Good evening, everyone, and welcome to Duolingo's Third Quarter 2024 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.com. On today's call, we have Luis von Ahn, our Co-Founder and CEO; and Matt Skaruppa, our CFO. We'll begin with some brief remarks before taking questions. Please note that this evening's event is being recorded, and all attendees are in listen-only mode. A quick reminder that we'll make some forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these are outlined in the risk factors of 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 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 now, I will turn it over to Lily.

Thanks, Debbie. Hi, everyone. So Luis asked me to cover for him. Lucky me. Anyway, let's just get this over with. How did we do this quarter? Pretty good, I'd say. We did way better than expected in all the important metrics. Since we did so well and we feel good about next quarter, we're raising our full year guidance. Matt's going to get into the details in a minute. He's into that kind of thing. And yes, we're hitting our goals. Daily active users are up 54% year-over-year, which is pretty neat, especially since users accelerated last year. The Family Plan has grown to 21% of subs compared to the 18% we had at the end of last year. Oh, and our new Duolingo Max feature video call lets learners chat with me. Lucky them. Don't worry, I won't judge. Much. Maybe just an eye roll here and there. How did we pull this off? You know the usual stuff, product improvements and social marketing. It just works. And the grand finale, generative AI and automation—yes, that's the future, I guess. I mean, look at me, an animated character running this call. AI is going to help us be more efficient and launch products faster. Pretty cool, right? So we're investing in that stuff. Anyway, I'm done. Over to Matt. He'll probably try to sound more excited.

Thanks, Lily. I'll do my best. Now, you may be wondering why we had Lily step in for Luis. Well, we wanted to give an example of how generative AI is positively impacting more and more aspects of our business. We're using it to make the product more fun, engaging, and effective through features like video call with Lily. And we're using it to automate internal processes like content creation. By the way, that video only took about seven minutes to create because of the tools and the infrastructure that we put in place. Now on to the numbers. As Lily highlighted, Q3 was a strong quarter. DAU grew by 54% year-over-year, which is impressive considering we're lapping last year's 60%-plus growth. Bookings and revenue grew 38% and 40% year-over-year, respectively, which came even as we lapped tougher comps. We posted an adjusted EBITDA margin of 24.7%. This quarter's performance was driven in part by the strength we're seeing in Duolingo Max. As a reminder, Max is our highest subscription tier and now includes our new AI-powered video call feature. We executed well and rolled out Max faster than we expected. Max is now available to roughly half of our DAU, and we expect this will increase by about 10 points or so as we scale it to more users, primarily on Android by the end of the year. We also saw early signs of strong demand for video call with Lily. We find that when we introduce new features, we see a one-time bookings gain that eventually settles down into a more predictable run rate. Some of the Max bookings increase this quarter was likely driven by this type of effect. Looking ahead, we're raising full year guidance. We're guiding to bookings and revenue growth of about 36% and 40%, respectively, for the full year. Our Q4 guide takes into account video call's estimated impact and our experiments around our New Year's promotion. Our Q4 guide has about 100 basis points of sequential quarter-over-quarter decline in gross margin, which is due to higher generative AI and amortization costs related to scaling Max and its video call feature. As a reminder, our Duolingo Max tier yields more gross profit dollars, but a lower gross margin percentage than our Super tier. We're also raising our 2024 adjusted EBITDA margin guidance to 25.5% at the midpoint, which is roughly 8 points higher than 2023. We continue to make progress towards our long-term target range of 30% to 35% adjusted EBITDA. For Q4, our adjusted EBITDA guide of 24.4% at the midpoint reflects quarter-over-quarter operating leverage of about 70 basis points for R&D, and 90 basis points for S&M, and that's offset by some slight deleverage in G&A. We ended Q3 with approximately 49.6 million fully diluted shares outstanding using the quarter end close price. We expect net dilution of a little more than 1%, similar to last year. Ah, and good timing. It looks like Luis is back.

Thanks, Matt. I'm glad Lily was able to cover for me. Now let's take some questions and Debbie will manage the queue.

All right. Sounds good. If you have a question, you can use the raise hand feature. So your first question comes from Justin Patterson at KeyBanc.

