Q3 2021 Duolingo Inc Earnings Call

Good day and welcome to the Duolingo third quarter 2021 earnings call.

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I'd now like to turn the conference over to Stephanie Sullivan head of Investor Relations. Please.

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Thank you operator, and welcome to Duolingo third quarter earnings call. Today, We released our third quarter results. After the market close you can find our press release and the accompanying presentation on our IR website at investors Dot Duolingo dotcom.

With me on the call today are Luis Mone on co founder and Chief Executive Officer, and that screw, but chief financial Officer.

After our prepared remarks, we'll open the call to Q&A.

First I'd just like to remind everyone that during this call. We'll make forward looking statements regarding our future events and financial performance, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to review the risk factors contained in our SEC filings. These forward looking statements are based on assumptions that we believe to be reasonable as of today and we are.

Undertakes 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 and welcome everyone I want to start this call with the same topic that I start with and many of my presentation about the company.

Our mission, which is to develop the best education in the world and make it universally available.

When we launched Duolingo 10 years ago, we decided to start with teaching languages. Because we believe we can impact an enormous number of people's lives by helping them learn a new language to get a better job or getting to school or even just communicate better on a trip.

But you'll notice that we don't see in our mission that we want to develop the best language education in the World. We say, we want to develop the best education in the world.

So we don't plan on stopping with just languages.

We made strong progress on our mission this past quarter and we have exciting plans for the future if I sit in our S. One I plan to devote my life to this mission.

Now with that let's get into the results of our third quarter.

This was an exceptional quarter for us we not only went public but we also delivered record results.

As you can see on our highlights page we continued to grow our users are paid subscribers, our bookings and our revenue hitting record numbers in all these metrics.

Our strong Mou, India, you growth was driven by continued organic word of mouth, some strategic investments in performance marketing and brand awareness campaigns, and our relentless focus on making our product more fun and engaging.

Our monthly and daily active users grew 13% and 16% respectively over the prior year, which was a period when many parts of the world, we're still locked down due to COVID-19.

We also grew bookings, 57% year over year as more learners purchased duolingo, plus our subscription product because of that we ended the quarter with 2.2 million paid subscribers, a 49% increase year over year.

Our subscribers now represent 5.5% of our monthly active users.

I'm also pleased to report we exceeded our revenue and bookings estimates and as a result have increased our financial year 2021 guidance, Matt will cover the financials in further detail as well as our updated guidance.

But now I'd like to share with you some highlights for the quarter, specifically the progress, we're making towards our strategic initiatives.

I'll start by discussing the progress we've made in growing users.

About 95% of our monthly active users or Emma use our learning completely for free while just over 5% of them pay for our plus subscription, which removes ads and offers additional features to help people learn faster.

Our monthly active users have been growing steadily since we started the company and this growth is overwhelmingly organic are very high quality mobile product that it's free fun and effective leaps leads people to telling their friends about it has made our apps synonymous with language learning and has driven our consistent growth by now we have nearly.

42 million monthly active users.

This chart also shows the impact of the Covid Lockdowns last year, which drove a spike in new users.

This quarter, we achieved the highest ever and may use in our history, even higher than Q2 of 'twenty 'twenty. When we saw this surge in activity.

As we mentioned on the last earnings call. We believe we are back on trend with our pre COVID-19 growth rates as the world has been opening up and we think that this quarter's the user growth further confirms that.

I'd also like to highlight the seasonality of our user growth.

You can see from the highlighted sections of the chart the areas with green circles on them.

That the past four years have the same trend in November and December are Emma use declined during the busy holiday season, and then because of new year's resolutions and People's outlook for the new year, we see a large spike in users in January.

Those are the parts of the graph, but have a steep slope and end in the center of each dark Green circle.

During this time, we also run our new year's promotion, which is primarily advertised in the App and offers a discounted price for an annual subscription the timing of this promotion aligns well with our system of resolutions as the newer inspires people to set personal aspirational goals for the coming year like for example, learning a new language.

It is a great fit between how users are thinking about themselves their lives on our brand, which is one of enriching your life through language learning.

The new year is the only time of the year, we offer a discount.

Annual subscribers can also renew each year at the discounted price. So this new year's cohort is particularly sticky in terms of renewals.

After the January Spike, we see a general downward trend in meus until the summer months, where usage flattens out and then rebounds in the fall.

Our daily active users or Dia use follow a similar seasonal path and we achieved a record high this quarter internally. We are much more focused on da use because learning a language requires consistency and daily practice and uses that come back through our app everyday are more likely to achieve their language goals.

This is why we constantly focus on driving daily engagement and via use is the key metric we use to measure the effectiveness of that focus.

On the topic of seasonality, we thought it'd be helpful to provide an overview of the various marketing campaigns, we have throughout the year that contribute to the variability in user and booking strengths our biggest and most impactful is a new year's campaign, which I just went through but we run other non discount campaigns in other parts of the year.

Our IPO in July while not an annual event was very positive given its high visibility and we believe it drove some increase in users.

Another one of my favorite initiatives, which drives awareness and user growth is our annual dual corner event, the largest gathering of language lovers from all over the world.

We held our third annual dual Con conference in August, which was a huge success during a record 350000 viewers and driving valuable impressions across multiple media channels.

The goal of duo Con is to provide informative talks by feature language experts.

Highlight exciting new developments in our products and provide a behind the scenes look at the talent that technology that makes duolingo successful.

Next year, we hope to have a hybrid format and whole dual con in person. Once again this time in Brooklyn stay tuned for updates.

And rounding out the year, we will send out our year in review in December which is a personalized summary of our learners accomplishments during 2021.

Because it drives a lot of bus and social media sharing it helps create word of mouth growth.

Last year dual 365, the hashtag we set for the year in review it became a trending topic on Twitter and generated a nice increase in da use.

This year, we look to build on this success by expanding our reach through influences another targeted PR.

Another important strategic initiative for us is to teach better and we are making important strides in this area.

As I've said before a surface level look at dwelling or can be misleading because the app looks so cute and game a fight that many people don't realize the amount of sophistication that is in the background and how much personalization various into learning experience.

We know every exercise you've done on dwell lingual, whether you got it right or wrong and if you've got it wrong. We know the most likely piece of practice you need to learn from your mistakes and.

And we use that data to make a model for each user. So when you start to lessen and dual lingo, we use artificial intelligence to pick exercises that are just right for you.

And this leads to very positive learning outcomes in a previous study, we compared dual ingalls effectiveness versus traditional University language courses. We ran this 34 people learning French and Spanish and we found that dual lingual learners, who complete units five about halfway through the French or Spanish course are as proficient in reading and writing as a person with they can for some.

Masters of University classes in a new study. We just released this quarter. We found that seven units of duolingo is equivalent to five University semesters.

Unlike our previous study the duolingo units can be accomplished in half the time than the University semesters with an app entirely for free.

This is something we're very proud of.

In addition to improving efficacy, we're constantly working to make the product more engaging.

If you use the App you are already familiar with our diverse cast of characters, who guide learners throughout their lessons and cheer them on.

Initially these characters all had the same computerized voice, but we've been making great progress using text to speech technology and giving these characters to unique voices and personalities in various languages and that way, bringing them to life.

We think of this as an investment in our brand acid as well since a cast of characters can make appearances in other apps, we develop from dwelling way B C, where they are already part of the experience to our upcoming map app.

As an example, we just finished production of our first in App animated short with two of our characters explaining the custom of giving vessels or kisses in Spanish speaking countries.

We rolled this out on our social channels last month, and now I'd like to play it for you to give you a sense of how we're bringing our characters to life by not only teaching language, but also culture.

Today, I'll Lilly terrifying experiments and social awkwardness ads.

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Not how things Ari now, they're even more ways to myself why don't I give a best sort of someone who doesn't want one.

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Hey, Juan.

I hope you enjoyed that we plan to rollout more of these animated shorts within the App in coming months. The idea is that this is how we are going to explain culture the dwelling Galway.

They are making learners three through boring text, our characters will explain the culture of each language through these fun animated videos.

Another initiative, we've been focused on is making duolingo more social because learning with friends is more fun, especially when friends can cheer each other on.

