Duolingo Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Raised full-year guidance again after record profitability, strong top-line growth, and ongoing investments in core and new areas like chess, math, and music.
  • Neutral Sentiment: Daily active user growth was 40% year-over-year—at the lower end of the 40–45% guidance—due to a brief social media backlash on AI comments, but sentiment has now recovered and another major shift isn’t expected next quarter.
  • Neutral Sentiment: Max subscription penetration climbed from 5% to 8% of subscribers, though growth was below expectations as beginners find monolingual video calls challenging, prompting experiments with bilingual dialogues and richer backgrounds.
  • Positive Sentiment: New “energy” mechanic for free users, which rewards correct streaks instead of penalizing mistakes, is boosting DAUs, time spent learning, and subscriber conversion, with full rollout slated by year-end.
  • Positive Sentiment: Tests of an iOS web-based purchase flow bypassing the App Store fee show minimal booking declines and much lower transaction costs—setting up higher profit margins when broadly deployed next year.
AI Generated. May Contain Errors.
Earnings Conference Call
Duolingo Q2 2025
00:00 / 00:00

There are 18 speakers on the call.

Operator

Good evening, everyone, and welcome to Duolingo's second quarter twenty twenty five 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 Vonon, our cofounder and CEO, and Matt Scarupa, 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.

Operator

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 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 those 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.

Operator

These non 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 results. And now I will turn it over to Luis.

Speaker 1

Hi, everyone, and thanks for joining us today. We had another great quarter, record profitability, strong top line growth, and solid performance across all subscription tiers. As a result, we're raising our full year guidance again while still investing in both our core business and exciting new areas like like chess, math, and music that we believe will drive long term growth. All of this brings us one step closer to our mission, which is to develop the best education in the world and make it universally available. And now we'll take your questions.

Speaker 2

We will now move to our question and answer session. At this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. You may remove yourself from the queue at any time by lowering your hand. When it is your turn, you will receive a message on your screen asking you to be promoted to a panelist. Please accept, wait a moment, and once you have been promoted, you will hear your name called, and you may unmute your video and audio and ask your question.

Speaker 2

Zoom application may disappear momentarily. This is expected, your window will reappear. We are allowing analysts one relevant follow-up to their main question. You will now pause a moment to allow the team to gather and assemble the queue. Our first question comes from Nathan Feathers with Morgan Stanley.

Speaker 2

Nathan, please unmute your audio and video and ask your question.

Speaker 3

Hey, everyone, and and congrats on the strong quarter. Two from my end. First, Dow growth was still really strong but moderated a touch in February. I guess, can you break down the primary drivers behind that and how we should think about the shape of user growth kind of through the year and into the back half? And then also wanna touch on the Chinese market.

Speaker 3

Can you provide some color on what you're seeing in that region? Any recent product improvements that are resonating and and when we might see video call out there? Thank you.

Speaker 1

Yeah. Thank thank you, Nathan, for your questions. Okay. So for DAUs, we just posted 40%, year over year growth, in q two, and that's lapping, q two from last year, which was 60% year over year growth, which is lapping in turn 2023, which was also 60% year over year growth. So we've had really tremendous growth over the last several years.

Speaker 1

Last time, we, guided to we were gonna say our DAU growth was gonna be somewhere between 4045%. And we normally don't guide to DAU growth, but we decided to do that last time because we had a really strong q one, in particular because of our dead duo campaign. And, also, we had a really strong q two of last year. So we knew that, you know, this was gonna be somewhere between forty and forty five. We came in at 40%, which is, you know, slightly on the on the lower end of of what we thought.

Speaker 1

Everything is is you know, we feel very strong about this. What what the reason we came up towards the the lower end was because I said some stuff about AI, and this was I I didn't give enough context. And because of that, we got particularly in our social media, we got some backlash on it. And what that did is it you know, the the most important thing is we wanted to make our sentiment the sentiment on our social media became negative. So we wanted to make the sentiment positive.

Speaker 1

So, we stopped posting edgy posts on our social media, and we started posting things that we thought would get our sentiment more positive. And that has actually worked. By now, the sentiment on our social media channels is all very positive. But we are we still are not posting the extremely edgy things that go that that are more likely to go viral. So that's that's probably what what had, you know, had us come in in slightly the lower end.

Speaker 1

I should say the effect of that was essentially all in The United States. And when I say United States, that, like, includes Canada and stuff like that. But it's essentially all in The United States, and and among, young audiences. But, you know, this is something that we think is is, that impact is in the past. We typically only guide to DAU whenever, there's gonna be a big change.

Speaker 1

This time, we're not guiding to DAU, so that just should tell you that, you know, kind of at least for next quarter, we're not expecting a big change from where we are now. And your next question was about China. We feel really good about China. It's it's our fastest growing market. We've been growing a lot.

Speaker 1

We had a really, incredible partnership, this time around with Luckin Coffee, where for a couple of weeks you know, Luckin is is like their Starbucks. It's essentially everywhere. For a couple of weeks, a lot of their stores were basically decorated with Duolingo and had Duolingo cups, and there were drinks named after Duolingo and everything. And that was a pretty big big boon for You know, our product feels really good in China. The one thing is we do not have Macs in China yet, and that is because, because of regulations, we cannot use, LLMs other than local LLMs.

Speaker 1

And after you choose a local element, which we have, you need approval from the government, and that's completely outside of our control. We don't have one yet, approval for the government. But, at some point soon, we'll we'll we'll have max. I I cannot give you a timeline on that because I myself don't know it.

Speaker 3

Very helpful. Thank you.

Speaker 2

Thanks so much for your question, Our next question comes from Alex Sklar from Raymond James. Please unmute your audio and your video. Please ask your question.

Speaker 4

Great. Thank you all. I wanted to ask about the paid conversion. You spoke to you spoke to increase on the super side and and good traction on the max side. Can can you update us on where the max stands today?

Speaker 4

And and any one to two changes that you put into place that drove that the particular increase in conversion this quarter?

Speaker 1

Yeah. So we feel we feel very good about Max and and Super. The both are growing, and both are growing nicely. The percentage of subscribers that are Max subscribers has gone. A couple of quarters ago, was 5%.

