Good evening, everyone, and welcome to Duolingo's Fourth Quarter and Full Year 2023 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 investor.duolingo.com. On today's call we will have Luis von Ahn, our Co-Founder and CEO; and Matt Skaruppa, our CFO. 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. And please note this event is being recorded and all attendees are in listen-only mode. Just a reminder that we'll make 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. 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'll turn it over to Luis.

Thank you, Debbie, and welcome, everyone. We delivered a stellar 2023, surpassing the ambitious expectations we set out for ourselves at the beginning of the year. This was capped off by record user growth, bookings, revenue profitability, and free cash flow in the fourth quarter. Stepping back, I'd like to put our 2023 performance in context by talking about how far we've come in the last few years. When we went public in July 2021, we laid out a plan showing rapid growth with increasing profitability over time. In 2021 and 2022, we delivered 55% and 45% year-over-year revenue growth, respectively, and had about breakeven adjusted EBITDA margins. In 2023, we reached an inflection point, demonstrating our ability to gain operating leverage and added over 13 points of adjusted EBITDA margin, taking our margin to over 17%. In short, we've been able to demonstrate that we can turn our incredible product into a profitable business. Now how did we do this? We made our app more fun, engaging, and effective, which encourages learners to tell their friends and family about us. The more learners we attract to our platform, the more learners we convert to subscribers. The more subscribers we have, the more money we have to invest in our courses to make them even more fun, engaging, and effective, and so on. Since our IPO, we've added about 18 million daily active users and over 50 million monthly active users, most of whom have come to our platform through word of mouth. We've supplemented that organic growth with a cost-effective social-first marketing strategy, which earned us three billion social media impressions last year alone. We accelerated DAU growth for 10 straight quarters from Q3 2021 through Q4 2023, and I'm proud of that. But as we've said before, we can't accelerate user growth forever. This Q1, we expect DAU growth to be closer to the mid-50s, which is still impressive given how large our user base has become. For the full year 2024, we expect strong top-line performance from rapid user growth and continued improvements in free-to-pay conversion. For the work we're doing around conversion and monetization this year, we're experimenting with ways to help free users select the best subscription plan for them. We will test different names, appearances, and packages to help users choose between our Free, Super, and Max subscription tiers. We're also putting more resources behind our family plan, which has higher retention and increases our platform lifetime value (LTV). Today our family plan has grown to about 18% of our subscriber base. This year we started a dedicated family plan team who will capitalize on its organic momentum. We will also make additional strategic investments to drive long-term growth. We will continue developing advanced content for English learners who make up the largest part of our addressable market. We will also continue to develop our math and music courses by expanding their content and making them even more fun, engaging, and effective for learners of all ages. Last year, we reached an incredible milestone. Our learners completed their 100 billionth lesson. Perhaps even more impressive is that we have about 90% share of global online language learning monthly active users. Yet we still see so much more potential and opportunity ahead of us. Hundreds of millions of language, math, and music learners out there have yet to sign up for Duolingo, and we're working on winning them over. While we're proud of how far we've come, I speak for everyone who works at Duolingo when I say we want to have more impact and we want to move faster. That's what you will see from us in 2024 and beyond as we continue to build our 100-year company. We're just getting started. And with that, I'll turn it over to Matt.

