Duolingo, Inc.

Good afternoon and welcome to Duolingo's third quarter 2022 earnings webcast. All attendees are in listen-only mode. Today after market close, we released our quarterly shareholder letter with our Q3 results and commentary, which you can find on our IR website at investors.duolingo.com. On today's call, we have Luis Von Ahn, our co-founder and CEO, and Matt Scarupa, our CFO. They will begin with some prepared remarks before opening the call to questions. Analysts will be able to ask a question by using the raised hand feature. Please note that this event is being recorded. Just a reminder that we will 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 that 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. 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 it over to Luis.

Thank you, Debbie, and welcome, everyone. I'm pleased to report that we delivered another strong quarter, continuing the momentum we've seen all year. We saw accelerating user growth with daily active users increasing 51% year-over-year. We also saw bookings grow 41% year-over-year, which came from growth in conversion year-over-year and from steady retention rates. We're not seeing any signs of consumer softness in our subscription metrics, and as a result, we're raising our full-year guidance again. I want to spend a little more time talking about our user growth because it's so important for our business. Daily and monthly active users continue to accelerate for the fifth quarter in a row, reaching all time highs in this third quarter. Of course, we can't expect this acceleration to go on forever, but the trend this year is evidence that our focus on organic growth coupled with modest and efficient marketing spend is an effective strategy. This is why we continue to invest in R&D to make our products even more fun and engaging, which is what drives word of mouth growth. And our strong using growth this year will also help drive bookings growth in the future. Because we have a great free product without a paywall, a good portion of the learners that have joined us this year will convert to paying subscribers in the coming quarters, providing a tailwind for subscription bookings. As to other parts of our business, you all know that the digital advertising market has faced headwinds this quarter. And while this impacted our ad revenue, the overall impact to our business has been small because ad monetization isn't a major focus for us. Rather than actively seeking to grow this revenue stream, ads have served more of a strategic purpose for us, which is to help give learners a reason to convert to paying subscribers. On the other hand, in-app purchase revenue is a priority for us, as we believe it's a bigger opportunity than ad revenue. Today, IAPs or in-app purchases only make up about 5% of revenues, up from 3% last year. But we believe we have plenty of room to increase this as we experiment with new features that encourage learners to make a la carte in-app purchases. Overall, we continue to maintain our financial discipline and manage our costs prudently. While our headcount continues to grow, we have never gone nuts on hiring. And because of that, we don't have to implement cost controls like layoffs or hiring freezes in order to achieve profitability. As I reflect on 2022, it's been a stellar three quarters for our business, even as the macro situation has gotten more uncertain. And the fourth quarter is a busy and fun quarter for us. We have just launched our new home screen to most users, launched our new math app, and we launched our New Year's promotion in late December. I'm excited about these efforts and look forward to all the energy and innovation that a new year brings. And with that, I'll turn it over to Matt to talk about our financial outlook.

Thanks, Luis. We had another exceptional quarter, outperforming our expectations on the top line and on profitability. And given our outperformance, we are raising our four-year guidance. During the third quarter, we delivered total bookings growth of 41% year over year. And as a reminder, over half of our revenue comes from outside the U.S. So on a constant currency basis, bookings growth would have been nearly 50%. As to our guidance for Q4 2022, we are guiding to $112 to $115 million in total bookings, $98 to $101 million in revenue, and an adjusted EBITDA of negative three to break even. For the full year 2022, we are increasing our guidance to $414 to $417 million in total bookings, $364 to $367 million in revenue, and an adjusted EBITDA of positive $7 to $10 million. Our four-year bookings guidance reflects 41% to 42% year-over-year growth, up from the 37% to 39% year-over-year growth we guided to on our last earnings call. Our updated guidance assumes current foreign exchange rates, and note that every 1% increase in the value of the dollar versus our basket of currencies has about a half a million dollar impact on bookings in the final quarter of the year. As Luis mentioned above, we continue to be disciplined in how we manage our expenses. In the fourth quarter, we expect non-GAAP R&D will increase as a percentage of revenue as we continue to invest in making our products more fun, engaging, and effective. Our non-GAAP sales and marketing expense as a percentage of revenue is expected to increase slightly, and non-GAAP G&A should stay roughly flat. For the full year, we expect to achieve approximately two to three points of operating leverage compared to last year. We ended Q3 with approximately 47.6 million fully diluted shares outstanding using the average Q3 closing price. And we expect to end the year with approximately 3% dilution from equity issued to employees. We will provide our full year 2023 guidance on our fourth quarter earnings call. But in the meantime, I'd like to remind everyone that we believe we are still early in our monetization efforts and believe that we have strong top line growth ahead of us. We will continue to invest in R&D to drive user growth and monetization, and we will invest more in early-stage efforts like the Duolingo English Test, Duolingo ABC, and Duolingo Math. But even as we do that, we will stay focused on making measurable progress each year toward our long-term profitability target of 30% to 35% adjusted EBITDA margins. And with that, I'll turn it back to Luis.