Q1 2025 Duolingo Inc Earnings Call
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Good evening, everyone and welcome to the oil and gas first quarter 2025 earnings webcast today. After market close we released this quarter's shareholder letter a copy of which you can find on our IR website at investors not duolingo Dot com.
Speaker Change: On today's call, we have Luis upon on our co founder and CEO and not screw up our CFO, who will begin with some brief remarks before opening the call to questions analysts will be able to ask a question by using the raise hand feature and please note. This event is being recorded and all attendees are in listen only mode.
Speaker Change: Just a reminder, we'll make forward looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these risks have been set forth in the risk factors in our filings with the SEC. These forward looking statements are based on assumptions, we believe to be reasonable as of today and we have no obligation to update these statements as a result of new information or future events.
Speaker Change: 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.
Luis: And now I will hand, it over to Luis.
Thank you Debbie.
Luis: Normally we start this call with prepared remarks, which in this case, probably would've been included the term AI like 17 times, but as.
Luis: I'm sure you've read in our shareholder letter if things are going great. So we're going to get right into questions shoot.
Speaker Change: Alright, Thanks, Louise now I'll pass it over to the moderator, who will begin the Q&A portion of the call.
Speaker Change: We will now move to our question and answer session. At this time, if you would like to ask a question. Please click on the right hand button, which can be found at the bottom of the black bar at the bottom of your screen you may remove yourself from the queue at any time by lowering your hand.
Speaker Change: When it is your turn you will receive a message on your screen asking to be promoted to panelist. Please accept wait a moment and once you have been promoted you'll hear your name called and you make a mute your video and audio and ask your question.
Speaker Change: Analysts are only allowed one relevant follow up from their main question. We will now pause a moment to gather the team and allowed us to assemble.
Speaker Change: At the moment at our first question is connecting that will come from Curtis Nagle with Bank of America. Please on mute your audio and ask your question.
Curtis Nagle: Terrific Thanks for taking.
Curtis Nagle: Taking the question maybe one for sure and then one for Luis.
Curtis Nagle: Could you just talk through the cadence for gross margin for the year.
Curtis Nagle: Really nice job performance onto the backs efficiencies.
Curtis Nagle: You are expecting.
Curtis Nagle: We're expecting the 50 bip deep into Q, and then ramping up in two wage.
Curtis Nagle: I just thought what you know why not more of a benefit in the second quarter and how.
Curtis Nagle: How should we think about kind of run rates going into next year in terms of gross margin.
Curtis Nagle: Thanks, Chris I appreciate the question. So we lay out in the shareholder letter the detailed gross margin guidance. So just kind of reiterate where we put in there you are absolutely right we.
Curtis Nagle: Continue to expect for the full year about 150 basis point decline year over year, we did see Q1 come in better than we expected we expected about a 300 basis point decline and we saw about a 200 basis point decline for the most part in Q1 Max was on plan in terms of its impact on gross margin and we saw.
Speaker Change: My flight.
Curtis Nagle: Benefit on ads, which helps.
Curtis Nagle: But as we lay out in the shareholder letter, we do expect Q2 to them.
Curtis Nagle: Sequentially compared to Q1 declined 50 basis points and then we'll see.
Speaker Change: The gross margin ramp up in Q3, and Q4, such that by the end of the year.
Speaker Change: We and roughly back to where we started the year at the end of Q4 of last year.
Speaker Change: Okay. That's helpful and then.
Speaker Change: But wish for you just maybe expectations in terms of the wall.
Speaker Change: Oh God.
Speaker Change: Language a module chess.
Speaker Change: Music math, right or do we still sort of see these largely as tools for engagement for streets, adding value to existing users or.
Speaker Change: Maybe increasingly so as potential monetization tools, what's what are your thoughts there.
Speaker Change: Yeah. Thanks for the question Chris So we're we're very happy with it it's just at a chess its not quite yet live and the output is going to be like very soon.
Speaker Change: I should mention.
Speaker Change: Amazing about the chances that it really started with a team of two people neither of whom knew how to program. So they were not programmers and they basically.
Speaker Change: Made prototypes and did the whole curriculum of chest by just using AI.
Speaker Change: Also neither of them knew how to play chess and we started that for several months and eventually when they had a really good prototype we had a whole theme to professor and I said I'd put it in the App. So we're very happy with it.
Speaker Change: This isn't this is at the moment, mainly going to be to increase you know at users, who we think there's a huge demand for testers hundreds of millions of people who want to play chess.
Speaker Change: And the same is true for math and music I mean, they're just they're growing really well.
Speaker Change: We are monetizing all of these subjects by the way on.
Speaker Change: The way the way you monetize them at the same way, we monetize our language learning, which as you know if.
Speaker Change: If you want to turn off ads you can pay to subscribe.
Speaker Change: So we're monetizing them already but the compared to language learning there are lot smaller, but yeah, we're very excited about it.
Speaker Change: Okay. Thank you.
Ralph <unk>: Our next question will come from Ralph <unk> with William Blair. Please on me here.
Speaker Change: Video and ask your question.
Speaker Change: Great. Thanks for taking the question, maybe I'll start with you.
Speaker Change: Maybe kind of give a sense of any macro softness you may or may not be saying I think during the 2022 time frame after going public you didn't see much there, but just give us a sense there and on the Dallas is kind of how broad based was that then Luis just on and Jenny I you know not focused on Max but obviously, you've been working with AI for a long time, just give us a sense.