Increasing social interactions on our App has also proven to be very effective in driving engagement today, roughly 40% of our daily active users are following at least one other user on duolingo and we're working to drive this percentage higher we have a feature internally called kudos, which allows users to congratulate the friends for certain achievements, including.

Milestones completing 10 lessons in a day and getting promoted to the next leap in our leaderboards just to name a few this.

This quarter, we saw 160% increase in the number of kudos sent by users highlighting the growing popularity of this feature to date, 8% of our Dia used are sending or receiving kudos on a given day.

We also launched the phone contacts sync feature which makes it easy for our learners to add new friends.

Early results are very promising in the first few days, we already have over 500000 learners that have opted to think their contacts with us even better many of them are following each other and congratulating each other's learning progress through our kudos feature we're excited to see our app become even more social in the coming months.

Growing paid subscribers is another strategic initiative as this drives the majority of our bookings and revenue, which supports the platform and our mission to develop the best education in the world and make it universally available today.

Today over 5% of our monthly active users subscribe to a plus offering in addition to having an AD free experience. We offer other benefits that help users learn faster. We recently launched two new features for dueling a plus.

One we called legendary where users will reach a certain level the app get their skills to change to a different color and the other called mistakes inbox, where we captured in one place mistakes you've made while using the App and give you a chance to focus on practicing those skills.

We believe that each of these has had a positive impact on our user conversion from free to paid as well as subscriber retention and speaking of that we also spent considerable time improving the retention of our subscribers.

We found that annual subscribers are not only more likely to stick with their language goals, but they have two times the lifetime value compared to monthly subscribers because the retention rate is much higher.

These learners on our annual plan now make up roughly 80% of our subscribers.

In July we quietly rolled out our family plan on iOS for dwelling, a plus which allows ups to six users to sign up under the same plan.

If our experience is similar to other companies who have rolled out a family plan. Then this plan will have even higher retention rates than our individual annual plan, which would further increase the lifetime value of our subscribers.

At this point, we are not broadly advertising the family plan just yet so we believe we're just getting started.

Our next strategic initiative is to become the language proficiency standard or dwelling go English test or D. T Force under this initiative and in Q3, we achieved some key milestones, including the DS five year anniversary I'm.

I'm very proud to report that our Det deliver strong growth this quarter and year to date.

Given that we are lapping quarters, where the D. T business expanded extremely rapidly due to COVID-19 lockdowns, it's all the more impressive.

We believe we've maintained our momentum and are continuing to build on the strong trends from last year.

As of the end of the third quarter all of the top 25 U S universities and in terms of international student volume now accept the D. T S proof of English proficiency for an international undergraduate admissions.

Today, we have over 3600 programs worldwide that accept the D D and we're excited about the growth we are seeing.

Before I turn it over to Matt I'd like to quickly touch on the recent news around App store fees.

Last month, Google reported that in January one 2022 they would be lowering their app store fees on subscription revenues collected from first year subscribers from 30% to 15%.

This is a very positive development for us as today around 20% of our revenue comes from the Google play store.

As we've said before we view the App stores as great partners, they enable us to distribute our product globally and they help us monetize via subscriptions with relatively little friction for the user.

This latest development by Google allows us to continue that relationship but at a lower cost. So we can reinvest the savings back into our products and learner experience.

And now I'll turn it over to Matt.

Thanks, Louise I'm excited to talk to you all about our results this quarter, we not only exceeded expectations on several key metrics, but we also achieved all time highs has will become common on these calls before I get to the detailed financials I'm going to start with a review of our growth framework to put the numbers in a clearer context.

That's where our growth framework first we have our language learning app, which generates revenue through subscriptions advertising and in app purchases or IAP.

Second we have our new initiatives, which include the dual lingo English test or Det as well as other new products that we may monetize in the future.

Subscriptions, which make up a majority of our bookings is driven by growing the number of free users converting more of them into plus subscribers and increasing the lifetime value of those subscribers.

Growth in advertising and in App purchases is also driven by growing users as well as through optimizing our AD in IEP revenue per user or.

The duolingo English test grows by increasing adoption of the test at institutions and with students taking the test finally, new product growth will be driven by expanding into new areas beyond language learning like literacy.

Now I'll present, our Q3 results.

As you can see we delivered strong performance compared to the prior year and achieved record results in bookings revenue subscribers Miu D. A U and gross profit.

Total bookings increased 57% year over year to $73 $1 million.

Subscription bookings increased 64% year over year to $55 $4 million and.

And revenue increased 40% year over year to $63 $6 million.

Now I'll take you through the key drivers of our results.

As I mentioned, when I was going through our growth framework, our language learning business grows as users grow and as we monetize them better this.

This quarter, our performance was driven by strong user and subscriber trends Mou increased to a record $41 7 million users.

N D au increased to a record $9 8 million users paid.

Paid subscribers grew to 2.2 million subscribers, an increase of 49% over the prior year.

Our subscribers as a percentage of Niu now stands at five 5% compared to four 2% a year ago as for bookings and revenue. This quarter saw strong growth in those financial metrics as well subscription bookings were driven by a combination of user growth and higher bookings per Mou, which was driven by an increase in subscribers on the annual plan. In addition to driving more conversions.

From enhanced plus features as Luis mentioned earlier annual subscribers have about two times, the lifetime value as compared to monthly subscribers.

We are also encouraged to see annual plan subscriber retention increase in Q3 year over year, we ended the quarter with the highest September retention, we've seen since 2018.

Our revenue grew 40% year over year, it grew slower than bookings because as I've mentioned, our bookings increased in part because of the mix shift to more annual plan subscriptions. The revenue for the annual plan is recognized over 12 months and so the revenue for a large portion of our new annual planned bookings hits in later quarters our.

Our gross margin remained strong at 71, 6%, which is 50 basis points higher than during the third quarter a year ago, we did see a slight quarter over quarter decline, which was driven by our Det business, where we added additional test Procter and resources.

Moving onto our non-GAAP operating expenses, we report three major categories of costs R&D, Our research and development sales and marketing and G&A R&D increased from 34% to 40% of revenue this quarter an S. N M decreased from 24% to 23% G&A.

G&A rose from 15% to 17% of revenues this quarter due to additional headcount professional fees and other costs, a significant amount of which were related to becoming a public company.

As we have discussed we expect that overtime, we will continue to invest in R&D as we built our amazing product to hiring more engineers product managers designers data scientists and technical experts, we expect to see operating leverage in the other two cost categories sales and marketing and G&A.

As a reminder, non-GAAP operating expenses represent GAAP expenses adjusted for depreciation amortization stock based compensation and onetime expenses. This quarter, we recognized approximately $21 million and stock based compensation. A majority of this was the acceleration of shares in expenses driven by the IPO and from the achievement of certain performance hurdles.

<unk> from our founder share grants you can find a reconciliation of these items in the appendix.

Our growth in revenue and stable gross margin was offset by a faster increase in costs, which led to a decline in adjusted EBITDA to negative $6 million this quarter for.

For the remainder of the year, we expect opex to follow a similar seasonal pattern as last year when Q4 Opex as a percentage of revenue was a few percentage points below that of Q3.

We added over $430 million in cash to the balance sheet. This quarter driven by the net IPO proceeds and strong bookings growth.

Free cash flow increased from zero point $6 million in the year ago quarter to $5 $2 million this quarter.

Before I get into Q4 guidance I would like to remind you. All we said during the IPO process about how we think about balancing growth and profitability. We think that we have a long term sustainable growth path given the underlying growth of our freezers and the room, we had to increase subscriber penetration and monetization.

We will grow users and subscribers primarily by investing in R&D to create an ever more engaging and effective product that will lead to higher engagement and efficacy we will run the business with cash flow discipline as we have historically, but we will continue to reinvest significantly in talent, especially in engineering product and design.

Now turning to guidance for.

For Q4, 2021 we are guiding to $79 million to $82 million of bookings or 38% to 44% year over year growth.

66.5 to $69 $5 million of revenue or 38% to 44% year over year growth.

And an adjusted EBITDA loss of 3.5 to $6 $5 million.

For the full year 2021 we are raising our guidance on bookings to 282.5 to $285 $5 million of bookings or 49% to 50% year over year growth.

For revenue and adjusted EBITDA, we are guiding to $244 million to $247 million of revenue, our 51% to 53% year over year growth and an adjusted EBITDA loss of $5 million $10 million.

