Release Date: February 27, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Duolingo Inc (NASDAQ:DUOL) reported a record quarter with a 51% year-over-year increase in daily active users, reaching 40 million.
• The company achieved its highest quarterly bookings, revenue, and adjusted EBITA, driven by strong Duolingo Max subscriptions and family plan momentum.
• Duolingo Max, featuring a Gen AI-powered conversation feature, has seen meaningful user engagement and represents about 5% of total subscribers.
• The family plan now accounts for 23% of total subscribers, showing higher retention and lifetime value than individual plans.
• Duolingo Inc (NASDAQ:DUOL) plans to leverage generative AI to improve content across language, math, and music courses, aiming for faster scaling and global reach.

Negative Points

• Duolingo Inc (NASDAQ:DUOL) anticipates a temporary 170 basis point year-over-year impact on gross margin in 2025 due to AI costs associated with Duolingo Max.
• The company expects a more moderate pace of profit growth compared to the exceptional levels of the past two years.
• AI costs are currently high, and while they are expected to decrease over time, they are not being optimized immediately.
• Duolingo Inc (NASDAQ:DUOL) faces challenges in pricing Duolingo Max in poorer countries, such as India, where the current price is considered too high.
• Retention of resurrected users is not as strong as that of new users, indicating a need for improvement in user retention strategies.

Q & A Highlights

• Warning! GuruFocus has detected 2 Warning Sign with DUOL.

Q: Can you help us understand which cohorts are exhibiting the strongest growth by language or geography for Duolingo Max, and how much of this growth is from new subscribers versus upgrades from existing subscribers? A: The growth in Duolingo Max is similar to our Super Duolingo markets, with Japan showing a higher share of Max subscribers. We saw strong adoption from both new subscribers and upgrades from existing Super subscribers. English learners particularly favor the video call feature, leading to a higher propensity to buy Max compared to Super. (Respondent: CFO, Matt Skuppa)

Q: Regarding AI investments, are they mainly focused on Duolingo Max and voice calls, or are there other areas within AI? Also, how does pricing strategy differ for English learners in less developed regions? A: AI investments are focused on automating internal processes to reduce costs and enhance content creation speed. We are also investing in features like video calls, which incur real-time AI costs. Pricing for Duolingo Max is set to avoid losses, which means higher prices in some regions like India, but we expect to optimize costs over time. (Respondent: CEO, Luis Van On)

Q: Can you provide insights on daily active user growth and whether the gross margin impact from AI costs is temporary? A: We experienced 51% year-over-year growth in daily active users, with all regions showing growth. The gross margin impact from AI costs is temporary, expected to normalize in the second half of the year as we optimize costs. We anticipate continued margin expansion, albeit at a slower pace than previous years. (Respondents: CEO, Luis Van On and CFO, Matt Skuppa)

Q: How should we think about the use of AI to enhance content in math and music, and what are the monetization plans for these categories? A: AI will significantly enhance our math content creation, allowing us to expand from basic to more advanced topics. Math and music courses are monetized similarly to language courses, with ads and subscription options. We expect these categories to grow and contribute more to our overall user base. (Respondent: CEO, Luis Van On)

Q: What are the expectations for Duolingo Max penetration by year-end, and how does it impact revenue growth? A: While we don't have a specific target for Max penetration, we expect it to grow significantly throughout the year. Revenue growth will naturally step down as it reflects the composite of past bookings growth rates, but we anticipate Max to be a material contributor to bookings in 2025. (Respondents: CEO, Luis Van On and CFO, Matt Skuppa)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.