Thanks, Luis. I'll provide some additional color on what drove our outperformance this quarter, and then I'll discuss our guidance for the year. As Luis shared, we had a fantastic year capped off with record bookings and profitability in Q4. We exceeded our bookings forecast in part because of the continued acceleration in user growth in the fourth quarter because we saw strength in our family plan throughout the quarter and because we saw better-than-expected performance in our New Year's promotion. Our continued strength in user and subscriber growth drove bookings and revenue growth of 51% and 45% year-over-year, respectively, or 49% and 43% on a constant-currency basis. Now turning to 2024. As Luis said, we want to continue doing this year what worked so well in 2023. We have strong momentum, which is why we feel good about our 2024 bookings outlook, which has bookings growth of 28% year-over-year at the midpoint. This growth comes even as we lap the really extraordinary growth we had in 2023. To give a bit more detail on our outlook we are guiding to a Q1 bookings growth of about 35% year-over-year. We expect our bookings growth rate to gradually step down throughout the year from Q1 to Q4. As usual, we expect that Q4 will be our biggest quarter in terms of dollar bookings. More specifically from Q1 to Q2, we expect bookings growth to step down by about five points as we lap our exceptional results from last year. At current prevailing exchange rates, we expect foreign currency to have no material impact on Q1 or on full-year 2024 bookings growth rates. We'll continue to make progress towards our long-term profit target. We expect to add an additional 500 basis points of adjusted EBITDA margin this year to reach 22.5% at the midpoint. Our adjusted EBITDA margin will vary a bit quarter-to-quarter given our bookings and hiring seasonality. Specifically, we expect adjusted EBITDA margin for Q2 to be lower than Q1; Q3 to be about the same as Q1; and Q4 to be the highest. For the full year, we are targeting an incremental margin at or slightly above our long-term adjusted EBITDA margin target of 35%. This year we expect to achieve our adjusted EBITDA margin expansion by gaining operating leverage across all three cost categories of non-GAAP Operating Expenses. In terms of those categories of spend, R&D will remain our largest category because we have several areas in which to invest this year. R&D is effectively a growth lever that drives word-of-mouth user acquisition for us and it's how we make our app more fun, engaging, and effective over time. For sales and marketing, we plan to continue improving efficiency by being creative and scrappy; evidence of which you saw at the opening of this call with our five-second Super Bowl ad. We spent $700,000 on that in total and yet earned over 60 million social media impressions. For G&A, we expect to continue to gain operating leverage as we scale. As to how our operating leverage will spread throughout the year sequentially starting in Q1, we expect to see slight leverage in total non-GAAP operating expenses as a percentage of revenue compared to Q4 2023. In Q2, we'll deleverage by a couple of points mostly in R&D given the timing of our hiring, the seasonality of our bookings, and then we plan to see leverage again in both Q3 and Q4. Finally, we ended the year with approximately 49 million fully diluted shares outstanding using the year-end closing price. 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.

Thank you, Matt. I want to close by congratulating our marketing team and our design department for their ingenuity in cheekily inserting us into the most watched program in US television history with our Super Bowl ad, which generated a lot of social buzz and brand love. Now we would be happy to take your questions. I'll turn it back to Debbie to manage the queue.

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

Good afternoon, Luis and Matt. I just got a couple of questions if I could. Later on the call, you talked about the family tier, I think you had about 18% now, and you talked about having higher retention rates. Maybe if you could kind of frame the retention here versus the rest of the business? And then more broadly how should we think about retention rates going forward versus how we trended in 2023? Then I have a follow-up.

Yes, happy to talk about the family plan retention rate. So, Ralph, as you know, we manage the business to lifetime value (LTV), so that's why retention is important. The family plan does have a materially higher retention rate on an annual basis compared to the other annual plan. It also has a higher price point, so it's just all around a higher LTV product. As we shift more towards the family plan, we're trying to optimize the LTV of the platform over time. We think there's a lot of opportunity to do that this year.

Great. And then historically, Matt, I think you've talked about adjusting regional pricing. Maybe sort of give us a reminder of your strategy for the rollout of this year—will it be a phased approach, country-by-country? Just any color you could add on that would be great. Thank you.

Yes. Pricing is another lever that we use from time to time; we experiment with it. This year, I think the pricing story will be less around regional pricing. So, if you remember, we rolled out a pretty broad range of regional pricing changes in 2022. We've essentially lapped that through in a revenue perspective throughout the course of 2023. If we change prices this year, we will from time to time do experiments. But the bigger overall price change for this year will be as we experiment with the three tiers. We saw a lot of demand at higher prices for our Max offering, and we're going to experiment with that this year and see what happens; that's where I would expect to see more impact on pricing throughout the year as we roll that out.

Thank you.

