VinFast Auto Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 15 speakers on the call.

Operator

Good evening, everyone, and welcome to Duolingo's Q1 2024 Earnings Webcast. Just a fun fact before we get started, that catchy song, Spanish or Vanish, is already 1,000,000 listens on Spotify, if you can believe it. Today, after markets close, we released this shareholder this quarter's shareholder letter, a copy of which you can find on our IR website at investors. Duolingo.com. On today's call, we have Luis Von Ahn, our Co Founder and CEO and Matt Scruppa, our CFO.

Operator

They'll 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 some forward looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these risks have been set forth in the risk factors of our filings with the SEC.

Operator

These forward looking statements are based on assumptions 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. And with that, I will turn it over to Luis.

Speaker 1

Thank you, Debbie, and welcome, everyone. We've started 2024 on a strong note with another stellar quarter. In Q1, we grew revenue and bookings by 45% 41%, respectively, delivered record profitability and grew DAUs 54% year over year. These results show how powerful our product driven flywheel is. Our excellent product fuels word-of-mouth growth, which in turn provides data to continuously improve the product, ultimately driving higher engagement and subscriber conversion.

Speaker 1

Our 3 pronged approach of teaching better, growing users, and converting them to subscribers continues to be a winning strategy for us. This year, our monetization efforts are focused on optimizing our subscription offerings, including our family plan and our 3rd tier, Duolingo Max. We feel good about the progress we've made on Max based on the results of our experiments to date. Because of that, we rolled out Max more broadly in April. And today, roughly 10 5% to 10% of our DAUs have access to it.

Speaker 1

We will make it available to more countries and courses in the next few months. We're also improving our family plan experience by streamlining the invite flow and having more engaging social features. Our progress on these initiatives, alongside other monetization initiatives and our current trends, give us the confidence to raise our full year guidance. Finally, our English Learner initiative will lay the foundation for long term user and monetization growth. Although the vast majority of global language learners are learning English, English learners represent less than half of our DAUs, which is why we see a substantial opportunity to expand into this part of the market to grow users and bookings over the next couple of years.

Speaker 1

This growth area, along with the continued momentum in our core product, highlights the massive opportunity ahead of us. With less than 1% of the language learning market, which is estimated to reach $115,000,000,000 by next year, you can see that we are just getting started. Our continued execution against our strategy is why we are confident that we can sustain rapid growth for years to come. And with that, I'll turn it over to Matt.

Speaker 2

Thanks, Luis. I'll provide some additional color on our Q1 results before updating you on our guidance for the remainder of the year. As Luis shared, we saw very strong Q1 performance with a combination of 41% bookings growth, 45% revenue growth a record 26% adjusted EBITDA margin, showing the continued strength of our business. We beat our Q1 guidance thanks to the compounding impacts of our growth and monetization experiments and our social first marketing. This strategy continues to drive organic growth and increasing subscriber conversion.

Speaker 2

The continued strength in the business is what gives us the confidence to raise our 2024 bookings and revenue guidance. At the midpoint, we are guiding to bookings and revenue growth of 31% 38%, respectively. I'd note that this growth comes even as we lap an incredibly strong 2023. For Q2, we are guiding to similar bookings and revenue growth rates as the full year, despite comping an unseasonably strong Q2 last year. As we mentioned on the last call, we expect Q3 and Q4 growth rates to step down from Q2.

Speaker 2

Note that if foreign currency rates were constant year over year, our Q2 bookings growth rate would be about 3 points higher and our full year bookings growth rate would be about 1 point higher. We are also raising our adjusted EBITDA margin guidance to 23.5% at the midpoint. Our updated full year adjusted EBITDA guidance reflects the operating leverage we expect to achieve across all expense categories this year. Our profitability typically varies a bit from quarter to quarter given our bookings and expense seasonality. Specifically, as we said on the last call, we expect Q2 margin to be lower than Q1 and are guiding to 21.5% at the midpoint.

Speaker 2

And in Q2, we expect to see some deleverage across all the spend categories, driven by increased hiring in R and D and normal course increases in sales and marketing and G and A. We expect adjusted EBITDA margin for Q3 will be lower than Q2 because it's typically our largest hiring quarter and because we've shifted some sales and marketing spend into that quarter. And Q4 will be similar to Q1. For the full year, we are guiding to an incremental adjusted EBITDA margin of 39%, which is slightly above our long term adjusted EBITDA margin target of 35%. Finally, we ended the quarter with approximately 49,000,000 fully diluted shares outstanding using the quarter end close price.

Speaker 2

And in 2024, we expect to end the year with about 1% net dilution from equity issued to employees, which is similar to the dilution we had in 2023. And with that, I'll turn it back to Luis.

Speaker 1

Thanks, Matt. I want to close by saying that this quarter's results are a testament to the dedication of our team and to the support of our subscribers, both of whom help us expand our mission to more learners. Finally, I'd like to extend a huge thank you to Leila Sturdy, a long serving board member who will be stepping back to focus on other priorities. Leila has been a tremendous supporter of Duolingo for the past decade and was instrumental in the progress we've made to date. So thank you, Leila.

Speaker 1

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. And as I mentioned earlier, if you have a question, just use the raise hand feature. And your first question comes from Ralph Schackart of William Blair.

