Q2 2021 Duolingo Inc Earnings Call
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Good day and thank you for standby welcome to the Duolingo second quarter 2021 earnings call. At this time, all participants are in listen only mode.
After the Speakers' presentation, there will be question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. If you require any Purdue assistance. Please press star Zero as a reminder, this conference call is being recorded I would now.
To turn the call over to Debbie Delavan head of Investor Relations. Please go ahead.
Welcome everyone to do all English first earnings webcast, highlighting our results for the second quarter of 2021, it's great to have you join us today. After our successful IPO last month with me on the call today are Luis spun on co founder and Chief Exec.
Officer, not scared about Chief financial Officer, and Bob <unk>, Chief business Officer. After repaired prepared remarks, we will open up the call to Q&A.
Like to remind all participants that during this call. We will make forward looking statements regarding future events and financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to consider the important risk factors contained in our SEC filings. These.
These forward looking statements are based on assumptions that we believe to be reasonable as of today. We undertake 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 with that I'd now like to turn the call over to Luis.
Thank you Debbie.
Welcome everyone.
Thanks for joining us today.
As our first earnings call and many of you are new to our story I would like to walk through who we are.
Where we've been and where we're going from a strategic perspective, then Matt will cover our results for the quarter and then we will open up for <unk>.
Q&A.
When we started to have legal I was in a very fortunate position in my life.
Was a professor in computer science at Carnegie Mellon University, and I had just two companies.
I wanted to work on something that was related to my true passion, which I've always been education.
But my views on education are very influenced by where I'm from.
I grew up in Guatemala, which is not a wealthy country.
And a lot of people talk about education is something that can bring deep quality to different social classes by always startup the opposite a company that can bring unique value because people already have a lot of resources can afford to get the best education, whereas people without much money often don't even get basic schooling, especially in poor countries like mine.
So along with my Phd students sovereign Hector we wanted to do something that would give equal access to education to everybody.
And so even before we knew we wanted to teach languages, we actually started with a mission to develop the best education in the world and make it universally available now. This mission is very general so we decided to start by pushing one thing and we've thought about various subjects, we could start with like coding or math, but decided on pizza in languages for a number of.
The biggest one of which is that it's a huge market.
There are close to 2 billion people in the World learning a foreign language and a big reason for all this demand is that in many countries really most of the world learning English can truly transform your life because it can significantly increase your income potential.
And if you look at spend in the language learning market, it's about $60 billion a year and this is expected to almost double by 2025.
One other thing to note about the language learning market is that it's still mostly offline I think of it half of people picking make practice and private institutes to learn English, but this market is shifting online and by now as a category leader online language learning, we expect to capture a lot of that shift.
So in 2012, we launched duolingo, which was just a free way to learn languages at first we launched a website to dealing with dot com, but soon after that we launched our iPhone App and then we launched our Android App and we were very fortunate that after we launched our apps quickly became the most downloaded apps in the education category worldwide.
Both iOS and Android.
Right now we have been downloaded over half a billion times now I should mention this growth has been overwhelmingly organic for word of mouth not due to massive marketing campaigns.
There are a number of reasons why we became so popular.
One is that we we're mobile first so in 2012, most people knew that mobile apps, we're going to be big but still the biggest thing was the web. So every company was spending most of their effort and their money on their website and apps, where you should adjust a companion product we.
We decided from the beginning that we would put the majority of our effort on our mobile apps. So we launched a very high quality up compared to what's out there at the time and because of this for example, Apple chosen as the iPhone Apple by year end 2013.
Another really important recent is dealing with free at the time, most digital learning products were really expensive and we were just free which helped us grow really quickly.
Also right before launching duolingo, we had this important realization, which is that the hardest thing about learning a language. We're really learning anything by yourself is staying motivated. So we decided to make do I think it'll be a fun as possible.
Our combination of a very high quality App that is also free and fund made it so that people started telling their friends about duolingo and this is what really drove our consistent growth by now we have about 40 million monthly active users and this is still overwhelmingly due to organic word of mouth growth.
As you can tell from our MAA graph over time, we've been growing our monthly active user steadily since we launched.
Every year, we have had more active users than the previous now if you see that spike around March or April of 2020, that's the impact of Covid based.
Basically we had increased demand during that time, while the world went into lockdown.
After lockdown ended traffic went down a little bit, but it settled higher than before COVID-19.