Speaker Change: When you're testing now and developing products what does <unk> allow you to do in terms of testing at scale and to develop products at scale and then.
Speaker Change: How does that sort of inform your roadmap to really sort of leverage that to great I guess more products over time and potentially be able to roll them out faster. Thank you.
Speaker Change: Thanks, Ralph so when it comes to the broader environment you can see from our Q1 results, which were which were great and the strength of our guide that we feel confident about the roadmap for 2025, we have a lot of exciting opportunities ahead of us and so that's what you see in the guidance.
Speaker Change: So far in Q2.
Speaker Change: We've been monitoring the metrics, we always monitor and we haven't seen any real change in the trends.
Speaker Change: Based on.
Speaker Change: Macro environment. So we feel good about that I just remind you also that we're a global business.
Speaker Change: The majority of our bookings and revenue come from outside the U S and we offer a really attractive in my view.
Speaker Change: Value to price relationship our average revenue per users in the $6 range. So we feel we feel good about it and that's what you see in the guide Ralph.
Speaker Change: And in terms of a journey I mean in general generally ice, allowing us there's three places where it is helping us I mean, one is data creation teaching requires quite a bit of content. It used to be the case that.
Speaker Change: You know a lot of this content was made by hand, with some automation, but a lot of it by hand by now we're able to make the content for all of our subjects, mostly close to 100% automatically.
Speaker Change: So that allows us to just have a lot more content that has made a lot faster and a much cheaper. So that's that's one place where its helping us another place where its helping US is just creating new features that were just not possible for like video call with Lilly that was just impossible to practice conversation with a computer or two years ago and then the last place is just helping us.
Speaker Change: With efficiencies everywhere in the company and the fact that for example chest. That's a really good example, because what I mentioned in the last answer the fact that to people who were not engineers.
Speaker Change: Really we're able to get to a pretty far in chess I mean, they didn't make the production version of chest, but what they made us really really good prototypes and so this is really this is showing what the future is going to look like we're going to have a lot of people in the company that are playing around with new subjects or with new ideas and.
Speaker Change: And I think that's going to speed up the development of our features.
Speaker Change: Alright, Thanks, Louise Thanks Pam.
Speaker Change: Our next question will come from Cristian <unk> with UBS. Please on your video audio and ask your question.
Speaker Change: For taking the question.
Speaker Change: The perfect just be on the back side of things any update on retention trends for Max and the percentage of overall subs and how should we be thinking about kind of where Max retention is super at this point.
Speaker Change: And I guess my second question would really be on the 148 new language sports.
Speaker Change: Pushing on that thread a little bit more here.
Speaker Change: It took 12 years to add the first hundred I guess is it more are we at the point now where we've kind of reached saturation near as far as the available courses that youre looking to offer here and it's about pushing deeper into certain markets or is there. Another 100 courses potentially that we could be looking here that'll be driving both.
Speaker Change: Really driving.
Speaker Change: Thanks.
Speaker Change: Yes, so on the.
Speaker Change: The Max retention rates, we feel good about how <unk> is progressing its about 7% of subscribers at quarter end, which is an impressive set of growth and.
Speaker Change: It helped to deliver a really strong Q1 for us and it's.
Speaker Change: Going well I think on the retention rates, it's kind of as expected with early days, but we feel.
Speaker Change: We feel confident that it's going well on the on the overall retention rates from axis.
At this point.
Speaker Change: John in terms of the the language courses.
Speaker Change: We added 148, new language courses and all of this content was done with AI I mean, it really took us about a year to add these 148 language courses and like you mentioned the previous one.
<unk> courses took us about 12 years to make.
Speaker Change: So this is an incredible speedup now to clarify what these courses are these are not new languages. So these are the same languages that we were teaching but for other based languages. So for example.
Speaker Change: We used to if you were oh.
Speaker Change: Portuguese Speaker, you Couldnt learn Korean.
Speaker Change: But now you can so that's the type of thing where basically filling in all the gaps that we had.
Speaker Change: At this point, we're teaching all the major languages to the majority of the countries that we serve.
Speaker Change: So we're very happy with that we're still going to add other languages likely and there's demand for that but there really is diminishing returns I mean in total different languages, we only reach about 40 of them.
Speaker Change: And these 148 courses mainly.
Speaker Change: Pertained to about eight of our top languages that are now we're teaching in the different geographies. So there's.
Speaker Change: There's not that much in terms of new courses to add but we are going to continue improving the courses that we have and also getting them to teach too.
Speaker Change: More advanced levels.
Brian: Our next question will come from Brian <unk> with Jpmorgan. Please on your audio video and ask your question great. Thanks for taking the questions and daily active users continue to see such strong and impressive growth rates I believe last call.
Speaker Change: You had talked about mature regions growing still very strong. So just curious you know what are you seeing on the product optimization cycle, that's driving better resurrected user growth anything that stands out to keep in mind, there and then secondarily and kind of related as well more of the English learning side still.
Brian: Still under indexing towards English language learning.
Brian: As you continue to scale of course units published add new continent efficacy over time.
Brian: How should we think about user growth across English language learning and the opportunity longer term. Thank you yeah. Thank you Brian in terms of da use it's a similar story to last quarter. I mean, we're getting a very strong growth I mean, we just posted a 49% year over year growth in da use which to remind you that is lapping the.
Brian: Same quarter, but the year before was doing 60% year over year growth and before that another 60% year over year growth. So it's really growing quite fast.