Speaker 3

Good afternoon, Luis and Matt. Two questions, if I could. In the letter, you talked about optimizing subscription tiers throughout the year. I think you've talked about this previously. Maybe just give an update on that if you could please, what you're finding there?

Speaker 3

I'm guessing you're doing some testing. And then I know you don't manage ARPU, just sort of any impact as it may relate to, impacting ARPU as we progress through the year? And then I have a follow-up.

Speaker 1

Thank you, Ralph. Thank you for the question. So in terms of subscription tiers, historically, we've had 2 tiers, the free tier and Super Duolingo. About a year ago, we started experimenting with a 3rd tier, which we call Duolingo Max, where the idea was that this coincided with the large language models and generative AI coming out. So we decided to use the AI features as a good kind of excuse to start the 3rd tier, which is something we wanted to do for a while.

Speaker 1

So we started experimenting with Duolingo Max, which had a couple of AI features, which are mainly conversational features. And as we said, it was going to take us about a year to get to a wider rollout. And this is what just happened. We started a wider rollout because we're pretty happy with the results. I mean, generally, we're seeing that users that there's a desire from users to, you know, to have higher tier.

Speaker 1

What you'll see us do over the next few quarters is, 1st of all, roll it, roll out Max to other countries and other languages. Right now, Duolingo Macs is accessible only to people who are learning French and Spanish on iOS in 6 countries. We expect to put it on Android and in many more countries and in many more languages to learn, which will get it to a higher fraction of DAUs. The other thing that you'll see us do is we'll see us start shifting features around to see what is the best packaging. And there's no real reason for the highest package to be just AI features.

Speaker 1

So we're doing experiments, for example, to put, unlimited hearts, which hearts, you lose a heart every time you make a mistake. We're running an experiment to put unlimited hearts in max. So what you'll see happen is that, you know, by towards the end of the year, we'll probably have a pretty set set of features. And then at that time, there will be work to be done to try to move as many of our subscribers to max as possible. That's kind of what we're doing for the tiers.

Speaker 1

I'll let Matt answer the ARPU question.

Speaker 2

Yeah. On the ARPU side, there's an a general trend that we've talked about before with our ARPU trending back towards basically flat year over year growth, if nothing else happened. If you add in a higher, mix of either family plan or max, you could see that, have some upside to it. And so that's how we think about it Ralph and the model.

Speaker 3

Right. Just one more maybe for Luis. Just in terms of advanced English product, obviously it's a big strategic focus. Maybe just a quick update how it's progressing, but maybe more importantly, if you get this right or if the consumers really adopt this product, sort of maybe give a sense of like how impactful this could be for the overall business.

Speaker 1

Yeah, great question. Thank you for asking because it's something we're very excited about, our English learner opportunity. Just to put things into context, if you look at the global language learning market outside of Duolingo, the overwhelming majority of people who are learning a language are learning English. And the overwhelming majority of the spend is in people who are learning English. With Duolingo, we're underrepresented in users and we were even more underrepresented in terms of revenue when it comes to English learners.

Speaker 1

Less than 50% of our DAUs, for example, are learning English. So we see this as a pretty major opportunity, and this is why we're investing in teaching English better. And in particular, the thing that we're doing for teaching English, just to remind everyone, we have a different English course for different base languages. So for example, we have an English course for Chinese speakers, and that's a different course than the English course for Spanish speakers, etcetera. So we have about 20 English courses.

Speaker 1

And if you look 3 years ago or so, they got you to different levels of proficiency, each one of these courses, and none of them got you to a very high proficiency. What we have done over the last couple of years, and this is one of the major achievements of this company, is we've made it so that our English courses, in particular, 18 of our 20 English courses now get you to pretty high proficiency. So that's the first thing we needed to do is get people to more advanced levels because English in particular, English learners usually are at a more advanced levels than other languages. So first thing is we needed to get people to higher proficiency. The content is now there as of the last few weeks.

Speaker 1

So that's good. That's kind of check mark 1. The next thing that we're working on is getting, placing people into the right spot in the course. Now that we have way more advanced content, when new users come in that have prior proficiency, we need to put them in the right place in the course. This is more important with English than with other languages because, you know, if for people who are learning Swedish or, or, you know, whatever other language that is not English, most of them come to Duolingo as complete beginners.

Speaker 1

English learners, it just turns out most people in the world just know some amount of English. So they come in with prior proficiency, but this prior proficiency that they come in with is pretty patchy because they may have learned it by watching some movies or, you know, they, you know, took English in 3rd to the 5th grade or just listened to some songs. What they know in English is pretty patchy. So the problem of putting them in the right place in the course is tricky, but that's what we're working on and we're making good headway. Once we are able to do that, which will happen throughout this year, we're going to start marketing so that Duolingo is now known as a good place to learn intermediate to advanced English.

Speaker 1

And when that happens, I think we're going to start seeing some meaningful contribution of these English courses more than they have now. In terms of how large this opportunity is, it's hard to say exactly, but we think that this is going to be pretty meaningful. So this is, and this is one of the main reasons why we think there's, you know, in the span of the next, you know, midterm kind of 3 ish years, we see that this is going to be a strong contributor.

Speaker 3

Thanks, Luis. Thanks, Matt.

Speaker 2

Thanks, Rob.