From there we kept growing in the same way we were before Covid. So we're now back to growing at our normal rate now even so the month of March and April of 2021, we're just not as high as the same month in 2020, because the world was in Lockdown Dennis.
Duolingo instead of focusing on marketing we are obsessed with our product we are product and engineering company and a majority of our employees are working on just making our products better.
We use gamification mechanics, like a streak that counts how many days in a row you've practiced on dwelling one we find that it really motivates people in fact over 50% of our daily active users have a streak longer than seven days and our one 1 million learners have an active streak longer than 365, meaning.
They have used dual English daily for at least a year or possibly longer again. The insight here is that the hardest thing about learning a language staying motivated we really believe that and this is why we make dwelling there will be upfront as possible.
We also believe that education is shifting online and not just online but through mobile phones. Our approach is to make something that is native to the mobile platform. We know that on mobile you have to compete for users' attention against social apps and games. So we work really hard to make drilling it will be something people want to do.
We want to have English to be the learning apps for the mobile generation.
Looking at duolingo can be misleading because the outlook, so cute and gain the fight that many people don't realize the amount of sophistication that there is in the background and how much personalization there is in the learning experience.
Every exercise you've done on duolingo, whether you got it right or wrong and if you've got it wrong why you've got it wrong and we use that to make a model for each user. So when you start to lessen and dwelling or we use artificial intelligence to pick exercises that are just right for you.
Our learners complete over half of 1 billion <unk> per day, and we used all of that data to improve how we teach.
And this leads to very effective learning outcomes in 2020, we did a study to evaluate dwelling with effectiveness versus traditional University language courses. We ran the study for French and Spanish and we found that dealing with learners, who complete unit five or about halfway through the French or Spanish course are proficient in reading and writing as it further.
Domestic and four semesters of University classes and one of the Amazing thing is that it takes half the time to do that on duolingo than it does to take the university classes. So and duolingo you can do it in half the time, just with an African entirely for free. This is something we're very proud of.
Now in terms of how we make money.
Because of our mission, we decided not to monetize in the usual way that education apps monetize which is like charging for learning content, we decided to keep all of our courses available for free and to use a freemium model similar to that of Spotify or the dating apps offering a subscription that gets rid of ads and have some additional features we make nearly 75% of our revenue from.
<unk>.
Another thing to understand about the dueling. The story is that we only really started monetizing very recently.
And we've grown our revenue very quickly 2017 was the first year, we focused on monetization on our bookings were around $14 million and that has more than doubled every year. Since then our bookings in 2020 were $190 million.
If you look at how we've been able to grow bookings. So fast there are really two things.
One is that our active users are growing and the other is that we are increasing the fraction of monthly active users who are paying to subscribers and.
In 2016 that fraction with zero percent, because we didn't have a subscription yet then we have constantly grown by 2020. It was 4% and we believe there is still a lot of room to grow that number we can grow it with optimizations that reduce friction to describe and also by adding new features to the subscription that make more people subscribers.
Our freemium business model is important to our success because it enables a really significant user scaling the model is driven by two mutually reinforcing flywheel.
On the learning flywheel side, the greater the scale of our learner base. The more we can use insights from data analytics to improve both engagement and efficacy.
And the more engaging our products are and the more effectively they each the more our learners tell their friends about duolingo and the more we continue to grow our learner base.
On the investment flywheel fight, our learner scale and word of mouth growth allow us to focus our investments on product innovation and data analytics instead of brand our performance marketing the more learners used dual lingual and converting to paid subscribers. The more we're able to invest in creating an even more delightful and engaging and effective learning experience and this further.
Increases our popularity in user scale.
Before I wrap up I would like to summarize our strategy.
First we will continue to focus on growing our user base around the world with our free App and iconic brands. We will do this by not only continuing to improve the efficacy of our products, but also by pitching higher levels of proficiency.
And this will lead to higher monetization as more and more users subscribe to a plus offering.
Our goal is to become the industry standard when describing someone's level of language proficiency. So instead of saying Im an intermediate level Spanish speaker, one will say I'm, a dueling with 65 in Spanish that's what we want to do.
And finally, we are.
We aspire to expand beyond language learning for example, our recently launched Duolingo ABC, our children's literacy yet.
Before I turn it over to Matt I want to reiterate what I noted in the shareholder letter, which is included in the S. One perspective I plan to dedicate my life to building a future in which two technology every person on this planet has access to the best quality of education, and not only that but a future in which people actually want to spend their time learning.
