Duolingo (DUOL) Q4 2022 Earnings Call Transcript

Duolingo (DUOL 2.01%)
This fall 2022 Earnings Name
Feb 28, 2023, 5:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Debbie Belevan

[Commercial break] We hope you loved that enjoyable TikTok. It is one of many many examples of natural learner-generated content material that goes viral daily with none involvement from us. And we like to see the creativity and enthusiasm of creators like this, which continues to drive our model consciousness and word-of-mouth development. And now, let’s get on with right this moment’s name.

Good afternoon, and welcome to Duolingo’s fourth-quarter and full-year 2022 earnings webcast. All attendees are in listen-only mode. At present, after market shut, we launched our year-end shareholder letter with our This fall and 2022 outcomes and commentary, which you’ll find on our IR web site at buyers.duolingo.com. On right this moment’s name, we’ve Luis von Ahn, our co-founder and CEO; and Matt Skaruppa, our CFO.

They are going to start with some transient remarks earlier than opening the decision to questions. Analysts will be capable to ask a query utilizing the raise-hand function. And please notice this occasion is being recorded. Only a reminder that we’ll make forward-looking statements concerning future occasions and monetary efficiency, that are topic to materials dangers and uncertainties.

A few of these dangers have been set forth in our danger components of our filings with the SEC. These forward-looking statements are based mostly on assumptions that we consider to be affordable as of right this moment, and we’ve no obligation to replace these statements because of new data or future occasions. Moreover, we are going to current each GAAP and non-GAAP monetary measures on right this moment’s name. These non-GAAP measures aren’t supposed to be thought-about in isolation from, or substitute for or superior to, our GAAP outcomes.

And we encourage you to contemplate all measures when analyzing our efficiency. And now, I’ll flip it over to Luis.

Luis von Ahn — Co-Founder and Chief Government Officer

Thanks, Debbie, and welcome, everybody. I am happy to report that we completed 2022 with a file quarter, attaining our highest-ever variety of DAUs and subscribers. We ended This fall with 16.3 million DAUs, which is 62% year-over-year development, and we ended 2022 with 4.2 million paying subscribers, which is 67% year-over-year development. These metrics led 2022 to be our greatest 12 months ever when it comes to bookings and income, which grew 46% and 47%, respectively.

It was a unbelievable 12 months. Our DAU to MAU ratio, which is an indicator of person engagement, improved to 27% this previous quarter, up from about 24% a 12 months earlier than. Now we have additionally seen the variety of learners with lengthy streaks develop immensely. To remind you, a streak is the variety of consecutive days {that a} person learns with our app.

This mechanic has confirmed to be an environment friendly instrument for encouraging engagement and serving to us develop DAUs. 63% of our DAUs now have a streak of seven days or larger, which is up from 53% final 12 months. What’s much more spectacular is that we now have over 3 million DAUs with a streak of over one 12 months. That signifies that greater than 3 million folks use Duolingo each single day for the final 12 months or longer.

It is also spectacular that it took us eight years to achieve 1 million DAUs with a year-long streak and solely 21 months to get from 1 million to three million. That is one instance of the compounding impact of our product enhancements. Our person development was sturdy in each area of the world. We even have customers of almost all ages, of all socioeconomic statuses, and who’ve quite a lot of motivations to study, together with work, college, and journey.

The result’s a diversified enterprise that has been largely uncorrelated with macro and geographic developments. Our investments in monetization have additionally proven the ability of compounding. Over the previous three years, we have seen conversion improve throughout almost all cohorts. Customers who’re new to the app have transformed extra readily to our paid subscription and customers who’ve been on the app for longer intervals, like a number of years, have additionally seen a rise of their conversion charges from free to pay.

And now I might like to debate what it’s best to count on from us this 12 months. In lots of methods, we count on 2023 to look much like 2022. We count on customers and bookings to develop properly. We nonetheless have an enormous $60 billion addressable market that we’ve solely barely penetrated, and we’ve sturdy natural development on our aspect.

And I wish to remind you that at present, our subscribers make up about 8% of our month-to-month lively customers. So, we’ve loads of room to additional monetize our present person base. We even have a gorgeous alternative to extend bookings from ala carte in-app purchases like we did in 2022. However I do wish to level out once more that you shouldn’t count on any bookings from our math or literacy apps this 12 months.

As to the place we’ll make investments, nearly all of our engineers, designers, and product managers will proceed to construct on the success we have had in development, efficacy, and monetization. That signifies that we’ll proceed to run experiments to extend DAUs and engagement, enhance how we educate and optimize how we convert free customers to pay. And in our shareholder letter, I mentioned the 2 extra areas we’re targeted on in 2023. The primary is generative AI, which can energy a higher-tier Duolingo Max subscription, in addition to assist us scale back content material creation prices; and the second is bettering how we educate and monetize English learners.

I might like to emphasise that we’re enthusiastic about these initiatives, however they’re nonetheless within the early levels. And I additionally wish to contact on profitability. Coming off a robust 2022, we’re well-positioned to develop customers and bookings quickly whereas additionally delivering increased profitability. We plan to proceed to compound the returns we have seen from our previous R&D investments, so we do not plan to rent as many individuals as we did final 12 months.

Simply to remind you, we have by no means gone nuts with hiring. And actually, we have grown income at about twice the speed of headcount up to now 4 years. This 12 months, we plan to indicate working leverage throughout all prices, R&D, gross sales and advertising, and G&A. Given these strengths, we’re guiding to a ten% to 12% adjusted EBITDA margin for the 12 months, up from about 4% in 2022.