Operator

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

Speaker 4

Great. Thank you very much and good afternoon. Luis, in the letter you teased, you know, having family quests, more family plan optimizations in there. From what we can tell, friend quests have been pretty popular in terms of driving daily engagement. So I'd love to hear more about just how you're thinking about some of these optimizations around family plan going forward, what that could do for the business.

Speaker 4

And then Matt, for the financial part of the question, we've often found that Family Plan is much better retention characteristics, much higher ARPU for companies, pretty priced at elastic. So as you see more value, see KPIs really improving around Family Plan, how do you think about that right price to value ratio going forward? Thank you.

Speaker 1

So I'll start with the feature. So, Family Plan is an interesting feature. The Family Plan was built by our monetization teams. There was no team that was called the family plan or anything. Just we built one of the plans to build family plan.

Speaker 1

And as soon as they built it, they moved to doing something else. So they kind of left it there. It was pretty bare bones family plan and it just started growing by itself organically. So we found that there's just a lot of desire from people to get a family plan. And what we love about the family plan of course, is that it has much higher retention than our other plans.

Speaker 1

Because if you buy a family plan and it has multiple users in your family, as long as any of them keep using it, you're still on that plan. So it's been really great for us. We saw it get to about 18% of our subscribers are on a family plan now. And that's without really spending any real effort improving the plan. So about 2 months ago or a couple of months ago, we started a new team, that's basically to work on improving the family plan.

Speaker 1

They've done a number of things. They started out by just fixing some things that were really should have just been fixed from the beginning. For example, it was the case, even though it grew, family plan grew that much, it was the case that if you had some kids under 13 in your family plan, the adults couldn't see the kids' names. This just made no sense. So we have fixed that.

Speaker 1

We are making it so that it is easier to find your family. So we're working on that. We are adding a lot more social features, like basically waste for the whole family to collaborate or compete. So we think that over the next few quarters, we're going to see an increase in the fraction of our subscriptions that are Family Plan. I don't know, Matt, if you have more to say about that with the pricing.

Speaker 2

Yeah. On the price to value, Justin, I think it's a great question. And I'll just, take a second to broaden it out. So we have added a ton of value to our super, subscription and to Family Plan. And now we're working on adding even more value with Max.

Speaker 2

And I think that's why when you hear us talk about experimenting with pricing, that's part of what we're trying to do just in general is find ways to see if we've added enough value to consumers that they're willing to pay us more for their subscriptions. I think on family plan in particular, what Luis just mentioned is adding value to a plan that historically has had one defining value addition feature, which was adding more people. And so as we add more value, I think we will continue to experiment with the the price, the price of family plan. And I know that my 2 daughters get a lot more value out of it already because they can consistently nudge me to do a lesson. So it's not hard for me.

Speaker 2

I'm biased, of course, to squint and see us experimenting with pricing because we are definitely already improving the value of the plan.

Speaker 4

Good stuff. Thank you both.

Operator

Thanks, Justin. Next question comes from Brian Smialek of JPMorgan.

Speaker 5

Great. Thanks for taking the questions. I guess just to start on MAX, can you just talk about the ultimate revenue contribution and target mix as you continue to roll out this tier going forward? And I guess, in terms of the sub mix, how much is incremental versus cross graders from Super and Freemium?

Speaker 2

Yeah, I mean Luis can talk more about maybe the longer term vision. In the short term, Brian, the answer is we don't know yet. We're still, we've rolled it out now to about, 5 to 10% of users who can have the option to to see it. And so we're excited about it and we're seeing a lot of traction. We're seeing a bunch of evidence that people are willing to pay a substantially higher price for it.

Speaker 2

But in terms of the ultimate mix, we don't we don't know just yet. And certainly in 2024, you know, the the impact of Max will be is in our guide, but it's commensurate with the fact that it's only a 5 to 10% rollout now. So it's relatively modest, in the 2024 guide. So I don't know, Luis, if you want to talk kind of maybe at a broader level.

Speaker 1

Yeah. It's hard to say what the ultimate, mix is going to be because it will depend in part where we settle on what features are going to be in which plan. So it's very hard to say because we have not settled on that. I mean, right now we're still experimenting which features are going to be in which plan. So I think we're going to have more to say.

Speaker 1

You probably know the answer to this question in the next few quarters. But at the moment, it's very hard to say.

Speaker 5

Great. Thank you. That's super helpful. And then I guess, just on user growth, can you just talk about in any given quarter, just given we've seen some very strong social media and marketing campaigns, how much that contributes to growth, and just how you're thinking about marketing going forward as you continue to scale the MAU base?

Speaker 1

Yeah, that's a great question. So generally, there are 2 big reasons why we're growing so fast. The bigger reason is that we've just been improving our product over the last several years and those product improvements compound. And when the product is better, 2 things happen. People tell their friends organically, it's just kind of word-of-mouth because it's a better product.

Speaker 1

And also people stick around for longer. So it has because it has better user retention in general, not just payer retention, but user retention. So that I would say is the majority. But also, you know, marketing and in particular, our brand marketing has just done a really good job at getting the brand out there. This is all our stuff with our social media, with TikTok and YouTube Shorts and Instagram, that we're really being able to replicate all over the world.