Thanks, Ralph. And the next question comes from Aaron Kessler of Seaport Research.

Great. Thanks, guys. A couple of questions. Maybe just first on the in-app purchases, if you can give us your thoughts on growth there, how we should be thinking about that for 2024 as well as some of the other revenue lines within that including the Duolingo English test and advertising? And then just anything we should be aware of regarding paid subscriber conversion as well for 2024?

Sure. I'm happy to start, and Luis can jump in. So again, Aaron, as you know, the biggest line item of our business is subscriptions. That's going to continue to be the focus for both revenue growth and bookings growth this year, but then also resourcing. When we look at ads, ad growth was significantly slower than subscriptions in 2023. I expect the ad growth delta to be relatively similar in 2024. I don't see ads picking up speed compared to our subscription product. The Duolingo English test (DET) is still early in its journey. It’s had enormous growth over the past several years and has increased by thirty times. It's a little bit harder to forecast, but it typically grows slower than our subscriptions as well. IAP is the last remaining piece. In 2023, it grew really impressively. In 2024, I would expect it to grow nicely as well, but it grew so rapidly in 2023—hundreds of percent; I don't think it can grow as fast. I'd expect it to grow probably more in line with all the other revenue lines.

Great. And just that pace of conversion, any way to think about that in 2024?

Yes. The way we think about pace of conversion internally is on a cohort basis. Throughout 2023, essentially every cohort of new users had higher free-to-pay conversion. We felt that was evidence of really adding high-quality users to the platform. We don't see any reason that that's likely to change in 2024 as of now. What that means is at the aggregate level, if you do the subscriber to the last 12 months MAU ratio that we publish, I wouldn't expect that to move significantly this year just given how rapidly our MAU base has scaled.

Great. Thank you.

And your next question comes from Zach Morrissey of Wolfe.

Hi, thank you. I guess first just on the 2024 outlook on the user side of things just only kind of expecting a slight deceleration. Historically, we've seen you've called out kind of these one-off events like Barbie or House of the Dragon that kind of been a nice tailwind for users. So, just curious, kind of what you're seeing today or kind of have line of sight to throughout the course of the year that kind of gives you comfort on the user growth kind of sustaining these really strong growth rates going forward?

Yes. Thanks for the question. The majority of our growth comes from just making our product better. I mean it's mainly word of mouth, and because of that, it's actually quite predictable. It's not perfectly predictable, but it is quite predictable because we just know that our product just keeps getting better and better. We expect that to be the case throughout this year. We're, of course, very proud of the fact that for 10 quarters in a row, we accelerated user growth. And it's surprising that we kept thinking we might not accelerate user growth anymore, but we did for 10 quarters. This time around, we expect mid-50s going forward. What helps us feel comfortable is we just have so much more total addressable market (TAM). There are about two billion people in the world learning a foreign language. We have close to but slightly under 100 million MAU. So, there's just a lot more room to grow. We feel pretty good about that.

Great. Thanks. And then just one on— I think you're leaning into AI to kind of help generate content creation and personalization of some of these courses. Just curious for like a progress update there. I think there were press reports earlier this year in terms of that kind of helping also drive cost efficiencies in the business as well. Just curious how you're thinking about the kind of opportunities to see kind of further leverage from AI there?

First of all, the press reports—they're a bit of a trigger point for me. The press reported that we did layoffs based on AI; that is actually not what happened. We've always had a contractor force—these are hourly workers doing stuff like translation and content creation. We did reduce our contractor force, but this was not due to full-time employee layoffs. The biggest reason for the reduction of the contractor force was the use of AI. Wherever we can, if something can be done by AI, we're going to take the opportunity. The two big places we are using AI are in content creation. Not only are we reducing costs there, but probably even more importantly, we're able to do things a lot faster, which also allows us to experiment faster. For example, we have this feature that we're rolling out called DuoRadio that requires the generation of a substantial amount of data. If someone had asked me to do DuoRadio five years ago, I would have told them it would take us 10 years to generate that data. Now we know it will take us a few months to generate, so we are actually willing to create a feature based on it. That acceleration just opens up many opportunities. We're leaning heavily on this, as it is a great technology.

