Q1 2024 Duolingo Inc Earnings Call
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Speaker Change: Linda.
Speaker Change: Yes.
Speaker Change: Good evening, everyone and welcome to <unk> first quarter 2024 earnings webcast.
Linda: Fun fact, before we get started that catchy songs Spanish or vanish is already 1 million listens on Spotify. If you can believe it.
Linda: Today after market close we released this shareholder this quarter's shareholder letter a copy of which you can find on our IR website at investors <unk> Duolingo Dot com.
Linda: On today's call, we have Luis one on our co founder and CEO and Matt screw up our CFO. They will begin with some brief remarks before opening the call to questions analysts will be able to ask a question by using the Raytheon feature.
Linda: Please note that this event is being recorded and all attendees are in listen only mode.
Linda: And just a reminder, we will make some forward looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these risks have been set forth in the risk factors of our filings with the SEC.
Linda: These forward looking statements are based on assumptions, we believe to be reasonable as of today and we have no obligation to update these statements as a result of new information or future events additional present, GAAP and non-GAAP financial measures on today's call.
Linda: 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 will turn it over to Luis.
Luis: Thank you Debbie and welcome everyone.
Luis: We've started 2024 on a strong note with another stellar quarter.
Luis: In Q1, we grew revenue in bookings by 45 and 41% respectively.
Luis: Livered record profitability and grew Dia used 54% year over year.
Luis: These results show how powerful a product driven flywheel is our excellent product fueled word of mouth growth, which in turn provides data to continuously improve the product ultimately driving higher engagement and subscribe for conversion.
Luis: Our three pronged approach of teaching better growing users and converting them to subscribers continues to be a winning strategy for us.
Luis: This year, our monetization efforts are focused on optimizing our subscription offerings, including our family plan on our third tier Duolingo Max.
Luis: We feel good about the progress we've made on Max based on the results of our experiments to date.
Luis: Because of that we rolled out maxx more broadly in April and today, roughly 10, 5% to 10% of idea you have access to it.
Luis: We will make it available to more countries and of course in the next few months.
Luis: We're also improving our family plan experience by streamlining the invite flow and having more engaging social features.
Luis: Our progress on these initiatives alongside other monetization initiatives on our current trends give us the confidence to raise our full year guidance.
Luis: Finally, our English learner initiatives will lay the foundation for long term user and monetization growth.
Luis: Although the vast majority of global language learners are learning English.
Luis: English learners represent less than half of our da use which is why we see a substantial opportunity to expand into this part of the market to grow users and bookings over the next couple of years.
Luis: This growth area, along with the continued momentum in our core product highlights the massive opportunity ahead of us.
Luis: With less than 1% of the language learning market, which is estimated to reach $115 billion by next year.
Luis: You can see that we are just getting started.
Luis: Our continued execution against our strategy is why we are confident that we can sustain rapid growth for years to come and with that I'll turn it over to Matt.
Matt: Thanks, Louise I'll provide some additional color on our Q1 results before updating you on our guidance for the remainder of the year.
Matt: As Louis shared we saw very strong Q1 performance with a combination of 41% bookings growth, 45% revenue growth and a record 26% adjusted EBITDA margin showing the continued strength of our business.
Matt: We beat our Q1 guidance, thanks to the compounding index of our growth and monetization experiments.
Matt: And our social first marketing.
Matt: This strategy continues to drive organic growth and increasing subscriber conversion.
Matt: The continued strength in the business is what gives us the confidence to raise our 2020 for bookings and revenue guidance.
Matt: At the midpoint, we are guiding to bookings and revenue growth of 31% and 38% respectively.
Matt: I would note that this growth comes even as we lap an incredibly strong 2023.
Matt: For Q2, we are guiding to similar bookings and revenue growth rates as the full year. Despite comping, an unseasonably strong Q2 last year as.
Matt: As we mentioned on the last call, we expect Q3, and Q4 growth rates to step down from Q2.
Matt: Note that foreign currency rates were constant year over year, our Q2 bookings growth rate would be about three points higher than our full year bookings growth rate would be about one point higher.
Matt: We're also raising our adjusted EBITDA margin guidance to 23, 5% the midpoint.
Matt: Our updated full year adjusted EBITDA guidance reflects the operating leverage we expect to achieve across all expense categories. This year.
Matt: Our profitability, our profitability typically varies a bit from quarter to quarter, given our bookings and expense seasonality specifically as we said on the last call. We expect Q2 margins to be lower than Q1 and are guiding to 21, 5% to midpoint.
Matt: And in Q2, we expect to see some deleverage across all of the spend categories driven by increased hiring in R&D and normal course increases in sales and marketing and G&A.
Matt: We expect adjusted EBITDA margin for Q3 will be lower than Q2, because it's typically our largest hiring quarter and because we've shifted some sales and marketing spend into that quarter.
Matt: And Q4 will be similar to Q1.
Matt: For the full year, we are guiding to an incremental adjusted EBITDA margin of 39%, which is slightly above our long term EBITDA margin target from 35%.
Matt: Finally, we ended the quarter with approximately 49 million fully diluted shares outstanding using the quarter end close price.
Matt: And in 2024, we expect to end the year with about 1% net dilution from equity issued to employees, which is similar to the dilution we had in 2023.
Matt: With that I'll turn it back to Luis.
Luis: Thanks, Matt.
Luis: Want to close by saying that this quarter's results are a testament to the dedication of our team and to the support of our subscribers both of whom help us expand our mission to more learners.
Luis: Finally.
Luis: I'd like to extend a huge well. Thank you to Layla sturdy a long serving board member will be stepping back to focus on other priorities Leila has been a tremendous supporter of duolingo for the past decade and was instrumental in the progress we've made to date. So thank you Leila.
Luis: And now we would be happy to take your questions I'll turn it back to Debbie to manage the queue.