Speaker 1

Then last quarter was 7%, and then in q two, it was, 8%. So it's been growing. It it actually grew a little less than we expected, but part of the reason for that is because super grew even more. So the this is just the fraction between those two. Super just is is is kind of performing even better than we expected, while Max is performing a little less than we expected.

Speaker 1

The reason for, Max, not growing as fast as super or or not growing as fast as we expected that, is because for, more beginner users the main feature for Max is video call, and it's something that allows you to practice your conversation. For more beginner users, this feature is just a little too difficult. And so we're gonna be working on that, of course. One of the problems for that feature is that at the moment, it is entirely monolingual, so it is entirely in the language that you're learning. But when you're just a beginner and you only know, like, 20 words, it's pretty hard to have a conversation entirely in that language.

Speaker 1

So one of the things we're gonna be experimenting with is having a a conversation that is bilingual. So if you're an English speaker learning Spanish, some of it is gonna be in English, some of it is gonna be in Spanish to to kinda ease you in. So that's the type of stuff we're gonna be seeing there. We're also gonna be working on making the conversations more engaging. If you if you play with video call, you will see that, now Lily has backgrounds.

Speaker 1

So she's, like, in different places, and she can talk about that. That that's a really good conversation topic. So this, you know, we're doing we're doing a bunch of things to improve that that one feature, that is the the killer feature for Max.

Speaker 4

Great great color there. And may maybe one follow-up probably for you, Luis. But last quarter, you kinda talked about testing, taking payments directly, maybe bypassing the App Store at least from test. Can you can you just update us where those tests stand today and any early learnings so far?

Speaker 1

Yeah. We're testing it. And, you know, the the there's a couple of things to say about that. So this is this is on iPhones, on iOS, on iOS in general. At least till the end of the year, we are able to have a a web purchase flow.

Speaker 1

So something that takes you to a website to pay instead of paying through the Apple purchase flow in The United States. That is the ruling, not in other countries. We don't know if this ruling is gonna stand, so it we really only know towards the end of the year for this, next year. Who knows what'll happen? But so far, the testing shows that, we can send people to a web purchase flow, minimally lose bookings.

Speaker 1

We do lose some bookings by sending people, to an external purchase flow because there's more friction, but, it it really significantly increases, our, you know, our profit because we don't have pay. Instead of having to pay Apple for a first time subscription fee, you pay them 30%. In this case, we only pay whichever provider we're using, like Stripe, we only pay, like, 2%, I mean, or some small fraction. So so this it it it's good. It's a good change.

Speaker 1

We have not done the full push to all our users on that, but you'll likely see us do that. I should say the impact on that even though it you know, we're very happy with that. But the impact on that because of of gap, the impact on that is not gonna be felt all that much this year. By the way, all of this is in our in our guide. It's not gonna be felt all that much this year because whenever you get a subscription in the you know, the main thing we sell is is twelve month subscriptions, you kinda have to amortize it over the twelve months and, you know, the rest of this year.

Speaker 1

By the time we push this out to all our users, it's only gonna be it's only gonna be about three of the twelve months there. So so the impact this year on our on our finance is not gonna be huge, but but it is something that we're pretty excited about, especially if it holds, you know, past the end of the year.

Speaker 4

Alright. Thanks for the color. We'll be on the lookout.

Speaker 1

Yep.

Speaker 2

Thanks so much for your question, Alex. Our next question comes from Ralph Schackart from William Blair. Please unmute your mic and ask your question.

Speaker 5

Great. Two questions that I could. I assume you could hear me, Luis.

Speaker 1

Yep. Yep. Hi, Ralph.

Speaker 5

Great. Good. Hey. How's it going? Just maybe first, Matt, just on looking at the mouse, it looked like they declined sequentially.

Speaker 5

Was that related to the social campaign? And then maybe just a broader question, Luis. Typically, when you roll out new products like, you know, math or music, you sort of play them down and say, you know, it's not gonna really impact the business, at least historically. But you called it out in the the shareholder letter, so I'm asking. You highlighted chess as sort of contributing earlier.

Speaker 5

Maybe kind of speak to what you're seeing with this product versus the other products, and it seems like there's some excitement there. Could that contribute to the to platform earlier perhaps than some of the other products? Thanks.

Speaker 6

Yep. Thanks, Ralph. I'll start with MAU and just give the my best Luis impression on on MAU, which is, in general, you know, we don't we don't have a team focused on MAU growth. We have a team focused on DA growth DAU growth because language learning is a daily practice, and so we're more focused on that metric. But as you said, MAU growth did come down.

Speaker 6

It was a a set of factors. And if you look at the trend, you know, I don't think the trend line was all that different than it was kind of in in q one from q four, etcetera. So, we are not worried about, MAU growth in that trend. And we think if anything, it's following the the DAU growth trend.

Speaker 1

I should also say it is an important when you look at, q one versus q two. In q one, we had this amazing Dead Duo campaign. So the comparison between q one and q two

Speaker 6

That's right.

Speaker 1

You're you're gonna see a little bit of a drop from that. And in terms of, math, know, math, music, and chess, yeah, we're we're very excited about actually, we're very excited about both, all three, math, music, and chess. We, we specifically called out chess in in the shareholder letter. It's it's it's just grown a lot, And it's it's a project that has gone really fast. I mean, one year ago, exactly one year ago, we had not even written a single line of code for chess in our app.

Speaker 1

Like, this is this project had not started. And within a year, less than a year, we launched it, and it's there on iPhones now and it's been growing. And, when you restrict only to iPhones and only to English user interface, already chess has surpassed math and music. So we're we're seeing a lot of demand for that, and and we're very happy with that. But, you know, that that also that also does not mean that we're not excited about math and music.

Speaker 1

I mean, you saw, or maybe you didn't see. I mean, we just we just acquired a team for music, we're super excited about that, that has made some really amazing music games. So we're we're very excited about all these subjects. Now in terms of you know, you you said we we downplay it a lot. The the thing that we do is we just we we wanna be cautious about, particularly, you know, investors getting very excited about the amount of revenue that these courses are gonna provide because at the moment, you know, we're just selling everything under the same subscription, and we're not even trying to optimize revenue for math, music, or even chess.