And with that, I am going to flip it over to Matt to speak extra about our monetary outlook.

Matt Skaruppa — Chief Monetary Officer

Thanks, Luis. To rapidly recap the highlights of our spectacular This fall and full-year 2022 outcomes. Within the fourth quarter, we delivered 39% bookings development 12 months over 12 months, which was about 46% on a constant-currency foundation. We noticed a 42% income development 12 months over 12 months, which was 47% on a constant-currency foundation.

We had a internet lack of $13.9 million in comparison with a internet lack of $17.5 million within the year-ago quarter. We posted our highest quarterly adjusted EBITDA of $5 million, which was a 5% adjusted EBITDA margin, and we had a free money stream margin of about 11%. For the complete 12 months, we delivered 46% bookings development 12 months over 12 months, which was about 52% on a constant-currency foundation. We noticed 47% income development, which was about 51% in fixed foreign money.

We had a internet lack of $59.6 million in comparison with a internet lack of $60.1 million final 12 months. We noticed adjusted EBITDA optimistic $15.5 million in comparison with an adjusted EBITDA lack of $1 million final 12 months, and we had a free money stream margin of about 12.5%. In 2023, we count on to proceed delivering sturdy bookings development, and we are going to achieve this whereas making progress towards our long-term profitability objective of an adjusted EBITDA margin of 30% to 35%. For the complete 12 months 2023, we’re guiding to $530 million to $542 million in complete bookings; $486 million to $498 million in income; and an adjusted EBITDA margin of 10% to 12%, which interprets to a few 32% incremental margin on the midpoint.

And for Q1 2023, we’re guiding to $127.5 million to $130.5 million in complete bookings, $111 million to $114 million in income, and an adjusted EBITDA margin of 9% to 10%. Our steerage assumes present prevailing overseas alternate charges. As a reminder, roughly half of our income comes from exterior the U.S., so each 1% improve or lower within the worth of the greenback versus our basket of currencies has a few $2 million headwind or tailwind, respectively, on full-year complete bookings. On the prevailing alternate charges we have utilized in our steerage, overseas alternate is predicted to be a three-percentage-point headwind to Q1 2023 year-over-year bookings development.

When it comes to quarterly cadence of our bookings for the rest of the 12 months, we count on our year-over-year development for complete bookings in Q2 to be about the identical as Q1. We count on Q3 year-over-year development price to be barely increased, and we count on This fall to be our greatest quarter when it comes to greenback bookings. Given our outperformance in This fall of this 12 months, it is going to be a barely decrease development price. After pricing in 2022, we lowered pricing — costs in a number of international locations to get our costs extra according to every nation’s GDP per capita.

This initiative and our intentional combine shift from month-to-month to annual plans was to extend the general LTV of our platform, and that drove down subscription income per paid sub. However we’re finished, for probably the most half, with reducing costs globally. And actually, based mostly on sturdy conversion developments, we consider we’ve the chance to boost costs in some locations and are experimenting with pricing as we converse. Now we have not included any materials quantity of bookings or income from Duolingo Max in our steerage since we have solely simply began testing it, however we’ll give you an replace after we report our Q1 outcomes.

I might like to emphasise that we’re targeted on managing the enterprise in order that we obtain our full-year adjusted EBITDA margin of 10% to 12%. We’ll be making spending selections all year long based mostly on our income and gross margin developments to make sure that we’re on this vary for the complete 12 months. Additionally to remind you, given the seasonality of our income, our Q2 and Q3 margins will probably be barely decrease than Q1, and This fall will probably be increased. We are going to proceed to run the enterprise with self-discipline and prudently handle our bills.

Beginning in Q1, we count on to see significant leverage in complete non-GAAP opex in comparison with the fourth quarter of final 12 months. And in 2023, we count on to attain about seven to 9 proportion factors of working leverage in complete non-GAAP opex. For each intervals, the development is generally in gross sales and advertising and G&A and, to a lesser extent, R&D. We ended the 12 months with roughly 48 million absolutely diluted shares excellent utilizing the year-end closing value.

In 2023, we count on to finish the 12 months with about 2% dilution from fairness issued to workers, which is lower than the roughly 3% dilution we had in ’22. And with that, I am going to flip it again to Luis.

Luis von Ahn — Co-Founder and Chief Government Officer

Thanks, Matt. Earlier than we get into Q&A, I might prefer to thank our very gifted crew of Duos, who proceed to search out new methods to innovate and delight our learners. And now, we’d be pleased to take your questions. I will flip it again to Debbie to handle the queue, and right here we go.

Debbie Belevan

OK. Thanks, Luis. And as I discussed earlier, in case you have a query, you’ll be able to simply use the raise-hand function.  And the primary query comes from Ralph Schackart of William Blair.

Ralph Schackart — William Blair and Firm — Analyst

Good afternoon, and thanks for taking the query. First query, the shareholder letter, I believe you known as it a “tremendous” finish to 2022. I believe which will incorporate a number of the beginning-of-the-year marketing campaign that you just run to draw new customers. Simply curious, what drove the actually sturdy efficiency within the year-end? After which how did your New 12 months’s marketing campaign evaluate to expectations? And I’ve a follow-up.

Luis von Ahn — Co-Founder and Chief Government Officer

Thanks. That is an excellent query. So, sure, we had an excellent This fall, nice year-end. The primary motive — there’s two principal causes.