Brian: The growth is from all regions.
Brian: So of course, some regions are growing faster than those but really all of them are growing and the same thing is true as last time some of our more mature markets are actually growing the fastest so.
Brian: We're very happy with that and what that tells US is that we really are not reaching the point of saturation.
Brian: And really any market.
Brian: And it's because they really are.
Brian: The total number of people learning a language in the world is about $2 billion.
Brian: We just posted 130 million active users. So there's a lot of room for that in terms of what drives the growth. It's the same story.
Brian: It's been with two things drive our growth one is product improvements and the product improvements basically get improve retention of the product and also get people to tell their friends of word of mouth and then the other thing that drives our growth is our excellent marketing campaigns I mean this last quarter. When you saw that we had this campaign were dueled alpha.
Speaker Change: His own death.
Speaker Change: We we Couldnt, we didn't know he was going to do that this is a kind of quirky guide that decides to do this type of stuff.
Speaker Change: But that campaign for example, got $1 7 billion $1 7 billion impressions and a $1 1.7 billion impressions and the cost of that campaign really was essentially nothing.
Speaker Change: So thats whats generating the growth or in terms of English learners, we're very excited by it.
Speaker Change: Still under indexed as you rightly said if you are if you look at in language learning as a whole 80% of the people that are learning a language learning English, but on duo lingual only you know, it's a little a little around 50% that percentage is increasing which is good.
Speaker Change: And because English learners in general are growing faster than the rest of our the rest of our growth. So we see a lot of a lot of potential there and just to remind everyone. The reason that English learners are now growing faster is because we've added a lot of content for them in particular intermediate and advanced content.
Speaker Change: And that's really helping us grow now one of the things that we said last time, we're going to continue saying here is it's going to take some time for this adoption to happen for English learners, because the word got around I mean, the main way duolingo grosses through word of mouth and the word got around that we were mainly good for beginner English learners and now that we have content for more intermediate.
Speaker Change: And advanced learners. The word has to get around we're trying to speed that up with some marketing initiatives, but generally we expect that most of this is gonna be word of mouth.
Speaker Change: And so.
Speaker Change: In some time and I don't know what the timeframe is but it's not months, it's probably years, we do expect that English learners are going to hopefully get to the 80%.
Speaker Change: But it's going to take some time.
Speaker Change: Awesome. Thank you and I guess I'm, just one quick follow up on English learning.
Speaker Change: Could you share any insights on just overall conversion rates and I mean, right like how that would vary versus a western world user anything would be super helpful. Thank you Yeah I mean.
Speaker Change: English learners.
Speaker Change: The.
Speaker Change: A lot of them are in regions that don't convert very well.
Speaker Change: Some of them are in regions that convert very well for example, Japan, Japan converts very well, but if they are in low GDP per capita countries. They don't convert super well. However, we are seeing something really awesome duolingo, Max and it is that they really have because because max really helps to try to.
Speaker Change: Practice conversation a lot more there are a lot more interested in it. So we're seeing more adoption of our video call with Lilly by English learners and non English learners and we're also seeing that.
Speaker Change: Like we said 7% of our subscribers are paying are paying for Max.
Speaker Change: But actually if you if you restrict to English learners that number is actually higher than 7% and non English learners, that's lower than surfaces. So the average of seven but English learners. The fraction of such subscribers that are English learners that are Max.
Speaker Change: It's higher than for non English learner, so we like that.
Speaker Change: Awesome. Thank you.
Speaker Change: Our next question comes from Justin Patterson with Keybanc. Please on your audio video and ask your question.
Speaker Change: Great. Thank you very much.
Speaker Change: It looks like cost optimizations are occurring faster than expected you've got better line of sight on AI cost how does that change just your desire to make duo Max more affordable or even just provide more features to some of those English learners and then related to that the three D. Lilly update for video call looks pretty interesting.
Speaker Change: Talk about how you think that's going to influence both engagement with Lilly and conversion rates. Thank you.
Speaker Change: And I can take the first part and you can jump in on that.
Speaker Change: Next one please.
Speaker Change: Yes.
Speaker Change: Yeah, Justin on the on the Optimizations you know, it's actually in our opinion trending as we expected. So there were a little there were some smaller optimizations that we were able to kind of do in Q1 that were faster than we expected, but they were pretty small.
Speaker Change: In general the.
Speaker Change: <unk> of video call and Max is on trend with what we expected on the last call and that's good news for us because it does lead to margin expansion in the back half of the year like we thought.
Speaker Change: And we also saw evidenced in the first quarter that.
Speaker Change: Rates.
Speaker Change: We're coming down for those type of API calls so.
Speaker Change: Just in general we feel confident with our.
Speaker Change: The current course and speed of those optimizations.
Speaker Change: John related to mass costs I should say it is still the case that Max in certain countries like India, India is a good example is too expensive we have not lowered the price mezzanine. This about seven in U S dollars per year.
Speaker Change: We feel confident that over.
Speaker Change: It probably in a few months, we'll be able to lower that price because prices are coming down and at that point, we're gonna see more adoption.
Speaker Change: But it's going to take a little bit of time.
Speaker Change: So thats Max in terms of three D vehicle, we're super excited about it it just I mean, if you had actually played with it for some users already have it not everybody has it it's a lot more engaging you now you can start asking Lilly about her dog, which you can see it right there and everything so it's.