All right. Thank you. And Luis, since you subbed in with Lily, I will sub in with baby Luca here, who's just out for his walk and nap right now. Nothing puts him to sleep faster than earnings calls. But if I project from your current trends and think about how next year or even 2026 goes, you're probably crossing 10 million subs within about an eight to nine-year period since you started monetizing. So as you think ahead, what does it really take for you to add the next 10 million, reach 20 million subs? Is that just expanding price tiers? Is that more marketing, new apps monetizing? Would love to hear about how you're thinking about that philosophically? Thank you.

Yes, it's a great question. I mean, generally, we're going to continue doing what we've been doing because it's working really well. In terms of monetization, there are a few things that we're doing. First, we're growing the number of users, both paying and non-paying users. As we grow that, we grow the number of subs because a certain fraction of them subscribe. We're going to be doing everything to make the product more engaging and also ramping up our social marketing. That should increase the number of users. As you saw, our DAUs have been growing between 50% and 60% really for the last two years. We're also going to get better at converting these users. There are several things that we can do. For one, we plan to make improvements to our purchase page or when we offer users the chance to subscribe. Also, the new plan, Max, we think that there are many geographies where Max is going to be more interesting than Super. In particular, for English learners, they're very interested in practicing conversation, which is what we offer with Max, the video call feature with Lily. We think there's going to be a lot of subscribers coming from that. But generally, that's kind of the philosophy for it.

All right. Justin, thank you. And we're going to go to the next question, which is Ryan from Needham & Co.

Congratulations on an excellent quarter. Thank you for taking my question. In the shareholder letter, Luis, you mentioned that there are now 2 million daily active users who are using the platform for intermediate or advanced English learning. You also discussed the initiative to attract more English learners to the platform about six months ago. Could you update us on the progress made with that 2 million users over the last six months? Additionally, which regions or languages are showing the most growth or near-term increase in usage? Thank you.

Yes. Thank you for that question, Ryan. As we have been saying, English learners are a pretty major opportunity for us. The reason for that is because if you look at the broader language learning market outside of Duolingo, the majority of the spend, about 80%, is from people who are learning English. However, if you look at Duolingo, the amount of revenue that we make from people who are learning English is significantly less than 50%, so there's a major opportunity there. The reason that we are underrepresented within the English learners is because we haven't historically had intermediate or advanced content in English. We started working on that a few years ago, and by now, all of that content is there so we're very happy with the content. We obviously plan to continue improving it because we're always refining everything, but the content is at least there. The other thing we've done is we've worked a lot on placing users. English is unique in that, because it's the lingua franca for the whole world and because in most countries, people learn English in schools, they mostly come to the app with some previous knowledge, unlike most other languages where users are usually beginners. So we have to do a really good job of placing users correctly. We've been working on that, and at this point, we feel pretty good about the product in terms of the content and the placement. We're excited about that as a major opportunity.

Maybe as a follow-up, it seems like as you continue to roll out new functionality, that you're expanding to the Android user base a little bit more quickly than you have in the past. Just curious how the uptake on Android users has been for the new functionality. And if you're seeing any differences in terms of how those users are converting relative to the past couple of years? Thanks.

Yes. The way we develop usually starts with iPhones, and then we roll out features on Android typically three to six months later. We're getting better at that rollout timing. Right now, we are working on adding all the Max features to Android. One thing to mention is that Android users tend to monetize less effectively than iPhone users. This is industry-wide; it's not just Duolingo. Android users probably have lower purchasing power. However, we are observing that English learners are using the Max features, particularly video calls, about twice as much compared to those learning other languages. So, we expect that, because Android has more English learners than iPhone, there will be a good uptake there.

Excellent. Thanks for taking my questions.

Thank you.

Okay. Next question comes from Aaron Kessler at Seaport Research.

Great. Thanks, guys. A couple of questions. Maybe just as a follow-up on the intermediate English learning. Can you just go through kind of maybe the marketing strategy to engage the users or make them aware of that? And then second, I think last quarter, you mentioned pretty strong international growth, including Japan benefiting from more country managers. Just any updates on that international growth this quarter as well? Thank you.

