaker 8

So it'd be great just to hear a little bit more about, I guess, how you cracked that egg and just what led to some success in this quarter.

Speaker 2

Yes. So, Curtis, I think I'm the one who said that in my prepared remarks. And the answer is going to be one that you're You'll get used to us hearing, which is it's actually not one thing. It's a bunch of experiments that we've been running around the world to understand how that Free to pay conversion can increase. In this particular quarter, one of the things we did was we optimized how we're showing what we call the hook to go from free to pay.

Speaker 2

So the kind of internal super ad that says, would you like to try Duolingo? We optimize that in a bunch of markets around the world, I changed the language a little bit, made it more local, more colloquial. And that was a big win. But again, that's one of many wins across the quarter. So that's really what drove it over the past kind of 3, 4 months.

Speaker 2

Luis, I don't know if you have anything else.

Speaker 1

No, yes, that's it. I mean, it's just generally a lot of we have teams exactly dedicated to getting more people to subscribe.

Speaker 8

Okay, makes sense. And then Matt, just a quick follow-up. So, if I heard correctly, dilution, I think, 1 to 1.5.

Speaker 11

I

Speaker 8

think that was brought down by 2. So just I guess what's the delta?

Speaker 2

Yeah, it's come down, in part because we, when we made our plans for the full year and guided to that 2% range. We'll probably hire end up hiring a couple fewer people this year. But then the other thing is that's A treasury stock method. So as the share price goes up, the amount of shares we grant over the course of the year goes down. So those are the two factors.

Speaker 2

Nothing crazy.

Speaker 8

Okay. Thanks very much.

Operator

All right. Next question comes from Chris Kunturich at UPS.

Speaker 12

Great. Thanks for taking the question. Maybe just a bit of a follow-up on what was just asked there on the regional payer penetration. Just curious how we should be thinking about like really how

Speaker 10

much of this is kind

Speaker 12

of rinse and repeat on a market by market basis versus kind of What needs to be done is really kind of the experimentation and it's unknown kind of really what the payer penetration is going to look like in some of these more nascent markets. I'm just kind of curious how we should be thinking about across that 8% payer penetration, like where are some of these earlier markets that we're at on a payer penetration versus some of our more advanced. And then maybe just one follow-up after.

Speaker 1

I'm happy to I mean, I think it's a little bit of both. I think some of it is look, There are some experiments that we're running that help payer penetration in every single country. It's just sometimes talking about The exact language that we use is better and we find better language to use that help the whole world. That said, There's a big difference in payer penetration in a country in a wealthy country like the U. S.

Speaker 1

Versus a country like India. And that's not just true for Duolingo. This is true for essentially every product out there. So there are some things that you're probably going to see us try there. It's not just Decreasing the price, which we've already done, but there are things like, well, maybe we sell more through the family plan.

Speaker 1

That's just an example. Or maybe we sell more through in app purchases or something because we do know that for some of these markets, some slight differences are just needed. So I think it's a bit of both. If I had to guess, my sense is that we're going to do more of the global stuff than the specific the market specific. It's kind of it takes a lot of effort to do a lot of market specific stuff.

Speaker 1

We may do market specific stuff for very large countries like China and India. You won't see us do market specific stuff for countries kind of smaller like, I don't know, the Czech Republic or something like that, which is a significantly smaller country.

Speaker 12

Got it. Very helpful. And just the follow-up would be on, I think you had talked last quarter that revenue per sub would Flat and I think you're now talking about improving. Should we be taking that as assuming that we're down kind of low single digits as far as revenue per subscriber or just Any more color you could provide around that would be helpful. Thanks.

Speaker 2

Yeah, we it's the same general trend. So this quarter, we thought it would be slightly less of a decline on ARPU Year over year. And it would have been but for the fact that we found this other lever around the world that drove mix shift outside the U. S. And That was a trade off we were happy to make because it drove LTV positive subscriptions.

Speaker 2

So that was the right decision. It probably delayed the lapping or the Kind of 0% year over year growth by quarter or so, but it's still the general trend, same trend as was on the last call.

Speaker 12

Got it. Thank you.

Speaker 3

All right.

Operator

I'm not showing any further questions. So I'm going to turn it back to you, Luis, to wrap up.

Speaker 1

Thank you, everyone. And thank you for the great questions. And we will see you next quarter.

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Earnings Conference Call
Duolingo Q3 2023
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