Duolingo, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company operates a freemium language-learning app and website, Duolingo Plus subscriptions, and the Duolingo English Test.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $58.8 | $40.0 | $114.2 | $68.1 |
| Gross profit / margin | $42.7 / 72.6% | $28.2 / 70.5% | $83.0 / 72.7% | $48.1 / 70.6% |
| Operating income (loss) | $(0.5) | $0.1 | $(13.9) | $(2.4) |
| Net income (loss) | $(0.2) | $0.04 | $(13.6) | $(2.2) |
| Adjusted EBITDA | $3.7 | $2.3 | $4.6 | $1.5 |
| Operating cash flow | $(0.9) | $8.5 | $4.2 | $13.2 |
| Free cash flow | $2.1 | $7.9 | $5.9 | $10.9 |
Revenue grew 47% year over year in Q2 and 68% for the first half. Subscription revenue was the largest source: $43.5 million in Q2 (+54%) and $83.6 million in the first half (+66%). Q2 advertising revenue was $9.1 million (+33%); English Test revenue was $4.8 million (+5%). Gross margin improved, which management attributed to advertising economics and lower subscription payment-processing fees associated with retention and plan mix.
- User and bookings measures: Q2 average MAUs were 37.9 million versus 39.2 million (down 3%); DAUs were 9.1 million versus 9.0 million (up 2%); period-end paid subscribers were 1.9 million versus 1.3 million (up 46%). Management attributed the MAU comparison partly to a pandemic-related increase in Q2 2020. The DAU/MAU ratio was approximately 24%, versus 23%.
- Q2 subscription bookings rose 34% to $48.9 million and total bookings rose 30% to $64.5 million. First-half subscription and total bookings increased 48% and 51%, respectively, to $99.4 million and $130.4 million. Bookings are not GAAP revenue and can differ because subscription revenue is recognized over the subscription term.
- At June 30, cash and cash equivalents were $114.6 million, compared with $120.5 million at December 31, 2020. Current assets were $162.6 million and current liabilities $85.1 million. Deferred revenue was $71.0 million, mostly expected to be recognized within 12 months. Total liabilities were $92.9 million, including $7.8 million of long-term operating lease obligations. The filing reports no material changes to contractual obligations and no off-balance-sheet financing arrangements.
- First-half cash from operations declined to $4.2 million from $13.2 million. Investing used $3.6 million; financing used $6.4 million, including tender-offer and offering-cost payments, partly offset by stock-option exercise proceeds. The company reported no cash paid for interest and no material sensitivity to a hypothetical 10% relative interest-rate or currency movement.
Material changes, unusual items, and outlook
- Operating expenses grew faster than Q2 revenue: total Q2 operating expenses increased 53% to $43.1 million, including research and development up 81% to $21.9 million. First-half operating expenses increased 92% to $96.9 million, contributing to the first-half operating loss.
- First-half results included $5.3 million of compensation expense related to an employee tender offer, $5.1 million of contributor awards (net expense after an $0.9 million Q2 reduction for unclaimed awards), and $1.7 million of IPO/public-company readiness costs. These items affect comparability; Adjusted EBITDA and free cash flow exclude certain costs and are non-GAAP measures.
- Management said existing cash and operating cash flows should support working capital and capital expenditures for at least 12 months. After the reporting date, the July 30 IPO generated approximately $431.1 million in net proceeds to the company. Preferred stock converted into Class B common stock upon the IPO. The IPO proceeds were not part of June 30 cash.
- No numerical forward guidance was provided. Management expects continued investment in research and development and infrastructure, and anticipates additional public-company costs. It cited subscription growth, renewal activity, marketing expansion, product development, and COVID-19 uncertainty as factors affecting future capital needs and performance.
- Management said COVID-19 had not significantly harmed operations to date, but pandemic-related changes had increased user and financial metrics in 2020. Risks include changing user demand and ability to pay, intense competition, reliance on Apple and Google for distribution and payments, privacy and cybersecurity obligations, foreign-exchange exposure, and operating uncertainty in China. The filing noted that the app had recently become unavailable for download on most Chinese app stores; management believed this was temporary and was discussing restoration with authorities.
- The company disclosed a previously identified material weakness in internal control over financial reporting. Remediation was ongoing and had not yet been validated over a sustained period. Management considered disclosure controls effective as of quarter-end, but cautioned that remediation of the financial-reporting weakness was not complete. Sales, use, and VAT tax exposures in certain jurisdictions may require additional payments; the filing does not provide a clear maximum potential amount.
Important facts for investors to verify
- Whether paid-subscriber growth and bookings convert into durable revenue, while monitoring MAUs and engagement after the unusual Q2 2020 comparison.
- Whether expense growth, stock-based compensation, tender-offer and IPO-related items, and investment spending affect the path to sustained GAAP profitability and cash generation.
- The impact of app-store and payment-provider concentration: Apple and Google processed a substantial share of revenue, and together represented 84.7% of accounts receivable at June 30, 2021.
- Progress and testing of internal-control remediation, and any developments in tax contingencies or the China app-store issue.
- Post-IPO share structure and dilution: Class B shares carry 20 votes per share; also review equity awards, lock-up expirations, and the use of IPO proceeds.