Great. Thank you.

And next question comes from Andrew Boone of JMP Securities.

Great. Thanks so much for taking my questions. I wanted to ask about top-of-funnel trends as it relates to the mid-50s percent growth guidance that you guys gave. I understood last year, I had a bunch of eye-catching moments with Barbie and everything else the clip you guys showed at the beginning. Can you just talk about top-of-funnel and maybe download growth as it relates to 2023 versus 2022 and then extrapolate that into 2024? Whatever top-of-funnel metric you want, Matt.

Yes. I can let Matt talk about some of the stuff, but we feel good about top-of-funnel. Like I said, the vast majority of our growth comes from word of mouth. There are some nice events like Barbie, and they're good, but most of it comes from people telling their friends or family members to download Duolingo. We see from what we observe is very strong. I don't know, Matt, if you have anything else to say.

No, I think that's right. We have visibility into Q1, and that's the mid-50s. Being in the 50% to 60% range, seeing that go up or down, the point we're trying to make is that it's not always going to accelerate from here. In terms of top-of-funnel, I just want to remind everyone that there are brand new users and then resurrected users (those who haven't used the platform for the past 30 days but come back), and those are about an equal proportion on any given day. It's the word of mouth that Luis talked about, but it also ensures that folks are reminded that they like Duolingo, and they will come back even if they haven’t been using it for a while; that's a significant portion of this. We feel good about it, and we don't see anything right now that indicates it's going to be all that different than what we're talking about.

And then I wanted to ask about the tiers that you guys are testing. I understood you're going to have a premium kind of standard and a free model. But what about the opportunity to just take price within the US? I understood you guys were regionally—how do you think about pricing more broadly for the US, where you're seeing that strong demand? Thanks so much.

Generally, with pricing, we're going to experiment. We're open to price experimentation, and we do that. Just to remind you, in terms of our improvements in monetization, we have multiple levers where we can pull, and we try to order them by return on investment. Pricing is one lever. We have the multi-tier strategy as another lever, and we have the family plan as another lever. The teams working on pricing have a long list of things ordered by return on investment. You will likely see us experiment with pricing not just in the US but worldwide. I just can't tell you what the results of those experiments will be because I don't know myself. But you'll see us experiment for sure.

Next question comes from Alex Sklar of Raymond James.

Thank you. Luis, I know it's a bit early to talk about the results from having some of the advanced English content that you mentioned in the shareholder letter, but with 17 courses now with advanced English available, how do you plan to grow awareness of that? Are there any formal marketing plans behind that? And then thinking about broader monetization now that you have that in there?

That's an excellent question because it's something that we are really talking about. To put things in context, if you look at the larger language learning market, the majority of learners and spending comes from English learners—around 80%, give or take. That's not quite true on our platform. We see this as a major opportunity. The reason it hasn't been the case on our platform is that our English courses have not had very advanced content. We actually have different English courses based on the learner's native language. So we have an English course for Spanish speakers and for Chinese speakers, etc., but they went to varying degrees of proficiency. The first step was to add advanced content. I'm very happy to say we have now achieved that. Users are starting to interact with the advanced English content, and we believe there is significant room for growth there. That was just the first step in a multi-step strategy. The second issue we need to solve relates to placing English learners effectively; they often come in with a patchwork of knowledge. Our approach to understanding their prior proficiency is being developed, so we aim to improve our offering for them. The next steps involve marketing to communicate that we cater to advanced English learners, which is not as well known as our beginner offerings. Broader monetization will follow once we establish those foundations. The timeline for this growth will likely be around 2024 and 2025, with some initial momentum visible this year.

That's great context. Just as a follow-up, Matt. Given what you've talked about today in terms of your family plan booking success, you're going to lean into that a little bit more, which sounds promising for the coming year alongside continued international growth. How should we think about the shape of blended average revenue per user (ARPU) heading into 2024?