Debbie: Alright, Thanks, Luis and as I mentioned earlier, if you have a question just use the raise hand feature.
Debbie: First question comes from Ralph Shakur of William Blair.
Ralph Edward Schackart: Good afternoon, Luis and map.
Ralph Edward Schackart: Two questions if I could the letter you talked about optimizing our subscription tiers throughout the year that you've talked about this previously.
Ralph Edward Schackart: Maybe just give an update on that if you could please you know what you're finding there I'm guessing youre doing some testing and then I know you don't manage to <unk>, but just sort of any impact as it may relate to.
Ralph Edward Schackart: Impacting our pool as we progressed through the year, then I have a follow up.
Speaker Change: Thank you Ralph Thank you for the question so in terms of subscription tiers.
Speaker Change: Historically, we've had two tiers, the free tier and Super Duolingo.
Speaker Change: About a year ago, we started experimenting with a third tier, which we called Duolingo Max.
Speaker Change: Where the idea was that this coincided with the.
Speaker Change: Large language models and generative AI coming out so we decided to use the AI features as a good kind of excuse to start the third tier which is something we wanted to do for a while so we started experimenting with duolingo, Max which had a couple of AI features which are mainly conversation all features and <unk>.
Speaker Change: We said it was going to take us about a year to get to a wider rollout.
Speaker Change: And this is what just happened we started a wider rollout because we're pretty happy with the results and generally we're seeing that users that theres a desire from users too.
Speaker Change: To have.
Speaker Change: Higher tier.
Speaker Change: What youll see us do over the next few quarters is first of all roll it rollout Max to other countries and other languages right now duolingo Max it's accessible only to people who are learning.
Speaker Change: <unk> in Spanish on iOS in six countries, we expect to put it on Android and in many more countries and many more languages to learn which will get it to.
Speaker Change: To a higher fraction of the.
Speaker Change: The other thing that you'll see us do is where you'll see you'll start shifting features around to see what is the best packaging and Theres No real reason for the highest package to be just AI features. So we're doing experiments for example to put on limited parts.
Speaker Change: Which parts you loose a hard every time you make a mistake we're.
Speaker Change: Running an experiment put unlimited hearts in Max.
Speaker Change: So what you'll see happen is that towards the end of the year, we'll probably have a pretty.
Speaker Change: That set of features.
Speaker Change: And then at that time there'll be work to be done to try to move as many of our subscribers to Max as possible.
Speaker Change: That's kind of what we're what we're doing for the tiers.
Speaker Change: Matt.
Speaker Change: And so the <unk> question.
Matt: Yeah on the RFP side.
Speaker Change: A general trend that we've talked about before with our ARPA trending back towards base.
Speaker Change: Basically flat year over year growth, if nothing else happened if you add in a higher.
Speaker Change: Nick's IV their family plan or Max you can see that.
Speaker Change: Has some upside to it and so that's how we think about it in the model.
Speaker Change: Right just one more maybe for at least you will just in terms of advancing lish products. Obviously, it's a big strategic focus maybe just a quick update how it's progressing but maybe more importantly.
Speaker Change: If you get this rider the consumers really adopt this product sort of maybe give a sense of like how impactful this could be for the overall business.
Speaker Change: Yeah, Great question and thank you for asking because it's something we're very excited about our our English learner opportunity.
Speaker Change: Just to put things into context, if you look at the the.
Speaker Change: Global language learning market outside of dwelling ago. The overwhelming majority of people who are learning a language learning English and the overwhelming majority of the spend and people who are learning English.
Speaker Change: Duolingo, we're underrepresented in users and were even more underrepresented in terms of revenue when it comes to English learners less than 50% of our da use for example are learning English. So we see this as a pretty major opportunity and this is why we're investing in teaching English better and in particular the thing that we're doing for for teaching English just to remind everyone.
Speaker Change: We have a different English course.
Speaker Change: Sure.
Speaker Change: Uh huh.
Speaker Change: Based language. So for example, we have an English course for Chinese speakers and that's a different course than the English courses for Spanish speakers et cetera. So we have about 20 English courses.
Speaker Change: And if you look three years ago or so.
Speaker Change: Got you two different levels of proficiency each one of these courses and none of them got you to a very high proficiency what we have done over the last couple of years and this was one of the major achievements of this company is we've made it. So there are English courses in particular 18 of our 20 English courses now get you pretty high proficiency. So that's the first thing we needed to do is get people to more advanced levels because.
Speaker Change: English in particular English learners, usually are at a more advanced level in other languages. So first thing is we can get to get people to higher proficiency. The content is now there has over the last few weeks. So that's good that that's kind of checkmark won the next thing that we're working on is getting placing.
Speaker Change: Placing people into the right spot.
Speaker Change: In the course now that we have way more advanced content when new users come in that have prior proficiency, we need to put them in the right place and of course this.
Speaker Change: This is more important with English than with other languages because.
Speaker Change: For people, who are learning Swedish or or whatever other language is not English most of them come to duolingo.
Speaker Change: Complete beginners.
Speaker Change: English learners. It just turns out most people in the world just know some amount of English so they come in with prior proficiency, but this probably proficiency that they come in with if its pretty patchy because they may have learned by watching some movies or you know they.
Speaker Change: Took English and third to the fifth grade or just listen to some songs. So what they know in English is pretty patchy. So the problem with putting them in the right place and of course, if it's tricky, but that's what we're working on and we're making good headway. Once we are able to do that which will happen throughout this year.
Speaker Change: We're going to start marketing so that dual language now known as a good place to learn intermediate to advanced English and when that happens I think we're going to start seeing some.
Speaker Change: Meaningful contribution of these English courses more than they have now.
Speaker Change: In terms of how large this opportunity is hard to say exactly but we think that is going to be pretty meaningful. So this is and this is one of the main reasons why we think there is.
Speaker Change: In the span over the next you know.
