Duolingo, Inc.

Good evening, everyone, and welcome to Duolingo's second quarter 2024 earnings webcast. I'm Debbie Belevin, head of investor relations. 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 Scaruba, our CFO. They'll 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, this event is being recorded and all attendees are in listen-only mode. 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 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 will turn it over to Luis.

Thank you, Debbie, and welcome, everyone. I'm excited to report that we delivered another strong quarter, with daily active users growing 59% and revenue growing 41% year over year. We had a record adjusted EBITDA margin of 27%, and this marked our fifth consecutive quarter of being net income positive. We also achieved two milestones, surpassing 100 million monthly active users and reaching 8 million paying subscribers. This is particularly impressive considering that only three years ago, at the time of our IPO, we had 38 million MAUs and just under 2 million subscribers. Our top of funnel growth remains strong, driven both by new users and those returning to the app after having been away for over a month, and that's across both more and less penetrated markets. Our free, fun, and effective app gets better over time through continuous testing and iteration, and that's why in Q2, our DAU growth accelerated and we reached a record high 33% DAU to MAU ratio. And not only did our business perform well, but we're also making substantial progress on our long-term growth initiatives. This year, our monetization priorities are optimizing both our family plan and our tiered subscription plans so that we can offer learners more choices at various price points and increase LTV. We continue to see excellent growth in our family plan. We've rolled out improvements to increase engagement between family members, and we're also helping existing individual subscribers discover and convert to family plan more often. As a result of these efforts, the family plan now makes up about 20% of our subscribers. At the end of Q2, we began to see the impact of Duolingo Max, our highest-priced tier with AI-enabled features. The rollout of Max has progressed so that as of now, it's available in five courses in 27 countries, covering about 15% of our DAUs. During Q3, you will see us expand the number of countries Max is available in, and by year end, we expect it to be available in most countries on both Android and iOS. This will set us up to see the impact of Max more fully in 2025. We will also be introducing new Max features that we believe will resonate with learners. This includes AI-powered immersive conversational practice, one of the most requested features over the last 10 years. Join us at Duocon on September 24th for the unveiling of this new magical experience. I want to conclude by talking about our initiative to better serve advanced English learners, which will allow us to more effectively reach the approximately 1.6 billion English learners who aren't on Duolingo today. We now have more advanced content in all 20 of our English courses, as well as a standalone English course for intermediate to advanced learners. We have exciting plans for the addition of Duo Radio and Stories to the more advanced levels of these courses. We're also improving how we place learners with prior proficiency so that they feel adequately challenged, but without hurting their engagement. As a reminder, our English Learners Initiative is a multi-year effort that we expect to monetize over the medium to long term. As you can see, we believe in investing in innovation to drive both current and long-term growth. We have very ambitious goals for our business and believe that Duolingo Max and our more advanced English content give us more options than ever before to achieve them. Of course, this path will not be linear, but we're excited by the huge growth opportunity we see ahead. And with that, I'll turn it over to Matt.

Thanks, Luis. I'll provide some additional color on our Q2 results and then update our guidance for the remainder of the year. To emphasize what Luis said in his remarks, Q2 is a strong quarter for us. We re-accelerated DAU and MAU growth to 59% and 40% respectively. We continued to see healthy top of funnel growth and we saw particular strength in resurrected users who are users who come back to the platform after more than 30 days away. Thanks to a seasonal feature we launched that focused on reminding them to do their lessons. In Q2, bookings grew 38% year over year, revenue grew 41% year over year, and we posted our highest quarterly adjusted EBITDA and adjusted EBITDA margin. And as Luis mentioned, this is our fifth consecutive quarter being net income positive. All around, it was a strong quarter. Going forward into the second half of the year, we feel good about the business, even as we lap the incredible strength we saw in the back half of last year. For the full year, we are raising our guidance so that at the midpoint, we are guiding to year-over-year bookings and revenue growth of about 32.5% and 38.5% respectively. Our guidance implies a year-over-year growth rate for the second half of the year of about 27%. Note that if FX rates were constant year-over-year, our Q3 bookings growth rate would be about two points higher, and our full-year bookings growth rate would be about 1.9. To put our top line growth into context, we grew bookings at about 40 percent year over year in the first half of this year, which is roughly the same rate as we grew bookings in the first half of 2023. In the second half of 2023, though, our year over year bookings growth accelerated materially up to about 50 percent. A meaningful part of that acceleration came from an extraordinary set of tailwinds. Our signature ding was featured in the Barbie movie, providing an incredible brand boost, and in many ways that was indicative of our commanding presence in the zeitgeist last year. It also helped our summer marketing campaign deliver home-run user growth. That user growth was coupled with some one-time improvements in monetization, especially in Q3, and more favorable exchange rates than today. This year, we feel good about our user growth and monetization, but we don't expect to see the same one-off accelerating tailwinds. Lapping last year's extraordinary growth is why we expect DAU growth to decelerate to about 50% in the second half and why we expect bookings and revenue to decelerate as well. Moving down the income statement, we expect gross margin will go down slightly in the back half of the year as our amortization and AI costs increase with the rollout of MAX. We continue to feel confident about our ability to drive increasing profitability and are raising our 2024 adjusted EBITDA margin guidance to 24.5% at the midpoint, which is a full seven points higher than 2023 and is an incremental margin of 42%. For Q3, our adjusted EBITDA guide is about 41 million or roughly 80% higher than the same quarter last year. As a reminder, our profitability typically varies a bit from quarter to quarter throughout the year, For Q3, we expect to see about five points of quarter over quarter deleverage in the margin and are guiding to 22.0% at the midpoint. This is mainly driven by increased hiring and R&D as we add a significant portion of our new engineering product and design hires in Q3. We'll also see seasonally higher sales and marketing spent this quarter. G&A should remain relatively flat as a percentage of revenue. For Q4, we expect to see slight leverage across all OPEX categories, resulting in about one point of quarter over quarter margin expansion compared to Q3. Note that overall, we shifted about $3 million of expense from Q2 into the second half of the year. Finally, we ended the quarter with approximately 49.4 million fully diluted shares outstanding using the quarter end closing price. And in 2024, we expect to end the year with about 1% to 1.5% net dilution from equity issued to employees, which is similar to the dilution we had last year. And with that, I'll turn it back to Luis.