The primary one is simply our compounding product enhancements. I imply, we have simply been getting higher and higher at making our merchandise stickier and attracting extra customers. Now we have a really high-performing development crew that does that. That is one factor.

After which one other one is a few of our advertising campaigns, we simply did very well. An excellent instance of that was our year-end overview marketing campaign the place towards — round December 14 or so or December 10 to December 14, all of the customers obtained a abstract of what they did all through the entire 12 months. They usually’re anticipated — properly, they’re inspired to share it. We obtained lots of shares, tens of millions and tens of millions of shares.

And we hit high trending subjects on Twitter, and stuff like that, by simply having folks share their Duolingo stats over a number of days. So, stuff like that actually helped us do the outperformance. When it comes to New 12 months’s marketing campaign, we began — only for reference, we begin a New 12 months’s marketing campaign on December 28 normally yearly, and it goes all the way in which to January. So, for this quarter, it is about three days-ish of marketing campaign, they usually carried out higher than we anticipated.

And the rationale for that outperformance simply has to do with the truth that yearly, we take the learnings from the earlier 12 months of the marketing campaign, and we simply get a bit of higher. So, yearly, we run a couple of A/B exams to attempt to make that marketing campaign simpler, and we take these learnings for the subsequent 12 months. So, that labored out fairly properly for us.

Ralph Schackart — William Blair and Firm — Analyst

Nice. Thanks. Possibly only a fast follow-up. Simply when it comes to DAUs, I believe you reaccelerated for six consecutive quarters, which is fairly robust to do.

However simply perhaps some coloration what’s driving the sturdy acceleration and development. I believe within the ready remarks, you talked about form of broad-based. However had been there any form of one or two areas that is stronger development than others? Thanks.

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. It is an excellent query, too. So, when it comes to areas, it truly is rising in each single area on the planet. If you wish to know stronger areas, the U.S.

is especially sturdy. Asia is especially sturdy, and Western Europe is especially sturdy when it comes to rising DAUs. And when it comes to why it’s, I imply, it is once more the identical two causes. It’s continued product enhancements that simply compound over time.

The product is simply higher and stickier, after which we simply get higher and higher at determining what strikes a chord with advertising. So, issues like our social media campaigns like our TikTok campaigns and our Twitter campaigns, and likewise a number of the influencer work that we do. And a number of the stuff, we do not even do. For instance, you simply noticed this video at first of this name.

These are completely natural movies that different folks make. It is virtually each single day. I do not know if it’s a truth that each single day on the planet, however virtually each single day, there may be an natural video that goes viral that mentions Duolingo. So, all of that simply retains getting — retains rising our customers.

Debbie Belevan

All proper. Thanks, Ralph. And the subsequent query comes from Justin Patterson of KeyBanc.

Justin Patterson — KeyBanc Capital Markets — Analyst

Nice. Thanks very a lot. Luis, lately, there was a very fascinating submit on the Duolingo weblog about simply utilizing information science to optimize DAUs. I believe present person retention price was that the metric you have been optimized up to now few years.

Would love to listen to extra about simply the way you’re utilizing lots of these top-down statistical fashions to essentially drive DAU development, hyperlink the product crew collectively. After which now that you have gone fairly far with the present metric, the way you’re serious about tailoring that to particular person cohorts? So, extra of a bottoms-up strategy to make the most of issues like, say, Gen Z, having a lot shorter consideration spans and ensuring they’re nonetheless having wholesome engagement. Thanks.

Luis von Ahn — Co-Founder and Chief Government Officer

Effectively, I am glad you learn that weblog submit. We’re very pleased with our development mannequin. Through the years, we have simply gotten considerably extra refined at analyzing our person base and making modifications that enhance sure cohorts. On this submit, we talked about what has been — I might say the only most vital metric for this firm during the last a number of years, which is known as — one thing we name CURR, or present person retention price.

And what that’s, it’s the price of folks that in the event that they had been right here right this moment they usually had been right here during the last one different time, no less than during the last seven days, what’s the likelihood they are going to come again tomorrow, that is present person retention price. That quantity is round 80% proper now, and we have elevated it. During the last two, three years, we have elevated that quantity from about 65% to about 80%, and each 1% improve of CURR elevated our DAUs by quite a bit. And so, that mannequin has been — actually helped us, and we maintain getting increasingly more refined.

You might be proper. We’re beginning to — this was a mannequin — at first, whenever you’re simply — earlier than this development mannequin, we’d simply deal with all our customers in a single cohort. Then we began getting extra refined, and we deal with form of new customers, present customers, and many others. Now we’re getting much more refined than that.

I do not assume we’ve a selected factor for Gen Z that we do. However we’re — relatedly, we’re making our periods shorter and shorter as a result of, you already know, such as you stated, they’ve a shorter and shorter consideration span.

Debbie Belevan

Nice. The subsequent query comes from Andrew Boone of JMP.

Andrew Boone — JMP Securities — Analyst

Nice. Thanks for taking my questions. Can we begin off with simply any learnings from in-app purchases? I noticed that it doubled this final quarter. Are you able to speak about what successes are there? After which how we must always take into consideration that for 2023? After which secondly, on profitability, Matt talked about actual contribution margin form of particularly within the again half of this 12 months.

Is there any motive to assume that that steps down as we take into consideration form of a three-year plan or one thing past this upcoming 12 months? Thanks a lot.