Speaker 1

So we're very excited. We think this is really gonna help us grow the TAM, because it's gonna get way more people to to to to wanna, use our product. But at the moment, we just don't have much to say in terms of, you know, this is gonna contribute a certain percentage of our revenue, etcetera. We don't we don't have much to say on that. This is gonna take a few years for it to be very meaningful.

Speaker 5

Understood. Thanks, Luis. Thanks, Matt.

Speaker 6

Yep. Thanks

Speaker 2

for your question, Ralph. Our next question comes from Chris Cuntarich from UBS. Please unmute your audio and ask your question.

Speaker 7

I just wanted to go back to Max for a second and specifically around retention. What are you seeing with some of your earlier larger cohorts as as they're coming up for renewal? What are kind of the key drivers here of churn that you're seeing? And kind of what are your how is this really kinda comparing to what super churn is at this point?

Speaker 6

Yeah. No. I'm happy to jump in there. I think, you know, it's early if you think about the kind of killer feature for Max, it's video call with Lily. You know, that, feature didn't really start to scale out to the majority of folks, until q three or q four of last year.

Speaker 6

So we haven't seen those cohorts yet. The early renewal signs in max, like I think we said on the last call, you know, look attractive. Relative to super, again, we think it's too early to kind of really parse that too finally because we haven't seen these cohorts. We'll know more about that in in q three and q four. But to just back up just one step, you know, the, the overall thing we're optimizing for on the platform with super max and these questions around mix is LTV for the platform.

Speaker 6

And because of max price point, you know, the LTV is the highest of any subscription offering we have. And so as we as max gain share as a percent of subscribers, our LTV is going up. So I think we'll have more to say on the kind of specifics on, the renewal rates as we get more data on it. But, you know, in general, we like how MAX is is growing, overall.

Speaker 7

Got it. That's helpful. Maybe just one follow-up, on on gross margin and just can you help us think about the back half of the year, kind of benefits from AI cost saving versus potentially any any of that flowing any of the web based checkout flowing through the gross margin? Thanks.

Speaker 6

Yeah. I think I'll take the last one first. I think it's easiest. I don't think the web based checkout will drive very much, change in gross margin in the back half of the year. Just as Luis said, you know, that's gonna be a an effect that takes time to feather in, just given how the accounting works.

Speaker 6

So, I don't think that'll be a a big driver. I think the drivers that we saw in q two, which were, you know, we outperformed our expectations on gross margin because AI costs overall did come down. And a driver of that, which was, you know, lower, API calls, token costs, we've got a a lot of data now, from the first two quarters of the year that says that the trend we expected to see, which was lowering of those unit costs, coming down, we think that trend is likely to stay intact, and so that's reflected in the guide, as we laid it out. I think the, you know, q two performance was also helped a little bit by ad, pricing. That remains to be seen, you know, over the course of the year.

Speaker 8

Appreciate it.

Speaker 2

Thanks for your question, Chris. Our next question comes from Justin Patterson from KeyBanc. Please unmute your line and video and ask your question. And just a reminder, everyone, please accept the promotion to panelists to ask your question on camera. Thank you.

Speaker 2

Looks like Justin's getting connected right now.

Speaker 8

There we go. Sorry. That took a second. Right there with you, Luis. So I wanted to

Speaker 4

like that.

Speaker 8

Yeah. So does Matt from our last fireside together. But, I'd like to touch on energy, actually. I thought it was really interesting that you brought up how it's uniquely moved three metrics. It's pretty rare for a feature to do that.

Speaker 8

So I'd love to hear about, you know, just some of the early learnings from energy and how you hope to iterate that on that more over time. And then maybe thinking just bigger picture in there. You know, if I look at the app today, there's about four different modalities for education featured. So if you consider jumping into some new areas over time, how do you prevent the consumer from getting too confused or overwhelmed by that experience as as you launch into new courses? Thank you.

Speaker 6

That makes sense.

Speaker 1

Okay. This is thank you for asking these questions. These are excellent. Okay. So energy, we're very excited about energy.

Speaker 1

Just to give context, what it is is it's a it's a different pacing mechanic, for free users. So, historically, we had this mechanic that we called hearts. I mean, it's basically you started with five hearts. If you made a mistake, you lost the heart. And if you ran out of hearts, you basically could not continue unless you watch something like a rewarded video or something to to to gain some hearts.

Speaker 1

That was the hearts mechanic. Energy is different. You start with a larger amount of energy. So you start with like 25 units of energy. And you spend one unit every time you do an exercise whether you got it right or wrong.

Speaker 1

So we we do not before you used to penalize you for getting something wrong. Now, we don't penalize you for getting anything wrong. But if you get five in a row, correct, we actually give you energy back, like a random reward back. So what's really nice about it is that for the average user at least, we're we've substituted a carrot for a stick. So it used to be the case that every time you made a mistake, you lost something.

Speaker 1

Now if you don't make mistakes, you gain something. So that's actually quite rewarding. And what we have seen in when we're rolling this out is that this increases revenue or bookings on both. It increases daily active users, and it increases the median times spent using the app. So we're we're we're really happy with this.

Speaker 1

We've been rolling it out. You'll see us you'll see us it's taking some time to roll out, and it'll continue taking some time. But, you know, my sense is that significantly before the end of the year, this, we will have switched all of our users from hearts to energy, all of our free users from hearts to energy. This does not affect paid users, really. And and, you know, we're very happy with with what this is gonna do for our for our users.

Speaker 1

Oh, and you asked about sub subjects being, you know, you said, well, we now teach, four different things. We teach languages. We teach math. We teach music, and we teach chess. How is it not confusing to users?

Speaker 1

Yeah. I mean, that's something we think a lot about. And, you know, we'll probably add more subjects, by the way. I am not announcing new subjects. We are not working on any new subjects at the moment or anything, but we'll probably at some point, it just, you know, stands the reason that we'll probably add more subjects at some point.

Speaker 1

Yeah, So, this is something we think a lot about. We're we're gonna be working on on the multi subject experience too, because we're noticing that a lot of the people that use Duolingo, they're not just learning one thing anymore. They're learning you know, it's like they're learning Italian and chess. And I think we need to do a better job with that. But I think at the moment, we're not seeing a lot of user confusion on that.