Before I wrap up I, just want to reiterate with Luis mentioned earlier that there is a considerable seasonality to our business.

We expect to see our user metrics fluctuate throughout the year, especially around holidays and associated marketing campaigns and our guidance reflects this.

As we get into the busy holiday season, we anticipate seeing relatively flat user activity in November and early December followed by a spike coming from our year end review and especially our new year's resolutions of our users.

This leads to an increase in usage at the end of December that goes through January we look forward to providing our 2022 guidance on our fourth quarter earnings call in early March and with that I'll turn it back over to Luis for closing comments.

Thanks, Matt to wrap it up I would like to thank our incredibly talented team that drives our mission forward everyday I started dealing with seven because we believe everybody in the world should have access to high quality education ever.

Every employee at duolingo, whether they're making people want to learn more or helping the rest of the organization succeed they contribute to a world where education is available to millions of people.

Of course, we're not done yet, but with continued hard work, we will make a huge dent in this goal.

I look forward to reporting on our progress in the future.

Sure.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

And our first question comes from Mario.

Please go ahead.

Great. Thanks for taking my questions first one is on marketing you guys mentioned you guys increase.

Increased strategic marketing in the third quarter I believe you know Theres Chow.

Our social media channels that you guys. Thank you.

I was just curious you know what what do you guys saw.

And Chinese new channel.

And then there's also no other.

Other reports that.

You know cultural phenomenon, where gains on FX Joe.

Increased users.

You know until learning that language, though any anything to talk about there in terms of.

Overall strategy in terms of marketing.

Thank you Mario for the question so.

So the first thing I, just just to remind everybody.

Where are our main focus is in product, where a product driven company. We're going to continue spending most of our efforts on making our product better. So that people can tell each other and so that you know we grow through word of mouth.

We have been you know.

Doing all kinds of different marketing.

You saw and as you mentioned, we've had a lot of success with Vic talk with no expenses whatsoever. We grew our Tictoc account basically from zero users to about a.

Amelia and followers.

We're getting a lot of a lot of media coverage about that about the thing dwelling was the only brand that understands <expletive> talk so we're very we're very happy with that we are seeing an increase in the number of users that signed up to do a lingo that say that they came from.

Picked up or what are they hearing about the willing from kicked off so we're pretty happy with that you know the other thing you mentioned the squid game that is also something else we saw an.

An increase in the number of people learning Korean Covid with games listen this is a pretty cool thing.

So we're basically at them the other thing to say about our marketing.

There's kind of two buckets of our marketing one is this bucket that we just talked about just kind of like the Tictoc stop everything things, where we don't do span you spent any money. There is the other bucket, where we where we spend money and generally what we're doing there there's kind of two buckets within that bucket. One is we're doing some marketing.

In certain geographies that are where we're underpenetrated.

And that is we do some influencer marketing and some small amounts of performance marketing.

Then the other bucket within this bucket is just.

Just experiment so we've been experimenting a lot with some of the experiments work some of the experiments don't work, so well, but basically we're still with.

With marketing we're still in the early days I mean, we really only started we really only started paying for marketing in the last couple of years.

We're still in the kind of test and learn setting.

Great. That's helpful. And then just one follow up on social.

You guys talked about kudos.

During your presentation.

So just curious over time I know you know a la carte revenue is still a small percentage of total, but how did you kind of increased user engagement.

Is there a greater opportunity to grow the Ala Carte revenue or is this you know social.

Social.

Initiatives, mainly to increased retention.

So that's a great question. So for now the majority of our social initiatives are to increase retention that said Oh, we have recently formed a team to do a la carte purchases and so we do think that that is going to be increasing a little faster than you have so far.

I would like to remind everybody that.

We are we are mainly a subscriptions business and that will continue being the case for the foreseeable future.

Okay. Thank you.

Thank you Mary.

The next question comes from Justin Patterson of Keybanc. Please go ahead.

Great. Thank you very much Louise I appreciate you starting with their mission and reinforcing your product driven company as you look to reinvest around App store changes, how do you think about allocating capital towards the product side versus potentially passing some of those savings onto their users.

Bring pricing down it just further grow that subscriber base. Thank you.

Thank you Justin and thank you for the question. So we are we are.

As Matt said, we are going to continue investing a lot on our product.

That's our focus we really believe there's a lot of runway to make our product better.

With where we're at but you know.

Theres just a lot we can teach a lot better we can make it significantly more engagement. We can also convert a lot of a lot more of our users into paying subscribers by adding feature suite plus so we think theres a lot of runway there.

In terms of kind of a passing savings to our users the one thing that.

Reminds me of.

One thing that one initiative that we're going to be working on and we have we're going to continue working on we have already been working on these regional pricing right now the price of dwelling or the majority of countries have the same price and and we understand that.

That just has to do with the fact that we're relatively early in our monetization. It should really shouldn't be the case that use us in a country like Colombia I pay the same amount as you say in the United States, So youre going to see that over the next.

The next few months, we are going to continue having a kind of different pricing per country. We already have four countries, where we have different prices.

We're going to be seeing that and sometimes people ask us why why can't we do that just as much faster. It turns out. This this takes a little time, because whenever we do a regional pricing experiment, we know we need to figure out what it does to our to our revenue.

And part of seeing that if we have to look at what it does to us.

Re subscriptions or or just re ups and renewals and so it takes a little bit of time, but that's one place where we do think that you know we're in them.

Pass on savings through yoga.

Great and if I could squeeze in one quick follow up you have a lot of interesting new features roll out from the mistakes inbox to legendary could you talk about just any learnings around engagement and conversion from those product updates. Thank you.

Yeah, I mean generally we.

We do have a bunch of new features we actually have significantly more features in the pipeline I mean, we run hundreds of AB tests per quarter.

And so youre going to see you're going to see a product continually change overtime, just get better and better because we run. So many I mean, the general learnings that we have are that we can increase the fraction of people who subscribe.

If you see a year ago I would have been the <unk>.

Percentage of pharma uses that were subscribers was something like four four ish percent, whereas we're now at about five 5% of our I may as I described and that is all through basically adding features like mistakes inbox and legendary or other kind of changes like that we also another big learning is that we can move our user retention and this is not just subscriber retention, but also free user retention.

We look at this as this number that would go current user retention rates, which is basically the chance that current user somebody who used to dealing with today and also another day in the last seven days current user retention is the chance that they use it today and also come back tomorrow. If they have been in the last seven days. We know we can increase that and we've been increasing that over the last couple of years, it's gone from something like 65.

5% to close to 80% now and so that keeps going up and up and that's generally just good for us not only because it's good for our free users, but also increases the retention of our paying subscribers. So the big learning because we can move those numbers.

Sure.

Our next question comes from Nat Schindler of Bank of America. Please go ahead.

Okay.

Yes, Hi, guys. Thank you for taking my question I was actually just wondering if you could talk to a little bit about the learnings you might have seen as kids went back to school.

This was probably the first quarter, where we saw really.

Substantial change from the year prior in schooling and I wanted to know if that had any impact on usage.

Thank you Matt good.

Good question. So every year around back to school time August September if you look at our monthly active users graph or a daily active users graphs every year, we do see an increase in usage and number of users and also increase in the amount of time that they use duolingo.

And you don't have people go back to school, we saw that increase again. This year. So it was no different than last year or I mean, I don't know if it was no zero difference, but it was pretty similar to last year basically just like every year, we see an increase.

So we're doing that.

I should say our belief is that.

At least in the United States, a significant number of our language classrooms used tooling, what our belief is that roughly 40% of language classrooms in the United States are using dwelling wouldn't one way or another so we see that in our numbers compared to the summer.

From the summer to the going back to school. So so we thought that this year again.

But to be clear no change.

With Covid without Covid with kids actually physically in school versus not.

Doing school from home.

You know I don't I don't know change that popped up to two for us to really notice it or they may be a small change there, but nothing basically it looks the graph looks pretty similar to previous years.

Great. Thank you.

The next question comes from Ralph <unk> with.

William Blair. Please go ahead.

Good evening, Thanks for taking the question on the paid sub sub subscriber number in the quarter was much better than we had modeled met during the prepared remarks, you talked about increases in annual plans and retention excuse me.

Then way you could provide a little bit more color. There you know with these marketing driven programs to increase to market. The annual plans are.