Luis von Ahn — Co-Founder and Chief Government Officer

I can take the IAP query, Matt, after which you’ll be able to take the subsequent one. So, for in-app purchases, sure, we’ve a really high-performing crew behind this that’s simply making in-app purchases increasingly more outstanding, increasingly more profitable within the app. As you noticed, they have been rising very quickly. We count on them to proceed rising quickly this 12 months.

And when it comes to learnings, the primary approach we do in-app purchases, by the way in which, is by promoting gems. So, there’s this in-app foreign money known as gems which you can both earn by doing stuff on the app or you may as well purchase them. After which you should utilize gems to purchase different stuff, form of power-ups within the app. One of many principal power-ups that we use within the app is the timer boosts that assist for sure timed classes.

So, we’ve these — most classes on Duolingo aren’t timed, however there are some classes that you are able to do — some observe classes which are timed. And the concept is that in case you’re not very quick, you run out of time or you should purchase these timer boosts with gems. And people timer boosts get lots of people to spend on in-app purchases. That is the kind of stuff you are going to get to see us do.

So, usually, for us, for in-app purchases, we’re not going to be promoting content material inside our purchases, however primarily we will be promoting gamification issues that folks actually like. And so, far, that technique has been working fairly properly.

Matt Skaruppa — Chief Monetary Officer

Nice. After which on profitability, so Andrew, the profitability elevated in 2022 by about 450 foundation factors from 2021 on an adjusted EBITDA foundation, which was good progress towards our long-term profitability objective, of that 30% to 35%. This 12 months, we’re guiding to 600 to 800-basis level enchancment over that. And so, as we glance out form of into the long term, our objective hasn’t modified.

We wish to be at a 30% to 35% adjusted EBITDA margin. And between final 12 months and what we’re guiding to this 12 months, we predict we’re exhibiting the suitable progress towards that objective.

Andrew Boone — JMP Securities — Analyst

OK. Thanks.

Debbie Belevan

Thanks. After which the subsequent query comes from Ryan MacDonald of Needham.

Ryan MacDonald — Needham and Firm — Analyst

Thanks for taking my questions, and congrats on a robust near the 12 months. Luis, let me begin with you on the Duolingo English take a look at. There was lately a ban in China from the federal government on on-line levels, form of a Chinese language citizen primarily taking a totally on-line diploma from a world college. They’re not recognizing that diploma.

And it looks as if that is going to start out creating form of a shift in an inflection level, and extra Chinese language learners seeking to go in particular person abroad. I am simply curious in case you’ve seen any impacts of this to this point on form of functions or sign-ups for the Duolingo English take a look at and the way you assume — or what your expectations for which are in 2023 right here.

Luis von Ahn — Co-Founder and Chief Government Officer

Effectively, thanks for the query. Now we have not seen any influence based mostly on this, and I believe there’s many causes. I imply, for one, sure, China is a comparatively massive chunk of the Duolingo English take a look at takers, however we actually have take a look at takers all around the world. The opposite factor is the explanations for taking the exams are very diverse.

A few of them is people who find themselves making use of for worldwide undergraduate admissions. There’s additionally graduate admissions. There’s transnational training. There’s every kind of various pockets.

And perhaps one pocket has some form of coverage implications to it. However usually, the pockets are fairly wholesome. That is simply form of one factor. The opposite factor is we’re nonetheless — we’re not the chief on this market.

We’re coming into this market with a web based take a look at, and it’s a market that normally has had all these offline exams. So, on condition that we’re nonetheless within the form of development part of this, we do not — it would not have an effect on us an excessive amount of when there’s one thing that modifications the complete quantity of it as a result of we’re coming in with no matter proportion of exams we’ve, which is considerably beneath 25%. We’re nonetheless rising fairly a bit and fairly quick, so this isn’t one thing that we’re seeing but.

Ryan MacDonald — Needham and Firm — Analyst

That is useful. Respect it. After which perhaps as a follow-up. You talked quite a bit about generative AI and the usage of that, and I am very curious across the content material creation.

You talked about an elevated give attention to form of extra superior English content material for non-English audio system or fundamental English audio system. How rapidly do you assume that the generative AI can compress your content material creation timeline? And the way do you handle for high quality in that? After which for Matt, are you assuming any — inside the leverage that you just’re exhibiting this 12 months on the revenue margin aspect, are you assuming any leverage from that content material creation from generative AI? Thanks.

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. Thanks for the query. So, we’re very enthusiastic about generative AI. And simply to place issues into context, at Duolingo, we have at all times leaned into AI from the start.

I imply, lots of our merchandise are constructed based mostly on AI, and many others. During the last couple of years, generative AI has develop into considerably higher, and we’re undoubtedly going to lean into this as properly. You talked about content material creation. That is one of many locations the place we predict that it might assist us quite a bit and velocity issues up fairly a bit.

It is a bit early for me to provide you a exact estimate of how a lot you’ll be able to velocity it up, however we’re sure — I imply, it is already occurring. We’re already dashing issues and likewise reducing prices. One of many locations the place we’re utilizing that’s to have the ability to create a way more English studying content material. So, you may see us create much more of that.

When it comes to high quality assurance, we’re nonetheless going to have people go over it. However the time-frame, it was once the case that each one of this was virtually completely generated by people. By now, it simply needs to be reviewed by people, and it is quite a bit faster to overview than to generate. So, when it comes to time-frame, we will get an enormous improve in that, and I assume it is the identical for price.

So, sure, that is one thing we’re very enthusiastic about. And the opposite factor I ought to point out about generative AI, so content material creation is considered one of them, and we will undoubtedly use that. Nevertheless it additionally goes to assist us simply create higher experiences to our customers, form of extra on-line conversational observe that we’re going to have the ability to do. And that is the kind of stuff that we’re placing into our new higher-tier subscription, Duolingo Max.