Speaker Change: Midterm kind of three ish years, we see that this is gonna be a strong contributor.
Speaker Change: Thanks, Louise Thanks, Matt.
Speaker Change: Sure.
Speaker Change: Alright next question comes from Justin Patterson of Keybanc.
Justin Tyler Patterson: Great. Thank you very much and good afternoon, Luis and the lettering and cheese.
Justin Tyler Patterson: <unk> family class more family plant optimizations in there from what we can tell friend class have been pretty popular in terms of driving daily engagement. So I'd love to hear more about just how youre thinking about some of these optimizations around family plan going forward, what that could do for the business and then Matt for the financial part of the question we bought them.
Justin Tyler Patterson: My plan is much better retention characteristics much higher argue for companies pretty price elastic. So as you see more value see kpis really improving around family plan. How are you thinking about that right price to value ratio going forward. Thank you.
Matt: So I'll start with the features a family plan. It's an interesting feature family. The family plan was built by our monetization teams there was no team that.
Speaker Change: Whats called the family plan or anything just we've built one of the plans to build family plan and as soon as they built that they moved to doing something else. So they kind of left it there it was pretty bare bones family plan and it just started growing by itself organically. So we found that Theres just a lot of the Cyrus desire from people to.
Speaker Change: Family plan.
Speaker Change: And what we love about the family plan of course is that it has much higher retention than our other plants because if you buy a family planning that has multiple users.
Justin Tyler Patterson: And your family as long as any of them to keep using it youre still.
Justin Tyler Patterson: On that plan.
Justin Tyler Patterson: So it's been really great for us we saw it get to about 18% of our subscribers are on a family plan now and.
Justin Tyler Patterson: And that's without really spending any real effort improving the plants. So about two months ago or a couple of months ago. We started a new team that's.
Justin Tyler Patterson: That's basically to work on improving the family plan they've done.
Justin Tyler Patterson: <unk> done a number of things they started out by just fixing some some things that work really should've just fix from the beginning for example.
Justin Tyler Patterson: It was the case, even though it grew and grew that much. It was the case that if you had some kids under 13 in your family plan. The adults couldn't see the kids' names.
Justin Tyler Patterson: This just made no sense.
Justin Tyler Patterson: So we have fixed that we are making it so that it is easier to find your family. So we're working on that we are adding a lot more social features like basically waste for the whole family to collaborate or compete.
Justin Tyler Patterson: So we think that over the next few quarters, we're going to see.
Justin Tyler Patterson: An increase in.
Justin Tyler Patterson: Action of our subscriptions that are family plan.
Speaker Change: I don't know, Matt if you have.
Matt: More to say about that with the pricing.
Matt: Yeah on a price to value Justin I think it's a great question and I'll just.
Matt: Take us looking to broaden it out so we have added a ton of value to our super.
Matt: Subscription and a family plan and now we're working on adding even more value with Max.
Matt: And I think that's why when you hear us talk about experimenting with pricing that's part of what we're trying to do just in general is.
Matt: Find ways to see if we've added enough value to consumers that they're willing to pay us more for their subscriptions I think on family plan in particular.
Matt: Luis just mentioned is adding value to our plan that historically has had one defining value addition feature which was adding more people and so as we add more value I think we will continue to experiment with the price the.
Matt: The price of a family plan and I know that my two daughters get a lot more value out of it already because they can consistently nudge meets do a lessons. So it's not hard for me I'm biased of course to squint and see.
Matt: As experimented with pricing because we are definitely already improving the value of the plan.
Speaker Change: Thank you both.
Speaker Change: Thanks, Justin next question comes from Brian <unk> of J P. Morgan.
Brian: Great. Thanks for taking the questions I guess just to start on Max can you just talk about the ultimate revenue contribution and target mix as you continue to roll out here going forward and I guess in terms of the sub mix, how much is incremental versus cross graders Super and for me yeah.
Max: We can talk more about maybe the longer term vision and the short term Brian the answer is we don't know yet.
Matt: We're still we've rolled it out now to about 5% to 10% of users who can have the option to see it.
Matt: And so we're excited about it and we're seeing a lot of traction we're seeing a bunch of evidence that people are willing to pay a substantially higher price for it but in terms of the ultimate mix.
Matt: We don't we don't know just yet and certainly in 2024.
Matt:
Matt: The impact of Max will be is in our guide, but it's <unk>.
Matt: Commensurate with the fact that it's only a 5% to 10% rollout now so it's relatively modest.
Matt: And the 2024 guidance. So I don't Luis if you want to talk kind of maybe at a broader level yet it's hard to say what the ultimate.
Luis: The mix is going to be because it will depend in part where we settle on what features are going to be in which plan.
Luis: So it's very hard to say because we have not settled on that I mean, right now we're still experimenting which features are going to be in which plan.
Luis: So I think we're going to have more to say you probably know the answer to this question in the next few quarters, but at the moment.
Matt: It's very hard to say.
Speaker Change: Great. Thank you that's Super helpful. And then I guess just on the user growth can you just talk about in any given quarter.
Speaker Change: We've seen some very strong social media and marketing campaigns, how much that contributes to growth.
Speaker Change: Just how youre thinking about marketing or as you continue to scale that new base.
Speaker Change: Yeah, Great question. So generally there are two big reasons, why we're growing so fast the the bigger reason is that we've just been improving our product over the last several years on those product improvements compound and when the product is better two things happens people tell their friends organically kind of word of mouth.
Speaker Change: It's a better product and also people stick around for longer. So it has to because it has better user retention in general not just payer retention, but user retention. So that I would say is the majority.
Speaker Change: But also.
Speaker Change: Marketing and in particular, our our brand marketing has just done a really good job of getting the brand out. There. This is all our stuff with our social media with Tic Toc and.
Speaker Change: Youtube shorts and Instagram.
Speaker Change: We're really being able to replicate all over the world.