Speaker 1

You know, it's hard to give an exact, you know, mix, but my sense is probably, you know, 2 thirds product, 1 third marketing. But this is a very hand wavy amount. And the reason it's so hard is because a lot of our growth just comes from word-of-mouth. And we just don't know. It's hard to measure word-of-mouth growth.

Speaker 1

How much of that is affected by the fact that the OWL did some weird thing on Instagram versus people told their friends. So that's why. But yeah, I mean, these are the 2 main reasons we're growing. And in terms of, in the future, we're very excited about all the marketing stunts that we have planned for the rest of the year. I mean, I'm not going to spoil them, but we have really cool stuff coming.

Speaker 5

Great. Thank you for taking my questions.

Speaker 1

Thank you, Brian.

Operator

Next question comes from, it looks like Ji An, who's sitting in for Mark Mahaney at Evercore.

Speaker 6

Yes. Thank you very First, just a quick follow-up on the MAX. I know it's probably early stage as well, but anything you can share on the uptake of MAX versus MAX family and then monthly versus annual? Like, is that different from your current super mix? And also for music and math, any update on the learnings and product roadmap for the rest of the year?

Speaker 6

Because I can imagine you're leaning into family plan, math would definitely be relevant, right? So and then I'll have a follow-up after.

Speaker 1

Matt, you want to take the mix question and then I'll talk about music and math?

Speaker 2

Yeah. Sean, the, mix question is going to be one that we already mentioned, which is, you know, right now, you know, the number of folks who are subscribing to MAX is relatively small. And so we could give you the mix of numbers, but it's going to change a lot as we roll it out even this quarter and throughout the rest of the year. So, you know, I I don't know exactly how, to guide you on that just yet, except to say that, like Luis said, we'll know more over the next couple of quarters. And, you know, again, I think it's gonna be it's gonna vary based on what features go where, what the price is and how it interacts with things like the family plan, math and music over time.

Speaker 1

Yeah. And in terms of math and music, again, for context, what we've done is, a few months ago, we added math and music as courses to the main Duolingo app. Currently, they are available only on iOS. They're going to come on Android, this year. So that's part of the roadmap.

Speaker 1

Also, currently, the courses are only available if you're the language of your phone is either English, Spanish, German, or French. So another thing that we're going to do is make them available and kind of for more basically for more markets, for more languages. So those are, you know, kind of standard bread and butter things that we're going to do to get more users trying these. But the main thing that we're doing for both of them is just adding a lot more content and making it more fun. In the case of math, we're adding a lot more real world content.

Speaker 1

So as opposed to just seeing kind of, you know, the standard math operations, you'll see them with thermometers and dollar bills and stuff like that, which people like quite a bit. We're finding that people like those quite a bit. There's a music. You probably see us do things like, you know, well, this may not be for this year, but over time, instrument integration. That's a big thing that we're going to be working on for music.

Speaker 1

But in general, we're very happy with the growth of math and music. Now, I just need to remind you one thing, because I have to remind people every time. We do not expect that we're going to get very meaningful revenue contributions from math and music, certainly this year. There may be some next year, but it won't be that meaningful. I mean, it'll just take some time for these courses to grow, but so far they're going very well and we're super happy with the results.

Speaker 6

Great. And then another question just on the bookings guidance. I hope I'm doing this math right. I think last quarter, you guys talked about bookings potentially 5.0.0 from Q1. I think the guidance adjusts a little bit short of that.

Speaker 6

So anything that you would call out?

Speaker 2

I think the strength that we're seeing in the subscription business. So, subscriptions grew 47% subscription bookings grew 47% year over year in Q1, which was faster than we expected. It was very strong. And so, subscriptions is continuing to grow. That's why the full year guide is up.

Speaker 2

In Q2 subscriptions again is going to be the majority of the story. So, that's just how the growth rates have have shaken out as we've seen how subscriptions strength has performed so far this year and what we expect for the rest of the year.

Operator

Great. Next question comes from Ryan McDonald of Needham.

Speaker 7

Thanks for taking my questions. As we think about the investments you need to make within for English content and then also to market the English learning capabilities of Duolingo moving forward. Can you give us a sense of what maybe the incremental magnitude of that invest of those investments might be and what maybe the time frame it's going to take in terms of to get additional content out and then obviously then to be able to start marketing that and sort of gaining share amongst those learners?

Speaker 1

Great question. For, for English, the content, the good news of the content is that we'll continue iterating on it and improving it. But at this point, the content is out there. So we are done doing the content. And what was amazing about it is this is really the first big batch of content that we were able to generate in large part because of generative AI.

Speaker 1

I mean, we use large language models for this. So it was a lot quicker and a lot cheaper to generate than what we had been doing in the past, which was mostly handmade. Now, this is not to say that humans are not involved anymore. They're still involved, but the involvement is much less because we've been using generative AI. The other awesome thing about generative AI with this is that it allowed us to do it's still, it is allowing us to do things a lot faster.

Speaker 1

And what that does, it just changes the calculus for everything. And this, you'll see this with English. There were projects that if they were pitched to me 7 years ago or 5 years ago, And I would just do the back of the envelope calculation of how long it was going to take to make the content. And it would be pretty clear that it was going to take us 5 years to make the content. I would say, let's not do that project because that's, I don't want to spend 5 years on that.