So, that is one thing we’re very enthusiastic about. As an organization, we have partnered with open AI, and we will be working very arduous on this.

Matt Skaruppa — Chief Monetary Officer

Yeah. And, Ryan, Luis answered the query for the information. I imply, we solely included within the information issues we’ve direct line of sight into. It is not — generative AI is so new.

We do not have a ton of line of sight into direct financial savings but. However as Luis stated, over time, that is in all probability the way in which to wager.

Debbie Belevan

Thanks, Ryan. And the subsequent query comes from Aaron Kessler of Raymond James.

Aaron Kessler — Raymond James — Analyst

Nice. Thanks. A few questions. Possibly for Matt.

On the paid conversion price, it was very sturdy in This fall. Are you able to simply speak about that? Was that household plan part of that? After which how ought to we take into consideration paid conversion in 2023? After which perhaps any replace on a given take a look at, perhaps form of human tutoring as properly. Is there any form of ideas on that path as properly, particularly as perhaps it pertains to Duolingo Max, the way you’re speaking about — serious about integrating that as properly?

Matt Skaruppa — Chief Monetary Officer

Certain. Sure. I am going to let Luis reply that final half. For the payer penetration, we had talked about, I believe all through most of final 12 months, so we anticipated a 1% to 2% improve every quarter 12 months over 12 months in that metric.

And that is coming from the entire issues that Luis has described earlier than, that each one the product enhancements that compound over time to make our free-to-pay conversion go up, usually. There wasn’t anyone explicit merchandise like household plan or this or that. It was all of them compounding over time. I believe going ahead, as we talked about on, I believe, the Q2 or Q3 name final 12 months, given the expansion in MAU, in order that denominator of that quantity is simply rising actually, actually properly, and the retention developments, we’d count on it to truly as a substitute of including one or two factors each quarter 12 months over 12 months, be nearer to 1% this 12 months, simply because, once more, that denominator is rising actually properly.

So, it is going to in the end flip into subscribers over time. However within the quick time period, it is going to be about one level. After which, Luis, you wish to speak about Max and tutors?

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. On human tutoring, I imply, the primary query was about human tutoring — or the second query was about human tutoring. Through the years, we have waffled with human tutoring. At first, we launched Duolingo with no people concerned.

Then we tried it. We tried placing it in. We tried — and during the last 12 months, we have made the choice that I believe is the suitable resolution that we’re not going to get into human tutoring in any respect. We have tried it.

We’re out. There’s various causes for that. There’s nothing — it isn’t like we’ve something towards human tutors. It is simply on our finish, we’re a expertise firm, and that is what we excel at.

And along with that, in case you take a look at it, human tutors are nice, however they don’t seem to be getting any higher. They’re simply there. Whereas expertise, particularly AI, and particularly lots of the stuff coming from generative AI, is simply getting higher and higher yearly. So, we will wager on that.

A lot in the identical approach, like 10 years in the past, we had been advised we couldn’t educate a language with synthesized computerized voices. We wager on that, regardless that 10 years in the past, synthesized computerized voices nonetheless sounded form of robotic. At present, they sound wonderful. We really feel the identical with AI that in 5 years, I do not know, 5, 10 years, we will probably be very pleased that we’ll have that on expertise moderately than people.

Aaron Kessler — Raymond James — Analyst

Thanks.

Debbie Belevan

And subsequent query comes from Nat Schindler from Financial institution of America.

Nat Schindler — Financial institution of America Merrill Lynch — Analyst

Sure. Thanks. I truly wish to simply go a bit of deeper on a number of the questions you had earlier than, actually about how the customers have modified. You noticed a dramatic acceleration in each customers and paid subscribers over this 12 months versus the prior 12 months.

Has there been an actual change within the demographics of these? Is there something considerably totally different about customers this 12 months than there have been final 12 months?

Luis von Ahn — Co-Founder and Chief Government Officer

It is an excellent query. If there was, it is small. Usually, our person base may be very huge. Now we have customers from each single nation on the planet.

Each single nation on the planet is represented. Now we have customers from each single socioeconomic standing from all ages so long as they know the best way to learn. So, it is form of from six years to about 100. We simply actually have customers from in all places, and it is a very huge person base.

So, it hasn’t modified an excessive amount of. The one factor we have observed is it has gotten barely, ever so barely youthful, and that in all probability has to do with our — lots of our prominence on social media like TikTok, however that is it. So, we’ve not actually observed an excessive amount of of a change.

Nat Schindler — Financial institution of America Merrill Lynch — Analyst

And as these modifications towards going barely youthful, has that occurred in each free customers and paid?

Luis von Ahn — Co-Founder and Chief Government Officer

The sincere reply is I do not know. I do know that it is — free customers is getting barely youthful. I do not know for paid.

Matt Skaruppa — Chief Monetary Officer

Sure. I might have to return and double-check, Nat, on the paid. I believe what we have seen on paid is that the conversion developments have not actually modified. Some have accelerated.

For instance, simply general conversion of form of cohorts throughout the board has elevated over the course of final 12 months. So, of us who’re new to the platform within the first couple of months, they transformed extra quickly than in 2021. People which have been on the platform for a protracted time frame, they transformed a bit of bit sooner than they’d up to now. We have at all times seen that individuals who use the app extra convert extra.