Speaker Change: It's hard to give an exact.
Speaker Change: No mix, but my sense is probably you know two thirds brought up one third marketing, but this is a this is a very hand wavy.
Speaker Change: And the reason its so hard is because a lot of our growth just comes from word of mouth and we just don't know it's hard to it's hard to measure word of mouth growth how much of that is affected by the fact that the.
Speaker Change: Al did some weird thing on Instagram versus people told her friends.
Speaker Change: So that's why but yes I mean these are the two main reasons, we're growing and in terms of you know in the future. We're very excited about all the other marketing stunts, though we have planned for the rest of the year I mean, I'm not going to spoil them, but we have really cool stuff coming.
Speaker Change: Great. Thank you for taking my questions.
Speaker Change: Thank you Brian.
Speaker Change: Our next question comes from it looks like <unk> is sitting in for Mark Mahaney at Evercore.
Speaker Change: Yes. Thank you very much first just a quick follow up on the Max and that was probably early stage as well, but anything you can share on the uptake of Max verses Max family and then monthly versus annual is that different from yours.
Speaker Change: Current Super mix and also for music and mass any update on the learnings and product roadmap for the rest of the year because I can imagine you know.
Speaker Change: Your name and your family plan mass would definitely be irrelevant right.
Speaker Change: And then I'll have a follow up after that.
Speaker Change: Matt you want to take the mix question, and then I'll talk about music and math.
Matt: Yeah, Sean the mix question is gonna be one that we already mentioned, which is right now.
Matt: The number of folks who are subscribing to Max is relatively small and so we can.
Matt: Given the mix of numbers, but it's going to change a lot as we roll it out even this quarter and throughout the rest of the year. So.
Matt: Yes.
Speaker Change: Yes, I don't know exactly how to guide you on that just yet except to say that like Louis said, we'll know more over the next couple of quarters.
Matt: And.
Matt: Again, I think it's going to be it's going to vary based on what features go where what the prices and how it interacts with things like the family plan math and music overtime.
Speaker Change: Yeah and in terms of method music again for context, what we've done is a few months ago. We added mapping music courses to the main duolingo app.
Speaker Change: Currently they are available only on iOS theyre going to come on Android. This year. So that's part of the roadmap also currently the courses are only available if you're the language of your phone if either English Spanish German French so another thing that we're going to do is make them available in kind of four more basically four markets for more languages.
Speaker Change: So those are kind of.
Speaker Change: Standard bread and butter bread and butter things that we're going to do to get more and more users.
Matt: Trying this but the main thing that we're doing for both of them is just adding a lot more content and.
Matt: And making it more fun in the case of mass, we're adding a lot more real world content, so as opposed to just being kind of.
Matt: The standard math operations, you'll see them with thermometers and dollar bills and stuff like that which people like quite a bit we're finding people like those quite a bit.
Matt: There's a music, you'll probably see us do things like Oh.
Matt: Well. This is it may not be for this year, but over time.
Matt: Instrument integration.
Matt: That's a big thing that we're going to be working on for music.
Matt: But our.
Matt: We're very happy with the growth of mechanistic now I just need to remind you one thing because I have to remind people every time, we do not expect that we're going to get very meaningful revenue contributions from Apple music. Certainly this year are there may be some next year, but it won't be that meaningful I mean, it'll just take some time for these for these quarters to grow but so far they are growing.
Speaker Change: Very well and we're super happy with the results.
Speaker Change: Alright, and then another question just on the bookings guidance I Hope I'm doing this math right I think last quarter, you guys talked about bookings potentially five point that you saw from Q1 I think the guidance suggests a little bit short of that so anything that you would call out.
Speaker Change: I think the.
Speaker Change: The strength that we're seeing in the subscription business. So subscriptions grew 47% subscription bookings grew 47% year over year in Q1.
Speaker Change: Which was fascinating second was very strong and so.
Speaker Change: Subscriptions is continuing to grow that's why the full year guide is up.
Speaker Change: In Q2 subscriptions again is going to be the majority of the story so.
Speaker Change: That's just how the growth rates of <unk>.
Speaker Change: Taken out as we've seen how subscription strength has performed so far this year and what we expect for the rest.
Speaker Change: Rest of the year.
Speaker Change: Okay.
Speaker Change: Okay. Next question comes from Ryan Macdonald of Needham.
Ryan Michael MacDonald: Alright, Thanks for taking my questions as we think about the.
Ryan Michael MacDonald: The investments you need to make within our English content and then also to market. The English capability learning capabilities are doing they are moving forward can you give us a sense of what maybe the incremental magnitude of that inverse of those investments might be and what maybe the timeframe, it's going to take in terms of to get additional <unk>.
Speaker Change: Content out and then obviously then to be able to start marketing that in sort of gaining share amongst those loans.
Speaker Change: Great question.
Speaker Change: For English the content the good news of the content is that.
Speaker Change: We'll continue iterating one of improving it but at this point the content is out there. So we are done doing the content on what was amazing about it is this is really the first.
Speaker Change: Big batch of content that we were able to generate in large part because of generative AI I mean, we use large language models for this so it was a lot quicker and cheaper to generate than what we had been doing in the past, which was mostly handmade now. This is not to say that humans are not involved anymore, they're still involved with the enrollment.
Speaker Change: <unk> is much less because we've been using generative AI.
Speaker Change: The other awesome thing about generative AI with this is that it allowed us to do a.
Speaker Change: It's still at its allowing us to do things a lot faster and what that does is it just changes the calculus for everything.
Speaker Change: This you will see this with English.
Speaker Change: There were projects that if.
Speaker Change: If they were pitched to me seven years ago or five years ago.
Speaker Change: And I would just do a back of the envelop calculation of how long it was going to take to make the content and I would.
Speaker Change: It'd be pretty clear that we're going to take five years to make the content.
