Duolingo, Inc. (NASDAQ:DUOL) Q3 2023 Earnings Call Transcript November 8, 2023
Duolingo, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $-0.08.
Deborah Belevan: Good evening, everyone. If you haven’t accidentally tuned into a replay of Duocon. This is actually Duolingo’s Third Quarter Earnings Webcast. Today after market closed 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 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. [Operator Instructions] Please note that this event is being recorded and all attendees are in a listen-only mode. And just a reminder we will 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 in our filings with the SEC. These forward-looking statements are based on assumptions that we believe to be reasonable as of today, and we have no obligation to update these statements as a result of new information or future events. Additionally, we will 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 now, I will turn over to Luis.
Luis von Ahn: Thank you, Debbie, and welcome, everyone. We had another fantastic quarter. We surpassed our expectations and had impressive user bookings and revenue growth. And it was a fun quarter two with the Barbie campaign and also preparing for our Best Duocon. We also feel very good about the coming quarter which is why we’re raising our full year guidance to now reflect 40% year-over-year bookings growth. And we’re also materially raising our full year adjusted EBITDA margin. Matt will share more details on our results and outlook shortly. Every year we run thousands of experiments to make our product more fun, engaging and effective. A lot of these experiments result in small wins that add up over time. If you look back at the past two years you can see evidence of this in action.
In Q3, 2021, we had about 10 million DAUs. And this past quarter we had over 24 million. In Q3 of 2021, we had 2.2 million subscribers. In this past quarter, we had nearly 6 million. The way we have done this has been through our process of making small changes, running a test to see how users react and then doubling down where we see gains. We’ve also hit some exceptional home runs. For example, our marketing has been a source of extraordinary wins that were fantastic for the business even though they are hard to predict. Think of our partnership with HBO’s House of the Dragon and most recently our Barbie social campaign built around the inclusion of our trademark Bing in the Barbie movie. The campaign generated 140 million organic social impressions which is a record for us.
To create the opportunity for both incremental improvement and home runs every so often we make bolder moves that open up entirely new areas for experimentation. For example, last year we redesigned the home screen of the app to give us more room to experiment with engagement, efficacy and monetization. And earlier this year we set out to create a multi-subject app experience by integrating our existing math course and a new music course into our flagship app. This change adding math and music to the main app is a good example to highlight. We did this to give our users an even more engaging experience. By adding new subjects into the main app, we believe we can more rapidly scale these new subjects with our gamification mechanics like streaks, leaderboards and quests that have been so effective in the language learning app.
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Q&A Session
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As more users access these new courses, we believe it will increase the commitment to our platform and that they’ll be more likely to recommend us, which will further drive organic user growth. It’s clear that our strategy is working as demonstrated by our exceptional growth. As I explained before, we can’t expect to accelerate forever but it’s very gratifying to see that our product improvements and creative marketing efforts are resonating with our learners. And I’m excited about our ongoing innovation and look forward to all the energy that our new year brings. And with that I’ll turn it over to Matt.
Matthew Skaruppa: Thanks, Luis. I’ll walk through, how we did this quarter in more detail and then I’ll provide our Q4 and updated full year guidance. As Luis shared, we are extremely pleased with this quarter’s performance, which exceeded our expectations, thanks to continued strong execution. Our DAU increased 63% year-over-year to 24.2 million, and MAU increased 47% to 83.1 million. This growth continues to be not only rapid, but also high quality and broad-based, with strong growth from around the world with improving free-to-pay conversion as well. Our total paid subscribers increased by 60% to 5.8 million. This continued strength in user and subscriber growth, drove bookings and revenue growth of 49% and 43% year-over-year respectively or 48% and 42%, on a constant currency basis.
Turning to profitability. We’ve made tremendous progress in expanding the bottom line, as we continue to see very strong top line growth, coupled with cost discipline. Our net income totaled $2.8 million compared to a net loss of $18.4 million, in the year ago quarter. We also posted an adjusted EBITDA of $22.5 million or a 16.3% adjusted EBITDA margin. This is a roughly 14-point expansion year-over-year. This quarter, we capitalized additional R&D expenditures compared to Q3 last year, as we continue to innovate on Max and Math and Music. Excluding this, would have led to an adjusted EBITDA margin expansion of about 12 points year-over-year. Based on our strong results and the trends we’re seeing so far, we feel confident about raising our full year outlook, issuing the following Q4 guidance.
For Q4 2023, we are guiding to $167 million to $170 million in total bookings, $145 million to $148 million in revenue and an adjusted EBITDA margin of 19.8% to 20.8%. For the full year 2023, we are raising our guidance to $598 million to $601 million in total bookings, $525 million to $528 million in revenue and we are updating our adjusted EBITDA margin range to 16.6% to 16.9%. Our full year guidance calls for 40% and 42% year-over-year bookings and revenue growth, respectively at the midpoint. As a reminder, at the end of every December, we start a promotion that discounts our annual subscription. Since we offer this promotion only once a year, Q4 bookings performance has more seasonal variance than other quarters. Note that our guidance assumes current prevailing foreign exchange rates as well.
And because we’ve achieved significant operating leverage this year, across the business, we feel good at raising our full year adjusted EBITDA margin guidance by about 225 basis points at the midpoint versus our last call. Now I’ll provide some color on average revenue per subscriber, OpEx and share count. Our average revenue per subscriber has declined by about 7% to 8% for each of the past three quarters driven by a combination, of foreign exchange impacts and regional mix shifts. Q3 saw higher-than-expected conversions in non-US countries, which kept the year-over-year change in that same range. We expect the year-over-year change in ARPU to improve in the coming quarters. As to OpEx compared to Q3 of this year in Q4, we expect non-GAAP R&D as a percentage of revenue to decrease by two points and non-GAAP sales and marketing to decrease by almost 2.5 points.
We expect non-GAAP G&A to be roughly flat as a percentage of revenue in Q4. We ended the quarter with approximately 48.8 million fully diluted shares outstanding using the quarter end closing price. And we expect to end the year with about 1% to 1.5% dilution from equity issued to employees. Finally, as Luis said, a few moments ago, the last years have been extraordinary for our business. Our user growth has benefited from compounding continuous product improvements, including home run improvements like we’ve seen with our street mechanic. We have unlocked social-first marketing and have had some big brand moments like the Barbie movie, and we’ve also seen large increases in conversion from free to version. Looking ahead, we feel very good about next year.
But as Luis has already reminded you our user growth is unlikely to accelerate forever and it may be hard to repeat some of the onetime events that have happened this year. Even so we feel good about our ability to continue our strong top line growth and make progress towards our long-term margin. And with that, I’ll turn it back to Luis.
Luis von Ahn: Thanks, Matt. Just want to thank the team for all their hard work and dedication. We know we’ve only made a tiny dent in the massive market opportunity ahead of us and we’re just getting started. And now, we would be happy to take your questions. I’ll turn it back to Debbie to manage the queue.
A – Deborah Belevan: All right. Thanks Luis. [Operator Instructions] And your first question comes from Ralph Schackart at William Blair.
Ralph Schackart: Good afternoon. Thanks for taking my question. Maybe let me start with you. I’ve been public for a couple of years now and you’ve seen some big extraordinary growth. And I’m sure some of this has been based on conservatism and the outperformance and then the business is obviously doing really well. Maybe just kind of taking a step back, if you isolate maybe the top one, two or three things that have really driven this significant outperformance that would be really helpful I think for investors and then I have a follow-up after that.