Speaker Change: I think that's going to increase engagement and the good news about engagement increases a number of things it increases word of mouth.
Speaker Change: Of Max itself. So we're basically be boiler you should get Max I know Youre Duolingo, you said, we usually get Max because you know you can talk to Lilly. It also of course increases retention. So it's just generally going to be good I don't know exactly what the results are going to be a b test I mean, this is an AB test at the moment, but we're pretty excited about it.
Speaker Change: Yes.
Speaker Change: Our next question will come from Nathan <unk> with Morgan Stanley. Please.
Speaker Change: <unk> video and ask your question.
Speaker Change: Hey, everyone. Thanks, so much the question really encouraging result.
Speaker Change: Thanks to the expansion and additional language courses.
Speaker Change: Nonetheless, the diminishing returns as you add additional languages.
Speaker Change: No you'll relative prioritization list for new content production now between further language sports is on plan.
Speaker Change: Jack.
Jack: Yeah in terms of relative career decision I mean, we're at the moment of course language learning is our largest business and it is growing very fast. So the majority of our efforts still go into that now in terms of creating content. There we may not be adding new languages, but we're always improving the content for the languages that we have and.
Jack: Making it more and more advanced.
Jack: And what's nice about this is because we now have this pipeline on on AI, we can actually regenerate the content superfast, but an improved manner. So you'll just see us improve things of locks.
Jack: And at pace to that so for example.
Jack: See us improve our Spanish scores, which is one of our largest courses.
Jack: And people will all over the world will be able to learn Spanish faster.
Jack: We are of course also investing in math and music and chest. There there were spending less effort on that because they are much smaller businesses than language learning but.
Jack: You'll see US for example for math Youll see us.
Jack: Vastly increase the content because of AI.
Jack: Within the next few months is probably the content is probably going to quadruple that we have in math because of AI in call. It I don't know a quarter or so.
Jack: Very helpful. Thank you.
Arvind: Our next question will come from Arvind <unk> with Piper Sandler Please and meet your audio video and ask your question.
Jack: Hi.
Speaker Change: Thanks, Larry Thanks, Matt.
Jack: Good background.
Jack: Well done.
Jack: Is it for all my colleagues online then yes, I believe you.
Jack: Uh huh.
Jack: Look I mean, you launched marathon music back in 2023, now you're launching tests and I'm really kind of better understand our business strategy I mean I fully appreciate that.
Jack: Investment costs are minimal.
Jack:
Jack: Even with math I believe it was that just a couple of engineers and and.
Jack: I appreciate that that part of the equation, but also.
Jack: Past couple of years, you've insisted that don't look at math and music and our test is going to be free.
Don't look at it as monetization lever, but they're clearly like a kind of a business strategy of expanding product I'm, just trying to get $10 million in ascending set.
Jack: Yeah.
Jack: To clarify one thing.
Jack: All of our new subjects math music and just when it launches which is going to happen in a few days.
Jack: They all have monetization they do make us money.
Jack: And it's because the same subscription works for everything and if you're not as described and Youre doing math you have to see ads at the end of our math lesson and all of the standard.
Jack: Things that get you to subscribe and we'll get you to subscribe. So we do get subscriptions from people, who are using math or people, who are using music and soon it'll be people who are using chess.
Jack: They're there.
Jack: Proportional to the number of daily active users that we have in those subjects, which is significantly smaller than language learning now theyre growing the good news is these new subjects are growing a lot faster than language learning and now they have millions of daily active users. So there is some monetization there. It's just we're not breaking it out yet but in general the.
Jack: <unk> is really to become.
Jack: Just a language learning app, but an app that teaches you sub.
Jack: Subjects that take a long time to learn and that and these are all going to be subject to that hundreds of millions of people want to learn and that take a long time to learn and that also good for the world We believe that.
Jack: We're getting better at math getting better at music getting better at chess are all things that make people smarter on are good for the world. So that's that's the strategy at the moment and we're very excited what we've known and you are right. We've been kind of cautioning people, we know that it takes a while to grow each of the subjects.
Jack: It took us 10 years to grow language learning to a big scale. So it takes a while to grow these subjects, but but we're very happy with the growth so far for them.
Speaker Change: Perfect and then just a quick follow up what's the sort of like common team and learners.
Speaker Change: Listen to enter a couple of weeks back when you talked about you are looking for large markets and all of that but is there a common thread where like the personal loans masses also learning music or.
Speaker Change: What's the commentary there is definitely overlap in all of our subjects between between them.
Speaker Change: You know the general common thread is people, who want to improve themselves in one way or another.
Speaker Change: And who used to probably a lot of these people used to spend all of their time on playing either mobile games or on.
Speaker Change: Doom scrolling on social media and now they're spending some of that time improving themselves either by getting better at math or music or language or something that's a common theme.
Speaker Change: And there's some overlap between them, it's not 100% overlap. There's many many uses only learned one thing but quite a few users are learning multiple of our subjects, including multiple of our languages.
Speaker Change: Perfect. Thank you.
Sam: Thanks Sam.
Speaker Change: Our next question comes from Wyatt Samsung with D. A Davidson. Please send me your audio video and ask your question.
Speaker Change: Hey, guys.
Speaker Change: Just kind of following up on chess here.
Speaker Change: Could you provide details around timeline and plans for rolling out the course to more users devices.
Speaker Change: What point do you think it'll be widely available and.
Speaker Change: What are your plans around driving engagement and making it well known that you also teach chess.