Speaker Change: I would say, let's not do that project because I don't want to spend five years from that that same content can now be made in.
Speaker Change: Call. It three months, so now I'm just like yes sure go for the project and even more even if we make the content in three months and at the end of the three months, we realized we screwed something up its okay. We can redo it again in three months. So it is just allowing us to do to be a lot more aggressive on what projects content projects we work on.
Speaker Change: So you know in terms of spend I don't think this is something that you should be too concerned about in terms of the spend on the content.
Speaker Change: And in terms of the marketing.
Speaker Change: Something else that we're not going to because as a company we've never been a company that.
Speaker Change: You don't use us for example performance marketing that heavily or anything so youre not going to see us spend the $100 million on a campaign to convince English learners on this probably what youll see US do is do.
Speaker Change: So a lot of in product marketing inside the duolingo, App, which is free and probably a lot of our very strong social media to convince people that are dealing with is an effective way to learn more advance English.
Speaker Change: Okay. That's helpful color and then maybe just speaking of social media channels. Obviously, we continue to see developments around tick tock, and a potential ban and bills being passed.
Speaker Change: Just can you remind us sort of what <unk>.
Speaker Change: Percentage now of sort of marketing spends on tick talk in the U S and then.
Speaker Change: If the need arises and you need to continue to diversify.
Speaker Change: What's the process like to sort of migrate maybe some of those campaigns, often and whats relative effectiveness, maybe on other channels relative to take that.
Speaker Change: Great question Ryan also okay. So.
Speaker Change: There are a number of things to say here.
Speaker Change: First of all our tick tock views are organic so we don't we don't pay for that that's the spirit its organic stuff.
Speaker Change: The.
Speaker Change: What we've decided we realized a while ago that it was a good idea for us to diversify away from Vic talk this was more than a year ago. I mean, we got very prominent on Tictoc and that was great, but we realized that it was that it was a good effort to diversify so we've done a number of things for one we've invested in.
Speaker Change: Instagram and Youtube shorts, the good news is that Youtube shorts and Instagram Reals.
Speaker Change: Folks that are pretty similar to tick tock, so what works.
Speaker Change: Tictoc pretty similar thing work on Youtube shorts, and Instagram rails.
Speaker Change: Hum.
Speaker Change: That's one thing to say another thing to say is by now.
Speaker Change: Actually Youtube Youtube contributes more users than Instagram for us already surpassed it. So that's that's good for us.
Speaker Change: Other thing is that our tick tock views in the U S or the U S accounts for less than <unk>.
Speaker Change: <unk> of the tick tock views because abuse from picked up from all over the world. So our sense is that if tictoc were banned.
Speaker Change: Which you know may happen, it's probably going to take about a year for that to happen and if that were to happen.
Speaker Change: Already it's a minority it's not a very large fraction of users that are coming from Arctic talk views. Because we are a diversified a particular type of use in the U S. And then the other the other is kind of in house view is that.
Speaker Change: While probably happen is what happened basically in India, and basically people move to from <expletive> talked to Instagram or Youtube.
Speaker Change: Where we're already pretty strong so overall, we're not particularly concerned about about a potential ban in the U S.
Speaker Change: Excellent thanks for the color.
Speaker Change: Your next question comes from Andrew Byrne of JMP Securities.
Andrew M. Boone: Hi, guys. Thanks for taking my question I wanted to ask about the deceleration in MAU and DAU and this may be more of a theoretical question, but how close do you guys think we are to occur where growth would be more limited to your ability to generate new users and restaurant users.
Speaker Change: Great question. So, yes, you use decelerated a little bit as well.
Speaker Change: <unk> growth decelerated a little bit.
Speaker Change: The way, we see it we had 10 quarters of accelerating <unk> growth and we kept saying almost every quarter like this can't happen forever. This can happen forever.
Speaker Change: And you know the <unk> growth was accelerating but it was very tiny but it was like 60%. Then it was 65% then it was like 61%, but then it kind of went all the way up to 64%. This time, we have 55% or 54% of your growth.
Speaker Change: Yep.
Speaker Change: At the beginning of Q2, which we already have is looking higher than the 54%. So we think it's going to go a little higher than that.
Speaker Change: The way, we see it as we're at around 60% da <unk> growth I mean, some quarters are a little more some quarters a little less it was kind of the fluke thing that we were.
Speaker Change: Going.
Speaker Change: Creeping up for 10 quarters in a row, but the way we see it as were around 60% of your growth.
Speaker Change: And we think that that's going to continue for a while it's hard to say exactly what a while means.
Speaker Change: We feel pretty good about our data growth so yes.
Speaker Change: Yes.
Speaker Change: And then for my second I wanted to ask about subscriber conversion.
Speaker Change: It ticked up this quarter looks very healthy.
Speaker Change: Can you talk about just the strength of the 23 cohort now coming through and it's just kind of that that yearly lag and that's where we're seeing for conversion or is there anything else you guys want to call out there as we think about that metric. Thank you so much.
Speaker Change: Yeah, I'll take a little bit and then we can talk about some of the products out of it but when we look at the numbers Andrew Thats, what we saw and that's why I mentioned.
Speaker Change: To your question earlier around the subscriber bookings growth.
Speaker Change: Cohort conversion has.
Speaker Change: <unk> has improved across every cohort from 2023.
Speaker Change: So we feel really good about the subscriber free to paid conversion and on a continuing ongoing.
Speaker Change: Conversion of those cohorts. So it's led to that's what led to the 47% bookings growth for sub bookings in Q1, and why we feel pretty good about the rest of the guidance on the bookings side.
Speaker Change: So he said he wanted to mentioned anything about the product.
Speaker Change: Well I mean, just generally we can making the.
Speaker Change: The subscription tiers more appealing for people to subscribe and it's working so it's getting more and more people described.
Speaker Change: Thank you.
Speaker Change: The next question comes from Eric Sheridan of Goldman Sachs.