Speaker 1

But but the main thing that we wanna work on is just making people, you know, for example, switching from one subject to another much easier, giving rewards for learning multiple subjects, and stuff like that.

Speaker 8

Great. Thank you. Yes.

Speaker 2

Thanks for your question. Alright. Our next question comes from Wyatt Swanson from DA Davidson. If you could please unmute your line and video and ask your question. Just give him a quick moment here.

Speaker 2

See he's loading.

Speaker 9

Hi, guys. Can you hear

Speaker 1

me? Yep. Yeah. Hi, Wyatt. Great.

Speaker 9

I just have another quick one on the energy system. I realized that you're seeing positive changes in DAUs, time spent, subscriber conversion, and all that. But I've just observed some feedback from users on social media, Reddit, stuff of that sort, and they don't seem to really like the change. Have you seen any negative impacts to any cohorts or demographics or anything like that as result of that switch?

Speaker 1

Yeah. I mean, this is something that we we knew would happen. Whenever we do a major switch to a mechanic on Duolingo, there's, you know, there's a there's a a number of people that don't like the change. You know, one of the things that happens is that Duolingo is a habit building app. We build a habit to use Duolingo every single day.

Speaker 1

And the thing about habits is you want them to be the same every single day. That's what people like. But, of course, we would like to continue improving the app. So there is some churn change aversion that we see. So that that this we we saw this exactly happen about about two years ago when we switched our home screen.

Speaker 1

We used to have a tree, and we changed it to this linear path. There was a lot of backlash for that even though our metrics showed that, you know, this was actually good. In that case, this that that that that particular change for switching from a path to a tree was not about revenue. It's about, simplifying the app, but our metrics were good. In this case, the metrics were are really good, both for daily active users revenue, median time spent learning.

Speaker 1

So, you know, we listened to the metrics. We did expect people some people would not like it, and and one cohort that would not like it is there is a group of people that had gotten really good at a, not paying and b, not making many mistakes. Yeah. So they could use the app for a while, whereas with energy, you you basically get capped. If if you're gonna use a you're gonna do a lot of lessons and not pay us, you're gonna end up getting capped.

Speaker 1

This affects only a minority of users, but, essentially, these are the people that are complaining because they are, you know, they are now can't do as many lessons as they did when they had managed to find a way to not make that many mistakes.

Speaker 9

Got it. Okay. That makes sense. And then I just had another quick one on active users. It looks like the DAU to MAU ratio improved pretty substantially Mhmm.

Speaker 9

Sequentially, and we saw, you know, that step down in MAU growth. Was that driven by the MAU step down, or is it, you know, DAUs getting more engaged? Could you kinda just walk us through what happened there?

Speaker 1

Yeah. It it's probably a little bit of both. I mean, the reality is if you look at our DAU to MAU trend, that the the trend of that ratio, that has been I don't know if it's a 100% monotonically, but essentially monotonically increasing, almost every quarter. I think it's every quarter, actually, for the last several years. I mean, a few years ago, it was 20%, and then it just kinda has been creeping up to at this point, it's something like 37%.

Speaker 1

And we like that. I mean, the reality is that the healthiest, you know, consumer products out there have high DA to MAU ratios. So we like the fact that we are you know, that that that keeps going up. In this for this particular quarter, it was a little bit of both. I mean, we increased, our retention of DAUs.

Speaker 1

So the DAU to MAU ratio gets better when your DAUs retain better. So we increased our retention of DAUs. That is one of the reasons why that got better. And, also, it's the case that MAUs went down a little bit when compared to the previous quarter. But the main reason they went down a little bit when compared to the previous quarters, you gotta remember, in q one, we had this crazy campaign of dead duo.

Speaker 1

That kind of slightly inflated MAUs that may not have been DAUs because it got a lot of people that may not have been very committed to just come in. And so I you know, we kind of passed that effect, and this is this is one of the reasons why the DAU to MAU ratio went up.

Speaker 6

Yeah. And and why just to put numbers to that, I was looking it up for Ralph's question on on the MAU trends. And, you know, q one went up, by about a point and a half on year over year growth rate versus q four for MAU growth and then went down from there to the 24% in q two. What Luis is saying is that up, you know, was higher than it otherwise would have been. And so that otherwise trend probably looks more more normalized.

Speaker 6

So I think that is part of the math.

Speaker 9

Got it. Alright. Thanks, guys.

Speaker 2

Thanks for your question, Wyatt. Our next questions come from Ryan MacDonald from Needham and Company. Please unmute your audio and video and ask your question.

Speaker 10

Alright. Thanks, and congrats on a great quarter. Thanks for taking my questions. Maybe to start, Luis, I know one of the goals early on with MAX and video call was really to continue to try to bring on and attract English learners to Just the curious, as you are seeing sort of video call and max mature over the last, near nearly a year, are you starting to see that pick up on on the the non or the English learners coming to the platform, or is it more of a mix of sort of upgrades from the existing, base?

Speaker 1

Yeah. We're we're definitely seeing growth in English learners that is outpacing the growth, overall of of learners of other languages in particular. So we're very happy with that. We're also seeing the case that people who are learning English are using video call more. Also, intermediate learners are using video call more, and those are typically English learners.

Speaker 1

And, also, in Asia, we're seeing a a pickup of not only using video call more, but also a a slightly higher propensity to buy max when compared to the rest of the world because of video calls. So we're very happy with the early signals. I mean, I I should say, we're still early in this, but, I mean, so far, we're very happy with with what we're seeing, and it's it's exactly what we expected.

Speaker 10

Nice. And maybe as a follow-up on the, on sort of the DAU commentary and sort of the slowing slowdown with the AI comments. One, is there a potential impact where if this goes beyond DAU growth slowdown into actual churn of subscribers and and sort of any concerns about sort of a knockdown effect of that as we get to the end of the year. And Luis is not trying to get you in trouble on social media again, but does this change your view in terms of the rate of internal adoption of AI within the company?

Speaker 1

On advice of counsel, I'm not saying anything. I'm kidding. Okay. So first of all, you know, you you saw what happened with the quarter. I mean, we beat bookings by we beat bookings pretty healthily.