Yes, thank you. We do a very specific type of marketing. You've seen our social media; it’s pretty unhinged. That type of marketing, our bread-and-butter, is not particularly applicable to convincing people that we have intermediate English content. What we think works better is leveraging influencers. We use influencers in many countries, and we plan to do that more. For example, there was a video recently that got many millions of views of a guy who used Duolingo to learn for a few months and then recorded himself in Russia, and it turned out he was able to get around effectively. That type of content is fantastic for showing efficacy. So that's the type of marketing strategy we'll continue to rely on, alongside word of mouth. Regarding international growth, we're very happy with the results so far. If you ask about our DAU growth this quarter, we reported 54%, and it's broad across all regions. Of course, some countries are growing a little more than others, but every region is growing. We have country marketing managers in several countries and are about to add new ones. We're specifically adding positions in Italy and Turkey on top of our existing managers in Korea, Japan, China, and Brazil. This strategy has worked well.

Great. Thank you.

Okay. Next question comes from Ralph Schackart at William Blair.

Good afternoon. Thanks for taking the question. Luis, can you provide an update on the macro? Some investors may view this business model as discretionary, yet you're growing 50-plus percent in DAU. Can you discuss why you think the model has held up so well and your expectations for sustaining this growth? I’ll ask Matt a question since he's kind of quiet over there next.

I mean, in general, we see a lot of opportunities still to grow. The number of people learning a language in the world is about 2 billion, and we have about 100 million monthly active users, so there's a lot of runway there. We expect our DAU growth for the rest of the year to remain around 50%. For the last two years, it's been between 50% and 60% year-on-year, and we anticipate that to continue. Over the longer term, we expect other subjects like math and music to begin contributing more to our offerings. So, we feel pretty optimistic about the macro outlook.

Yes. And Ralph, before you ask your question, I’d add that our entry-level price for Duolingo is free, which helps. The actual subscription is also not very expensive, even Super or Max.

Great. And then, Matt, can you remind us of your framework for scaling the business versus reinvestment opportunities? Obviously, the model is scaling significantly and generating substantial cash and margin. How should we think about incremental margins moving forward?

It's a great question and it gives me a chance to highlight that we have scaled incredibly well. Our top line bookings CAGR over the last three years is 42%, including our most recent guidance. Eight quarters ago, we had $2 million in Q4 of adjusted EBITDA, and we just guided to $49.7 million at the midpoint, which is a 25x increase in adjusted EBITDA. It feels like we're scaling both growth and profitability nicely. We're looking above our long-term target of 30% to 35% for incremental margins, and we feel that that's reasonable. Ultimately, we have a ton of opportunity ahead. The first question was about how to reach 20 million subscribers. You’ve asked about macro, and there are many ways for us to win. We will continue to invest in growth, primarily in R&D because that's our main growth driver through word of mouth.

Awesome. Thanks, Luis. Thanks, Matt.

Great. Thanks, Ralph. Next question comes from Bryan Smilek of JPMorgan.

Great. Thanks for taking the questions. Just to start on Max, which is now available to 50% of DAUs, up from 15% last quarter. Can you help us understand the conversion cycle of a Max subscriber from when it becomes available to when they go down the funnel? And how does that differ versus Super?

We've been increasing access to Max by adding it to more countries and courses. At this point, around 50% of our daily active users have access to it, although that doesn't mean they all purchased it. By the end of the year, we expect this to rise to between 60% and 70%. One important note is that while we're adding countries, the remaining countries are mostly long tail countries, as we've already added the wealthier nations. In terms of the funnel, we see many buyers of Max as first-time subscribers—it’s their first subscription after being a free user. Also, we see many current Super subscribers directly upgrading to Max. It’s too early to ascertain the long-term trajectory of this, especially since some features in Max are very new, like the video call feature, which has been around for just a couple of months. The adoption and preference dynamics may vary geographically.

Awesome. Thank you. And I guess, one more, if I could, just on DAU growth. Can you walk us through the building blocks of that growth as we head into 2025? Coming off strong growth in the 50% range, where do you realistically see TAM expansion occurring? Will it be more English in 2025 or still focused on non-English learning?

I think we will see growth from all regions. The nice aspect of our growth so far is that no country is growing very slowly; they're all steadily growing. For next year, we expect continued growth in more penetrated markets, like the US, and anticipate a significant increase in English growth. Our growth strategy remains intact, supported by the 2 billion people learning languages, and in certain countries, we are effectively creating new markets. For example, in the United States, about 80% of our users are individuals who were not previously part of the learning ecosystem.

Thank you, both.

Thanks, Bryan.

Thank you, Bryan.

Next question comes from Ross Sandler at Barclays.