Win back campaigns and retention any color there and I have a follow up.

No happy to provide some additional color.

So I think the primary drivers were while we already talked about the product changes.

Prior changes as Luis mentioned like the legendary rollout the mistakes inbox.

Making the App more social I think these things as he mentioned do increase conversion and so that's what we saw.

Over the quarter the shift to annual plan.

Certainly impacts conversion because those experiment impact the conversion to the annual plan as well, but that actually had a more profound impact on me.

<unk> per subscriber of bookings parameters number so it was kind of a twofer lateral in that regard.

Great and Luis you talked about I think he said four countries you had different pricing programs, maybe just any color on what you're observing there and sort of.

Does that lead you to more optimism as you roll out new pricing strategies to other countries in terms of driving that conversion. Thank you.

Yeah, I mean, so with these countries that we saw.

We saw an increase in total bookings from these countries whenever we change the price. So so that's good.

I should mention that you know in many of these countries.

Yes.

A lot of the countries, where we already monetize well, we think that the pricing is pretty good like the U S and the UK etcetera for.

A lot of times in developing countries where.

Truthfully, our prices are just too high right now because it's the same as the prices in the United States.

What we're going to see what I think we're going to see is we're going to see.

Possibly increase bookings, but I think not it's not going to be as immediate as you might think because I think in a lot of cases. It is for many of these countries lowering the prices is a necessary, but not sufficient condition for for a lot of people a lot more people to describe I think a lot of times just things like for example, and many of these countries people are just not.

Used to paying for our digital subscriptions.

So the way we see it we have to have the right price and we're going to do that but over time I think we're going to see the penetration in a lot of these countries increased a lot.

For example are you know they started getting Netflix.

We just don't think that for many of these countries, we're going to be the first description that a lot of people forget but once they are used to getting something like Netflix, we think theyre going to come soon after.

Great. That's helpful. Thanks, Louise Thanks for that.

Okay.

<unk>.

The next question comes from Mark Mahaney.

Alright.

Please go ahead.

Okay, Hey, Luis I think you began this whole conference call talking about how you wanted the company to be a learning application of learning platform not just the language learning platform. So given that can you just talk about.

The cadence or the timeline you have in terms of getting into learning being a platform where people can learn.

Subjects other than language.

Yeah, that's a great question, Mark because it's something that I think about a lot.

And like you said I mean, our goal has always been to be to develop the best education in the world and not just language education and make it universally available.

Our mission that's our goal so we started with.

And we've been working on languages for for this whole time.

One of the key things that we know is that a lot of the technology that we have can be applied to each other subjects.

For example, a lot of our gamification, where we have technology built for that or also a lot of our personalization systems that try to really figure out what is the best thing to teach do we choose there at each time all of that can be reused to teach many other subjects, maybe not every single subject in the world, but many other subject.

So we are going to be reusing that and making other products. We do have one other project brought up out there called dwelling or ABC, which we launched last year. We're also working on a product to teach our elementary school math, so it's gonna be a mobile app.

My Best guess is this is going to be launched next year, Although I will tell you I've been working on developing products digital products for the last 20 years.

Very hard to give a precise timeline on when this is going to happen I think we're going to be able to launch that next year.

And then just the other thing that I would say yes.

As you've seen for for Us as a company, we're not a company that puts out a product and then puts.

$50 million of marketing behind this product to make it grow from one day to the next our belief is that really good products should grow by themselves mostly.

So we are going to put this out but I would not expect that next year for example, and map out suddenly has 50 million users and makes $50 million of revenue that that's unlikely.

So I would say at least for next year. It is unlikely that we're going to see any of this effect our revenue, but we are you know we're going to be putting these products out on working working on them on for <unk>.

While.

And having growing them through product improvements.

Yes, I got it Luis.

The emphasis on leading with product makes a ton of sense I get that the other question I wanted to ask is I know this is a small part of your your revenue stream now advertising.

Could you talk a little bit double click a little bit on our products our product development for advertisers.

And I you know I don't think that's a top priority for you I think it's really about users and consumers et cetera, but just talk about where you are in terms of having marketing solutions.

That are good for marketers and advertisers on your platform. Thanks.

Yeah, It's a great question I mean as you know so.

I don't know the exact numbers, but up 10% of our revenue comes from advertising.

A few things I'd say the first thing to say as you correctly said, we are mainly a focus on subscription.

We believe that it's the right thing to do so we're mainly focused on subscription and right now our ads you know basically our free users, which is 95% of our users give or take a see ads and most of the ads. They see our program all the ads, so basically a programmatic ads that come from.

At networks, like Google or Facebook, that's kind of what we have.

A couple of things to say, but our ads business has been growing pretty nicely I mean, it's been growing about as fast as the rest of our businesses are so so that's good.

We believe that it will continue growing it'll also growth just naturally as our users grow our <unk> business will grow.

We also do have some optimizations to do for example, trying to figure out.

Which users may just never subscribed to doing a plus and then we just wouldnt want to pipe in.

Entirely through ads or also trying to figure out. If there are users that are that are more okay with with a higher ad load.

Some some optimizations to do the one thing that I will say is that.

You should not expect that we will.

Suddenly triple our AD revenue or anything like that because I.

I just don't want to make a free user experienced crappier are right now we feel pretty good with our AD load is not that heavy and our fear and they're not just a fear we see it on our numbers if if we suddenly start a triple.

Tripling, the ad load or something like that.

Engagement goes down.

So we're we like our free user experience and.

And we're going to keep it that way.

Makes sense, thanks for the tutorial earlier on that basis.

Tradition color.

Cultures, just add in there, which countries take two in which countries.

It takes three kisses that's always confused me thanks, so much.

I have this I am I am from Latin America, and I don't know the answer to that question. So yes that has confused me too.

Okay.

Thanks.

The next question comes from Aaron Kessler of Raymond James. Please go ahead.

Great. Thanks, a couple of questions maybe on Google play, Matt You mentioned that I mean, how should we think about that starting to impact. The model. Obviously, we kind of know we believe it kind of goes from 30% to 15%.

Should we start to think about that impacting the model in 2022.

And then just do you happen to have the share count for the quarter as well probably in the Q, but didn't see in the release. Thank you.

Yes.

No.

You asked the question as Luis mentioned, just real quick any.

Opening remarks.

The App store.

Fees are obviously undergoing a lot of change and we're paying very close attention to that but we view them.

As good partners historically that will hopefully continue to be good partners and so we view this as just a nice tailwind truck and then the Google play.

A fee decrease for subscribers that are less than one year old.

That will impact our margins.

Next year, starting in January one of 2022 on bookings that occur after that date and so yes, we expect to see a nice tailwind there.

The merchandised.

And.

After that it.

Anyone anyone who gets what happened outside of Google.

For the share count the fully diluted share count.

Is it.

Depending on the stock price, but if it's around <unk> 346 million fully diluted.

The weighted average.

Share count is in the queue.

So I'm not sure, which one you're you're looking for got it yeah. That's helpful. Maybe just quickly on the Google play again, so should we expect the impact will start to impact kind of current revenues and Cogs or is the only when you sign up new subscribers and then that would flow through.

Yeah, it's only going to be on new flow through.

Yes, it does.

Yeah the.

The folks.

<unk> got bookings this year for example, like right now if you signed up for the annual plan you paid us.

And he walks through the Google play store, that's going to be at a 30% on January 1st that drops to the 15. So it's really only on go forward revenue.

Got it okay, great. Thank you.

This concludes our question and answer session I would like to turn the conference.

For any closing remarks.

Thank you I just want to thank everybody for the great questions and we look forward to talking to you in future quarters.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Yeah.

Good day and welcome to the Duolingo third quarter 2021 earnings call.

Participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key forward. Thank you Ralph.

After todays presentation, there will be an opportunity to ask questions.

Consideration of time, please limit yourself to one question and one follow up.

If you have further questions you may reenter the question queue.

Can I ask a question you May press Star then one on your Touchtone phone.

Westphalia question. Please press Star then two please.

Please note this event is being recorded.

Now I'd like to turn the conference over to chair Debbie Delavan.

<unk> of Investor Relations.

Please go ahead.