Speaker 1

And, you know, the rest of what we expect is on our guide. You know, we we we just don't believe that that the effect of this is is is is very material on terms of when you're when you're looking at actual financial metrics. We do expect a little bit of you know, if you were if you were to look at kind of what our guide includes, there's some positives, some some good things that includes, and there's some things that are, you know, kinda not as positive. So the the things that that it include that are that are positives, you know, are are super is doing really well, so that that's in their energy is is another positive. Ads and IAPs are positive.

Speaker 1

So we you know, we're those are those are those are the positives. Bringing it down are things like max are it's just not growing as fast as as we expected. This is this is what I what I mentioned already. The the Duolingo English test, we we think that, you know, the the main audience for the Duolingo English test, the main consumers are international students applying for universities here in The US or in The UK. And given the macro trends, we're seeing that, there's just much fewer people applying to universities in, you know, internationally because of that.

Speaker 1

So, you know, the the Duolingo English test we're gonna be we we it's lower than expected. And then there's there's something that we're putting in there, which is about our social media at the moment is not in full force because we are we've recovered sentiment, but we are not taking as many risks because, honestly, we're skittish about it. But I think over the next few weeks, I don't know exactly how many weeks, weeks slash months, we're gonna be recovering or or posting more edgy things that are more likely to go viral. And that does help booking some, but I you know, everything should be in our guide.

Speaker 6

Yeah. Yeah, Ryan. I would just round that out for Luis to kind of remind everyone that, you know, the impact of what you're asking about was really concentrated in The US. And The US had you know, we talk about this on almost every earnings call, how The US, grows slower than the average because the rest of the world grows above the average DAU growth rate. And then The US, growth rate decelerated a bit over the course of the quarter, and and now we think that we're past that, and it's stable.

Speaker 6

And, once we go back on social media in an edgy way, you know, we expect things to go back. All of that does have an impact, as Luis said, on the guide, and that's all in there. I think I would just point out that, you know, we beat by 9% on bookings. A couple points of that is FX. So that's, you know, just if you mark that down, a couple points of it was ads.

Speaker 6

My, my point is that when you're, not doing edgy things on social media, the chance for a viral breakout hit like a dead duo, goes down. So the chance for, like, a real surprise, to the upside also goes down. So that beat, should not be carried forward as an expectation.

Speaker 7

Appreciate it.

Speaker 2

Thanks for your question, Ryan. Our next question comes from Ross Sandler from Barclays. Please unmute your audio and video and ask your question.

Speaker 11

Great. Hey, everybody. Luis, so we've seen pretty rapid improvement in model capability and and latency lower latency from a lot of these AI companies. So as that improves, how does that kind of change your thinking around how you evolve your service to take advantage of those improvements? And and the the follow-up to that would be, it sounds like the video call feature in Max is getting better engagement.

Speaker 11

Are there things that you're doing behind the scenes to kind of improve, you know, the way that the interaction happens with the video call to then, you know, make it a better experience to then drive higher max adoption? Can you just talk about that, please?

Speaker 1

Yeah. So, you know, AI models are getting better. I mean, that is that is that is happening. In some cases, that helps us. In some it kinda doesn't do all that much.

Speaker 1

It depends on the use case. You know, we have multiple use cases. One of our biggest use cases is just in generation of content. Our language learning content, you know, improvements in models or latency or or all of that doesn't help all that much for a language learning content. It it helps some, but it's not all that much because the models are already pretty good at language and and have been for a while.

Speaker 1

For example, for generating content for math, the improvements in the models actually helps because, if you remember kind of a year ago, the models simply couldn't do math. Today, the models can do math, so we're able to generate more more math content. In a case like in the case of video call, latency certainly helps. Improvements in latencies certainly help. But also improvements in the model, you know, one of the things that that that really helps us is whenever a new model comes out, what happens is that the previous one, they just lower the price.

Speaker 1

And so that helps us a lot. The so maybe that we don't use the latest one, but we are using the the still the same one, but the price just came down. So it helps with that. Now in terms of video call, what we're doing, we're doing a number of things to make it more engaging. I mean, for example, we are we are training our own, you know, fine tuning our own models to make it, know, to make it more engaging.

Speaker 1

And so what you'll see the the the types of things you'll see so it it may not look all that different in the product when you use it. The one the one changes, Lily now has background, so that looks different. But most of it is not it's not gonna look all that different. It's just the conversations are gonna flow a lot better, and they're gonna adapt to your level a lot better. And that you're we're seeing basically changes kind of on a on on a weekly basis on that.

Speaker 1

The other thing that I'll say with video call is early on, we didn't really have a metric that we were, optimizing, for video call. We just kind of wanted people to use it more. Now we have a really good metric that we're optimizing for, which is average number of words spoken per max subscriber. And it's a really good metric because we can move it and because it it exactly captures, what what we want people to do, which is to speak more. And ever since we started optimizing that, I think our video calls just started getting better and better in the sense that they that now the models are starting to learn that it is better to do things to keep you to keep you engaged.

Speaker 1

So asking more questions, etcetera to keep you engaged and also asking you open ended questions as opposed to yes, no questions, to get you to practice more. So that's the type of stuff that that we're doing, and and I'm very happy with the progress.

Speaker 2

Thanks for your question, Ross. Our next question comes from Shweta Kajuria from Wolfe Research. Please unmute your audio and video and ask your question.

Speaker 12

Hi. Thank you for taking my question. I'm sorry for the for the lag. I guess, Mike, I have a follow-up to the prior question. So, where do you think the product experience is for voice on Duolingo versus perhaps some of the other AI based voice translations?

Speaker 12

Because if we look through Reddit, there is some feedback that it's maybe a bit slower. So where are you with that, and is that a fair comparison? That's the first question. And then second is just on download. So I know it's not a metric you report, but did you see any particular trends in The US or abroad on how your, app downloads are tracking?

Speaker 12

Thanks a lot.

Speaker 1

Yeah. The you know, in terms of how or I'm I'm not entirely sure I understand the question. Mean, there are translation translation apps that are I mean, you mentioned translation. There are translation apps that are really good for kind of voice to voice translation, etcetera. We we, you know, we do we do teaching.

Speaker 1

And, you know, in that case, you know, we feel really good about our offering with video call. You know, the the most important thing is that it is engaging, and we feel really good about that. In terms of downloads, you know, I honestly don't know the answer to that. We I don't I don't even look at that. So I don't know if Matt does, but I I don't know.

