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spk10: Good day and welcome to the Duolingo first quarter 2022 earnings call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up question. If you have further questions, you may re-enter the question queue. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Debbie Belevin, Head of Investor Relations. Please go ahead.
spk09: Thank you, Operator, and welcome to Duolingo's first quarter 2022 earnings call. Today, after market close, we released a shareholder letter with our Q1 results and commentary, which you can find on our IR website at investors.duolingo.com. Today's call will be led by Luis Van On, our co-founder and CEO, Matt Scaruba, our CFO, and Bob Meese, our chief business officer. We'll begin with some brief remarks before opening the call to Q&A. Just to remind everyone, during this call, we'll make forward-looking statements regarding future events and our financial performance. which are subject to material risks and uncertainties that could cause actual results to differ materially. Some of these risks have been set forth in the risk factors of our periodic reports filed with the SEC. These forward-looking statements are based on assumptions that we believe to be reasonable as of today, and we undertake no obligation to update these statements as a result of new information or future events. Additionally, we will present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing our performance. And with that, I'll turn the call over to Luis.
spk03: Thank you, Debbie, and welcome, everyone. As usual, I want to kick off the call by reminding you of our mission, which is to develop the best education in the world and make it universally available. We work to achieve this mission by continually innovating and improving our products so that they are fun and effective. Now onto our first quarter results. Since our shareholder letter contains an in-depth discussion of this quarter's performance, Matt and I will provide some brief remarks and then get right into Q&A. Q1 of 2022 was our best quarter yet. We achieved new highs on nearly every metric. In fact, we surpassed our own performance expectations, which led us to raise our full year guidance. We are now projecting full-year bookings growth well above 30% and also expect to be profitable for the year on an adjusted EBITDA basis. The reason behind this stellar performance is clear. Our product focus strategy is working. Thousands of A-B tests that we run to make our products better are materializing in the form of stronger word-of-mouth user growth, stronger paying subscriber conversion rates, and higher overall retention. Our user growth accelerated from the previous quarter. We converted a record number of new paid subscribers, and we retained more of our previous subscribers. All of this resulted in total bookings growth of 55% this quarter compared to Q1 of last year. And now, Matt will discuss our updated outlook for 2022.
spk06: Thank you, Luis. As Luis just highlighted, we had a tremendous quarter. And because of that, we are announcing that we are raising our full year guidance. For Q2 2022, we are guiding to 86 to $89 million in total bookings, 84 to $87 million in revenue, and an adjusted EBITDA of negative four to negative $1 million. For the full year 2022, we are increasing our guidance to 388 to $397 million in total bookings, 349 to $358 million in revenue, and a necessity of zero to positive $3 million. Our full year bookings guidance reflects 32 to 35% year-over-year growth, up from the 26 to 30% year-over-year growth we got into on our last earnings call. In terms of our Q2 guidance, I'd like to point out that this is seasonally our softest quarter in terms of absolute bookings because we don't have our New Year's promotion or other big marketing events as we do in Q1, Q3, and Q4. We plan to continue managing the business with strong cost and capital discipline. For the full year, we expect to be profitable on an adjusted EBITDA basis, even while we continue to invest in R&D as we have done historically. We expect that non-GAAP R&D as a percentage of revenue should be roughly flat compared to last year. While we expect to continue to get leverage in non-GAAP sales and marketing through more efficient spend, we will see some deleveraging in non-GAAP G&A. primarily driven by our expanded office footprint and the fact that 2022 is our first full year as a public company. And now I'll turn it back to Luis.
spk03: Thank you, Matt. Before going to Q&A, I'd like to take this opportunity to thank our entire team for their dedication to delivering on our mission. I'd like to thank our learners who spread the word of our products to their friends and family. And I'd like to thank you, our shareholders, for your support. We look forward to sharing more with you in the coming quarters. And now, we would be happy to take your questions.
spk02: We will now begin the question and answer session.
spk10: To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will now pause momentarily to assemble our rosters. Your first question comes from Eric Sheridan from Goldman Sachs. Please go ahead.
spk01: Thanks for taking the question. I may be staying focused on the investment commentary in your opening remarks. Can you remind us some of the key priorities on the product side that you're investing against? in 2022 and how we should be thinking about that product roadmap beyond just the next 12 months but over the next couple of years. Thanks so much.
spk03: Thank you for the question, Eric. Can you hear me okay? I will listen again. So thank you for the question. So the most important thing to understand is that we're going to be investing the majority of our resources on our language learning app. We think language learning is a massive opportunity, and it's about $60 billion market, which is mostly shifting online, and we are the largest player online. So we're going to be investing mostly in our language learning app. There, you know, we run... And that's kind of the main thing for the next couple of years. Also, as we said in the shareholder letter, most of the changes that we make are relatively small changes, but we are working on a pretty large change that is going to be live in the next few months, which is a redesign of the home screen of the app.