Eric James Sheridan: So much for taking the question I just have one maybe for more for Matt Obviously, you continue to sort of demonstrate.
Eric James Sheridan: Continued incremental margin outperformance versus the way you guide one quarter forward, obviously, you're talking about a step back in margins lower than the level you just put up in Q1 for both Q2 and the remainder of view of the full year talk a little bit about the investments you want to make between now and the end of the year that caused that margin to take a step back.
Speaker Change: The level seen in Q1, and if you were to outperform margins as we go through the end of the year what would be some of the drivers of more of the upside note. Thanks.
Speaker Change: Yeah, No. It's a great question and I understand why you would ask yet given that.
Speaker Change: We printed a 59% incremental margin, which is higher than our long term margin by a lot.
Speaker Change: The reason that happened in Q1.
Speaker Change: Was twofold.
Speaker Change: One was we actually just shifted some of the expenses out of Q1, it's in the normal course.
Speaker Change: Some of that went into Q3, which is why I mentioned sales and marketing expense goes up in Q3 relative to our previous guidance.
Speaker Change: That was about half of that the other half was we were finalizing some additional.
Speaker Change: Additional projects, so Max and some.
Speaker Change: Some of the newest learning content, so we capitalized about a million million and half more.
Speaker Change: Incremental then we expected that was about two points of adjusted EBITDA margin. So if you take those two things into account and you get about <unk>.
Speaker Change: Half of that.
Speaker Change: Over performance in in kind of a minimal incremental margin.
Speaker Change: But to step back even from that very detailed Q1 answer the broader point is we.
Speaker Change: We have a ton of things we want to invest in throughout the course of this year and then for the next couple So Luis mentioned English learning that as a priority.
Speaker Change: We're going to focus on that we're going to focus on math and music, we're going to focus on our core subscription.
Speaker Change: <unk> as well and so that's why we think that the.
Speaker Change: Prudent thing to do to attack. This huge opportunity. We have is to continue to invest such that that incremental margin stays closer to 35, then than six to eight and that's what we're guiding to and that's where I think we'll see the rest of the year.
Speaker Change: Yeah.
Speaker Change: Next question comes from Chris at UBS.
Chris: Great. Thanks for taking the question.
Chris: Maybe just going back to the Max here are there any markets that as of right now as we just kind of think about the cost of Gen AI, where it's just simply to restrict it to be rolling out.
Chris: Rolling out the Max team here and can you maybe kind of give us a sense for what that scale is.
Chris: Yeah.
Chris: There are markets, where we do not plan to roll it out given the current cost. These are usually very low monetizing markets.
Chris: It's it's markets like India, where.
Chris: Where we have a lot of users, but not a lot of payers generally we expect that in.
Chris: The markets that monetize pretty well call it Western Europe, the English speaking World, Japan, Korea that we'll be able to rollout Max because because it's fine now.
Chris: That said, we expect that the cost of.
Chris: Generative AI cost a large language models will go down.
Chris: So over time, we'll probably be able to rollout everywhere. That's my hope.
Chris: But for now our incentives for the rest of the year.
Chris: You'll probably see us in kind of higher GDP countries.
Chris: Okay.
Speaker Change: That's very helpful and just kind of curious about how you guys are thinking about that LTV to CAC for Max I think you touched on a little bit earlier, but just as we think about it across the various plans.
Speaker Change: How does that kind of compare the core Super subscription family plan versus Max and then just a quick follow up on another question.
Speaker Change: Matt you had mentioned kind of thinking about 60% <unk> growth going forward is is that also the right framework to kind of be thinking about to queue. Thanks.
Speaker Change: Yes, yes.
Matt: Yeah. So on on the LTV side, we primarily because most of our acquisition comes from.
Matt: Organic word of mouth, we mainly focus on the LTE side of that equation and so.
Matt: It's basically right now.
Matt: The family plan has a has a higher LTV than the Super plan, because it has a higher price and higher retention.
Matt: Max.
Matt: Right now could have a higher <unk>.
Matt: LTV, depending on a bunch of variables that go into it but mainly what price we end up settling out in what features that goes in there. So that'll that will remain to be seen right now if I had to.
Matt: Put pen to paper on it the LTV of Max's higher Oh.
Matt: I expect it to be higher over the medium term as we both refining our pricing and then the cost of the.
Matt: Jen AI features come down so, but we'll have to see we have to we have to experiment with that over time.
Matt: Then the.
Speaker Change: What was the second part of your question can you remind me.
Speaker Change: Yeah, just on the <unk> you commented about 60% is that kind of the right framework for <unk>.
Speaker Change: Yeah, I think that was luisa comment around the fact that we.
Matt: We accelerated up over 10 quarters from <unk>.
Matt: <unk> 40, some odd percent to about mid fifties and then from the mid $50 up to the mid <unk>.
Matt: Have ticked up.
Matt: Not not a ton over the course of several quarters.
Matt: And so right now we're feeling very good about being in the.
Matt: In that range for for a while.
Matt: He said now I'll steal from him it's hard to say how long a while as you know we feel good for definitely for Q2 and from a 'twenty 'twenty four.
Speaker Change: Understood. Thank you so much.
Speaker Change: Thanks, Chris next question comes from Alex Sklar of Raymond James.
Matt: Yeah.
Alexander James Sklar: Great. Thank you maybe just sticking on that LTV topic that you just kind of hit on but on Ltvs and retention broadly after maybe family plans, which seems like that's been the most successful newer development to date what are some of the biggest tests youre still looking at to kind of further move the needle in LTV and retention metrics.
Matt: Probably in terms of tests.
Matt: Continuing improvements of family planning on a family plan. It was you.
Matt: It was very good but it was just it's kind of a bare bones feature so we expect that that.
Matt: That will have you know that there'll be a higher shift to family plan, which should increase LTV and then the other.