Thank you operator, and welcome to <unk> third quarter earnings call. Today, We released our third quarter results. After the market close you can find our press release and the accompanying presentation on our IR website at investors Dot Duolingo Dot Com with me on the call today are Luis <unk> co founder and Chief Executive Officer, and that SKU about chief financial <unk>.

Officer.

After our prepared remarks, we'll open the call to Q&A.

First I'd just like to remind everyone that during this call. We'll make forward looking statements regarding our future events and financial performance, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to review the risk factors contained in our SEC filings. These forward looking statements are based on assumptions that we believe to be reasonable as of today and we are.

Undertakes 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 and welcome everyone I want to start this call with the same topic that I start with and many of my presentation about the company.

Our mission, which is to develop the best education in the world and make it universally available.

When we launched Duolingo 10 years ago, we decided to start with teaching languages. Because we believe we can impact an enormous number of people's lives by helping them learn a new language to get a better job or getting to school or even just communicate better on a trip.

But you'll notice that we don't see our mission that we want to develop the best language education in the World. We say, we want to develop the best education in the world.

So we don't plan on stopping with just languages.

We made strong progress on our mission this past quarter and we have exciting plans for the future as I sit in our S. One I plan to devote my life to this mission.

Now with that let's get into the results of our third quarter.

This was an exceptional quarter for us we not only went public but we also delivered record results.

You can see on our highlights page we continued to grow our users are paid subscribers, our bookings and our revenue hitting record numbers in all these metrics.

Our strong Mou and <unk> growth was driven by continued organic word of mouth, some strategic investment in performance marketing and brand awareness campaigns, and our relentless focus on making our product more fun and engaging.

Our monthly and daily active users grew 13% and 16% respectively over the prior year, which was a period when many parts of the world. We are still locked down due to COVID-19.

We also grew bookings, 57% year over year as more learners purchased duolingo, plus our subscription product because of that we ended the quarter with $2 2 million paid subscribers, a 49% increase year over year.

Our subscribers now represent five 5% of our monthly active users.

I'm also pleased to report we exceeded our revenue and bookings estimates and as a result have increased our financial year 2021 guidance.

Matt will cover the financials in further detail as well as our updated guidance.

But now I'd like to share with you some highlights for the quarter, specifically the progress, we're making towards our strategic initiatives.

I'll start by discussing the progress we've made in growing users.

95% of our monthly active users or Emma use our learning completely for free while just over 5% of them pay for our plus subscription which removed ads and offers additional features to help people learn faster.

Our monthly active users have been growing steadily since we started the company and this growth is overwhelmingly organic are very high quality mobile product that it's free fun and effective leaps leads people to telling their friends about it has made our apps synonymous with language learning and has driven our consistent growth by.

By now we have nearly 42 million monthly active users.

This chart also shows the impact of the Covid Lockdowns last year, which drove a spike in new users. This.

This quarter, we achieved the highest ever Emma used in our history, even higher than Q2 of 2020, when we saw this surge in activity.

As we mentioned on the last earnings call. We believe we are back on trend with our pre COVID-19 growth rates as the world has been opening up and we think that this quarter. So user growth further confirms that.

I'd also like to highlight the seasonality of our user growth.

You can see from the highlighted sections of the chart the areas with green circles on them.

But the past 40 years to have the same trend in November and December are Emma use declined during the busy holiday season, and then because of new year's resolutions and peoples outlook for the new year, we see a large spike in users in January.

Those are the parts of the graph, but have a steep slope and then the center of each dark Green circle.

During this time, we also run a new year's promotion, which is primarily advertising in the App and offers a discounted price for an annual subscription the timing of this promotion aligns well with the system of resolutions as the newer inspires people to set personal aspirational goals for the coming year like for example, learning a new language.

It is a great fit between how users are thinking about themselves their lives on our brand, which is one of enriching your life through language learning.

The new year is the only time of the year, we offer a discount.

Annual subscribers can also renew each year at a discounted price. So this new year's cohort is particularly sticky in terms of renewals.

After the January Spike, we see a general downward trend in <unk> until the summer months, where usage flattens out and then rebounds in the phone.

Our daily active users or Dia use follow a similar seasonal pattern and we achieved a record high this quarter internally. We are much more focused on da use because learning a language requires consistency and daily practice and users that come back through our app everyday are more likely to achieve their language goals.

This is why we constantly focus on driving daily engagement and Dia use is the key metric we use to measure the effectiveness of that focus.

On the topic of seasonality, we thought it'd be helpful to provide an overview of the various marketing campaigns, we have throughout the year that contribute to the variability in user and bookings trends our biggest and most impactful is a new year's campaign, which I just went through but we run other non discount campaigns in other parts of the year.

Our IPO in July while not an annual event was very positive given its high visibility and we believe it drove some increase in users.

Another one of my favorite initiatives, which drives awareness and user growth is our annual dual corner event, the largest gathering of language lovers from all over the world.

We held our third annual do a con conference in August which was a huge success during a record 350000 viewers and driving valuable impressions across multiple media channels.

The goal of duo Con is to provide informative talks by feature language experts.

Highlight exciting new developments in our products and provide a behind the scenes look at the talent that technology that makes duolingo successful.

Next year, we hope to have a hybrid format on hold do alcon in person. Once again this time in Brooklyn stay tuned for updates.

And rounding out the year, we will send out our year in review in December which is a personalized summary of our learners accomplishments during 2021.

Because it drives a lot of bus and social media sharing it helps create word of mouth growth last year dual 365, the hashtag we set for the year in review it became a trending topic on Twitter and generated a nice increase in da use.

This year, we look to build on this success by expanding our reach through Influencers and other targeted PR.

Another important strategic initiative for us is to teach better and we are making important strides in this area.

As I've said before a surface level look at dwelling or can be misleading because the app looks so cute and game a fight that many people don't realize the amount of sophistication that is in the background and how much personalization various into learning experience.

We know every exercise you've done on duolingo, whether you got it right or wrong and if you've got it wrong. We know the most likely piece of practice you need to learn from your mistakes and.

And we use that data to make a model for each user. So when you start to lessen and duolingo, we use artificial intelligence to pick exercises that are just right for you.

And this leads to very positive learning outcomes in a previous study, we compared dual ingalls effectiveness versus traditional University language courses. We ran the study for people learning French and Spanish and we found that duolingo learners, who complete units five about halfway through the French or Spanish course are as proficient in reading and writing as the person we're sticking for some.

Masters of University classes.

A new study we just released this quarter, we found that seven units of duolingo is equivalent to five University semesters.

Unlike our previous study the duolingo units can be accomplished in half the time than the University semesters with an app entirely for free.

This is something we're very proud of in.

In addition to improving efficacy, we're constantly working to make the product more engaging.

If you use the App you are already familiar with our diverse cast of characters, who guide learners throughout their lessons and cheer them on.

Initially these characters all had the same computerized voice, but we've been making great progress using text to speech technology and giving these characters to unique voices and personalities in various languages and that way, bringing them to life.

We think of this as an investment in our brand asset as well since a cast of characters can make appearances in other apps, we develop from duolingo, a b C where they are already part of the experience to our upcoming map app.

As an example, we just finished production of our first in App animated short with two of our characters explaining the custom of giving vessels or kisses in Spanish speaking countries.

We rolled this out on our social channels last months and now I'd like to play it for you to give you a sense of how we're bringing our characters to life by not only teaching language, but also culture.

Today on Lilly's terrifying experimented and social awkwardness ads.

And on calendar lean into that left.

Tiny yeah.

On the other topic, that's locally ask questions may vary by bass us Besides online, Spain or are you a fan.

Family bankers.

So we are visiting my Antero, which means.

Yeah.

So family time, socializing and is that called grading all my nightmares outlined Mike.

Yeah, I don't know shall supply I don't have a motion.

Hi.

About these.

Gary.

So on Spanish speaking countries, you say, Hello, and Goodbye with care says like with friends or family, our family friends or almost anyone but not every line.

Little Air kisses right exactly you don't need to be made I think of all the ways. It could go.

Okay. It's party time, I mean based off time.

So not ready for that I'm going to mess up and it's part of every well.

Here some people may not want to be greeted rubicon.

Okay.

Not how things Ari malware, even more ways to Mark why don't I give a day.

I sort of someone who doesn't want one one what Neil Chatfield.

I know that that can be run under control.