Speaker 1

That same content can now be made in, call it 3 months. So now I'm just like, yeah, sure, go for the project. And even more, even if we make the content in 3 months, and at the end of the 3 months, we realized we screwed something up. It's okay. We can redo it again in 3 months.

Speaker 1

So it's just allowing us to do, to be a lot more aggressive on what projects, content projects we work on. So, you know, in terms of spend, I don't think this is something that you should be too concerned about in terms of the spend of the content. And in terms of the marketing, you know, this is, it's something else that, you know, we're not going to, because as a company, we've never been a company that, you know, uses, for example, performance marketing that heavily or anything. So you're not going to see us spend $100,000,000 on a campaign to convince English learners on this. Probably what you'll see us do is, do a lot of in product marketing inside the Duolingo app, which is free, and probably a lot of our very strong social media to convince people that the Duolingo is an effective way to learn more advanced English.

Speaker 7

Makes sense. All right. That's helpful color. And then maybe, just speaking of social media channels, obviously, we continue to see developments around TikTok and a potential ban and bills being passed. Just can you remind us sort of what percentage now of sort of marketing spends on TikTok in the US?

Speaker 7

And then if if it the need arises and you need to continue to diversify, you know, what's the process like to sort of migrate maybe some of those campaigns off? And what's relative effectiveness maybe on other channels relative to TikTok? Thanks.

Speaker 1

Yeah. Great question, Ryan. So, okay. So there are a number of things to say here. First of all, our TikTok views are organic.

Speaker 1

So we don't, we don't pay for that. That's just, it's organic stuff. The, what we've decided, we realized a while ago that it was a good idea for us to diversify away from TikTok. This was more than a year ago. I mean, we got very prominent on TikTok And that was great, but we realized that it was a good way to diversify.

Speaker 1

So we've done a number of things. For one, we've invested in Instagram and YouTube Shorts. The good news is that YouTube Shorts and Instagram Reels are products that are pretty similar to TikTok. So what works on TikTok, pretty similar things work on YouTube Shorts and Instagram Reels. That's one thing to say.

Speaker 1

Another thing to say is by now, actually YouTube contributes more users than Instagram for us, already that surpassed it. So that's, that's good for us. The other thing is that, our TikTok views in the US are, the US accounts for less than, it's a minority of the TikTok views, because we have views from TikTok from all over the world. So our sense is that if TikTok were banned, which may happen, it's probably going to take about a year for that to happen. And if that were to happen, already, it's, it's a minority, you know, it's not a very large fraction of users that are coming from our TikTok views because we've diversified a particular TikTok views in the U.

Speaker 1

S. And then the other kind of in house view is that while probably happened is what happened basically in India. Basically people move to from TikTok to Instagram or YouTube, where we're already pretty strong. So overall, we're not particularly concerned about a potential TikTok ban in the U. S.

Speaker 7

Excellent. Thanks for the color.

Operator

Your next question comes from Andrew Boone of JMP Securities.

Speaker 8

Hi, guys. Thanks so much for taking my question. I wanted to ask about the deceleration in MAU and DAU, and this may be more of a theoretical question. But how close do you guys think we are to CUR where growth would be more limited to your ability to generate new users and resurrect users?

Speaker 1

Great question. I mean, so yes, DAU's decelerated a little bit. Well, DAU growth decelerated a little bit. But, you know, the way we see it, we had like 10 quarters of accelerating DAU growth. And we kept saying almost every quarter, like this can happen forever.

Speaker 1

This can happen forever. And, you know, DAU growth was accelerating, but it was accelerating a tiny bit. It was like 60%, then it was 60.5%, then it was like 61%, etcetera. And it kind of went all the way up to 64%. This time we had 55% sorry, 54% DAU growth.

Speaker 1

You know, we're at the beginning of Q2, which we already have is looking higher than the 54%. So we think it's going to go a little higher than that. Kind of the way we see it is we're at around 60% DAU growth. I mean, some quarters are a little more, some quarters are a little less. It was kind of this fluke thing that we were going, keep creeping up for like 10 quarters in a row.

Speaker 1

But the way we see it is we're around 60% DAU growth. And we think that that's going to continue for a while. It's hard to say exactly what a while means. But we feel pretty good about our daily growth. So yeah.

Speaker 8

And then for my second, I wanted to ask about subscriber conversion. It ticked up this quarter, looks very healthy. Can you talk about just the strength of the 23 cohort now coming through and it's just kind of that yearly lag and that's what we're seeing for conversion? Or is there anything else that you guys want to call out there as we think about that metric? Thank you so much.

Speaker 2

Bruce Yeah, I'll take a little bit and then, you know, Luis can talk some of the products out of it. But when we look at the numbers, Andrew, that's what we saw. And that's what I mentioned to a question earlier around the subscriber bookings growth. You know, cohort conversion, has improved across every cohort, from 2023. And so we feel really good about the subscriber free to pay conversion and then the continuing ongoing conversion of those cohorts.

Speaker 2

So it's led to, you know, that's what led to the 47% bookings growth for sub bookings in q one and why we feel pretty good about the rest of the guide on the sub booking side. So, Luis, if you wanted to mention anything about the product.

Speaker 1

Well, I mean, just generally, we keep making the subscription tiers more appealing for people to subscribe and it's working. So it's getting more and more people to subscribe. Yeah.

