Duolingo, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise. The company operates a freemium language-learning app and website, Super Duolingo subscriptions, and the Duolingo English Test.
Key financial and operating metrics
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $88.4 | $58.8 | $169.6 | $114.2 |
| Gross profit | $64.5 | $42.7 | $124.2 | $83.0 |
| Gross margin | 73.0% | 72.6% | 73.3% | 72.7% |
| Operating loss | $(15.0) | $(0.5) | $(26.9) | $(13.9) |
| Net loss | $(15.0) | $(0.2) | $(27.2) | $(13.6) |
| Adjusted EBITDA (non-GAAP) | $4.2 | $3.7 | $8.1 | $4.6 |
| Operating cash flow | $12.7 | $(0.9) | $33.3 | $4.2 |
| Free cash flow (non-GAAP) | $9.9 | $2.1 | $28.8 | $5.9 |
- Q2 revenue grew 50% year over year. Subscription revenue was $65.2 million, advertising $11.2 million, Duolingo English Test $8.0 million, and other revenue $3.9 million.
- Bookings, which reflect amounts received and differ from revenue recognition, increased 51% year over year: subscription bookings were $74.1 million and total bookings were $97.5 million. H1 total bookings were $199.5 million, up 53%.
- Average Q2 monthly active users were 49.5 million (+31%); daily active users were 13.2 million (+44%); and period-end paid subscribers were 3.3 million (+71%). The DAU/MAU ratio was 26.6%, compared with 24.2% a year earlier.
- At June 30, cash and cash equivalents were $591.2 million, including $510.5 million in money market funds. Current assets were $655.2 million; current liabilities were $147.3 million, including $128.2 million of deferred revenue. Total liabilities were $172.8 million, including operating lease obligations. The filing reports no borrowings or debt balance.
- For H1, investing activities used $5.7 million, primarily for capitalized software and property and equipment; financing activities provided $9.7 million, mainly from option exercises.
Material changes versus the prior comparable period
- Revenue growth was led by subscriptions, up 50% in Q2, and the English Test, up 66%; advertising revenue increased 24%.
- Gross margin improved modestly, which management attributed mainly to improved subscription retention and lower Google fees. Advertising margins declined, including due to lower advertising revenue per DAU and newly amortized software; English Test margins also declined with higher proctoring costs.
- Operating expenses rose 84% in Q2, faster than revenue. General and administrative expense increased 159% to $30.1 million, with higher stock-based compensation, including founder performance-based RSUs, as a major driver. Q2 stock-based compensation was $18.1 million versus $2.9 million a year earlier.
- GAAP operating and net losses widened. Adjusted EBITDA increased, but excludes stock-based compensation and other specified items; it should not be treated as a substitute for GAAP results.
- Operating cash flow and free cash flow improved substantially in H1. Management attributed operating cash flow growth mainly to the impact of stock-based compensation adjustments and increased deferred revenue.
Outlook, commentary, risks, and unusual items
- No quantified revenue, earnings, or bookings guidance is provided in the supplied filing text. Management said existing cash and operating cash flow were expected to support working capital and capital expenditure needs for at least the next 12 months.
- Management plans continued investment in research and development, infrastructure, customer support, and product improvements. It expects sales and marketing to decline as a share of revenue over the long term, while general and administrative expense may rise in absolute dollars as the business grows.
- Management reported that COVID-19 had not significantly negatively affected operations or financial performance to date, while noting ongoing uncertainty about consumer demand and future effects.
- Risks highlighted include user retention, engagement and paid conversion; competition; reliance on Apple and Google for distribution and payments; reliance on cloud providers; privacy, data security and regulatory compliance; and international risks, particularly in China. Apple and Google processed a substantial share of revenue. The app was temporarily unavailable for download on most Chinese app stores in 2021 and was reinstated in May 2022.
- The company was filing voluntary disclosures and remitting estimated sales, use, and VAT taxes in certain jurisdictions; additional amounts could be required. It reported no material legal proceedings.
- Founder performance-based RSUs generated $8.1 million of Q2 stock-based compensation expense; no additional stock-price hurdles were met in H1. The company disclosed $157.6 million of unrecognized compensation cost for options and RSUs, plus $78.2 million related to founder awards.
- Class B shares carry 20 votes per share; specified insiders and other large holders controlled 83.4% of voting power at June 30, 2022. Management stated disclosure controls were effective at period end and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether rapid user and subscriber growth converts into durable subscription bookings, recognized revenue, and improved GAAP profitability.
- How stock-based compensation, especially founder awards, affects future expenses, dilution, and the gap between GAAP results and adjusted EBITDA.
- Whether deferred revenue and operating cash flow remain strong, and how much cash is available after operating leases and planned investment.
- How much revenue and payment processing remain concentrated in Apple and Google, and whether platform fees, policies, or payment timing change.
- Whether the reported user metrics are comparable over time: the company says they rely on internal analytics and have not been independently validated.
- The potential financial exposure from sales, use, and VAT tax assessments, and regulatory, privacy, cybersecurity, and China-related developments.