Okay.

But at some point.

Personally I thought.

Uh huh.

Okay.

Thank you.

So I'm feeling good that can only help.

Yes.

Alright.

Every one.

I hope you enjoyed that we plan to rollout more of these animated shorts within the App in coming months. The idea is that this is how we are going to explain culture. The dueling go way.

Instead of making learners three through boring text, our characters will explain the culture of fish language through these fun animated videos.

Another initiative, we've been focused on is making duolingo more social because learning with friends is more fun, especially when friends can cheer each other on.

Increasing social interactions on our App has also proven to be very effective in driving engagement today, roughly 40% of our daily active users are following at least one other user and duolingo and we're working to drive this percentage higher we have a feature internally called kudos, which allows users to congratulate the friends for certain achievements, including <unk>.

Strict milestones completing 10 lessons in a day and getting promoted to the next leap in our leader boards just to name a few.

This quarter, we saw a 160% increase in the number of kudos spent by users highlighting the growing popularity of these feature.

Do they 8% of our dear use are sending or receiving kudos on a given day.

We also launched the phone contacts sync feature which makes it easy for our learners to add new friends.

Early results are very promising in the first few days, we already have over 500000 learners that have opted to think their contacts with us even better many of them are following each other and congratulating each other's learning progress through our kudos feature we're excited to see our app become even more social in the coming months.

Growing paid subscribers is another strategic initiative as this drives the majority of our bookings and revenue, which supports the platform and our mission to develop the best education in the world and make it universally available today.

Today over 5% of our monthly active users subscribe to a plus offering.

In addition to having an AD free experience we offer other benefits that help users learn faster. We recently launched two new features for doing a plus.

One we called legendary where users will reach a certain level in the app get their skills to change to a different color and the other called mistakes inbox, where we capture in one place mistakes you've made while using the App and give you a chance to focus on practicing those skills.

We believe that each of these has had a positive impact on our user conversion from free to paid as well as subscriber retention.

And speaking of that we also spend considerable time, improving the retention of our subscribers with.

We've found that annual subscribers are not only more likely to stick with our language goals, but they have two times the lifetime value compared to monthly subscribers because their retention rate is much higher.

These learners on our annual plan now make up roughly 80% of our subscribers in July we quietly rolled out our family plan on iOS for Duolingo, plus which allows ups to six users to sign up under the same plan.

If our experience is similar to other companies who have rolled out a family plan. Then this plan will have even higher retention rates than our individual annual plan, which would further increase the lifetime value of our subscribers.

At this point, we are not broadly advertising the family plan just yet so we believe we're just getting started.

Our next strategic initiatives is to become the language proficiency standard or dwelling go English test or D. T Force under this initiative and in Q3, we achieved some key milestones, including the DS five year anniversary.

I'm very proud to report that our D. T delivered strong growth this quarter and year to date.

Given that we are lapping quarters, where the D. T business expanded extremely rapidly due to COVID-19 lockdowns, it's all the more impressive.

We believe we've maintained our momentum and are continuing to build on the strong trends from last year.

As of the end of the third quarter all of the top 25 U S. Universities in terms of international student volume now accept the D. T S proof of English proficiency for an international undergraduate admissions.

Today, we have over 3600 programs worldwide that accept the D D and we're excited about the growth we are seeing.

Before I turn it over to Matt I'd like to quickly touch on the recent news around App store fees.

Last month, Google reported that in January one 2022 they would be lowering their app store fees on subscription revenues collected from first year subscribers from 30% to 15%.

This is a very positive development for US is today around 20% of our revenue comes from the Google play store.

As we've said before we view the App stores as great partners, they enable us to distribute our product globally and they help us monetize via subscriptions with relatively little friction for the user.

This latest development by Google allows us to continue that relationship but at a lower cost. So we can reinvest the savings back into our products and learner experience.

And now I'll turn it over to Matt.

Thanks, Louise I'm excited to talk to you all about our results this quarter, we not only exceeded expectations on several key metrics, but we also achieved all time highs as.

As will become comment on these calls before I get to the detailed financials I'm going to start with a review of our growth framework to put the numbers in a clearer context.

That's where our growth framework first we have our language learning app, which generates revenue through subscriptions advertising and in app purchases or IAP.

Second we have our new initiatives, which include the duolingo English test or Det as well as other new products that we may monetize in the future.

Subscriptions, which make up a majority of the bookings is driven by growing the number of freezers converting more of them into plus subscribers and increasing the lifetime value of those subscribers.

Growth in advertising and in App purchases is also driven by growing users as well as through optimizing our AD in IEP revenue per user.

Duolingo English test grows by increasing adoption of the test at institutions and with students taking the test finally, new product growth will be driven by expanding into new areas beyond language learning like literacy.

Now I'll present, our Q3 results.

As you can see we delivered strong performance compared to the prior year and achieved record results in bookings revenue subscribers Miu D. A U and gross profit.

Total bookings increased 57% year over year to $73 $1 million.

Subscription bookings increased 64% year over year to $55 4 million and.

And revenue increased 40% year over year to $63 $6 million.

Now I'll take you through the key drivers of our results.

As I mentioned when I was growing through our growth framework, our language learning business grows as users CRO and as we monetize them better.

This quarter, our performance was driven by strong user and subscriber trends.

<unk> increased to a record $41 7 million users.

NDA you increased to a record $9 8 million users paid.

Paid subscribers grew to $2 2 million subscribers, an increase of 49% over the prior year.

Our subscribers as a percentage of Niu now stands at five 5% compared to four 2% a year ago as for bookings and revenue. This quarter saw strong growth in those financial metrics as well subscription bookings were driven by a combination of user growth and higher bookings per Mou, which was driven by an increase in subscribers on the annual plan. In addition to driving more conversions.

<unk> from enhanced plus features as Luis mentioned earlier annual subscribers have about two times the lifetime value as compared to monthly subscribers. We are also encouraged to see annual plan subscriber retention increase in Q3 year over year. We ended the quarter with the highest September retention, we've seen since 2018.

Our revenue grew 40% year over year, it grew slower than bookings because as I've mentioned, our bookings increased in part because of the mix shift to more annual plan subscriptions. The revenue for the annual plan is recognized over 12 months and so the revenue for a large portion of our new annual planned bookings hits in later quarters.

Our gross margin remained strong at 71, 6%, which is 50 basis points higher and during the third quarter a year ago, we did see a slight quarter over quarter decline, which was driven by R&D tea business, where we added additional test Procter and resources.

Moving on to our non-GAAP operating expenses, we report three major categories of costs R&D, Our research and development sales and marketing and G&A R&D increased from 34% to 40% of revenue this quarter, an S and M decreased from 24% to 23% G&A.

G&A rose from 15% to 17% of revenues this quarter due to additional headcount professional fees and other costs.

In infant amount of which were related to becoming a public company.

As we have discussed we expect that over time, we will continue to invest in R&D as we built our amazing product to hiring more engineers product managers designers data scientists and technical experts, we expect to see operating leverage in the other two cost categories sales and marketing and G&A.

As a reminder, non-GAAP operating expenses represent GAAP expenses adjusted for depreciation amortization stock based compensation and onetime expenses. This quarter, we recognized approximately $21 million and stock based compensation. A majority of this was the acceleration of shares in expenses driven by the IPO and from the achievement of certain performance hurdles.

From our foundry share grants you can find a reconciliation of these items in the appendix.

Our growth in revenue and stable gross margin was offset by a faster increase in costs, which led to a decline in adjusted EBITDA to negative $6 million this quarter for.

For the remainder of the year, we expect opex to follow a similar seasonal pattern as last year when Q4 Opex as a percentage of revenue was a few percentage points below that of Q3.

We added over $430 million in cash to the balance sheet. This quarter driven by the net IPO proceeds and strong bookings growth.

Free cash flow increased from zero point $6 million in the year ago quarter to $5 $2 million this quarter.

Before I get into Q4 guidance I would like to remind you. All we said during the IPO process about how we think about balancing growth and profitability. We think that we have a long term sustainable growth path given the underlying growth of our freezers and the room, we have to increase subscriber penetration and monetization.

We will grow users and subscribers primarily by investing in R&D to create an ever more engaging and effective product that will lead to higher engagement and efficacy we will run the business with cash flow discipline as we have historically, but we will continue to reinvest significantly in talent, especially in engineering product and design.