Matt: The group of testers is Max like like Matt said, our expectation is that Max will end up having higher LTV.
Matt: But it's hard to say, but we are that's what we're working on them and hopefully that will be able to find a setup.
Matt: Kind of where each feature goes so that Max is actually a big win on LTV, but it's very hard to guarantee that right now.
Matt: And Alex I would just emphasize that.
Matt: The LTV of our annual subscription product is very good.
Matt: And we have.
Matt: Plenty of free users to go convert to paid so I think the.
Matt: There's a big amount of LTV to still go get in our in our free users as well. So just don't want to skip over that the family plan is great Max is going to be great.
Matt: The normal course of more users converting more of those to super even produces a ton of LTV and that's that's core to our strategy this year and in the near term.
Speaker Change: That's super helpful context.
Speaker Change: It's a very fair point on the on the big.
Speaker Change: <unk> base do they still go get them out.
Speaker Change: Matt maybe this one's for you.
Matt: You've talked about tracking kind of at risk paid subscribers in the past I'm curious if there's been anything from a macro standpoint, just in terms of consumer health you are picking up in the numbers behind the scenes right now yeah, we haven't seen anything we track that.
Matt: And that metric and a bunch of others to see how.
Speaker Change: Our subscriber base is doing and it looks pretty consistent with 2023, so not to say that that couldn't develop.
Matt: But we haven't seen anything so far this year.
Speaker Change: Alright, great. Thank you both of them.
Matt: Next up we've got Ross Sandler from Barclays.
Ross Adam Sandler: Hey, guys. Thanks for taking my question Awesome.
Ross Adam Sandler: So the Dia you was already answered so I appreciate that 60% comment, but I guess as we go back to <unk>.
Ross Adam Sandler: Converting gaea, you or Mou TTM to payers.
Ross Adam Sandler: That conversion rates are moving around a bit so.
Ross Adam Sandler: <unk>.
Ross Adam Sandler: With that I.
Ross Adam Sandler: I guess what explains the variation we're seeing there between Geo language corridor or like product changes that you guys are doing.
Ross Adam Sandler: To kind of.
Ross Adam Sandler: That payout ratio fluctuate as it is.
Ross Adam Sandler: Ross what metric are you keying in on how Youre looking at.
Ross Adam Sandler: Subs per Mou or what's the metric youre, saying is moving around.
Ross Adam Sandler: So well the G U D. So I was going to ask why is that happening in the March quarter first of all but I think you've kind of answered it and then it's going to Reaccelerate to 60 in the in the June quarter, but your bookings guide is kind of decoupling a little bit. So these types of variations that would be the key the question is that.
Ross Adam Sandler: Got stuff that you guys are doing with the product or is it.
Speaker Change: Something else with these corridors that we need to understand that's all thank you no I appreciate and I appreciate you, giving us a chance to clarify so for Q2, I don't think Louisa, saying that Q2 is.
Speaker Change: Expecting can be exactly at 60, I think you were saying that April was faster than the 54 and so we feel good about.
Speaker Change: Being in the range. There I don't think that was meant to be it's going to be 60. It's.
Speaker Change: Around there plus or minus it's just the normal course variation that comes from.
Speaker Change: A great organic.
Speaker Change: The growth story that you don't have a point.
Speaker Change: <unk> operated lever on that so you can't dial that into.
Speaker Change: 57 point to if you wanted to it right. So does it it's varying $55 60, it's going to be in the range.
Speaker Change: On the payer side and the bookings.
Speaker Change: What I would say is that Q2 is typically a slower quarter for us. So you can see that in the seasonality there's nothing.
Speaker Change:
Speaker Change: All that interesting in that because.
Speaker Change: It doesn't have any of the one time things that we do throughout the year. So it doesn't have the year's promo which is in the Q4 Q1 doesn't have back to school, which is Q3 Q2 has got just kind of a normal course order and it's historically been one that just kind of goes with the flow. So I don't think you are seeing anything that we're doing necessarily with a prop.
Ross Adam Sandler: Driving a bunch of volatility, it's just kind of normal course stuff.
Speaker Change: Thank you.
Ross Adam Sandler: And our next question comes from Arvin from 90 at Piper Sandler.
Arvin: Hi, Arvind you're on mute.
Arvin: Yes.
Arvin: Yeah, Hi, Arvind Aaron.
Speaker Change: And you just went back on mute.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Can you hear me now.
Speaker Change: Sorry, I'm on the road, so sorry for any background noise.
Speaker Change: We're not somebody out of India.
Speaker Change: Kind of a business right I mean, you indicated like.
Speaker Change: Those are.
Speaker Change: A market that don't really have a kind of high tolerance to pay for or that have a higher tolerance for advertising.
Speaker Change: And maybe that's kind of the the market, but is there a different price point.
Speaker Change: That will make them an interesting market.
Speaker Change:
Speaker Change: Like subscription based subscription basis.
Speaker Change: Yeah.
Speaker Change: India is very interesting I mean, we've grown a lot in India.
Speaker Change: Which is great we do see significantly lower payer conversion.
Speaker Change: And that is expected when we talked to other companies that are subscription based that it's very hard.
Speaker Change: To get you know payer conversion in India to go up.
Speaker Change: We have we you know the price of a subscription India is lower I. My sense is that this is just.
Speaker Change: We're going to continue doing things with India, but my sense is that this is just a market that needs to mature a little bit.
Speaker Change: In terms of people being okay with.
Speaker Change: Digital subscriptions.
Speaker Change: So.
Speaker Change: The way we see it as this is this is a great opportunity, but more in the mid term rather than that in the short term because you know we're going to continue to try and things like in our purchases with India and stuff like that but for the subscription if even if you look at you know if you look at companies like Spotify or other subscription businesses. Its just India, it's hard to get users too.
Speaker Change: Become digital subscribers, but I think that is changing over time and I think if you look at it over kind of the next five years, you'll probably see an increase.