Speaker 9

Thank you.

Operator

Next question comes from Eric Sheridan of Goldman Sachs.

Speaker 10

So much for taking the question. I just have one maybe more for Matt. Obviously, you continue to sort of demonstrate continued incremental margin outperformance versus the way you guide 1 quarter forward. Obviously, you're talking about a step back in margins lower than the level you just put up in Q1 for both Q2 and the remainder of the year, the full year. Talk a little bit about the investments you want to make between now and the end of the year that caused that margin to take a step back from the level seat in Q1?

Speaker 10

And if you were to outperform margins as we go through the end of the year, what would be some of the drivers of more the upside note? Thanks.

Speaker 2

Yeah, no, it's a great question. And I understand why you would ask it given that we printed a 59 percent incremental margin, which is higher than our long term margin by a lot. The reason that happened in Q1, was 2 fold. One was we actually just shifted some of the expenses out of Q1. It's in the normal course.

Speaker 2

Some of that went into Q3, which is why I mentioned sales and marketing expense goes up in Q3 relative to our previous guide. That was about half of it. The other half was, we were finalizing some additional projects. So Max and some, some of the English learning content. So we capitalized about a 1,000,000,000 and a half more incremental than we expected.

Speaker 2

That was about 2 points of of adjusted EBITDA margin. So if you take those two things into account, you get about, you know, half of that over performance and incremental margin. But to step back even from that very detailed Q1 answer, the broader point is, we have a ton of things we want to invest in throughout the course of this year and then for the next couple. So Luis mentioned English learning. You know, that is a priority.

Speaker 2

We're going to focus on that. We're going to focus on math and music. We're going to focus on our core subscription business as well. And so that's why we think that the prudent thing to do to attack this huge opportunity we have is to continue to invest such that that incremental margin stays closer to 35 than 60. And that's what we're guiding to.

Speaker 2

And that's why I think we'll see the rest of the year. Okay. Yeah.

Operator

Next question comes from Chris at UBS.

Speaker 11

Great. Thanks for taking the question. Can maybe just going back to the MAX tier, are there any markets that as of right now as we just kind of think about the cost of Gen AI where it's just simply too restrictive to be rolling out, rolling out the MAX tier and can you maybe kind of give us a sense for what that scale is?

Speaker 1

Yeah. There are markets where we do not plan to roll it out given the current costs. These are usually very low monetizing markets. It's markets like India, where we have a lot of users, but not a lot of payers. Generally, we expect that in the markets that monetize pretty well, call it Western Europe, the English speaking world, Japan, Korea, that we'll be able to roll out Max, because it's fine.

Speaker 1

Now that said, we expect that the cost of generative AI, the cost to large language models will go down. So over time, we'll probably be able to roll out everywhere. That's my hope. But for now, our intent is for the rest of the year, you'll probably see us in kind of higher GDP countries.

Speaker 11

Okay. That's very helpful. And just kind of curious about how you guys are thinking about that LTP to CAC for MAX. I think you touched on a little bit earlier, but just as we think about it across the various plans, how does that kind of compare the core super subscription family plan versus max? And then then just a quick follow-up on another question.

Speaker 11

Matt, you had mentioned, kind of thinking about 60% DAU growth going forward. Is that also the right framework to kind of be thinking about 2Q? Thanks.

Speaker 2

Yeah. Yeah. So on on on the LTV side, you know, we primarily because most of our acquisition, comes from organic word-of-mouth. You know, we mainly focus on the LTV side of that equation. And so, it's basically right now, that the family plan has a has a higher LTV than the super plan because it has a higher price and higher retention.

Speaker 2

Max right now could have a higher LTV depending on a bunch of variables that go into it, but mainly what price we end up settling at and what feature set goes in there. So that'll remain to be seen. Right now, if I had to put pen to paper on it, the LTV of MAX is higher or expected to be higher over the medium term as we both refine the pricing and then the costs of the Gen AI features come down. So, but we'll have to see, you know, we have to we have to experiment with it over time. And then the, what was the second part of your question?

Speaker 2

Can you remind me?

Speaker 11

Yeah. Just on the 2Q DAUs, you had commented about 60 percent. Is that kind of the right framework for 2Q?

Speaker 2

Yeah. I think that was Luis's comment around the fact that we accelerated up over 10 quarters from 40 some odd percent to about mid-50s. And then from the mid-50s up to the mid-60s, it kind of ticked up not a ton over the course of several quarters. And so right now, we're feeling very good about being you know, in that range for, for a while. As Luis said, and I'll steal from him.

Speaker 2

It's hard to say how long a while is, but, you know, we feel good for, her, definitely for q2 and and for most of 2024.

Speaker 11

Understood. Thank you so much.

Operator

Thanks, Chris. And the next question comes from Alex Sklar of Raymond James.

Speaker 12

Great. Thank you. Maybe just sticking on that LTV topic that you just kind of hit on. But on LTVs and retention broadly, after maybe family plans, which seems like that's been the most successful newer development to date. What are some of the biggest tests you're still looking at to kind of further move the needle in LTV and retention metrics?

