Duolingo(DUOL) - 2024 Q3 - Quarterly Results

Shareholder Letter Duolingo's CEO highlights strong Q3 2024 performance, user growth, and product innovation, exceeding expectations Q3 2024 Performance Overview Duolingo exceeded expectations in Q3 2024 with significant revenue, profitability, and user growth, leading to an upward revision of full-year guidance - The company exceeded expectations for top-line growth, profitability, and user growth, prompting an increase in its financial guidance for the remainder of the year[3] Q3 2024 Financial and User Highlights (YoY) | Metric | Q3 2023 | Q3 2024 | YoY Growth | | :--- | :--- | :--- | :--- | | Total Bookings | $153.6M | $211.5M | 38% | | Total Revenues | $137.6M | $192.6M | 40% | | Net Income | $2.8M | $23.4M | >100% | | Adjusted EBITDA | $22.5M | $47.5M | >100% | | Daily Active Users (DAUs) | 24.2M | 37.2M | 54% | | Paid Subscribers | 5.8M | 8.6M | 47% | User Growth and Engagement Duolingo achieved impressive 54% YoY DAU growth, driven by feature improvements and re-engagement, identifying long-term English learning opportunities - DAU growth of over 50% YoY is particularly notable as it builds upon a 60%+ growth rate in Q3 of the previous year, driven by compounding improvements to retention features like Friends Streak[5] - More than 50% of the top-of-funnel growth in the past year came from returning users who had been inactive for over a month, highlighting successful re-engagement strategies[6] - The company sees a significant long-term growth opportunity in advanced English education, with over 2 million DAUs currently learning intermediate English on the platform[7] Product Innovation Duolingo enhanced its learning experience with new GenAI-powered features, including 'Video Call' in Duolingo Max, improving conversation practice - A new 'Video Call' feature was launched within Duolingo Max, allowing users to practice conversation skills in a low-pressure environment with an AI character that remembers past interactions[10] - Early data indicates that English learners are using the Video Call feature approximately twice as much as other language learners, validating its effectiveness for this key user group[11] - As of the end of Q3, Duolingo Max, including the new Video Call feature, was available to about half of the platform's Daily Active Users, with plans to expand availability to more users, primarily on Android, by year-end[11] Financial Performance and Outlook Duolingo's Q3 2024 financial results show strong growth in revenue, bookings, and profitability, leading to increased full-year guidance Financial and Operating Highlights Duolingo reported strong Q3 2024 YoY growth across all key metrics, with surging user engagement and significant financial improvements Q3 2024 Key Metrics Summary (YoY) | Metric | Q3 2023 | Q3 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Monthly active users (MAUs) | 83.1M | 113.1M | 36% | | Daily active users (DAUs) | 24.2M | 37.2M | 54% | | Paid subscribers (period end) | 5.8M | 8.6M | 47% | | Total bookings | $153.6M | $211.5M | 38% | | Revenues | $137.6M | $192.6M | 40% | | Net income | $2.8M | $23.4M | >100% | | Adjusted EBITDA | $22.5M | $47.5M | >100% | | Free cash flow | $33.5M | $52.7M | 57% | Revenue and Bookings Total bookings and revenues saw strong YoY growth in Q3 2024, primarily driven by increased paid subscribers, despite a slight gross margin dip - Total bookings grew 38% YoY to $211.5 million, while revenues increased 40% YoY to $192.6 million, primarily driven by growth in paid subscribers[18][19] Revenues by Product Type (in millions) | Revenue Type | Q3 2023 | Q3 2024 | % Change | | :--- | :--- | :--- | :--- | | Subscription | $105.9 | $157.6 | 49% | | Other (1) | $31.7 | $35.0 | 10% | | Total revenues | $137.6 | $192.6 | 40% | - Total gross margin declined slightly from 73.7% in Q3 2023 to 72.9% in Q3 2024. This was attributed to lower margins in 'other revenue' (Advertising, Duolingo English Test, etc.), despite an increase in the proportion of higher-margin subscription revenue[20] Operating Expenses Duolingo achieved strong operating leverage in Q3 2024, with expenses decreasing as a percentage of revenue, driven by faster revenue scaling - The company achieved operating leverage across all expense categories (R&D, S&M, G&A) on both a GAAP and non-GAAP basis by scaling revenue faster than operating expenses[22] Operating Expenses as a Percentage of Revenue (YoY) | Expense Category | GAAP % of Revenue (Q3'23 → Q3'24) | Non-GAAP % of Revenue (Q3'23 → Q3'24) | | :--- | :--- | :--- | | R&D | 37% → 33% | 27% → 24% | | S&M | 16% → 13% | 15% → 12% | | G&A | 24% → 20% | 15% → 13% | - Stock-based