Speaker 6

No. I I was just thinking, Shweta, I'm sorry. I I don't actually know

Speaker 2

Okay.

Speaker 6

The trend in downloads.

Speaker 1

That that tells you how much we look at this.

Speaker 12

Well, the the as you may know, intra quarter, there was some growing fear around engagement, not only

Speaker 6

Yeah.

Speaker 12

Around DAUs and MAUs, but also downloads. And so if that's, you know, not something that you about, that's that's fine. And so if I could do a quick follow-up on DAUs, anything in particular that you saw across geographies on engagement? So how did US trend versus certain other geographies on engagement?

Speaker 1

Yeah. In terms of okay. So, you know, our DAUs are are growing very nicely, 40% year over year. And, again, that lapse a year that was 60%, which last year that was 60%, etcetera. So we're we're we're very happy with the with the DAU growth.

Speaker 1

Not all countries are growing equally. I mean, some countries obviously are growing faster than others. The The US has been growing below our our, you know, overall average for, you know, a few quarters. And it has actually kinda had been the the the the the year over year growth over The US kinda has kinda been slowing down, over time. We and and we think the main reason for that is because The US is unique when compared to every other country, that that we operate in.

Speaker 1

We don't spend any marketing money in The US, or historically. We have not spent any marketing money in The US. In in in every other country that we at least the ones that that are kind of larger enough markets, we we actually spend money with performance marketing, with influencers, some brand, etcetera, The US because our internal thought was, well, we're growing really nicely in The US historically. We've been growing really nicely in The US, and it's so expensive to market in The US that we're like, we're just gonna we're just gonna not spend money there, and we'll spend money everywhere else. And so, you know, we think that that is contributing to kind of the slowdown in growth.

Speaker 1

And we we we're comparing it a lot with the situation of Mexico. For a while, we were also not spending at all in Mexico. We were entirely relying on our social media, and we've noticed that Mexico DAU growth I mean, it's always been growing, but DAU growth was also slowing down, and it had gotten pretty low at some point. And then we decided to start spending in Mexico, and it's not a large spend. I mean, you see how much spend we have in, you know, in our filings.

Speaker 1

We don't spend a lot on marketing. But we started spending a little bit on performance marketing and a little bit of influencers, and that made it so that year over year growth in Mexico at this point, Mexico is significantly above average because we spend some amount. So what we think we're gonna be doing in The US, you will see us start spending some in The US. Again, we're not gonna be spending a $100,000,000 in The US or anything like that. These are small amounts, but we believe that that that helps because it just helps you reach different audiences.

Speaker 1

So that's that's kind of how how we see it in The US.

Speaker 12

K. Thanks, Luis. Thanks, Matt. Yep.

Speaker 2

Thanks for your question, Shweta. Our next questions come from Brian Smilek from JPMorgan. Please unmute your audio and video and ask your question. Give Ryan a second. He should be loading in now.

Speaker 13

Great. Thanks for taking the questions, Matt and Luis. Luis, I guess just to start, you know, a few quarters ago, you had mentioned that north of 2,000,000 daily active or intermediate or advanced English learners on the platform. Just curious, you know, what are the investments that's needed to drive deeper efficacy and just overall broader engagement and adoption of English learners on the platform, just given it is the vast majority of the TAM? And conversely as well on monetization, you know, Matt, how do you think about overall pricing of Max in some of these international markets as the cost of comp view comes down and Max approaches potential gross margin accretion over time?

Speaker 13

Thank you.

Speaker 1

Yeah. I mean, English learners are very important. I mean, we've been talking about them for a while. And and, yeah, English learners, not just advanced, but all English learners, including also beginner English learners, that's the largest TAM. So, you know, we've been we've been working on that.

Speaker 1

We've been adding adding not only adding, but also improving a lot of our content for English learning, and we're gonna continue doing that. Most of our features for learning, we spend a lot of the effort on the English, and we're seeing that, you know, that 2,000,000 number is now a lot higher. I don't know if we report on that, but it is now a lot higher than 2,000,000. And so, you know, we're very happy with that with that progress. I'll let Matt talk about the pricing, experimentation.

Speaker 6

Yeah. So, I mean, Brian, it's a great question because I think it allows us to talk about two, well, three concepts. The three concepts are LTV optimization, relative pricing of our subscription offerings, and then, you know, the cost of compute. So we'll take the last one first. Cost of compute is coming down, as we've talked about, I think, is widely expected to continue not just by us.

Speaker 6

And the good news about that is it gives us options to do more experiments with pricing of max to put more max features that maybe use less compute in different tiers. It gives us options, basically. And so we're gonna experiment with that over time as those cost comes down, being mindful of, you know, not only gross margin, but ultimately that LTV. Because, again, I just wanna reiterate what we're doing with Max and the family plan in particular, You know, people ask about ARPU and and bookings, and those those things are important, but what we're trying to do is optimize LTV. And so the pricing of Max not only matters about the cost of compute and its gross margin accretion or dilution, It matters on how does it help us relative to our other tiers.

Speaker 6

So one of the things Louis said was it was growing a little slower than we expected, and that was partially offset because super experiments were growing faster than we expected. And, again, that is not independent. Like, when you show a max price and a super price, you get some relative compare comparative value, math going on in the consumer's head. So this is all a long winded way of introducing three concepts just to say that as compute comes down, we have now more options to experiment. Experimenting is our sweet spot, and so I would expect us to run some experiments, around relative pricing for Max and Super for family plan.

Speaker 6

And geographically, again, if costs come way down, it does open up a couple of really interesting markets for us that right now we're not really, offering Max in, And so that could be interesting down the line.

Speaker 13

Great. Thank you both.

Speaker 2

Thanks for your question, Brian. Our next question comes from Mark Mahaney from Evercore. Please unmute your audio and video and ask your question. Let's give Mark a second here. Looks like alright.

Speaker 2

Great. He should be in. Mark, can you hear us?

Speaker 14

Can. Alright. Let me throw two questions. One, Matt, you talked about pricing on super. And so just bring us up to date.

