Duolingo, Inc.

Good afternoon and welcome to Duolingo's first quarter earnings webcast. My name is Debbie Belevin, head of IR. Today, after market close, we released our quarter end shareholder letter with our Q1 results and commentary, which you can find on our IR website at investors.duolingo.com. On today's call, we'll have Luis Fanon, our co-founder and CEO, and Matt Scaruba, our CFO. They'll begin with some brief remarks before opening the call to questions. All attendees are in listen-only mode. Analysts will be able to ask a question by using the raise hand feature. And please note that this event is being recorded. Just a reminder that 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 of 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'll 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.

Hello, hello, everyone. Thank you, Debbie, and welcome. I'm proud to report that we kicked off this year with another great quarter. We had strong user growth, top line results, profitability, and free cash flow. In the first quarter, our user growth exceeded our expectations. DAUs increased 62% year over year to 20.3 million, with all major markets growing nicely. Our strong user growth, of course, helps us deliver on our mission to create the best education in the world and make it universally available. but it also helps us increase paying subscribers, which are up 63% year over year to 4.8 million or 8% of MAUs at quarter end. This user and subscriber growth led to bookings and revenue climbing 37 and 42% year over year, respectively. And thanks to our continued financial discipline, this quarter saw us post our highest profitability ever. As a result of this outperformance, we're raising our top line and profitability guidance for this year. Matt is going to walk you through our updated outlook shortly. I've said many times before that the hardest thing about learning a language is staying motivated. That's why I'm proud that our engagement numbers continue to improve, with our DAU to MAU ratio reaching an all-time high of 28% compared to about 25% a year ago. And the number of DAUs with a streak longer than seven days grew to nearly 14 million. Our goal is to keep learners coming back to our products every day, and we mainly do that by continually innovating and improving them so that they are fun and effective. This quarter's shareholder letter focuses on how well the recent advances in generative AI complement our existing competitive advantages, like our data moat, our beloved brand, and our unique way of teaching. As a former computer science professor, I've always believed that humans and computers working together can accomplish incredible things, and applying this synergy to benefit the greater good has long been my passion. I also feel very fortunate to be among the companies with the best chances of taking advantage of the rapid advances in AI. As you'll recall, last quarter, we announced our new higher tier subscription offering, Duolingo Max, which is powered by GPT-4. We are proud that we are one of the few companies that have launched a live consumer-facing product with this technology. That we did this so quickly speaks to the talent of our team. Also last quarter, my shareholder letter reminded everyone that our freemium business model enables us to grow organically, keeps competitors at bay, and provides us with enormous amounts of data that we use to make our products better. Because of our large user base, we're able to test Max features on small fractions of users and iterate rapidly. This is a great example of how our model works in general and how we'll use generative AI in particular. As you can tell, I'm very excited about all the possibilities I see with AI and Duolingo Max, but I should emphasize that we're still in the early stages of rolling Max out. We'll continue to update you about the progress we're making over time. And with that, I'll turn it over to Matt.

Thanks, Luis. To recap our impressive results, in the first quarter, we delivered 37% bookings growth year over year, which was about 42% on a constant currency basis. We had a net loss of $2.6 million compared to a net loss of $12.2 million in the year-ago quarter. And we posted our highest quarterly adjusted EBITDA of $15.1 million, which was a 13.1% adjusted EBITDA margin. We also had our highest quarterly free cash flow margin of about 25%. Based on this strong start to the year, we feel very good about our Q2 and four-year outlook. For Q2 2023, we are issuing guidance of $128 to $131 million in total bookings, $122 to $125 million in revenue, and an adjusted EBITDA margin of 11% to 12%. And for the four-year 2023, we are raising our guidance to $552 to $561 million in total bookings, $500 to $509 million in total revenue, and we are updating our adjusted EBITDA margin range from 11% to 12%, which reflects an incremental margin of about 32%. Because of the strong trends we saw in Q1, we are guiding to continued strong top line growth with bookings growing at 30% year over year at the midpoint and revenue growing at 37% at the midpoint. The combination of strong top line growth and continued discipline on operating expenses is why we feel good about raising our adjusted EBITDA margin guidance at the midpoint. In Q2, we expect each non-GAAP expense line item to show operating leverage year over year, with R&D showing about one point of improvement as a percentage of revenue, G&A showing about three points of improvement, and S&M showing about 1.5 points of improvement. I know that the S&M line would show about 2.5 points of improvement, but for the roughly $1.5 million of S&M spend that was time shifted from Q1 of this year into Q2. As to the seasonality we expect for the rest of the year in adjusted EBITDA, We are guiding to an 11% to 12% adjusted EBITDA margin for Q2. Our Q3 margin will be lower than Q2. And that's the quarter in which the largest portion of our new hires start. And then in Q4, the margin will expand because that quarter is typically our strongest revenue quarter. We don't expect a material step up in cost between Q3 and Q4. As Luis mentioned, we are excited about Duolingo Max, but we are still in the early days of rolling it out. We have not yet included any material amount of bookings or revenue in our guidance for this new higher tier. We will keep you posted on the progress in the coming months. Finally, we ended the year with approximately 48.3 million fully diluted shares outstanding using the quarter end close price. And as we mentioned on the last call, we expect to end the year with about 2% dilution from equity issued to employees. And with that, I'll turn it back to Luis.