Duolingo, Inc.

second quarter earnings webcast. We hope you enjoy that celebrity compilation, which complements the themes we discuss in this quarter shareholder letter, which was released today after market close. You can find that letter on our IR website at investors.duolingo.com. On today's call, we have Louise Von Ahn, our co-founder and CEO. and Matt Scaruba, our CFO. They 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 that this event is being recorded and all attendees are in listen-only mode. 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 now I'll turn it over to Luis.

Thank you, Debbie, and welcome, everyone. I'm pleased to share that we had another record quarter. In Q2, we achieved our highest ever daily and monthly active users, revenue, profitability, and free cash flow, and we surpassed 5 million subscribers. We also just celebrated our two-year anniversary of becoming a public company, and I'm very proud that we have outperformed the lofty goals we set for ourselves at the time of the IPO. Thanks to our continued strong performance, we're raising our top line and profitability guidance for the year. Matt will walk you through our updated outlook shortly. Our strong results are a testament to our relentless focus on making our product more fun, engaging, and effective. We delight our learners who tell their friends and family about us, which drives our organic word of mouth growth. Add to that our unique and efficient, though at times unhinged, approach to marketing, and you get a brand that has become synonymous with language learning. And that creates opportunities for us to be part of cultural moments, like you saw this past month when we were referenced in the Barbie movie. I should mention that this was an inbound request to us. We didn't seek out being in the film, which I think is a reflection on the strength of our brand. Over the past eight quarters, we've seen very strong DAU growth, and that growth has been high quality and has been broad-based, with users coming from all regions of the world. The US continues to grow nicely, and some of our fastest growth has come from the wealthier European countries. This growth not only validates the huge addressable market of language learners, but because of the power of our freemium business model, which I've discussed in previous shareholder letters, strong user growth drives strong financial performance. We attract free users primarily through word of mouth, we delight them through product improvements driven by experimenting and optimizing the app, and then we convert them to paid subscribers. This playbook for growing subscribers has worked exceptionally well. Last quarter, the focus of our shareholder letter was on how AI has been part of our strategy for a long time. We have been using artificial intelligence for years to make our product more personalized and engaging. We're also embedding the recent advances in this type of technology throughout our products and the company. For example, we're using generative AI to speed up our script writing for Duolingo stories and to more efficiently scale our course content. We're using generative AI to continue to innovate on Duolingo Max, which is a higher tier offering. We will continue improving Max features and testing pricing and packaging before rolling it out more broadly, as we do with all our major changes. Using new technologies to make excellent products takes time to get right. But it's exciting to think about how the acceleration in AI can help us achieve our vision of teaching you as well as a human tutor. And with that, I'll turn it over to Matt.

Thanks, Luis. In the second quarter, we outperformed our expectations for user growth with DAU and MAU increasing 62% and 50% year over year, respectively. This took DAU to an all-time high of 21.4 million and MAU to an all-time high of 74.1 million, respectively. On our total paid subscribers, we increased them by 59% to 5.2 million. Our strong user and subscriber growth fueled our top line performance with bookings and revenue increasing 41 and 44% year over year respectively, or 42 and 46% on a constant currency basis. We continue to manage the business with cost discipline and this quarter we delivered our highest quarterly profit. Our net income totaled $3.7 million compared to a net loss of $15 million in the year ago quarter. Note that our net income benefited from a 1.3 million non-cash tax benefit. We also posted a record high adjusted EBITDA of 20.9 million, or a 16.5% adjusted EBITDA margin. Note that we moved some marketing spend from Q2 to the back half of the year, and that this increased our adjusted EBITDA this quarter by about half a point, or a point and a half. Based on our strong results and trends, we are raising our four-year guidance and issuing the following for Q3 2023. $136.5 to $139.5 million in total bookings, $129.5 to $132.5 million in revenue, and an adjusted EBITDA margin of 13% to 14%. For the full year 2023, we are raising our guidance to $569 to $575 million in total bookings, $510 to $516 million in revenue, and we are updating our adjusted EBITDA margin range to 14 to 15%. Our full year guidance calls for 33% year-over-year bookings growth and 39% year-over-year revenue growth at the midpoint. We feel confident raising our top line guidance because of our strong user growth and continued strong free to pay conversion. And because we've achieved significant operating leverage year over year across the business, that gives us confidence to raise our full year adjusted EBITDA margin guidance by about 300 basis points compared to what we issued on our last call. Let me go through how our Q3 operating expenses are expected to compare to Q2. We expect non-GAAP R&D as a percentage of revenue to increase by about a point. And we expect non-GAAP sales and marketing to increase by about two points due to the sales and marketing spend that I mentioned that we shifted from Q2 to Q3. Non-GAAP Q&A will be relatively stable as a percentage of revenue in Q3. In Q2, our average subscription revenue per subscriber declined by about 7% year-over-year, driven by foreign exchange impacts and regional pricing. At current exchange rates, we expect that the year-over-year decline in this metric has bottomed out and that the year-over-year change will approach zero by Q4 as we finish lapping FX and regional pricing impacts. Our guidance assumes current prevailing foreign exchange rates, and as a reminder, roughly half of our revenue comes from outside the U.S., so every 1% increase or decrease in the value of the dollar versus our basket of currencies has about a $1 million headwind or tailwind, respectively, on total bookings for the second half of the year. As Luis mentioned, we're excited by Generative AI's potential to help us accelerate our mission, and we are experimenting with that in Duolingo Max, our higher tier subscription. We have not yet included any material amount of bookings or revenue from Max in our guidance, and we'll keep you updated on our progress in the coming quarters. Finally, we ended the quarter with approximately 48.8 million fully diluted shares outstanding, using the quarter end closing price. We continue to expect to end the year with about 2% dilution from equity issue to employees. And with that, I'll turn it back to Luis.