<unk> English the platform for building the future and we're just getting started.
With that I'll turn it over to Matt to discuss the Q2 results and guidance.
Thank you Luis and thank you all for joining us on our first earnings call.
We are pleased to report a strong second quarter.
Before I jump into the numbers I want to quickly talk about our growth framework.
Focus on two areas of growth first we have our core language learning products, which includes subscription.
And in App purchases.
Second we have our new initiatives, which include the Duolingo English test also known as the <unk> and other new products that we may seek to monetize the future.
For our language learning products, we plan to continue to grow by expanding the number of active lenders on our platform by driving higher conversion of our free users to paying subscribers and by increasing the lifetime value of our subscribers.
We plan to continue to invest in R&D to improve our language learning App to drive these growth vectors.
For our new initiatives, we plan to continue growing by expanding adoption of the <unk> among institutions and consumers and by offering more value added features the duolingo English test takers.
We'll also grow by creating new products on our platform, which we have already started to do dual Ingo ABC. Our early literacy yeah.
With that let's take a look at our Q2 operating and financial metrics and their comparative performance against the same quarter last year.
Subscription bookings increased 34% year over year to reach $48.9 million in the second quarter totaled.
Total bookings increased 30% year over year to reach $64.5 million in revenue increased 47% year over year to reach $58.8 million.
As for our users and subscriber metrics.
<unk> decreased year over year to $37.9 million and <unk> increased slightly to $9.1 million.
Paid subscribers increased 46% as compared to Q2.2020.
Our non-GAAP financial metrics include adjusted EBITDA and free cash flow.
Adjusted EBITDA increased year over year to $3.7 million.
And free cash flow declined from $7.9 million in Q2 of last year to $2.1 million in Q2 of this year. This was driven by working capital changes.
Increases in bookings this year was less than Q2 of last year, given the extraordinary nature of Q2.2020.
And to expand upon our Q2.2020 are comparable quarter from a year ago I wanted to discuss the impact of COVID-19.
In Q2, 2020, we experienced an unseasonal uplift driven by COVID-19.
Typical year, we expect Q2 to be in line with Q1 in terms of bookings and other measures.
They can be flat slightly down or slightly up but not materially different quarter over quarter.
This historical seasonality makes Q2.2020 stand out is difficult to compare to Q2.2021.
We don't know exactly how much of Q2.2020 performance with Covid related if you were to normalize Q2.2020 to be more in line with Q1.2020.
You would see a higher year over year growth rate in Q2, 2021 bookings revenue and other metrics.
With that context, let's drive further into our operating metrics, starting with a review of our active lenders.
In Q2, 2021 with $37 nine meus.
A 3% decline from last year.
$9.1 million.
A 2% increase from last year.
Our <unk> ratio increased from 23% 24%.
Turning to Q2.2020, we saw an all time high in MCU and saw a slight decline. This year, that's a low reopened was expected.
We believe we will continue to grow nicely year over year as we get past this comparable period and then we'll be doing so from a higher baseline level of users and Luis walk you through on a previous page.
As of June 30 of this year, we had $1.9 million subscribers, a 46% more than the same period last year our.
Our subscriber penetration increased from 4% to 5%.
These increases were driven by continued investment in product improvement such as new premium features product off the product optimization.
That drives subscriber conversion and retention improvement.
In Q2, 2021 we generated $64.5 million of booking a 30% increase year over year, driven by strong growth in subscription bookings, which grew at 34% year over year.
As we've discussed a core growth driver for us is shifting our subscriber mix towards subscribers on our annual plan we.
We do this because they are approximately two X the lifetime value of our monthly subscribers.
For Q2, we ended the quarter with more than 75% of subscribers on the annual plan up from about 64% last year and we're pleased with this trend.
We generated $58.8 million in revenue, a 47% increase year over year.
AD revenue grew 33% year over year and made up 15% of total revenue.
AD revenue growth was driven by strong average revenue per daily active user or opt out.
Our gross margin was 72, 6%, which is an increase as compared with 75% gross margin we had last year.
This increase is driven primarily by a higher subscription gross margin due to our mix shift towards annual subscription plan.
And from increased advertising margins driven by the improvement in <unk> that I just mentioned.
Our non-GAAP operating expenses in Q2, 2021 were $39.3 million or 67% of revenue.
An increase of.