That stayed the identical or obtained a bit of bit higher. So, sure, it was form of a broad base. Similar to our customers grew all over the world in a reasonably broad-based approach, the identical development on the free to paid conversion.

Nat Schindler — Financial institution of America Merrill Lynch — Analyst

Thanks very a lot. And as soon as once more, very spectacular.

Debbie Belevan

Thanks, Nat. And subsequent query comes from Mark Mahaney of Evercore.

Mark Mahaney — Evercore ISI — Analyst

Two questions. You had this line within the launch about how the variety of returning customers is roughly the identical because the variety of brand-new customers. I might simply have assumed that that has at all times been the case, or it has been the case for some time. However is that one thing new that is occurred? As a result of I get your level about how folks will use it, after which they will both come again to it once they understand significance in studying a brand new language or there will be one other alternative.

Possibly they’re touring to a distinct nation. So, is {that a} new development or not? What is the so what out of that? And simply actual rapidly, Duo Math, although, that math product, simply the place is that? Are you continue to tweaking it? Is it removed from being the place you need it to be? Simply speak about form of adoption, how a lot curiosity you have actually seen in that. Thanks.

Luis von Ahn — Co-Founder and Chief Government Officer

To your first query, this isn’t a brand new factor. It has been some time since returning customers are the identical as new customers. I will assume on the very early of Duolingo, that was not the case. Nevertheless it’s been some time that has been like that.

And also you’re proper. It is as a result of it’s uncommon for us to see a person that makes use of Duolingo goes away and by no means comes again. That’s uncommon. Normally, folks could even go away for 2 years after which come again.

It is simply because there’s such a bit of friction. So, we see that. And the rationale we put that there’s primarily to emphasise that it isn’t proper to think about our customers as coming, having churn, and been gone eternally. That’s uncommon.

It is extra that they arrive. They keep for a couple of months or one thing, then they could take a break for a few months, they usually come again or one thing. So, one thing like that. When it comes to math, we’re very pleased with the progress.

It is rising quickly. We’re pleased with that. Simply to remind you of the plan, we’re — proper now, the objective is to develop our math product organically for it to develop by itself. As soon as we get to a reasonably first rate variety of customers, name it, 1 million day by day lively customers, that is form of — it would not need to be precisely 1,000,000.

As soon as we get there, we will say, OK, nice. Now we have good product market. It’s time to begin monetizing. We’re not there but, however it’s rising fairly properly, and so we’re pleased with the outcomes.

When it comes to tweaking friends, we’re working very arduous on tweaking the app. We’re including lots of the options that we all know work properly on the primary Duolingo app to the maths product. So, enhancements to the Avenue. We’re pondering of including issues like leaderboards, higher notifications.

So, lots of the stuff that we have discovered during the last 10 years on Duolingo and that we’ve the code for, we’re beginning to add to the maths app to get it — to have increased retention. We’re additionally including extra content material to it. One of many issues that occurs with the maths app proper now’s folks truly run out of content material as a result of if you’re very — it seems we’ve some very heavy customers that use the entire thing, after which they form of run out of content material. So, we’re including extra content material to it.

So, you may see us over the subsequent 12 months simply make the product higher and higher. And due to that, it is going to proceed rising.

Mark Mahaney — Evercore ISI — Analyst

OK. Thanks, Luis.

Debbie Belevan

Subsequent query comes from Eric Sheridan of Goldman Sachs.

Eric Sheridan — Goldman Sachs — Analystb

Nice. Thanks. Possibly first query could be following up on one thing that was implied in Mark’s first query. Journey has clearly been a giant tailwind, and the shift to companies over items has been a giant tailwind within the macroeconomic setting.

Are you able to discuss a bit of bit about what you have seen with journey doubtlessly as a catalyst for utilization, each high of the funnel and the underside of the funnel as that is continued to construct momentum and the way perhaps because of cross-border journey persevering with to return, that could possibly be a pleasant tailwind for the enterprise going ahead over 2023 and past. After which the second dynamic could be you talked quite a bit about virality in TikTok. Are you able to discuss a bit of bit about the place you’re excited to experiment and take into consideration advertising or constructing virality on platforms on the content material aspect or the distribution platform aspect, perhaps even away from TikTok, and the way we must be serious about that constructing within the years forward? Thanks a lot.

Luis von Ahn — Co-Founder and Chief Government Officer

Nice query, Eric. Let’s examine. When it comes to journey, we do not see in our metrics that increasingly more individuals are utilizing Duolingo for journey. We did see a really momentary dip within the top of COVID a few years in the past.

That is sort of a fewer — barely fewer. Since then, it has been about the identical. And we simply — journey is fascinating. For lots of people like us which are, to be sincere, from the worldwide perspective, fairly rich.

I believe journey is sort of a large motivation for utilizing Duolingo. However for lots of our customers, they’re utilizing it to study English or as a interest or one thing. So, we do not see this stuff that is like, “Oh, my god, journey has opened up, and subsequently, Duolingo is exploding.” That simply — we simply have not seen a lot of that. We do ask when folks enroll, why they’re utilizing Duolingo.

And a few fraction inform us they’re utilizing it for journey. I do not know the quantity off the highest of my head, I will assume it is one thing like 15% to inform us that they are utilizing it for journey. Nevertheless it’s simply not one thing that we glance an excessive amount of to. When it comes to your second query about virality.

So, up to now, we’ve experimented with a couple of social media platforms to get our phrase out, by the way in which. And that is primarily natural, as in we do not pay for these items. We simply make actually good content material. TikTok has been actually good for us.