Speaker 1

Probably in terms of tests, continuing improvements of family plan. I mean, family plan, it was very good, but it was just kind of a bare bone feature. So we expect that that will have, that there will be a higher shift to family plan, which should increase LTV. And then the other big group of tests is Max. Like Matt said, our expectation is that Max will end up having higher LTV.

Speaker 1

But it's hard to say, but we are that's what we're working on. And hopefully that we'll be able to find a set of kind of where each feature goes so that Max is actually a big win on LTV. But it's very hard to guarantee that right now.

Speaker 2

Yeah. And Alex, I would just emphasize that the LTV of our annual subscription product is very good, and we have, you know, plenty of free users to go convert to paid. So I think the, there's a big amount of LTV to still go get in our in our free users as well. So just don't want to skip over that. The family plan is great.

Speaker 2

Max is going to be great. But the normal course of more users converting more of those to super even produces a ton of LTV. And that's core to our strategy this year and in the near term.

Speaker 12

Got it. That's super helpful context and good. It's a very fair point on the on the big, m a u base, d a u base, still go get map. You've you've, Matt, maybe this one's for you. You've talked about tracking kind of at risk paid subscribers in the past.

Speaker 12

I'm curious if there's been anything from a macro standpoint just in of consumer health that that you're picking up in the numbers behind the scenes right now.

Speaker 2

Yeah. We haven't seen anything. You know, we've we track that metric and a bunch of others to see how, our subscriber base is doing. And, you know, it looks pretty consistent, with 2023. So not to say that that couldn't develop, but we haven't seen anything so far this year.

Speaker 12

Great. Thank you both for the time.

Operator

Okay. Next up, we've got Ross Sandler from Barclays.

Speaker 13

Hey, guys. Thanks for taking my question. Awesome. So the DAU was already answered, so I appreciate that 60% comment. But I guess as we go back to converting DAU or MAU TTM to payers, that conversion rate is moving around a bit.

Speaker 13

So with the I guess what explains the variation we're seeing there between geo language corridor or like product changes that you guys are doing to kind of have that payer ratio fluctuate as it is?

Speaker 2

Ross, what metric are you keying in on? Are you looking at MA subs per MAU or what's the metric you're saying is moving around?

Speaker 13

Yeah. So well, the DAU decel, I was going to ask why is that happening in the March quarter, first of all, but I think you kind of answered it. And then it's going to reaccelerate to 60 in the June quarter, but your bookings guide is kind of decoupling a little bit. So these types of variations that would be kind of the key of the question. Is that stuff that you guys are doing with the product or is it something else with these corridors that we need to understand?

Speaker 13

That's all. Thank you.

Speaker 2

No, no, I appreciate it. And I appreciate you giving us a chance to clarify. So for Q2, I don't think Luis was saying that Q2 was expecting to be exactly at 60. I think he was saying April was faster than the 54. And so we feel good about, you know, being in the range there.

Speaker 2

I don't think that was meant to be, it's going to be 60. It's, you know, it's around there, you know, plus or minus. It's just the normal course variation that comes from, you know, a great organic, growth story that, you know, you don't have a point operated lever on that. So you can't dial that into, 57.2 if you wanted it. Right?

Speaker 2

So just it's it's varying. It's 55, 60. It's gonna be in the range. On the payer side and the bookings, what I would say is that Q2 is typically a slower quarter for us. You can see that in the seasonality.

Speaker 2

There's nothing you know, all that interesting in that because, you know, it doesn't have any of the one time things that we do throughout the year. So it doesn't have New Year's promo, which is in the q4, q1. It doesn't have back to school, which is q3. Q2 has got, you know, just kind of a normal course order, and it's historically been one that just kind of goes with the flow. So I don't think you're seeing anything that we're doing necessarily with the product driving a bunch of volatility.

Speaker 2

It's just kind of normal course stuff.

Speaker 13

Thank you.

Operator

Okay. And next question comes from Arvind Ramnani at Piper Sandler. And Arvind, you're on mute.

Speaker 9

Yes. Can you help me out?

Speaker 1

Yeah. Hi, Arvind. Hey, Arvind.

Operator

And you just went back on mute.

Speaker 9

Can you hear me now? Yes. Yes. Sorry. I'm, I'm on the road.

Speaker 9

So sorry for any background noise. You know, I I want to ask about your India kind of business. Right? Like, I mean, you you indicated, like, you know, those are kind of markets that don't really have a, you know, kind of high tolerance to pay for or they have a higher tolerance for advertising. And and maybe that's kind of the the market.

Speaker 9

But is there a different price point, that that will make them an interesting market from a subscription base subscription basis?

Speaker 1

Yeah. I mean, it's India is very interesting. I mean, we've grown DAUs a lot in India, which is great. We do see significantly lower payer conversion. And that's expected when we talk to other companies that are subscription based.

Speaker 1

It's very hard to get payer conversion in India to go up. The price of the subscription in India is lower. My sense is that this is just we're going to continue doing things with India. But my sense is this is just a market that needs to mature a little bit in terms of people being okay with digital subscriptions. So the way we see it is this is a great opportunity, but more in the midterm rather than in the short term, because we're going to continue trying things like in app purchases with India and stuff like that.

Speaker 1

But for the subscription, is if even if you look at, you know, if you look at companies like Spotify or other subscription businesses, it's just India, it's hard to get users to become digital subscribers. But I think that is changing over time. And I think if you look at it over kind of the next 5 years, you'll probably see an increase.