Speaker Change: Yeah, Yeah, yeah, perfect that helps.
Speaker Change: And I guess you know.
Mike: Mike one for you.
Speaker Change: In terms of like margin right I mean.
Mike: And maybe I don't think of it this way, but when you think of your latest cohorts, but that's right.
Mike: Our next steps.
Speaker Change: That's right.
Speaker Change: And then okay.
Speaker Change: This does it but but in general.
Speaker Change: Where do margins come in.
Speaker Change: In each of the different cohorts because kind of.
Speaker Change: And I'm wondering as yet.
Speaker Change: Exciting, but it's also not cheap.
Speaker Change: Sure Yeah.
Speaker Change: We talked about this on our actually about a year ago, when we talked about the.
Speaker Change: The fact that for Max.
Speaker Change: There is incremental costs for every use case forever usage of it and that does lower the gross margin of the Max.
Speaker Change: Product, but in an absolute dollar margin basis, because of the way we've priced it at least today.
Speaker Change: On an absolute dollar margin basis, youre better off even even with the prices that were happening last year. So again I don't want you to take away from that that that's where this and I think that's where it starts and we're going to experiment with the price and the costs are changing relatively rapidly. So right now I feel pretty good about our dollar margin on Max.
Speaker Change: I think ultimately the gross margin will be just fine.
Speaker Change: Perfect and just last question for me.
Speaker Change: I'll see you all had a lot of.
Speaker Change: Kind of basically free sort of quasi pre marketing, but that is almost.
Speaker Change: Hum.
Speaker Change: Barbie movie and all of that.
Speaker Change: And I think you know when we met last time, you were saying you know a lot of that just basically came to you.
Speaker Change: Is there anything you're able to do in your business. If they are you are you able to kind of leverage some of that debt.
Speaker Change: Kind of basically free.
Speaker Change: Pre marketing from from kind of a popular Vince.
Speaker Change: Yes, we expect similar stuff to last year I mean, some of these we expect similar stock last year in terms of the volume of the some of them are outsized in terms of the impact and that's very hard to know, which one is going to be outsized, but we have a lot of things that are coming to us based upon mainly because we are we are a brand that has.
Speaker Change: Struck a chord.
Speaker Change: And so we're seeing that.
Speaker Change: Hard to know whether you know are the things that we that that we have visibility towards for the rest of the year are going to be as big as the Barbie movie eye.
Speaker Change: It's very hard to say, but I can tell you that in terms of number of opportunities is probably even higher than last year.
Speaker Change: So we're just you know I think there's just a lot to that and we were talking right before the call. We finally cracked do a lead busted finally, craxi finally mentioned dust.
Speaker Change: We've been simply Hereford like year, finally mentioned the word dwell ingalls in some interview so that's the stuff that we see you know, it's just entirely for free and we feel you know.
Speaker Change: A lot of those things are happening.
Speaker Change: Hopefully you all have.
Speaker Change: Our next Investor day.
Speaker Change: [laughter] who knows.
Speaker Change: Okay.
Speaker Change: Great. Thank you so much.
Speaker Change: Oh, that's it.
Speaker Change: Great. Thanks, everyone I'm not showing any further questions I'll turn it back to Louis for closing remarks.
Speaker Change: Oh, I'm sorry, Chris just got his hand up at the very last second credits.
Chris: Sorry about that I think I really haven't raised it somehow but anyway.
Rick: Rick one.
Speaker Change: On the music I think you mentioned that theres going to be working on new features.
Speaker Change: Teachers in terms of.
Chris: I guess the integration with musical instruments, just curious a little bit more in terms of what that is and how much of I guess unlock white and I don't know if you. If you've mentioned this before forgive me, but how big is that market.
Speaker Change: Abolish it Tim.
Tim: Yeah. So for music, we're working on a number of things. What we have is we've only had the music course out for I don't know what.
Tim: At four months five months.
Tim: A few months.
Tim: And so we're still adding a lot of features we know that a lot of people who want to learn music actually want to learn how to play an instrument today with our music of course, we have kind of like a phone piano thing like I mean, you can just get the tap on the phone.
Tim: So over time, we're going to do.
Tim: Musical instrument integration another thing that we know people want them that we are going to have its licensed music right now all the music is.
Tim: Stuff that is in the in the three domain.
Tim: So, which usually means very old songs were going to Oh, we're going to be adding licensed music as well, which is what people want to do so we think that there's a lot of opportunity there.
Tim: Get people too.
Tim: It's going to be a really fun music learning experience.
Tim: In terms of the Tam we've looked into this there's a lot of people.
Tim: Uh huh.
Tim: So they're good at.
Tim: Hard to say exactly what's happening.
Tim: Because what we wanted and pharmacy same thing we did for language learning.
Tim: Which.
Tim: In fact grew the time line for example in the United States, 80% of our users for language learning, we're not learning a language before duolingo. So we just we're just growing the market and that's kind of what we want to do with.
Tim: With music, it's hard to say exactly.
Tim: What it is.
Tim: Think it's going to be as big as language learning, but I'm, hoping for a significant fraction of language learning at least.
Speaker Change: Just a quick follow up on that question on the corner of licensed music with that number.
Tim: Acquire.
Tim: On monetization.
Speaker Change: That cost yeah, we would have to do that.
Speaker Change: Of course, the details are still up in the air but.
Tim: It would have to be the case that the only the payers or at least.
Tim: The payers get before experience or something like that it will have to be basically yeah something to support them.
Speaker Change: Okay very good appreciate it.
Speaker Change: And.
Speaker Change: That's the last question, so I'll turn it back to Luis to cause that.
Luis: Well just thank you Debbie I just like to thank everyone for joining us and we look forward to speaking you next quarter do your lessons learned some music and have a great evening.
Luis: Yes.
Speaker Change: Yes.