Now turning to guidance for.

For Q4, 2021, we are guiding to $79 million to $82 million of bookings or 38% to 44% year over year growth.

66.5 to $69 $5 million of revenue or 38% to 44% year over year growth.

And an adjusted EBITDA loss of $3 five to $6 $5 million.

For the full year 2021, we are raising our guidance on bookings to $282 five to $285 $5 million of bookings or 49% to 50% year over year growth.

For revenue and adjusted EBITDA, we are guiding to $244 million to $247 million of revenue, our 51% to 53% year over year growth and an adjusted EBITDA loss of $5 million $10 million.

Before I wrap up I, just want to reiterate what Luis mentioned earlier that there is a considerable seasonality to our business.

We expect to see our user metrics fluctuate throughout the year, especially around holidays and associated marketing campaigns and our guidance reflects this.

As we get into the busy holiday season, we anticipate seeing relatively flat user activity in November and early December followed by a spike coming from our year end review and especially our new year's resolutions of our users.

This leads to an increase in usage at the end of December that goes through January we.

We look forward to providing our 2022 guidance on our fourth quarter earnings call in early March and with that I'll turn it back over to Luis for closing comments.

Thanks, Matt to wrap it up I would like to thank our incredibly talented team that drives our mission forward everyday I started dealing with seven because we believe everybody in the world should have access to high quality education.

Every employee at duolingo, whether they're making people want to learn more or helping the rest of the organization to succeed they contribute to a world where education is available to millions of people.

Of course, we're not done yet, but with continued hard work, we will make a huge dent in this goal.

I look forward to reporting on our progress in the future.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.

At this time, we will pause momentarily to assemble our roster.

And our first question comes from Mario <unk> of Barclays. Please go ahead.

Great. Thanks for taking my questions first one is on marketing you guys mentioned you guys.

Increased strategic marketing in the third quarter.

I believe you know theres channels, such as social media channels that you guys. Thank you.

So just curious you know what what do you guys saw.

And Chinese new channels and then there's also no.

Other reports that.

Cultural phenomenon like square gains on FX Joe.

<unk> users.

You know until learning that language, though any anything to talk about there in terms of.

Overall strategy in terms of marketing.

Thank you Mario for the question.

So the first thing I, just just to remind everybody.

Where are our main focus is in product, where a product driven company. We're going to continue spending most of our efforts on making our product better. So that people can tell each other and so that we grow through word of mouth.

We have been you know.

Doing all kinds of different marketing.

You saw and as you mentioned, we've had a lot of success with Vic talk with no expenses whatsoever. We grew our Tictoc account basically from zero users to about a.

Millions of followers.

We're getting a lot of a lot of media coverage about that about the thing dwelling was the only brand that understands <expletive> talk so we're very we're very happy with that we are seeing an increase in the number of users sign up duolingo that say that they came from.

Picked up or what are they hearing about the willingness to talk so we're pretty happy with that the other thing you mentioned the squid game that is that also something else we saw.

An increase in the number of people learning Korean split game. So listen this is a pretty cool thing.

So we're that's basically it and the other thing to say about our marketing.

There's kind of two buckets of our marketing one is this bucket that we just talked about just kind of like the tick tock stuff everything things, where we don't do you spend any money, there's the other bucket, where we spend money.

And generally what we're doing there there's kind of two buckets within that bucket. One is we're doing some marketing in.

Certain geographies that are where we're underpenetrated.

And that is we do some influencer marketing and some small amounts of performance marketing and.

And then the other bucket within this bucket.

Just experiment so we've been experimenting a lot some of the experiments work some of the experiments don't work, so well, but basically we're still.

With marketing we're still in the early days I mean, we really only started we really only started paying for marketing in the last couple of years.

We're still in the kind of test and learn setting.

Great. That's helpful. And then just one follow up on Paul.

<unk> talked about kudos.

During your presentation.

So just curious over time I know you know.

Ala Carte revenue, it's still a small percentage of total, but as you kind of increased user engagement.

Is there a greater opportunity to grow the Ala carte revenue or social.

Sure.

Initiatives, mainly to increased retention. Thank you.

So that's a great question. So for now the majority of our social initiatives are to increase retention that said Oh, we have recently formed a team to do.

The card purchases and so we do think that that is going to be increasing a little faster than they have so far.

I would like to remind everybody.

We are we are mainly a subscriptions business and that will continue being the case for the foreseeable future.

Okay. Thank you.

Thank you Mary.

The next question comes from Justin Patterson of Keybanc. Please go ahead.

Great. Thank you very much Louise I appreciate you starting with their mission and reinforcing your product driven company as you look to reinvest around App store changes, how do you think about allocating capital towards the product side versus potentially passing some of those savings onto the users that now.

Bring pricing down it just further grow that subscriber base. Thank you.

Thank you Justin and thank you for the question. So we are we are.

As Matt said, we are going to continue investing a lot on our product.

That's our focus we really believe there is a lot of runway to make our product better.

Happy with where we're at but.

Theres just a lot we can teach a lot better we can make it significantly more engaging we can also convert a lot of a lot more of our users into paying subscribers by adding feature suite plus so we think theres a lot of runway there.

In terms of kind of a passing savings to our users the one thing that.

Remind me.

Hum.

One thing that one initiative that we're going to be working on and we have we're going to continue working on we have already been working on is regional pricing right now the pricing dwelling or the majority of our countries have the same price and we understand that is that.

It has to do with the fact that we're relatively early in our monetization.

It really shouldn't be the case that use us in a country like Colombia I pay the same amount.

And in the United States, So youre going to see that over the next year.

Next few months, we are going to continue having a kind of different pricing per country. We already have four countries, where we have different prices.

We're going to be seeing that.

Sometimes people ask us why why can't we do that just much faster. It turns out. This this takes a little time, because whenever we do a regional pricing experiments. We you know we have to figure out what it does to our to our revenue.

And part of seeing that if we have to look at what it does to us.

Re subscriptions or or just re ups.

And renewals and so it takes a little bit of time, but that's one place where we do think that.

We're going to pass on savings to Egypt.

Great and if I could squeeze in one quick follow up you have got a lot of interesting new features rollout from the mistakes inbox to legendary could you talk about just any learnings around engagement and conversion from those product updates. Thank you.

Yeah, I mean generally we.

We do have a bunch of new features we actually have significantly more features in the pipeline I mean, we run hundreds of AB test per quarter.

And so youre going to see you're going to see a product continually change overtime, just get better and better because we run. So many I mean, the general learnings that we have are that we can increase the fraction of people who subscribe.

A year ago.

The percentage of if I may use that where subscribers were something like 44 ish percent, whereas we're now at about five 5% of our EMEA as I described and that is all through basically adding features like mistakes inbox and legendary or other kind of changes like that we also another big learning is that we can move our user retention and this is not just subscriber retention, but also a free user returns.

We look at this as this number that would go current user retention rates, which is basically the chance that current user somebody who uses it wasn't go today and also another day in the last seven days current user retention is the chance that they use it today and also come back tomorrow. If they used in the last seven days, we know we can increase that and we've been increasing that over the last couple of years, it's gone from something like six.

5% to close to 80% now and so that keeps going up and up and that's generally just good for us not only because it's good for our free users, but also <unk>.

This is the retention of our paying subscribers.

Big learning because we can move those numbers.

Sure.

Our next question comes from Nat Schindler of Bank of America. Please go ahead.

Yeah.

Yes, Hi, guys. Thank you for taking my question I was actually just wondering if you could talk to a little bit about the learnings you might have seen as kids went back to school.

This was probably the first quarter, where we saw a really.

Substantial change from the year prior in schooling and I wanted to know if that had any impact on usage.

Thank you Matt.

Good question. So every year around back to school time August September if you look at our monthly active users draft for our daily active users grafts every year, we do see an increase in usage and number of users and also increase in the amount of time that they use duolingo.

As people go back to school, we saw that increase again this year. So it was no different than last year.

Or I mean, I don't know if it was no zero difference, but it was pretty similar to last year basically just like every year, we see an increase so.

So we're doing that.

I should say our belief is that a significant at least in the United States a significant number of our language classrooms use tooling, what our belief is that roughly 40% of language classrooms in the United States are using drilling one one way or another so we see that in our numbers compared to the summer.

