Duolingo, Inc. (NASDAQ:DUOL) Q4 2023 Earnings Call Transcript February 28, 2024
Duolingo, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.21. DUOL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Deborah Belevan: 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.dualingo.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.
Luis von Ahn: Thank you, Debbie, and welcome, everyone. We delivered stellar 2023, surpassing the ambitious expectations we set out for ourselves at the beginning of the year. This was capped off by a record user growth, bookings and 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 get operating leverage and added over 13 points of adjusted EBITDA margin.
That took 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 did this by making 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. And 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.
Now 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. As an example of 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 LTV.
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Q&A Session
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Today our family plan has grown to about 18% of our subscriber base. And this year we started a dedicated family plan team who will look to 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 MAUs. And yet we still see so much more potential and opportunity ahead of us.
There are hundreds of millions of language, math and music learners out there who have yet to sign up for Duolingo, and we’re working on winning them over. So 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. And that’s what you’ll 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.
Matt Skaruppa: 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.
And 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. And 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.
And 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 getting operating leverage across all three cost categories of non-GAAP OpEx. As to those categories of spend R&D will remain our largest category because we have several areas in which to invest this year because 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 get 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 OpEx as a percentage of revenue compared to Q4 2023. In Q2, we’ll delever 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.
Luis von Ahn: Thank you, Matt. I want to close by congratulating our marketing team and our design department for their ingenuity to cheekily insert 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. And now we would be happy to take your questions. I’ll turn it back to Debbie to manage the queue.
A – Deborah Belevan: Okay. Thanks Louis. And as I mentioned earlier if you have question, just use the raise hand feature. And the first question comes from Ralph Schackart of William Blair.
Ralph Schackart: Good afternoon, Luis and Matt. I just got — just 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 can 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.