Speaker Change: And then just looking out a little bit further how do you expect it to contribute to engagement revenue 12 months to 18 months or even further down the line.
Speaker Change: Yeah.
Jeff: Thanks for the question, Okay. So Jeff.
Jeff: I literally a few minutes ago promised the product manager of the testing that I would not give a specific date, but it really is in the next next few weeks, it's like very soon.
Jeff: It'll be there it will first be on iphones and then soon after it'll be on Android phones.
Jeff:
By the end of the year this will be widely available to everybody.
Jeff: In terms of.
Jeff: How we're going to get the word across its kind of similar to Matthew music. Most of it is word of mouth, but we're going to speed it up with our marketing.
Jeff: Certainly, you'll probably see a lot of kind of tick tock or.
Jeff: Instagram videos, so far our mascot doing on hinge things related to chess.
Jeff: So that's going to get the word out we're probably going to you know we're going to test our different we're going to we're going to.
Jeff: Point, our marketing engine towards this this and including also towards map in music.
Jeff: So I think we're going to we're going to see quite a bit of growth from this four for these new subjects in terms of the contribution of chess is similar to map and music.
Jeff: There is a business there is an already people are going to be as soon as we launch it people are going to be able to pay for a subscription for chess them that removes the ads and does all the things that are subscription does so there's going to be a contribution there but.
Jeff: It will depend.
Jeff: It depends on the daily active users and like I said in the previous answer it takes time for daily active users are forgiven subject to grow from zero.
Jeff: So I don't I don't really know what the contribution is going to be in 12 months.
Jeff: But compared to language learning is probably going to be small.
Jeff: Got it okay. Thank you guys.
Speaker Change: Our next question will come from Edison Cai with Citigroup. Please send me your audio video and ask your question.
Speaker Change: Oh, Hi, Luiz, it's great to see such a.
Speaker Change: Hormones given that it's really early in China right now.
Speaker Change: Wellness and I do have one question.
Speaker Change: Marketing and pay and a depth.
Speaker Change: Diving into because of that.
Speaker Change: Last quarter, you talked about how your market campaign any shift shifting from growing the.
Speaker Change: User base into a more likely to be killer to let the users.
Speaker Change: Users know how your in depth English constantly growing and now youre doing chess contents, which I think is another like him.
Speaker Change: Relocated giving it.
Speaker Change: Already.
Speaker Change: Mature.
Speaker Change: <unk> provider.
Speaker Change: Service providers like chest, a pump so how do you think that your market containing a user base grow and it's going to shift from current situation given your diving into.
Speaker Change: Diving deeper into the market in both.
Speaker Change: Language learning and the new markets like chess, playing which is more competitive.
Speaker Change: Yeah.
Speaker Change: I would like to know more about that yeah. Thanks for the question, Okay. So our marketing.
Speaker Change: What's amazing about our marketing is that it's incredibly efficient.
Speaker Change: Most of our marketing efforts, our social media efforts.
Speaker Change: On tictoc or Instagram or different social media.
Speaker Change: Sites, including Chinese sites.
Speaker Change: And where.
Speaker Change: We basically have a really good playbook for doing this type of marketing on social media, where we don't spend very much money. The majority of our efforts are going to continue in the same way that they have been so far which is.
Speaker Change: Making content that goes viral almost every single day.
Speaker Change: Some do content related to duolingo, either made by us or made by our audience goes viral and by that I mean, it gets millions of views that will continue and we're not going to stop investing in that.
Speaker Change: Additionally, what I mentioned last quarter is.
Speaker Change: If we're trying to get things like the word out that.
Speaker Change: Tooling was now good for more advanced English learners were probably going to do some things related to that this includes things like our influencers.
Speaker Change: And it also includes things in certain geographies for example in Japan.
Speaker Change: Sure.
Speaker Change: We ran a television campaign that actually had.
Speaker Change: Video call with Lilly, so you'll see us do stuff like that but the majority of our efforts will continue being.
Speaker Change: For the hour doing on hinge things and when it comes to things like Jeff probably they all will do on hinge things related to chess and I think that'll get the word out that we teach chess.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from Alex Sklar with Raymond James Please on your audio video and ask your question.
Great. Thank.
Speaker Change: Thank you Luis just starting off on packaging across the tiers, you've talked about testing pricing and also potentially moving some certain features across the tiers. What have you kind of learned so far this year from those past how are you thinking about and any change in terms of new features still to come including those in the premium version versus wanting to put in one of the paid plans.
Luis: Yeah, a great question.
Luis: With packaging and pricing.
Luis: It's the same story that it's always been which is we are testing a lot of things and we continue testing I mean for example, we've continued testing pricing in terms of.
Luis: Geographically in different countries, we are testing different prices. This last quarter, we actually tested a price increase for new users and in fact increased the price for Super Duolingo for new users because of that so you'll see us continue doing that going.
Luis: Going forward, we're always testing things, we have not moved things between packages and.
Luis: So for example between between tiers that at the moment Max still contains role play in video call and explain my answer and Super still contains what Super has been has been having this whole time.
Luis: You'll see us change a few things.
Luis: <unk> test a few things I don't know what will end up launching a so far nothing no changes have launched.
Luis: But you'll see us you'll see us doing that.
Luis: It is likely that some of the Max features.
Luis: That are.
Luis: That are cheaper for us to give we may bring them down packages. For example explained my answer is relatively cheap for us to do that is not the core feature of Mexico core feature of Max's video call, but that's a feature that's in Max we may try it on super or even free.