From the summer to the going back to school. So so we thought that this year again.

But to be clear no change.

With Covid without Covid with kids actually physically in school versus not.

During school from home.

You know I don't I don't know changed that popped up to two for us to really notice it may be a small change there, but nothing basically it looks the graph looks pretty similar to previous years.

Great. Thank you.

The next question comes from Ralph <unk> with.

William Blair. Please go ahead.

Good evening, Thanks for taking the question on the paid sub sub strawberry number in the quarter was much better than we had modeled met during the prepared remarks, you talked about increases in annual plans and retention excuse me.

If you could provide a little bit more color. There you know with these marketing driven programs.

It's a market that annual plans are.

Win back campaigns and retention any color there and I have a follow up.

No.

Happy to provide some additional color.

So I think the primary drivers were well, we already talked about the product changes.

Priority engine as Luis mentioned like the legendary rollout the mistakes inbox.

Making the App more social I think these things as he mentioned do increase conversion and so that's what we saw.

Over the quarter the shift to annual plan.

Certainly impacts conversion because those experiment impact the conversion to the annual plan as well, but that actually had a more profound impact on the bookings per subscriber of bookings per Mou number. So it was kind of a twofer.

In that regard.

Great and Luis you talked about I think you said four countries you had different pricing programs, maybe just any color on what you're observing there and sort of.

They need a more optimism as you roll out new pricing strategies to other countries in terms of driving that conversion. Thank you.

Yeah I mean.

So with these countries that we saw.

We saw an increase in total bookings from these countries whenever we changed the price. So that's good.

I should mention that many of these countries.

A lot of the.

The countries, where we already monetize well, we think that the prices, it's a pretty good like the U S and the UK etcetera for.

A lot of times in developing countries where.

Truthfully, our price is just too high right now because it's the same as the prices in the United States.

What we're going to see what I think we're going to see is we're going to see.

Absolutely increased bookings, but I think it's not going to be as immediate as you might think because I think in a lot of cases.

For many of these countries lowering the prices is a necessary, but not sufficient condition for for a lot of people a lot more people to describe I think a lot of times just things like for example, and many of these countries people are just not used to paying for digital subscriptions.

So the way we see it we have to have the right price and we're going to do that but over time I think we're going to see the penetration in all of these countries increase a lot.

For example.

They started getting Netflix.

We just don't think that for many of these countries, we're going to be the first prescription that a lot of people forget but once they are used to getting something like Netflix, we think theyre going to come soon after.

Great. That's helpful. Thanks, Louise Thanks for that.

Okay.

Our next question comes from Mark Mahaney.

Please go ahead.

Okay.

Hey, Luis I think you began the whole conference call talking about how you wanted the company to be.

Learning application of learning platform not just the language learning platform. So given that can you just talk about.

The cadence or the timeline you have in terms of getting into learning being a platform where people can learn.

Subjects other than language.

Yeah, that's a great question, Mark because it's something that I think about a lot.

And like you said I mean, our goal has always been to be to develop the best education in the world and not just language education and make it universally available.

Our mission that is our goal so we started with.

We've been working on languages for this whole time.

One of the key things that we know is that a lot of the technology that we have can be applied to teach other subjects.

For example, a lot of our gamification, where we have technology built for that or also a lot of our personalization systems that try to really figure out what is the best thing to teach do we choose there at each time all of that can be used to teach many other subjects, maybe not every single subject in the world, but many other subject. So we are going to be reusing that I'm, making other products.

We do have one other project brought up out there called dwell Ingo ABC, which we launched last year. We're also working on a product to teach our elementary school math, it's going to be a mobile app.

My Best guess is this is going to be launched next year, Although I will tell you I've been working on developing products digital products for the last 20 years.

Very hard to give a precise timeline on when this is going to happen I think we're going to be able to launch that next year.

And then just the other thing that I will say, yes.

As you've seen for us as a company, we're not a company that puts out a product and then puts.

$50 million of marketing behind this product to make it grow from one day to the next our belief is that really good products should grow by themselves mostly.

So we are going to put this out but I would not expect that next year for example, and map out suddenly has 50 million users and makes $50 million of revenue that's unlikely.

So I would say at least for next year, it's unlikely that we're going to see any of this effect our revenue, but we are we're going to be putting these products out on working working on them.

For a while.

And having <unk>.

<unk> them through product improvements.

Yes, I got it Luis and the emphasis.

This leading with product makes a ton of sense I get that the other question I wanted to ask is I know this is a small part of your revenue stream now advertising.

Could you talk a little bit of double click a little bit on products product development for advertisers.

And I don't think that's a top priority for you I think it's really about users and consumers et cetera, but just talk about where you are in terms of having marketing solutions.

That are good for marketers and advertisers on your platform. Thanks.

Yeah, that's a great question.

I don't know the exact numbers, but up 10% of our revenue comes from advertising.

Uh huh.

Few things I'd say, the first thing to say as you correctly said, we are mainly a focus on subscription.

We believe that it's the right thing to do so we're mainly focused on subscription and right now our ads you know basically our free users, which is 95% of our users give or take a fee ads and most of the ads. They see our program all the ads, so basically a programmatic ads that come from.

<unk> networks, like Google or Facebook, that's kind of what we have.

A couple of things to say, but our ads business has been growing pretty nicely I mean, it's been growing about as fast as the rest of our businesses. So that's good and we believe that it will continue growing it will also growth just naturally as our users grow our apps business will grow. We also do have some optimizations to do for example, trying to figure out.

Which users may just never subscribed to <unk> plus <unk> and then we just wouldn't want them entirely threats or also trying to figure out. If there are users that are that are more okay with with a higher ad load.

Some some optimizations to do the one thing that I will say is that.

You should not expect that we will.

Suddenly triple our AD revenue or anything like that because.

I just don't want to make a free user experienced crappier are right now we feel pretty good with our AD load is not that heavy and our fear and not just a fear we see it on our numbers if if we suddenly start.

Tripling, the ad load or something like that.

Engagement goes down.

So you know, where we like a free user experience and and we're wondering keep it that way.

Okay makes sense, thanks for the tutorial earlier on that basis.

Tradition.

<unk> just add in there, which countries take two in which countries.

It takes three kisses that's always confused me thanks, so much.

I have this I am I am from Latin America, and I don't know the answer to that question. So yes that has confused me too.

Okay.

Thanks.

The next question comes from Aaron Kessler of Raymond James. Please go ahead.

Great. Thanks, a couple of questions maybe on Google play, Matt You mentioned that I mean, how should we think about that starting to impact. The model. Obviously, we kind of know because it kind of goes from 30% to 15%.

Should we start to think about that impacting the model in 2022.

Do you happen to have the share count for the quarter as well, it's probably in the Q, but didn't see in the release. Thank you.

Yes no.

No.

You asked a question I've always mentioned just real quick any.

<unk> remarks.

Add store.

Fees are obviously undergoing a lot of change and we're paying very close attention to that but we view them as good partners historically that will hopefully continue to be good partners and so we view this as just a nice tailwind for US and then the Google play.

A fee decrease for subscribers that are less than one year old.

That will impact our margins.

Next year, starting in January one of 2022 on bookings that occur after that date.

So, yes, we expect to see a nice tailwind there.

<unk> died.

<unk>.

After that it gets.

Anyone anyone's guess what happens outside of Google.

For the share count the fully diluted share count.

Is it.

Depending on the stock price, but if it's around <unk> 346 million fully diluted.

The weighted average.

Share count is in the queue.

So I'm not sure, which one you're you're looking for got it yeah. That's helpful. Maybe just quickly on the Google play again, so should we expect the impact will start to impact.

Current revenues and Cogs or is the only when you sign up new subscribers and then that would flow through.

Yeah, it's only going to be on new flow through.

Yes, it does.

Yes.

The folks.

<unk> got bookings this year for example, like right now if you signed up for the annual plan you paid us.

And he walks through the Google play store, that's going to be at a 30% on January one that drops to the 15. So it's really only on go forward revenue.

Got it okay, great. Thank you.

This concludes our question and answer session I would like to turn the conference.

Im for any closing remarks.

Thank you I just want to thank everybody for the great questions and we look forward to talking to you in future quarters.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.