Speaker 14

I know you did some experimentation with super pricing in the March, and I think you rolled it out globally. So just talk about what kind of what kind of response you saw to that. And then, Luis, I wanna ask you a question, and maybe it's a little bit rude, but I'll ask it to you anyway, which is what if you drawn what kind of lessons in terms of, you know, leadership lessons have you drawn from, you know, what happened in the in the controversy? Do you think the messaging was bad? The message was bad?

Speaker 14

You know, like, how do you learn about from that and and, you know, how do you improve going forwards? And then I also wanna ask you to, at the same time, you you know, just address other concerns. You know, is there is there does the growth somehow a reflection of maturation or saturation of end markets? Or are there, you know, much greater competitive pressures in the market? So I'm throwing a lot by you, Luis, but but I I know you can answer them.

Speaker 6

Yeah. Those are those are good questions for Luis. I will answer the easy one, Mark, on pricing, which is we ran some pricing experiments earlier in the year. The way our pricing experiments work, like I just mentioned, is we're testing volume price and trying to calculate and get a sense of LTV, although it's, you know, not perfect. And they were beneficial to bookings.

Speaker 6

They increased bookings. So we raised prices, and, you know, that had a small impact. It wasn't, you know, a a very large part of of the movement you saw in q two. And just to point out that our ARPU has gone up really nicely. I think q two ARPU, I think it was up around five or 6%.

Speaker 6

Most of that didn't come from this price change. Right? It either came from FX or plan mix shift to higher price plans. And just you know, again, I can't control FX, but what we can try to control is more family plan and and max over time. That will be the larger driver of of ARPU, not price point increases.

Speaker 6

And now over to Luis for the other questions.

Speaker 1

Yes. So, Mark, what I've learned as a leadership is just don't post on LinkedIn. I'm kidding. Look. I think, ultimately, I did not give enough context on our post internally.

Speaker 1

This was you know, when I when I sent an that email to the company, this was not controversial. I mean, we know internally that we've always been since the beginning of this company, this is many years ago, many years before LLMs were a thing, you know, we have decided that what we're gonna do is we're gonna teach people with a computer, and that ultimately means we're using AI. And the goal for us to use AI is to teach better and to reach more users and, you know, have more content. That is the goal. And I think I did not give enough context to say that that is the goal.

Speaker 1

And what people understood from my message, which is not the intention, is that, you know, oh, we just wanted to fire all our employees, which is is not what we did and not what we want to do. We love our employees. So, you know, I've I've learned that I need to be a lot more careful, you know, when talking externally versus internally and and given off context. Sometimes it's just, you know, the the external world thinks about things very differently than, you know, the internals of just us and other tech companies. So that, you know, that's that's my sense.

Speaker 1

In the case of, maturation, we're not worried about this. I mean, if you look at our DAU growth, some of our most penetrated markets are actually the ones that are growing fastest. So we don't see we don't see that, like, oh, we've reached the level of penetration that allows us that that that makes us so that we're gonna grow slow everywhere. We don't see that. I mean, there's some countries that are growing faster than others, but, you know, the the the penetration is is not something we're worried about.

Speaker 1

And I, you know, just wanna remind you. I mean, we have there are 2,000,000,000 people learning a language in the world. We have about a 130,000,000 active users, give or take. And so there's a lot of room there. And now we're also adding other subjects.

Speaker 1

I mean, there's hundreds of millions of people that are interested or already playing chess. The same is true for math. The same is true for music. So I just don't think that we're anywhere near, our our full TAM.

Speaker 14

Okay. Thank you, Luis. Thank you, Matt.

Speaker 6

Thanks, Mark.

Speaker 2

Thanks for your question, Mark. Our next question comes from Andrew Boone from Citizens. Please unmute your audio and video and ask your question.

Speaker 15

Hi, guys. Thanks so much for taking the question. I wanted to go back to Max and talk about incrementality. Matt, you've kinda talked about it in a couple ways in terms of solving for LTV. But how do we think about your ability to actually increase conversion given Max's offering, especially with more advanced learners and and some of the testing that you guys have put out that shows it's efficacious.

Speaker 16

Is that the right word?

Speaker 6

That's right.

Speaker 15

And then very specifically in terms of the guide and thinking through the numbers, ARPU has continued to go up. Matt, can you break that down a little bit further than just kind of FX and and some of the stuff that you talked about? And then how do we think about that going forward in terms of relating it to the guide for the back half of the year? Thanks so much.

Speaker 17

Absolutely.

Speaker 6

Luis, you wanna start with the, max, how we think about conversion, or do you, want me to jump in on ARPU first?

Speaker 1

You can jump in on ARPU. I mean Yeah.

Speaker 6

So, so, Andrew, I think the the way to think about it for the guide, on ARPU is that we were up around 6% this quarter. Again, I keep I think it's around five or 6%. And, again, that came from mix shift of plans, and I don't really think that that ARPU number is, it's certainly not going back down. I think it's gonna stay in that range consistently, you know, low single digit positive because we have good visibility into some of the revenue that came from bookings in the past that flows through. And then, you know, we, we hope to continue to mix shift it up.

Speaker 6

On the guide, I would say that FX, you know, has been a nice tailwind as you can tell in the report from q two. Right? We had a nice tailwind to bookings from FX, and that's certainly driving a a meaningful part of the guide. The majority or or vast majority of the guide for the back half is you know, we have a nice FX tailwind. So I think that's how we're thinking about FX playing out through the guide and then peppering in through ARPU, but that takes, you know, more time.

Speaker 6

The ARPU impact of FX is spread out over four quarters. So

Speaker 1

Yeah. And in terms of, you know, Max and our different plans, I think, you know, the way we think about it, we we now have a a a bunch of different plans to offer people. I mean, there's the free plan, of course, but then there's super. There's super family. There's Max.

Speaker 1

There's Max family. And we need to you know, we are always trying to figure out what is the right plan to offer to the right person or at the right time. And, of course, you know, it is best for us if people go all the way to Matt's family. That's that's kind of what's what's best for us because

Speaker 7

That's my

Speaker 6

favorite one to do.

Speaker 1

Yeah. That's that's Matt's favorite. But, you know, there are just some users for whom super's probably a better thing or super family or something. And, you know, we're always experimenting about, you know, what actually increases platform LTV. And and, you know, that's that's the driving factor here.