Luis: So we'll try that but at the moment not nothing has changed.
Luis: Okay, Great and maybe one follow up for you you've given some stats on annual in family plan penetration in the past how does that mix look for your Mac space versus the Super base any difference in kind of annual or family plan adoption between those tiers.
Luis: Yeah, sure I think that the.
Luis: The theory of the case for US is providing the right package to the right user at the right time and servicing that that's primarily how we drive Max in Super and payment plan adoption and right now the mix is different for Max then I would say annual our family plan that will evolve over time right. It's still very early days at 7%.
Luis: Subs.
Luis: As Max and so as we move features around and then decide how how and when to surface family plan for Max.
Luis: Users now of all but it's too early to kind of home in on what that's going to look like in the longer term.
Bill: Great. Thank you Bill.
Speaker Change: Our next question comes from Ryan Macdonald with Needham. Please send me your audio video and ask your question.
Ryan Macdonald: Thanks for taking my questions and congrats on a great quarter.
Speaker Change: Two questions on AI lease first for you can you talk about.
Speaker Change: The level of urgency internally in terms of new generative. The features particularly as we're seeing more funding going into this space for G&A and language, whether it's speak are properly. But then also the announcement that Google has some lightweight Nai language learning now and then Conversely on the cost side Matt.
Speaker Change: Yes.
Speaker Change: This email obviously that you published about internally sort of this new approach.
Speaker Change: Any evaluation of use of AI and as we incrementally higher.
Speaker Change: See if we can automate things first can you just talk about sort of how quickly that approach can translate to improve unit economics and does this change your view on the long term sort of structural profitability of the business. Thanks.
Speaker Change: Yes, I think thanks for the question I mean, we're.
Speaker Change: We believe that AI is really transformative for our business and I think it's pretty transformative for a lot of businesses, but we believe AI very transformative for our business.
Speaker Change: It helps us it helps us teach better it helps us create content a lot faster it helps us create content.
Speaker Change: That was just in feasible to do before I mean, a good example is we just released 148 language courses, we wouldn't have done that if it wasn't for AI.
Speaker Change: We are really going all in as a company.
Speaker Change: AI, because it's technology that particularly applies to us.
Speaker Change: Because.
Speaker Change: The main improvement and they are the last couple of years as large language models and language is what we teach so particularly applies to us.
Speaker Change: So you'll see us I mean, we really are.
Speaker Change: A lot of features are being developed.
Speaker Change: But that are related to AI and Youll see us develop the right features for the user so where.
Speaker Change: We really want to stay ahead with it and we believe that we're far ahead of anybody else in this.
Speaker Change: I should mention that in terms of my email to everyone.
Speaker Change: Say that we're going to be a I first we're going to try to automate everything.
Speaker Change: In terms of costs, we're not changing and I'll, let Matt talk a little bit about this we're not changing our estimates because yes. This is going to save us some cost and things that.
Speaker Change: Humans are.
Speaker Change: Used to do with that now I can do however.
Speaker Change: We're going to apply all of that I mean, many of those same people, but we're going to apply not just with people, but all of that to develop AI features. We think this is an amazing opportunity for us. So the cost savings are going to be offset by the fact that we're just investing a lot in making the right features I don't know if Matt has more to say about that but that's how we're seeing it now.
Ryan Macdonald: Ryan just to underline that last point, we have done things because of AI that we wouldn't have been able to do before so that's not taking the.
Ryan Macdonald: Savings to the bottom line, that's investing in the enormous opportunity ahead of us and that's what we're going to continue to do I think we first and foremost prioritize reinvesting to go tackle all of the opportunities and that's that's that's how we're going to use this.
Ryan Macdonald: Excellent. Thanks again.
Ryan Macdonald: <unk>.
Ryan Macdonald: Yes.
Speaker Change: Our next question comes from Andrew Boone with citizens JMP. Please send me your audio video ask your question.
Speaker Change: Hi, guys. Thanks, so much for taking the question I wanted to ask about subscriber conversion rates, it's been a steady progression up kind of over the last four quarters call. It 10 basis points quarter. If you look at kind of trailing 12 month MAU.
Speaker Change: Can you speak to the incremental Max though as it affects that should we expect kind of that step up as you guys do start to unlock maybe what is Max in terms of a lower price.
Speaker Change: <unk> connect that metric to Max <unk> of that subscription product and then I wanted to add on to Ryans question right. Mike just talked about you talked about the end market. What is an AI engineer, that's going be a midlevel engineer that's coming in the next kind of Dr. Louise He dropped out of college you have a Phd.
Speaker Change: Help us understand your view.
Speaker Change: A software developer and how do we think about the efficiency of kind of your opex and work for us on a go forward basis.
Matt: Matt you want to take the first part.
Speaker Change: Okay do you want to you want to start with the second part first.
Matt: Sure I'm happy to talk about the commodity basket.
Speaker Change: I mean look.
Speaker Change: In particular for engineering AI is getting a lot better.
Speaker Change: That is just the case.
Speaker Change: So we're going to see.
Speaker Change: A lot more efficiency from engineers, we're already seeing it.
In terms of what is good at and what its better I think.
Speaker Change: AI coding is really good at creating something from scratch, it's not as good at taking a large codebase, which is what we have on duolingo fully understanding it on making modification for it it's not as good at that and that's going to take some time to be really good at that and so my sense is what's going to happen.