Not simply TikTok within the U.S., we have truly localized our TikTok to Portuguese and Spanish and different languages. So, one of many issues that we’re enthusiastic about is TikTok accounts within the different languages. They’re truly rising actually quick. And it is truly superb how — by the way in which, that is simply superb factor about Brazil.

Something you do with social in Brazil does properly. And so, as quickly as we put TikTok in Portuguese, it simply form of went nuts. And in case you go see these movies, they’re superb. We simply had Duo dressed up as Wednesday from the Netflix present, Wednesday.

And we obtained, I do not know what number of, 10 million views or one thing. So, we’re enthusiastic about platforms like TikTok and truly additionally Twitter. We’re doing fairly properly in Twitter. Now, whenever you ask about virality usually, one other factor that we’re doing is we’re simply including much more issues contained in the product.

This isn’t social media or something, contained in the product to get extra folks to share issues. And we now have a crew behind it. It is a actually good crew, too, and they can get much more folks to share issues. One of many principal issues that folks share, there’s now a strategy to share sentences rather more simply.

One of many principal issues folks share are bizarre sentences that they see on Duolingo. So, a number of the programs, for one motive or one other, have a really bizarre sentences. I do not know if I can consider considered one of them. Just like the German course has one thing like — the sentence has one thing like, “proper subsequent to the mattress, lay the physique of the husband,” or one thing like actually bizarre stuff that folks share.

And that simply will get lots of people. So, we’re engaged on getting folks to share like that, and it is understanding fairly properly. I wish to say Matt in all probability wrote that query in regards to the — that sentence in regards to the husband. However OK.

Debbie Belevan

Subsequent query comes from Mario Lu of Barclays.

Mario Lu — Barclays — Analyst

Nice. Thanks for taking the query. So, the primary one is on app retailer charges. Simply curious to your thought on the latest development of apps bypassing the app retailer.

For instance, video games like Fortnite and apps like Spotify, Netflix have finished this for some time. However extra lately, extra conventional cell video games are implementing like a direct-to-consumer fee technique. Simply curious your ideas on any initiatives that you just guys have in your finish.

Luis von Ahn — Co-Founder and Chief Government Officer

We’re not at present engaged on that. For us, we love the app shops. Clearly, it is arduous to say that we would not find it irresistible in the event that they lower their charges. In fact, we’d.

However we do very well with the App Shops. They’re a tremendous distribution mechanism. And the factor whenever you go off app shops is that it is tougher to distribute your product. And in addition, it has fairly a little bit of friction.

One of many superb factor in regards to the app shops is that folks have already got the bank card in there, they usually simply need to faucet as soon as and it will get to there. So, you might be able to decrease your charges, however you add a lot friction to your customers. Nevertheless it’s not clear to us that we’d make that rather more cash. It is one thing that we’re at all times serious about and will finally do it, however it’s not one thing that we’re at present engaged on an excessive amount of.

Matt Skaruppa — Chief Monetary Officer

And bear in mind, Mario, we did get a fairly important bump from Google reducing their app retailer charges final 12 months.

Mario Lu — Barclays — Analyst

Acquired it. Useful. After which second one simply on form of modifications to the Duolingo app itself. I consider previous few quarters, you talked in regards to the change to the only studying monitor being at parity.

Any updates to that? And simply usually, how do you steadiness between form of optimizing for studying and versus having a extra informal app that form of attracts the plenty? So, I believe simply person feedbacks, could possibly be like a lab minority. However the elimination of like issues like oral prompts or sort solutions, I consider obtained some adverse suggestions. I simply needed to listen to your ideas there. Thanks.

Luis von Ahn — Co-Founder and Chief Government Officer

Mario, you learn Reddit.

Mario Lu — Barclays — Analyst

I do.

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. So, it is an excellent query in regards to the modifications to the app. So, we made some fairly important modifications. We’re at all times making the app higher.

I imply, that is what we work on. This is the reason we spent a lot on R&D. We’re actually at all times making the app higher. During the last 12 months, we made this huge change to our residence display, going from — giving lots of selection about what to study subsequent to this linear path.

The primary motive we did that linear path, by the way in which, was to show higher. We observed that we had been — after we had been giving folks a lot selection, what was happening was a big fraction of them, we’re simply coming in to increase the streak with very easy classes that we’re not truly getting them to study. Whereas now with the linear path, we have inspired a considerably bigger fraction of customers to every time they arrive to extend their streak, they really additionally study one thing. So, the primary motive we did that was truly to show higher and likewise to simplify our product, which has actually helped us.

However that was truly to show higher. The best way we consider it’s after we’re making modifications, we take a look at — we’ve three issues that we’re bettering. We’re bettering how properly we educate. We’re bettering how participating the app is, so mainly, how a lot time folks spend on it, how — retention, and many others., and we’re bettering how properly we monetize.

And we’ve massive groups behind every considered one of this type of group of metrics. And what occurs is that every crew, for instance, there’s the monetization crew, what they’re attempting to do is get extra folks to subscribe. Each time they run a take a look at to attempt to get extra folks to subscribe, what we implement is that they can not screw up the opposite metrics. So, sure, you may get extra folks to subscribe, however you can not lower our variety of DAUs.

You can not lower the time folks spend studying, otherwise you can’t lower the educational final result. Equally, after we get folks to — the group of individuals that’s devoted to show higher, we inform them, OK, you can also make modifications that educate higher, however you can not screw up the monetization otherwise you can’t screw up the person engagement. That is how we steadiness it. And we discovered that that works fairly properly.