compensation (SBC) was the most significant adjustment to non-GAAP expenses, totaling $30 million in Q3 2024[21] Profitability and Cash Flow Profitability and cash generation significantly improved in Q3 2024, with Adjusted EBITDA more than doubling and robust free cash flow growth - Adjusted EBITDA increased by $25.0 million YoY to $47.5 million, with the Adjusted EBITDA margin expanding to 24.7% from 16.3% in the prior year, driven by revenue growth and operating leverage[23] - Free Cash Flow (FCF) grew to $52.7 million, representing a 27.3% FCF margin, up from $33.5 million and a 24.3% margin in Q3 2023. The increase was primarily due to higher net income[24] Q4 and Full-Year 2024 Guidance Duolingo raised its full-year 2024 guidance, projecting revenues between $741.0 million and $744.0 million and Adjusted EBITDA between $188.3 million and $190.4 million Q4 and Full-Year 2024 Financial Guidance (in millions) | Metric | Q4 2024 Guidance | FY 2024 Guidance | | :--- | :--- | :--- | | Bookings | $244.5 - $247.5 | $843.5 - $846.5 | | Revenues | $202.5 - $205.5 | $741.0 - $744.0 | | Adjusted EBITDA | $48.6 - $50.8 | $188.3 - $190.4 | | Adjusted EBITDA margin | 24.0% - 24.7% | 25.4% - 25.6% | - A reconciliation for the forward-looking Adjusted EBITDA to GAAP net income is not provided due to the unreasonable effort required to predict certain items, such as stock-based compensation and legal expenses[26] Appendix This section provides definitions for key operating metrics and non-GAAP financial measures, along with unaudited condensed consolidated financial statements and reconciliations Key Metrics and Non-GAAP Definitions This section defines Duolingo's key operating metrics (MAUs, DAUs, Paid Subscribers, Bookings) and explains the use of non-GAAP financial measures - MAUs are the average of unique monthly users, DAUs are the average of unique daily users, and Paid Subscribers are users with an active subscription at period end, excluding free trials[30][31][32] - Total Bookings include subscription purchases, advertising income, Duolingo English Test fees, and in-app purchases, providing an indication of cash flow trends not fully reflected in ratably recognized revenue[33] - The company uses non-GAAP measures like Adjusted EBITDA, Free Cash Flow, and non-GAAP operating expenses to evaluate period-to-period comparisons and believes they are useful for investors in analyzing the health of the business[36] Unaudited Condensed Consolidated Financial Statements Unaudited financial statements for Q3 2024 show strong financial position with increased assets, revenues, net income, and operating cash flow Condensed Balance Sheet (in thousands) | Account | Dec 31, 2023 | Sep 30, 2024 | | :--- | :--- | :--- | | Total Assets | $953,957 | $1,219,549 | | Total Liabilities | $298,456 | $397,096 | | Total Stockholders' Equity | $655,501 | $822,453 | Condensed Statement of Operations - Q3 (in thousands) | Account | Q3 2023 | Q3 2024 | | :--- | :--- | :--- | | Revenues | $137,624 | $192,594 | | Gross Profit | $101,370 | $140,414 | | Income from Operations | ($4,670) | $13,574 | | Net Income | $2,807 | $23,360 | Condensed Statement of Cash Flows - Nine Months Ended (in thousands) | Account | Sep 30, 2023 | Sep 30, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $104,421 | $202,169 | | Net cash used for investing activities | ($9,436) | ($106,965) | | Net cash (used for) provided by financing activities | ($1,428) | $11,595 | Reconciliation of Non-GAAP Financial Measures Detailed reconciliations from GAAP to non-GAAP measures for Q3 2024, including Adjusted EBITDA, operating expenses, and Free Cash Flow Reconciliation of Net Income to Adjusted EBITDA - Q3 2024 (in thousands) | Line Item | Amount | | :--- | :--- | | Net income | $23,360 | | Interest income | ($11,246) | | Provision for income taxes | $2,029 | | Depreciation and amortization | $2,876 | | Stock-based compensation | $29,990 | | Other adjustments | $499 | | Adjusted EBITDA | $47,508 | Reconciliation of GAAP to Non-GAAP Operating Expense - Q3 2024 (in thousands) | Line Item | Amount | | :--- | :--- | | Total GAAP Operating Expense | $126,840 | | Less: Depreciation and amortization | ($1,479) | | Less: Stock-based compensation | ($29,970) | | Less: Other adjustments | ($499) | | Non-GAAP Operating Expense | $94,892 | Reconciliation to Free Cash Flow - Q3 2024 (in thousands) | Line Item | Amount | | :--- | :--- | | Net cash provided by operating activities | $56,267 | | Less: Capitalized software & intangible assets | ($1,845) | | Less: Purchases of property and equipment | ($3,178) | | Plus: Other adjustments | $1,430 | | Free cash flow | $52,674 |