Speaker Change: Truly do not believe that over the next at least the foreseeable future is going to be the case that we're not going to need engineers. In fact, if you look all of these companies even the companies that are developing.
Speaker Change:
The AI are hiring engineers and there's a reason for that I think we're going to need them.
Speaker Change: And we're going to need them.
Speaker Change: In part because theyre going to be so much more effective and they are inefficient and they are now so I think that's what's going to happen, we're just going to see them.
Speaker Change: A lot more efficient another thing that is really <unk>.
Speaker Change: Exciting is that now also non engineers can do stuff, maybe not production code, but just kind of play around with things.
Speaker Change: One of our goals internally at the companies that you know.
Speaker Change: 100% of our employees and I'm not just talking about engineers really 100% of our employees.
Speaker Change: We'll have coded something.
Speaker Change: <unk> AI.
Speaker Change: We want everybody here to know how to automate things and I think just the whole workforce is going to get.
Speaker Change: Ah.
Speaker Change: A lot more efficient because of that.
Speaker Change: Okay.
Speaker Change: Andrew.
Speaker Change: And in that context, what was your first part of your question.
Speaker Change: I want to focus on the incrementally of math right.
Speaker Change: The conversion rate.
Speaker Change: Sorry, I was I was thinking about.
Speaker Change: So when demand was worried that he's going to have to vibe code something himself.
Speaker Change: I love that Covenant I do I do it in those days.
Speaker Change: So when we think about the increment holiday Andrew when we run our a b tests for Max.
Speaker Change: Again, we are not optimizing for.
Speaker Change: And the very specifics since we're not optimizing for a Max subscriber.
Speaker Change: Or an <unk> or this or that we are optimizing for platform LTV and so when we run our a b tests, we have to take into account.
Speaker Change: Are these.
Speaker Change: Max out incremental or not and figuring out the overall impact on platform LTV and that's why we launched maxes because we ran enough of the experiment to figure out that they were incremental there were enough incrementally to it that it was platform LTV positive and we still think that's true and in fact, we think it'll become more true over time.
Speaker Change: <unk>.
Speaker Change: And so that's really my answer to your question is that again, we're not trying to drive a max penetration rate, we're not trying to drive our subscriber penetration rate, we're trying to drive platform LTV higher by driving mix shift to higher LTV plans that's Max.
Speaker Change: And we see also you know theres a lot of.
Speaker Change: Upgrades part of the Q1 outperformance was driven by the fact that Super subscribers, we're converting up to.
Speaker Change: Max subscribers and Thats, what I said to the answer to another question, which was showing our current users free and paid.
Speaker Change: The right plan at the right time to get to the right LTV. So we feel really good about the incremental audience and the overall platform LTV increase we're seeing from Max.
Speaker Change: Thank you.
Speaker Change: Our next question will come from Mark Mahaney with Evercore ISI. Please send me your audio video ask your question.
Speaker Change: Okay. Thank you.
Speaker Change: I had missed this but I know you've disclosed the <unk>.
Speaker Change: Max penetration I guess, its 7% did you provide an update on Matthew music adoption and then.
Speaker Change: Talked a little bit Louise I think about it.
Speaker Change: Pricing for Super and I think your logic is.
Speaker Change: You've changed pricing and Super in quite some time and as you improve the product the functionality to make it better.
Speaker Change: You or it <unk> create greater value.
Speaker Change: Potentially ask people to pay more for it so.
Speaker Change: A long way of answering.
Speaker Change: Are you thinking about raising prices kind of across the board on Super and <unk>.
Speaker Change: What would be the key factors that would make you decide to do that now versus doing it we're doing it next year. Thank you.
Mark Mahaney: Thank you Mark.
Mark Mahaney: In terms of adoption for mathematic Theres no update from last time that we talked about it I mean, which we said we had about 3 million daily active users learning either math or music. It is it's higher now it's growing.
Mark Mahaney: And Matthew music are growing faster than language learning, but compared to languish lenders to small.
Mark Mahaney: Now in terms of prices where.
Mark Mahaney: We were just always testing different things so.
Mark Mahaney: At the moment, we're testing prices in different countries and Everything's My sense is there will be increases, but I don't know what the what the a b test will tell us and generally we're just going to be data driven on this.
Mark Mahaney: Thank you.
Speaker Change: Our next question will come from John Koller, one Tony with Jefferies. Please Amit your audio video and ask your question.
Speaker Change: Great. Thanks for taking my questions.
Speaker Change: First I wanted to come back to the topic of incrementally a Max can you give us a sense for what portion of recent Mac subscribers are new to do a lingo and what portion are intermediate English learners, just to give us a sense for that incremental Avi in second.
Speaker Change: Turning to gross margins for Max you'd originally characterized as subscription tier is dilutive to gross margin, but accretive to gross profit dollars has that changed as more cost effective AI models had been released since you first made those comments. Thanks, yes.
Speaker Change: Yeah. So we're seeing like I mentioned to the.
Speaker Change: To Andrew you know, we're seeing good Incrementals city, we like the increase in platform LTV from Max a lot of that come through they've got a lot of new to the platform or new to paid subscribers are choosing Max for the first time.
Speaker Change: But we're also seeing a relatively high proportion of folks upgrading into Mac. So of total Maxim Scriber.
Speaker Change: Good chunk of those are coming from folks who currently are paying us and then start paying us more so in general the bookings in a crew mentality of Max's attractive and we like how that's trending.