It's a great question. Just to give you my usual disclaimer: we don't run the business on ARPU; we manage based on platform LTV and our experiments to drive bookings. That said, ARPU does emerge from that, and we pay attention to it. In 2023, ARPU declined between 7% and 8% on average each quarter, except for Q4, which declined about 4%. We expect Q1 ARPU to be closer to zero and then lap it throughout the rest of the year. That trend might shift depending on our experiments. If we have a successful set of experiments on a three-tier strategy, it could raise ARPU. Pricing experiments could also influence this, but that's the current trajectory.

Awesome. Thank you both.

Thank you.

Next question comes from Ryan MacDonald of Needham.

Thanks for taking my question, and congrats on yet another great year. Louis, I'm curious—you obviously launched math and music into the core app late in 2023. I'm curious, as you're monitoring the progress there, I think learners have the capability to complete their Duolingo each day, not just from language but in math and music. I'm curious what you're seeing in the early days on the progress there? If we're getting to a stage yet, especially with math, where you can start to see enough usage that you can turn the screw on monetization in that area?

Yes, that's a great question. To put things in context, we added math and music as courses into our main Duolingo app about a quarter ago. What that means is that all of our growth mechanics work for math and music, so users can complete their streaks by doing a math lesson. We are very happy with the results so far. These courses are much smaller than our language courses because we're well-known worldwide as a language learning app and less so as a math or music app. However, our confusion about the size of these courses is that we believe we are already among the largest in terms of daily active users (DAUs) for learning math or music. The growth is promising, but we have to keep in mind that it took us 12 years to achieve this with language learning. We hope it won’t take that long for math and music, but it will take a few years, and although the results are encouraging, one must remember these courses are still developing.

That's helpful. Maybe this one is a bit more qualitative, I guess. Obviously, you talked about the success you've had with large viral moments or cultural moments over the past year. Some of that came by chance, while some was strategic. But are you taking any learnings from that in 2023 and applying it to 2024? Are there ways you’re looking to be more proactive in how you create that marketing strategy, especially with large releases like Dune coming up this week?

It’s an excellent question. Some things we just can’t control; they come organically. We get a lot of inbound requests from brands, movies, TV shows who think of us and approach us. While we can’t control that, it is great that it happens. Our marketing team has gotten very good at knowing where to get involved and what to comment on. Many of these viral moments that seem random were actually planned by our marketing team. We have robust plans for the rest of the year related to creating viral moments. While not all of them may work, we feel confident about what we are preparing. My meetings with our Chief Marketing Officer are usually exciting because he brings me funny videos of things they are preparing.

Well, congrats again, and thanks for taking our questions.

Thank you.

Thanks, Ryan. And the next question comes from Mark Mahaney of Evercore.

I'll ask two questions, please. First, on the incremental margins that you're guiding to for this upcoming year at 35%, those are very robust EBITDA margins. They are lower than what you did in 2023. Is there anything to read into that? Is there any structural change in the business in terms of the cost requirements of new growth areas or something like that? Secondly, you've given interesting disclosures on how growth in terms of bookings or revenue in your most mature markets, the US, compares with the overall global average. Any update you could provide? How does US bookings growth and North American bookings growth compare with that of the business as a whole? Thank you very much.

Thanks, Mark. The adjusted incremental EBITDA comment in the guide—our belief is that we want to make progress toward our long-term margin every year. You have to be at or above your long-term margin in terms of incremental margin for that to happen. I don't think we're paving new ground here; that’s normal. The reason is that we have significant runway ahead of us in our core markets, and we're adding math and music. We are excited about that investment in R&D. There’s really nothing else to read into it other than our excitement about the opportunity ahead and our continued investment in core R&D, while still making progress each year towards our long-term margin. Regarding your second question about geography—historically, we have looked at DAU growth, considering whether our rapid growth is high quality and broad-based. The growth rates for significant countries like the US or some European countries remain close to the average growth rate. We look at free-to-paid conversion to see how high quality those users are, and those cohorts globally continue to trend well. Our growth in Q4 was still broad-based and high-quality.