Speaker 9

Yeah, terrific. That's helpful. And I guess, Matt, one for you. You know, in terms of, like, margins, right, like, I mean, and and and maybe you don't think of it this way, but, when you think of your various cohorts, whether it's max or, like, subs, family plans, does and and I don't know if you, you know, you don't disclose it, but but in general, where do margins come in, in each of the different cohorts? Because kind of one thing is AI is exciting, but it's also not cheap.

Speaker 2

Sure. Yeah. And we've, we talked about this on our actually about a year ago, Arvind, we talked about the, the fact that for Max, you know, it's, there's incremental cost for every use case, for every usage of it. And that does, lower the gross margin of the max product. But in an absolute dollar margin basis, because of the way we've priced it, at least to date, on an absolute dollar margin basis, you're better off even, even with the prices that were happening last year.

Speaker 2

So again, I don't want you to take away from that, that that's where this ends. I think that's where it starts And we're going to experiment with the price and the costs are changing relatively rapidly. So right now I feel pretty good about our dollar margin on max. And I think ultimately the gross margin will be just fine.

Speaker 9

Terrific. And just last question for me. Last year you all had a lot of kind of basically free sort of quasi free marketing, whether it is a form of the kind of Barbie movie and all of that. And I think when we met last time, we were saying a lot of that just basically came to you. Is there anything you're able to do in your business this year where you're able to kind of leverage some of that kind of basically free marketing from kind of popular events?

Speaker 1

Yes. We expect similar stuff to last year. I mean, some of these we expect similar stuff to last year in terms of the volume of these. Some of them are outsized in terms of the impact, and that's very hard to know which one's going to be outsized. But we have a lot of things that are coming to us basically for free, mainly because we are a brand that has just struck a chord.

Speaker 1

And so we're seeing that. It's hard to know whether the things that we have visibility towards for the rest of the year are going to be as big as the Barbie movie. It is very hard to say, but I can tell you that in terms of number of opportunities is probably even higher than last year. So we're just, I think there's just a lot to that. We were talking right before the call, we finally cracked Dua Lipa.

Speaker 1

She finally cracked. She finally mentioned us. We've been simping her for like years. She finally mentioned the word Duolingo in some interview. So that's the type of stuff that we see.

Speaker 1

It's just entirely for free. And we see a lot of those things are happening.

Speaker 9

Terrific. Hopefully, you said you live at the next Investor Day.

Speaker 1

Who knows?

Speaker 2

We'll see. Who knows? We'll see.

Speaker 9

Great. Thank you so much. Oh, that's it.

Operator

Great. Thanks, everyone. I'm not showing any further questions. I'll turn it back to Louise for closing remarks.

Speaker 1

Oh, just Oh,

Operator

I'm sorry. Curtis just got his hand up at the very last second. Curtis

Speaker 14

Sorry, Sorry about that. I think I unraised it somehow. But hey, Louise, just a quick one on the music. I think you mentioned that there's going to be you're working on some new features in terms of, I guess, integration with musical instruments. Just curious a little bit more in terms of what that is and how much of, I guess, an unlock, right?

Speaker 14

And I don't know if you've mentioned this before, forgive me, but how big is that market in terms of at least TAM?

Speaker 1

Yes. So for music, we're working on a number of things. What we have is you know, we've only had the music course out for, I don't know what, about 4 months, 5 months, you know, few months. And so we're still adding a lot of features. We know that a lot of people who want to learn music actually want to learn how to play an instrument.

Speaker 1

Today with our music course, we have kind of like a phone piano thing. Like, I mean, you can just get the tap on the phone. So, over time, we're going to do you know, musical instrument integration. Another thing that we know people want and that we are going to have is licensed music. Right now, all the music is, you know, stuff that is in the free domain, which usually means very old songs.

Speaker 1

We're going to be adding licensed music as well, which is what people want to do. So we think there's a lot of opportunity there to get people to have a it's going to be a really fun music learning experience. In terms of the TAM, you know, we've looked into this, you know, there's a lot of people learning music. So that's good. It's hard to say exactly for the TAM because what we want to do for music is the same thing we did for language learning, which in fact grew the TAM.

Speaker 1

And for example, in the United States, 80% of our users for language learning were not learning a language before Duolingo. So we've just we've just grown the market and that's kind of what we want to do with music. So it's hard to say exactly what it is. I don't think it's going to be as big as language learning, but I'm hoping for a significant fractional language learning, at least.

Speaker 14

Just a quick follow-up on that question on, that point on licensed music. Would that require some form of monetization to support that cost? Doctor.

Speaker 1

Yeah, we would have to do that. I mean, the, it's, of course the details are still up in the air, but it would have to be the case that the only the payers or at least, you know, the payers get the full experience or something like that. It'll have to be basically, yeah, something to support that.

Speaker 14

Okay. Very good. Appreciate it.

Operator

Okay. That's the last question. So I'll turn it back to Luis to close-up.

Speaker 1

Well, just thank you, Debbie. I'd just like to thank everyone for joining us. And we look forward to speaking you next quarter. Do your lessons, learn some music, and have a great evening.

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Earnings Conference Call
VinFast Auto Q1 2024
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