Great. I guess it's kind of a question for both of you guys. Luis, you were on the Decoder podcast recently. Nice job, by the way. I think you mentioned that at the subscriber level, Max is accretive to margin. And Matt, you just said that COGS is going to go up because of the video call feature. Can you clarify that for us, just in terms of unit economics versus overall cost? Additionally, Luis, inference costs are down like 90% in AI right now. How might that influence the Max rollout or feature rollout?

Yes, let me address your second question first. Costs are expected to continue decreasing. Not only will query costs for large language models decrease over time, but we have not focused on optimizing our costs yet. Our directive to all teams has been not to worry about costs at the moment for large language models because that's going to naturally decline. So, just focus on developing the best features you can, and we will optimize costs over time if necessary. This is significant as it will enable us to offer features like video call with Lily at more reasonable prices in poorer countries—countries where users are typically trying to learn English and are eager to practice conversation. Therefore, this could be a major unlock for us. As for the first question, Matt will provide details.

Yes. We launched Max because we believe there is demand for Duolingo at a higher price point. Generative AI enabled us to add features that warrant that pricing. For example, in the U.S., Max is about twice the price of Super. So you can expect a higher gross profit per subscriber for Max than Super. The margin for Max may be lower as we incur app store fees and partially LLM-related operational costs. However, for free cash flow and adjusted EBITDA dollars, Max subscribers yield more revenue. We still feel optimistic about this model. As Luis mentioned, we tasked the team with creating a wonderful product. We haven't fully optimized pricing and costs yet, but we'll address that as we scale.

Okay. Next question comes from Andrew Boone at JMP.

Thanks so much, guys, for taking the question. I wanted to revisit product testing. If tests are a key driver of retention on the platform, can you discuss the pace of testing and whether the larger user base has enabled faster improvements or gains?

Yes, the good news is we’re running more tests per quarter, and the success rate for tests is about the same. It's a funny observation—about 50% of tests are successful in achieving the desired results. The pace of testing is increasing, and we have a good visibility on future tests for the next six months.

Additionally, teams continually experiment to speed up their own testing rates and to analyze experiments more rapidly. We believe we can improve the frequency of experiments while gaining insights.

That's helpful. To follow up, if I consider recently launched products, such as adventures and video calls, how does their testing surface area compare to past successful products like streaks or leaderboards?

To clarify, we operate the Duolingo app with a focus on improving three main areas: monetization, engagement, and teaching efficiency. Features like streaks enhance engagement and have been the subject of hundreds, if not thousands, of experiments. For features like adventures and video calls, which focus on improving teaching outcomes, those will have their own area of tests, and they continue to be tested. The number of teams working on these three areas is fairly equal.

Okay. Next question comes from Curtis Nagle at BofA.

Thank you for taking the question. First, regarding the family plan, which ticked up to 21% of subs. What has contributed to this increase in visibility versus new features? And what are your expectations for future penetration?

We've made two significant changes for the family plan: improving the features and increasing its visibility. The majority of contribution has come from visibility efforts, while improving features will help with long-term retention. However, predicting future penetration is difficult; I expect it to continue increasing, albeit at an unknown pace.

And as a follow-up, you mentioned resurrected users as a focus last quarter. What progress has been made in 3Q compared to 2Q, in terms of subs or DAUs?

Resurrected users are a significant opportunity for us. Our top-of-funnel comprises new users and resurrected users. Over time, a higher proportion of top-of-funnel users are now resurrected. At this point, more than half of our top-of-funnel users are resurrected users. Interestingly, a common reason users think they have left Duolingo is that they believe they haven't stopped using it; even after being away for a significant period.

Thanks for the insights.

Our next question comes from Wyatt Swanson at D.A. Davidson.

Hey, guys. Thank you for the question. Could you discuss subscriber retention trends as additional features roll out? Are you seeing differences in retention for Super Plans versus Max?

The overall retention has remained stable since we last discussed it. Our blended retention on the platform stays consistent. We don’t have enough data on Max to know how it will stabilize, but we are comfortable that its LTV will exceed that of Super. So far, there have not been any major changes in retention.

Okay. Next question comes from Arvind Ramnani at Piper Sandler.

I really enjoyed the animation. Luis, I really like listening to you, but Lily did a great job.

You know what? She's doing part of my job now. Over time, she's going to take over more of my responsibilities, and I can just retire.

Regarding DAUs, should we focus on ensuring that in the long term, DAUs grow at a rate that's higher than revenue growth? Over the last two years, we’ve discussed many unusual factors that contributed to impressive DAU levels. How should we think about this relationship long-term?