Speaker Change: In terms of the gross margin for Max nothing.
Speaker Change: The you mentioned has changed it's still the same lower gross margin percent highest growth higher gross profit dollars that will change overtime as two things happen one as the price of the generative I used for video call. For example comes down and we saw in Q1 New models released.
Speaker Change: With lower pricing.
Speaker Change: And then we're also going to run optimizations in the back half of the year. So we would expect.
Speaker Change: The gross margin of Max.
Speaker Change: To increase but again the goal of Max's right now to drive incremental subscriptions and bookings and LTV.
Speaker Change: And still make a really attractive gross profit dollar return.
Speaker Change: We are on track like we mentioned on the last call to do that better and better throughout the course of the year.
Speaker Change: Thanks, so much.
Speaker Change: Our next question will come from Ross Sandler with Barclays. Please on your audio video and ask your question.
Speaker Change: Hey, guys.
Speaker Change: So.
Speaker Change: Wanted to ask a question.
Speaker Change: Sort of rematch of loop or maybe for Luis because we won't need a Phd to answer this.
Speaker Change: Yesterday Apple was finally dealt.
Speaker Change: Fairly definitive blow on the conjunction.
Speaker Change: Conjunction with epic around like.
Speaker Change: High quality developers like fortnite or duolingo.
Speaker Change: Re directing users to pay for subscriptions.
Speaker Change: Off the appstore billing and.
Speaker Change: It seems like you won't be discriminated against if you do that now so I know 60% of bookings comes from.
Speaker Change: <unk> payments I think because what it says in your filings so.
Luis: Luis I guess.
Speaker Change: You guys looked at testing the flow of directing people to the web.
Luis: Matt.
Speaker Change: What percent of Cogs does this represent.
Speaker Change: And kind of where do you guys see this going is this an opportunity to drive a little bit of leverage.
Speaker Change: Yeah, I mean first of all this this ruling is brand new.
Speaker Change: Obviously, we saw it.
Speaker Change: The.
Speaker Change: The App stores, both both Apple and Google have been great partners to us.
Speaker Change: One of the things that they really help with it's just ease of payment I mean People's credit card is already in there and it's usually just kind of like a double click that you have to do and you pay so that.
Speaker Change: That's great and that has really helped us.
Speaker Change: Yeah.
Speaker Change: My sense is that if we were to try to send people to the web.
Speaker Change: <unk>.
Speaker Change: We wouldn't have to pay apple or Google, but we would see slightly fewer people actually converting because theres more friction.
Speaker Change: We're obviously going to test something here given the ruling where we're obviously going to test something and we'll see what happens but at the moment. There is no I can't give you a results it's hard to know exactly how much. This will this will help it may help but it's hard to know by how much.
Speaker Change: Yeah.
Speaker Change: And then on the gross margin on the Cogs side, Ralph I mean, its the majority well over a majority of our Cogs are payments to <unk>.
Speaker Change: Payment providers and so to the extent that you would take.
Speaker Change: Take a chunk out of those it would be definitely accretive to gross margins, but as Louis said, it's early days for us and we're going to run a b tests in Green machine any change we make so it would happen over time.
Speaker Change: We would just have to wait and see it certainly seems like it's.
Speaker Change: You know potential optionality, but but again, it's it's not something that we run experiments on given the recency of the news.
Speaker Change: We would be foolish not to test us.
Speaker Change: <unk>.
Speaker Change: Our next question comes from Duane <unk> with Wolfe Research. Please on your audio video and ask your question.
Speaker Change: Hello.
Speaker Change: Thanks for taking my questions I just have one for you.
Speaker Change: What is your vision for the video call feature.
Speaker Change: And it evolves over the next 123 years, what are you working towards what's been good.
Speaker Change: Stayed back close to an end state.
Speaker Change: Solution looks like.
Speaker Change: Yeah, I mean for vehicle. The main thing we want is to be able to get you to practice conversation.
Speaker Change: That's a very important part of language learning and so the more time, we get people to spend on practicing conversation the better they will get at the language that they're learning we know that so.
Speaker Change: So what we want to do is just get people to spend more time on it how do we do that by making it a lot more engaging and by making our lot Snappier. So for example, right now there's still a little bit of latency between when you say something on when Lily to response, we need to decrease that it is still the case that.
Speaker Change: You know sometimes to cut you off a little too soon we need to get better at she needs to get better at knowing when the conversation has faded out humans actually really good at basically saying I know no you're not so interested in talking to me. So I'm just going to leave.
Speaker Change: Humans are very good at that Lilly is not very good at that.
Speaker Change: So.
Speaker Change: That type of stuff, we got to get better at and then what.
Speaker Change: We're going to have a whole world for her.
Speaker Change: She's going to be able to change their background immediately and separate tending that she's like you know.
Speaker Change: Your taxi driver or something so where really the idea is to practice as much languages as possible and to increase engagement and the more we increase the engagement the more people will tell their friends that.
Speaker Change: Not only to use duolingo, but if they are doing single users they should get duolingo macs to be able to practice with Lilly.
Louis: Thanks Louis.
I'm showing no further questions. This concludes the question and answer session of the call I would now like to turn the call back to the host for closing remarks.
Louis: Just want to say thank you. Thank you for the great questions, but more importantly, thank you to our excellent duolingo employees for yet another great quarter. The team is firing on all cylinders. So thank you and thank you everybody.