And would you call out any interesting international markets? English language learning can have a material impact on earnings generation for people in several countries outside of the US. Are there particular international markets you'd want to call out as showing particularly interesting organic growth for Duolingo?

Yes. We categorize the world into four major segments. One of those is Southeast Asia, including Japan and China. Both of those regions have shown robust growth. Japan, in particular, has grown nicely, as well as several countries in Europe. It’s difficult to single out a particular country since the growth has been broad-based, but those areas have seen substantial growth over the past year.

Thank you, Matt.

You're welcome.

So our next question comes from Justin Patterson of KeyBanc, who I understand is driving and not able to be on video.

Be careful, Justin.

Yes. Thank you very much. I'd like to echo Luis's thanks to the marketing team for letting me cheekily insert myself into the call, doing the avatar while driving. So just a big picture one for you, Luis. You've had the new user interface out for over a year now. How much more ceiling do you think you have to go here with the product and growth teams? How do you view the opportunity to improve KPIs? It feels like you've had a much broader canvas to A/B test against and you also have a large DAU base that's grown over the past year.

It’s an excellent question. The teams that are dedicated to figuring out how to grow faster are firing on all cylinders. You will see us adopt a portfolio approach where we conduct numerous small A/B tests that accumulate. You will see us try larger initiatives as well. One thing you'll see more of is our app becoming increasingly social. We are investing effort in social features. Additionally, you'll see us experimenting with better placement of users, especially English learners. We’re also looking into teaching conversation more effectively. There’s a lot of work being done at the moment with literally hundreds of A/B tests per month. That pace has not decreased at all since the last few years. In fact, the pace is increasing.

Got it. Thank you.

Great. Next question comes from Chris Kuntarich of UBS.

Great. Thanks for taking the question. Can we unpack some of the strength just a little bit more color on the strengths in the family plan that you saw in 4Q? And maybe can you just talk about how we should think about or what you all are seeing as far as family plan adoption from English learners versus non-English learners?

Yes, I'm happy to start, and then Luis can jump in on the last one. When we talk about strength in the family plan, what's been surprising is that we haven't devoted a ton of resources to expanding that product. What we did was released it, were excited, and it grew naturally and organically. In Q4, it experienced over 100% year-over-year growth, showing enormous organic demand for the product. It’s simply a fun product; you want to do Duolingo with friends and family, making it a natural fit. This year, we plan to devote more resources to it, which gives us confidence that it could grow even more beyond the organic demand we're already witnessing on the platform.

I'm generally very excited by the roadmap that will make the family plan much better. Currently, we've just put a plan out there with minor bugs, like the issue where children were present but you couldn't see their names. These are minor areas we’ll enhance. Regarding the adoption of the family plan between English and non-English learners, I don't think there's much difference overall in terms of higher subscription rates. Usually, we see higher subscription penetration in wealthier countries. Certainly, the US has a higher penetration rate, while English learners come from less wealthy countries. Hence, the family plan behaves similarly to our other subscriptions.

Got it. Very helpful. Maybe just one follow-up. Any way to think about the shape of marketing spend or sales and marketing expense throughout the year? Thanks.

For sure. In general, you should continue to expect two things from our sales and marketing spend. First, it should increase in absolute dollars but grow slower than bookings. Historically, I don’t think there will be anything seasonally different this year compared to last. You typically see us spending a bit more during the Q3 timeframe, for example; that’s usually our summer campaign around back-to-school time. The seasonality for sales and marketing should follow a similar pattern as in the past couple of years.

Okay, thank you.

Hi, I’m Curtis Nagle from BofA. Thanks for taking my question. Sorry, I am unable to be on camera.

I don't see Curtis in the queue anymore. So that looks like our last question. I'll turn it back to Luis to wrap up.

Thank you, Debbie, and just thank you all for joining us. We look forward to speaking to you next quarter. Please do your Duolingo lessons. We expect you to have a perfect streak next quarter. Have a great evening.

Thanks, everyone.

Thank you, guys.