Speaker 6

Thank you. Thanks, Andrew.

Speaker 2

Thanks for your question, Andrew. Our next questions come from Curtis Nagle from Bank of America. Please unmute your audio and video and ask your question.

Speaker 17

Awesome. Great. Thanks very much. Matt, maybe just a few first. Just kind of going back to DAUs.

Speaker 17

I think our language was you're not expecting a big change from 3Q to 2Q. Could you elaborate on this? Is this sequential basis? Is it year over year and in line with the 40% in 2Q? Just some clarification on that would be helpful, and then a question for Luis.

Speaker 6

Yeah. So, Chris, I mean, what we're basically telling you is that, in general, we try not and haven't historically guided, to DAU. Last quarter, we did because we had this amazing q one, forty 9% year over year. '51. No.

Speaker 6

Oh, yeah. 50 around 50% DAU growth in q one. And then we knew because of that peak from DEDUO and the tough comps that we already mentioned that it was gonna be in the 40 to 45% range. So we told you that because we didn't want anyone to get surprised. And so when it's a change of, you know, that scale and size and there's clear, predictability about it, we wanna tell you about it.

Speaker 6

When there's not something like that, we're we're not gonna, opine on the exact numbers. And so that's what Luis mentioned earlier. That, you know, you can take it as year over year gross rate sequentially is that framework that we just laid out for you.

Speaker 1

Yeah. I meant year over year, we'll grow sequentially. We don't expect a big change.

Speaker 17

A big change. Okay. That's helpful. And then maybe just going back to the switch from energy to hearts and the higher revenue. In terms of what's driving that, is it that cohort of the high usage, non mistaking users who just were didn't want to pay?

Speaker 17

And they're converting, or is there something else going on? And when is the energy feature fully rolling out? I I don't think I have a piece of mind. So, yeah, just some thoughts on that would be would be great.

Speaker 1

Yeah. What's going on is the following. It's you know, internally, we just had a belief, and this is executing on that belief, is that if you use Duolingo a lot and you are able to pay for example, if you use Duolingo a lot and you pay for Netflix, you should pay us. That is how we see it. And energy basically accomplishes that.

Speaker 1

So it used to be the case that, you know, there's the there's the type of person that is is always going to pay. Never mind. They pay with whatever they just don't like ads, etcetera. But the pacing mechanic I mean, energy bias towards if you make a lot of mistakes, you have to pay us. Whereas this just bias us to if you use it a lot, you know, it it would be good if you paid us.

Speaker 1

And so that's that's what we're seeing. And sorry. What else? Oh, rollout. You know, we're rolling it out.

Speaker 1

It it's more than half rolled out on I on iOS now, as in more than half of daily active users of iOS have energy. Android is less than half, so Android is behind iOS. I don't know exactly when we'll be done, but it'll be, you know, couple of months, give or take, we'll we'll we'll we'll essentially be done.

Speaker 17

Okay. Thank you. Appreciate it.

Speaker 2

Thank you, Curtis. Our next question comes from Han Yee Kao from CITIX. Please unmute your audio and video and ask your question.

Speaker 16

Oh, hi, Louis.

Speaker 1

Hi.

Speaker 16

It's another strong quarter. Congratulations on the result. And I have this nice notebook, your your collaboration with Luckin in China.

Speaker 1

Nice. Nice. We love that collaboration. It was awesome.

Speaker 16

Yeah. It was awesome. And I do wanna know more about the regional mix that you mentioned in prior questions. That is you can see the fast growing country right now is in China. But in China, you haven't rolled out the max.

Speaker 16

So is that a part of reason why you're thinking that, the the the the max is behind your expectation because you're you are expanding new users in a new market, low lower penetrated market, and they are not max users yet. And then my second question related to your investment because you as we can see, the first half, you have adjusted EBITDA, ratio, if I'm calculating correctly, 29%. And your guidance for the full year is around, like, 28.5 to 29%. So I will know more, like, what you're investing in the next next half of the year, and, it will be related to new content or it will be related to the new features in AI. Yeah.

Speaker 1

Okay. I'll take the first question, and then, Matt, you can take the EBITDA question. So, you know, we're like I said, we're very happy with our growth in in in all of Asia, really. Asia is growing. It's the fastest growing region.

Speaker 1

China was a positive surprise this quarter. It grew faster than we expected. Part of that was the partnership with Luckin. I you know, for people who are in The US, I don't think you know, it's it's hard to explain the the prevalence of Luckin in China. So it it you know, that that grew faster than expected.

Speaker 1

I probably some of that has to do with super growing even faster than max because because of that. My sense is that's probably a small amount. My sense is that the the reality is just that Super has been we've just been doing a better job with Super than with Max. And, yeah, that's that's that's my

Speaker 6

Yeah. And then on the investment side, again, we feel very happy about the fact that we're able to grow so quickly, expand margins, and reinvest. In the back half of the year, we're doing, what we what we think is the most important thing for the long term growth of the business, which is investing back in the product, which is mainly you know, we do a bunch of hiring. We have a bunch of new grads who start in q three. We also are, you know, bringing on a group of people who we're really excited about who are gonna help us grow our music road map.

Speaker 1

We're extremely excited about that group of people, and I'm gonna go have drinks with them very soon.

Speaker 6

Yes. So we're doing those things to invest back in the product. That's a big chunk of it. And then as Luis already mentioned, we're gonna spend a small amount of money, you know, incrementally on marketing in the back half of the year. I think the overall thing I would say is if you look at the trend in our guide around EBITDA margin by quarter, The guide lines up very closely with what happened last year in actuality in terms of the shape of that curve.

Speaker 6

So I think this is kind of more normal course, as you'd expect. Last year, q two is our highest quarterly EBITDA margin, and I think that's what we're implying is gonna be the case this year.

Speaker 16

Okay. Thank you. Thank you, Mary. Thank you, Luis. Yeah.

Speaker 1

Thank you.

Speaker 2

Thank you for your questions, Han I am showing no further questions. This concludes the q and a section of the call. I would now like to turn the call back to Luis for closing remarks.

Speaker 1

Thank you, everyone, for tuning in, and thank you to all the analysts for their questions. And, we'll see you next time.

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