It's difficult to predict the future. DAU growth has consistently been between 50% and 60% for the last couple of years, and we expect this trend to continue, at least for the rest of the year. Through word of mouth and improved features, we see strong growth ahead, but steady state remains uncertain.

Yes. Just to reiterate, we have many levers to grow users. We have strategies that range from attracting new users, resurrected users, increasing conversions from free to paid, and optimizing retention of subscribers. We believe that we can sustain robust revenue growth, even with varying DAU levels.

Great. One last question if I may. Our Duocon, Consumer Day was really enjoyable. How do we compare the current year against the last year? Are there any metrics or anecdotes to share?

The number of live views on Duocon was three times that of the previous year. Every year, we're seeing a significant rise in both live and historical views. Our brand recognition continues to grow.

When considering Duolingo Max and Super, how do we determine which features belong where? Is it strictly convenience, or is there a clear delineation?

Currently, Super Duolingo offers features prioritizing convenience, such as turning off ads, while Max is mainly focused on interactive conversation features, particularly with Lily. As it stands now, Super is convenience-focused, while Max is geared towards improving conversation skills.

Thanks for taking the questions.

Thank you.

What initial data has been collected regarding video calls? Has there been any uptick in engagement or session times that might translate to higher retention for Max?

The usage metrics for video calls are very encouraging and align with our expectations. English learners are using it more compared to non-English learners, and more advanced users engage with it more than beginners. We're continuing to enhance the experience and seeing increases in call frequency and duration as we make it more engaging. We've also recognized the need to keep content relevant to current events.

Regarding the holiday season, any changes to strategy with the wider rollout of Max? How does this tie into your outlook? The quarterly guide reflects expectations for our holiday promo period, which occurs over a year-end. We’ll run experiments on how to promote it differently and will start testing that in December. However, these elements are already incorporated into the current guidance.

Thanks for taking my questions. Can you update us on the status of your international marketing efforts, specifically for France and Korea, and your general marketing ROI?

Yes, we recently added marketing managers for France and Korea. The results have been very promising, particularly in France. We've also identified additional markets for next year, including Italy and Turkey. Regarding marketing strategy, we primarily rely on organic social media. Most of our successful content is generated organically, while we supplement with performance marketing, which is a small part of our budget.

Thank you.

Thank you. Can I ask a couple of questions? How does the growth of the US market compare to global growth in terms of bookings, revenue, MAUs, or DAUs?

Yes, the growth in the US market is consistent and on par with global growth, neither exceeding nor lagging significantly. Overall, the growth rates across countries remain comparable.

Did you provide any insights regarding Max’s traction? Any metrics on user engagement for that segment?

We certainly saw Max's traction increase in Q3, marking our first quarter where it made a meaningful contribution to overall bookings and guidance. We anticipate experiencing a similar effect in Q4 as well.

How is ARPU impacted by the adoption of Super and Max? Are those changes enough to sustainably increase ARPU?

As you observed, ARPU trended towards 0% year-over-year, indicating a stabilizing trend. We anticipate Max's increased popularity will positively influence ARPU over time as we scale.

Thanks for taking the question. Can you provide more details regarding who is adopting the Max subscriber? Is it mostly English learners?

Max is priced higher than Super, which corresponds to the greater adoption in wealthier countries despite some features targeting English learners. The balance will evolve as we aim to introduce Max into larger markets where English learning is prioritized.

I noticed there was a meaningful contribution from Max to total bookings in 3Q. Should we think of that as a low single-digit growth contribution within the quarter?

Yes, Q3 saw a material change, and the Q4 guide incorporates anticipated impacts from Max and video call. This quarter, Max is making a meaningful impact in terms of bookings.

Thank you for your time. How do you view the longer-term trend for paying ratios for Duolingo Max compared to Super ultimately?

We currently do not know where the ratios will settle. It really depends on the geography and pricing. User behavior can also shift over time, making it complicated to predict. In terms of competition, our position is driven by significant brand awareness and retention strategies. Our freemium model attracts a vast base, giving us leverage through word of mouth to reach users efficiently.

Okay, well, that's it for questions. I'll turn it back to Luis to wrap it up.

Thank you, Debbie. I'd like to thank everyone for joining us. Until next time, enjoy video calling with Lily in whatever language you're learning.