Of over 65% of revenue in Q2, 2020, driven primarily by our continued investment in R&D.
As a reminder, non-GAAP operating expenses represent GAAP expenses adjusted for depreciation amortization stock based compensation and one time expenses.
We've provided a reconciliation between non-GAAP and GAAP metrics in the appendix.
Our adjusted EBITDA in Q2, 2021 was $3.7 million an increase from the $2.3 million last year.
This was driven by our revenue growth and our increased gross profit offset by an increase in operating expenses, including our continued investment in R&D.
Our free cash flow in Q2, 'twenty, one 'twenty, one was $2.1 million.
Declined from $7.9 million in the comparable period last year. This resulted primarily from the working capital changes I mentioned previously.
I'll now turn to our forward looking guidance.
Our Q3.2021, we are guiding to 63% to $66 million of bookings or 35% to 41% year over year growth.
$58.5 million to $61.5 million of revenue or 29% to 36% year over year growth.
And an adjusted EBITDA loss of negative <unk> 12 to negative $8 million.
For full year 2021, we are guiding to $267 million to $273 million of bookings or 40% to 44% year over year.
236% to $242 million of revenue or 46% to 50% year over year growth.
And an adjusted EBITDA loss of negative <unk> 14 to negative $8 million.
With that thank you again for joining us today and at this point, we would like to open it up for questions.
As a reminder, if you have a question at this time. Please press Star then the number one key on your telephone.
<unk> has been answered English to solve some of the Q.
Pound key place.
A question to one question and one follow up.
Your first question comes from the line of Justin Patterson with Keybanc. Your line is now open.
Great. Thank you very much could.
Could you perhaps elaborate on a regional pricing tests and then Luis next week, we have duo Con any teasers ahead of the event. Thank you.
Thanks for the question. So we have okay. So we've been living.
As we said in the road show we have been.
Being in different regions. So far we have succeeded in changing the price in a few countries and Brazil, and Japan and in Germany.
And then the prices remain the same in the UK as well.
The prices remain the same in every other country, we're going to continue doing that.
Over the next few over the next few quarters Youre going to see us do that.
And in terms of <unk>.
You should you should watch and see I mean, we're going to be announcing a lot of really cool stuff.
Certainly going to be talking about family plan, we're certainly going to be talking about.
The new ways of teaching Non-roman scripts, So Asian languages for example, where we're going to be talking about that.
More should watch it it's going to be cool.
Great. Thank you.
As a reminder, if you have a question at this time please press the star and the number one key on your catch Tim telephony.
Your next question comes from the line of Jian Li with Evercore ISI. Your line is now.
Hey, Thank you guys. So I just wanted to a couple of questions. One is just.
<unk> two <unk> ratio.
So we'll continue to kind of go up pretty nicely can you talk about what are the kind of the initiatives of the product development to drive this consistent growth.
Sure I mean in terms of our product development, we majorly work on three things.
We work on improving.
Engagement, so getting people to use that more and more often we work on pitching better and we also work on monetizing better that mainly means getting more optical to describe.
The first two are the things that really read that lead to a higher data to EMEA ratio basically we've added more gamification to the App and also.
It features better so basically people use it more often.
Okay and also just a follow up I'll comment just on the paid subs net ads.
The year over year comp is tougher, but just kind of moving forward would you say that would you expect kind of the net adds cadence to be.
On a higher level.
Closer to the 2020 level or do you expect that to kind of.
Go back to kind of a 2019 level growth.
Great question. So if you look at.
The 2020 number.
Essentially.
Ed.
Around 700000 net subscribers.
From our projections and what we see in the business as Luis has mentioned our <unk> growth is we believe likely going back to the pre COVID-19.
Rate of growth.
And we continue to take all of the efforts that Luis has talked about in terms of driving increased conversion and then maintaining retention and so.
We think that the cadence does the pre COVID-19.
Growth rates will apply going forward.
Thanks, guys I'll go back ticket.
Thanks once again.
Once again, if he would like to ask a question. Please press. The Star then the number one key on your Touchtone telephone.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
And we have no further question at this time I will now turn the call is back to Luis.
Remarks.
Yes, Thank you and I just really like to thank you all for attending on for all the great questions and we look forward to talking with you regularly in the future I also want to take this time to thank all our wonderful employees for the great work. They do every day, it's really all because of them that we're showing really strong results. So thank you.
And thank you Brittany.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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