spk04: Hello?
spk02: Thank you. Operator, can you hear us?
spk10: Yeah, we can hear you. Your next question comes from Justin Patterson from KBank. Please go ahead.
spk08: Great. Thank you. Perhaps for Luis and Matt can tack on to this. How should we think about the potential impact to users and monetization from Super Duolingo and the new home screen versus past changes to the app like hearts. And then I have one follow-up.
spk04: Sorry, Justin, can you hear me okay?
spk08: Yeah, I can hear you, although you did cut out a little bit in your response to Eric. Okay.
spk03: Okay, hopefully. I mean, I think we're having a little bit of phone trouble, but hopefully, you know, if I cut out, you can just ask again. But okay, so, you know, we're making some pretty big changes. I mean, there'll be the sign of the home screen of the app. There's also super duolingo. You know, in terms of super duolingo, we don't think that by itself is going to have a pretty major impact on metrics. The main reason we're doing the redesign of what our subscription product looks like is because we think it really fits in a lot more with our Gamify brand. In terms of the redesign of the home screen of the app, we do think that's going to really set us up for pretty big improvements into our metrics, mainly in terms of engagement and teaching better. So those are the two things that we're going to be looking for. I should say also for the redesign of the home screen, we run thousands of A-B tests. We've done some pretty major redesigns roughly every three or four years. So we have experience doing this type of redesign. And there's a couple of things to say there. The first one is we're going to really be looking at our metrics to make sure that everything increases when we launch it. By the time we launch the redesign, we will have a lot of confidence that the metrics will have increased. But, you know, one thing that I should kind of mention to people is that people don't like change. Users don't like change. And this is a pretty major change to the home screen of the app. So even though we know, you know, once we launch it, we will know that our metrics are positive, you know, we may see some negative sentiment here and there, but that's something that we're prepared for. But that's, you know, that's something else. But these are the two major changes we talked about in the shareholder letter.
spk08: Okay, perfect. And then for my follow-up, I just wanted to hit on social features. It sounds like you're having some success there, even helping users find love. I guess you could probably spin that as a Duolingo love language app down the road. But I'm curious to hear how those social features are benefiting the KPIs, whether it's daily engagement or just better conversion over time, less churn on the app. Thank you.
spk03: Yeah, the beautiful thing about social features is that they help every single metric. Really, what they do is they get users to come back more often because their friends who are on Duolingo contact them on Duolingo, so they get users to come back more often. They get users to spend more time on the app. They increase user retention. And because people spend more time on the app, they also learn more and also subscribe more and actually pay us more. So the social metrics really increase everything, and this is why we're investing in them.
spk04: Great. Thank you.
spk02: Thank you. Your next question comes from Mario Lou from Barclay.
spk10: Please go ahead.
spk07: Great. Thanks for taking the question. So the first one's on the strong bookings number this quarter. I believe you came in nine points above your guidance at the midpoint. So just curious if you could provide more color in terms of what led to that outperformance. You guys mentioned the New Year's campaign, but anything else to kind of point to that led to this? Thanks.
spk03: Yeah, great question, Mario. I mean, the result of our outperformance, our outperformance really is the result of just hundreds of A-B tests that we've been running. I mean, thousands, actually, of A-B tests that we've been running over the last couple of years. And it's just a compounding effect. I mean, if you look at the outperformance on revenue, that comes from basically increased users, also increased conversion to paying subscribers, and also increased retention of paying subscribers. So basically, all our KPIs are up. And it really is just the result of compounding effects from just a ton. We had a good New Year's campaign, but in addition to that, the months after that, it's also continued up-performing.
spk07: Great. Thanks, Luis. And then just to follow up on the full year guide that you guys raised, I guess how should we think about that raise in the context of the first quarter peak, and then any embedded impact from FX or impacts from Russia that you guys can call out?
spk04: Yeah, thanks.
spk06: I'm happy to answer that. So obviously the four-year guide takes into account the results of Q1 actuals. The outperformance that Luis is talking about is really broad-based, as we've mentioned. So it's not just any one thing in the business. It's improved user growth, conversion, and retention. And so the guide takes into account all of those things. Now, I just do want to mention that The world is obviously an uncertain place, and we're obviously paying very close attention to what's going on with the war you mentioned in Ukraine, inflation, interest rates, and all those things. And so we've taken a prudent approach to the guide for the rest of the year, just knowing that there is a lot of uncertainty out there.
spk05: Got it. Thanks, Matt. Operator, are you there? Can anybody hear us?
spk03: Hi, everybody. I think you can all still hear us. It seems like the operator essentially disappeared. So we are trying to figure out what to do with the operator for now. Sorry about that. This is Luis again. I think we just lost the operator. I'm going to tell some jokes.
spk04: I'm kidding you.
spk01: Excuse me, everyone. Give me one moment. We'll go ahead and proceed with Q&A here. And it looks like we currently still have
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