Duolingo, Inc.

Good evening, everyone, and welcome to Duolingo's third quarter 2024 earnings webcast. Today, after market close, we released this quarter's shareholder letter, a copy of which you can find on our IR website at investors.duolingo.com. On today's call, we have Luis Monon, our co-founder and CEO, and Matt Scarupa, our CFO. We'll begin with some brief remarks before taking questions. Please note that this evening's event is being recorded and all attendees are in listen-only mode. Quick reminder that we'll make some forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these are outlined 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 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 gap results, and we encourage you to consider all measures when analyzing our performance. And now, I will turn it over to Louis.

Thanks, Debbie. I guess. Hi, everyone. So, Louis asked me to cover for him. Lucky me. Anyway, let's just get this over with. How'd we do this quarter? Pretty good, I'd say. We did way better than expected in all the important metrics. Since we did so well and we feel good about next quarter, we're raising our full year guidance. Matt's going to get into the details in a minute. He's into that kind of thing. And, yeah, we're hitting our goals. Daily active users up 54% year over year, which, okay, is pretty neat, especially since users accelerated last year. Family Plan has grown to 21% of subs compared to the 18% we had at the end of last year. Oh, and our new Duolingo Max feature video call lets learners chat with me. Lucky them. Don't worry. I won't judge. Much. Maybe just an eye roll here and there. How did we pull this off? You know, the usual stuff. Product improvements and social marketing. It just works. And the grand finale, Generative AI and Automation. Yeah, that's the future, I guess. I mean, look at me, an animated character running this call. AI is going to help us be more efficient and launch products faster. Pretty cool, right? So we're investing in that stuff. Anyway, I'm done. Over to Matt. He'll probably try to sound more excited.

Thanks, Lily. I'll do my best. Now you may be wondering why we had Lily step in for Louise. Well, we wanted to give an example of how generative AI is positively impacting more and more aspects of our business. We're using it to make our product more fun, engaging and effective through features like video call with Lily. And we're using it to automate internal processes like content creation. By the way, that video only took about seven minutes to create because of the tools and the infrastructure that we put in place. Now on to the numbers. As Lily highlighted, Q3 was a strong quarter. DAU grew by 54% year-over-year, which is impressive considering we're lapping last year's 60% plus growth. Bookings and revenue grew 38% and 40% year-over-year respectively, which came even as we lapped tougher comps. And we posted an adjusted EBITDA margin of 24.7%. This quarter's outperformance was driven, in part, by the strength we're seeing in Duolingo MAXX, As a reminder, Max is our highest subscription tier, and it now includes our new AI-powered video call feature. We executed well and rolled out Max faster than we expected. Max is now available to roughly half of our DAU, and we expect this will increase by about 10 points or so as we scale it to more users, primarily on Android, by the end of the year. We also saw early signs of strong demand for video call with Lilly. We find that when we introduce new features, we see a one-time bookings gain that eventually settled down into a more predictable run rate. Some of the max bookings increased this quarter was likely driven by this type of effect. Looking ahead, we're raising full-year guidance. We're guiding to bookings and revenue growth of about 36% and 40%, respectively, for the full year. And our Q4 guide takes into account video calls' estimated impact, and our experiments around our New Year's promotion. Our Q4 guide has about 100 basis points of sequential quarter-over-quarter decline in gross margin, which is due to higher Gen AI and amortization costs related to scaling Max and its video call feature. As a reminder, our Duolingo Max tier yields more gross profit dollars, but a lower gross margin percentage than our Super tier. We're also raising our 2024 adjusted EBITDA margin guidance to 25.5% at the midpoint, which is roughly eight points higher than 2023. As we continue to make progress towards our long-term target range of 30 to 35% adjusted EBITDA. For Q4, our adjusted EBITDA guide of 24.4% at the midpoint reflects quarter over quarter operating leverage of about 70 basis points for R&D, 90 basis points for S&M, and that's offset by some slight deleverage in G&A. We ended Q3 with approximately 49.6 million fully diluted shares outstanding using the quarter-end close price, and we expect net dilution of little more than 1%, similar to last year. And good timing. It looks like Luis is back.