And most each change within the app, you’ll be able to truly hint it down. That change was made by the group or by the crew of individuals that’s attempting to make us develop sooner or make us make more cash, and many others. And so, that is how we do it. Hopefully, that provides you some coloration.

Mario Lu — Barclays — Analyst

Yeah. Very useful. Thanks.

Debbie Belevan

Our subsequent query comes from Arvind Ramnani from Piper Sandler. You are muted, Arvind.

Arvind Ramnani — Piper Sandler — Analyst

Yeah, I caught it right here. I suppose my first query is, among the many administration crew, who has the longest streak when it comes to utilization? However let me now ask that.

Luis von Ahn — Co-Founder and Chief Government Officer

However I do not know the reply to the query, however I am prepared to wager it is me, however I do not know the reply to the query.

Matt Skaruppa — Chief Monetary Officer

We may be fairly positive about that.

Arvind Ramnani — Piper Sandler — Analyst

All proper. Thanks. Yeah, yeah. So, a very good metric with person engagement and form of the income development and bookings.

However I do know there’s an entire lot of different metrics you monitor that — past what you may share with us. So, are you able to — conceptually, in case you’re not in a position to share arduous numbers, can you conceptually share a bit extra beneath on a number of the metrics that is supplying you with confidence in form of the form of the expansion for this 12 months?

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. I imply, I do not know if we will share exact numbers of — there’s sure issues that we share and stuff that we do not share, however we do monitor lots of metrics. Generally, as I used to be saying earlier than, there are three teams of metrics. There’s what we name the expansion metrics, which is simply normally our total person base.

Are they utilizing the product extra? Do we’ve extra DAUs, and many others.? There’s the monetization metrics, which is how a lot cash we make, mainly. After which there’s the metrics about how properly we educate. In every considered one of them, we’ve a ton of metrics. When it comes to development, a number of the issues that no less than I take a look at, I take a look at time spent studying.

I take a look at DAU to MAU ratio. I take a look at resurrection charges, so form of variety of folks which are being resurrected. I take a look at the retention of resurrected customers. I take a look at the retention of present customers.

I take a look at the retention of latest customers. So, that is the kind of stuff. In monetization, the forms of stuff we take a look at are issues like conversion from free to paid, LTV, retention of paying customers. Every day bookings is one thing we take a look at quite a bit, variety of customers or a fraction of customers which have an IAP or do a purchase order on an IAP.

In studying, we take a look at various issues, however one of many principal issues we take a look at is issue of the content material that we’re in a position to give out with out scaring customers all away. So, there’s lots of metrics that we monitor, and I do not even know all of them off the highest of my head.

Arvind Ramnani — Piper Sandler — Analyst

Yeah. That is useful. After which, you already know, form of bookings development, form of sitting externally in some sense, it is a bit of a black field. However can you share like whenever you challenge for bookings development, what are the inputs that go into form of coming as much as the kind of projections for bookings development? I imply we do not even know the precise numbers.

However simply conceptually, what goes into predicting person development — reserving development, sorry?

Luis von Ahn — Co-Founder and Chief Government Officer

Yeah. We simply take a ruler and go up like that. It really works fairly properly. I am kidding.

Matt has a significantly better reply than that.

Matt Skaruppa — Chief Monetary Officer

Effectively, you already know, perhaps not. I imply, the primary factor to consider with bookings development is that there is simply the 2 dimensions. There’s new bookings development, new subscribers, and there is renewals, and so — on the subscription aspect. After which you’ll be able to add in provides, clearly, and IAP.

On the brand new customers, Luis mainly talked about how we’ve a very sophisticated mannequin, a markup mannequin, if you wish to learn our weblog submit on our development mannequin, how we predict customers. An enter into that’s new customers, and that is a mix of natural development and advertising spend. So, we predict new customers. That flows into some aspect of latest bookings.

After which we’re simply mainly doing cohort math for our cohorts of latest customers over time to see what we predict they’ll convert into. After which we’re including into that for the subscription enterprise, the renewal cohorts, which we’ve actually good information on at this level. We really feel fairly assured about. So, you add that collectively, you get your subscription bookings.

Add in provides and IAP, which once more are a bit much less detailed within the cohorts, make rather less sense for that. And then you definitely obtained bookings. It is actually that easy, Arvind.

Arvind Ramnani — Piper Sandler — Analyst

Excellent. That is a mouthful. Thanks.

Debbie Belevan

Nice. Effectively, that is all we’ve for questions. So, I will flip it again over to Luis.

Luis von Ahn — Co-Founder and Chief Government Officer

Thanks for all the superb questions. And please, please, I urge you. Do your Duolingo lesson.

Period: 0 minutes

Name contributors:

Debbie Belevan

Luis von Ahn — Co-Founder and Chief Government Officer

Matt Skaruppa — Chief Monetary Officer

Ralph Schackart — William Blair and Firm — Analyst

Justin Patterson — KeyBanc Capital Markets — Analyst

Andrew Boone — JMP Securities — Analyst

Ryan MacDonald — Needham and Firm — Analyst

Aaron Kessler — Raymond James — Analyst

Nat Schindler — Financial institution of America Merrill Lynch — Analyst

Mark Mahaney — Evercore ISI — Analyst

Eric Sheridan — Goldman Sachs — Analystb

Mario Lu — Barclays — Analyst

Arvind Ramnani — Piper Sandler — Analyst

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