Duolingo, Inc.

Good evening, everyone. You haven't accidentally tuned into a replay of Duocon. This is actually Duolingo's third quarter earnings webcast. Today, after market close, we released this quarter shareholder letter, a copy of which you can find on our IR website at investors.duolingo.com. On today's call, we have Luis Fanon, our co-founder and CEO, and Matt Scarupa, 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. Please note that this event is being recorded and all attendees are in listen-only mode. And just a reminder, 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 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'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. Luis.

Thank you, Debbie, and welcome, everyone. We had another fantastic quarter. We surpassed our expectations and had impressive user bookings and revenue growth. And it was a fun quarter, too, with the Barbie campaign and also preparing for our best duo con yet. We also feel very good about the coming quarter, which is why we're raising our full year guidance to now reflect 40% year over year bookings growth. And we're also materially raising our full year adjusted EBITDA margin. Matt will share more details on our results and outlook shortly. Every year, we run thousands of experiments to make our products more fun, engaging, and effective. A lot of these experiments result in small wins that add up over time. If you look back at the past two years, you can see evidence of this in action. In Q3 2021, we had about 10 million DAUs, and this past quarter, we had over 24 million. In Q3 of 2021, we had 2.2 million subscribers, and this past quarter, we had nearly 6 million. The way we have done this has been through our process of making small changes, running a test to see how users react, and then doubling down where we see gains. We've also hit some exceptional home runs. For example, our marketing has been a source of extraordinary wins that were fantastic for the business, even though they are hard to predict. Think of our partnership with HBO's House of the Dragon, and most recently, our Barbie social campaign built around the inclusion of our trademark ding in the Barbie movie. The campaign generated 140 million organic social impressions, which is a record for us. To create the opportunity for both incremental improvement and home runs, every so often we make bolder moves that open up entirely new areas for experimentation. For example, last year, we redesigned the home screen of the app to give us more room to experiment with engagement, efficacy, and monetization. And earlier this year, we set out to create a multi-subject app experience by integrating our existing math course and a new music course into our flagship app. This change, adding math and music to the main app, is a good example to highlight. We did this to give our users an even more engaging experience. By adding new subjects into the main app, we believe we can more rapidly scale these new subjects with our gamification mechanics like streaks, leaderboards, and quests that have been so effective in the language learning app. As more users access these new courses, we believe it will increase their commitment to our platform and that they'll be more likely to recommend us, which will further drive organic user growth. It's clear that our strategy is working as demonstrated by our exceptional growth. As I've said before, we can't expect to accelerate forever, but it's very gratifying to see that our product improvements and creative marketing efforts are resonating with our learners. And I'm excited about our ongoing innovation and look forward to all the energy that a new year brings. And with that, I'll turn it over to Matt.

Thanks, Louise. I'll walk through how we did this quarter in more detail, and then I'll provide our Q4 and updated four-year guidance. As Louise shared, we were extremely pleased with this quarter's performance, which exceeded our expectations, thanks to our team's continued strong execution. Our DAU increased 63% year-over-year to 24.2 million. and MAU increased 47% to 83.1 million. This growth continues to be not only rapid, but also high quality and broad-based with strong growth from around the world with improving free-to-pay conversion as well. Our total paid subscribers increased by 60% to 5.8 million. This continued strength in user and subscriber growth drove bookings and revenue growth of 49% and 43% year over year respectively, or 48% and 42% on a constant currency basis. Turning to profitability, we've made tremendous progress in expanding the bottom line as we continue to see very strong top line growth coupled with cost discipline. Our net income totaled 2.8 million compared to a net loss of 18.4 million in the year ago quarter. We also posted an adjusted EBITDA of 22.5 million, or a 16.3% adjusted EBITDA margin. This is a roughly 14-point expansion year-over-year. This quarter, we capitalized additional R&D expenditures compared to Q3 last year as we continued to innovate on Macs and math and music. Excluding this would have led to an adjusted EBITDA margin expansion of about 12 points year-over-year. Based on our strong results and the trends we're seeing so far, we feel confident about raising our four-year outlook and issuing the following Q4 guidance. For Q4 2023, we are guiding to $167 to $170 million in total bookings, $145 to $148 million in revenue, and an adjusted EBITDA margin of 19.8 to 20.8%. For the full year 2023, we are raising our guidance to $598 to $601 million in total bookings, $525 to $528 million in revenue, and we are updating our adjusted EBITDA margin range to 16.6 to 16.9%. Our full year guidance calls for 40% and 42% year-over-year bookings and revenue growth, respectively, at the midpoint. As a reminder, at the end of every December, we start a promotion that discounts our annual subscription. Since we offer this promotion only once a year, Q4 Booking's performance has more seasonal variance than other quarters. Note that our guidance assumes current prevailing foreign exchange rates as well. And because we've achieved significant operating leverage this year across the business, we feel good about raising our full year adjusted EBITDA margin guidance by about 225 basis points at the midpoint versus our last call. Now I'll provide some color on average revenue per subscriber, OPEX and share count. Our average revenue per subscriber has declined by about seven to 8% for each of the past three quarters, driven by a combination of foreign exchange impacts and regional mix shifts. Q3 saw higher than expected conversions in non-US countries, which kept the year over year change in that same range. We expect the year over year change in ARPU to improve in the coming quarters. As to OPEX compared to Q3 of this year, in Q4 we expect non-GAAP R&D as a percentage of revenue to decrease by two points and non-GAAP sales and marketing to decrease by almost two and a half points. We expect non-GAAP G&A to be roughly flat as a percentage of revenue in Q4. We ended the quarter with approximately 48.8 million fully diluted shares outstanding using the quarter end closing price. And we expect to end the year with about one to 1.5% dilution from equity issue to employees. Finally, as Louise said a few moments ago, the last two years have been extraordinary for our business. Our user growth has benefited from compounding continuous product improvements, including home run improvements like we've seen with our street mechanic. We have unlocked social first marketing and have had some big brand moments like the Barbie movie. And we've also seen large increases in conversion from free to paid conversion. Looking ahead, we feel very good about next year, but as Luis has already reminded you, our user growth is unlikely to accelerate forever, and it may be hard to repeat some of the one-time events that have happened this year. Even so, we feel good about our ability to continue our strong top-line growth and make progress towards our long-term margin. And with that, I'll turn it back to Luis.