Duolingo, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; figures are unaudited. Duolingo operates a freemium learning platform, subscription services, and the Duolingo English Test.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $137.6m | $96.1m | $380.1m | $265.7m |
| Gross profit / margin | $101.4m / 73.7% | $69.8m / 72.6% | $278.6m / 73.3% | $194.0m / 73.0% |
| Operating income (loss) | $(4.7)m | $(20.2)m | $(18.1)m | $(47.0)m |
| Net income (loss) | $2.8m | $(18.4)m | $4.0m | $(45.6)m |
| Adjusted EBITDA (non-GAAP) | $22.5m | $2.1m | $58.5m | $10.3m |
| Operating cash flow | $37.7m | $8.8m | $104.4m | $42.0m |
| Free cash flow (non-GAAP) | $33.5m | $6.1m | $96.6m | $34.9m |
Q3 revenue grew 43% year over year; subscription revenue rose 47% to $105.9m. Advertising revenue was $11.7m, Duolingo English Test revenue $10.6m, and other revenue $9.4m. For the first nine months, subscription revenue increased 47% to $287.2m. Q3 revenue growth was 42% on a constant-currency basis; nine-month growth was 45% on that basis.
Q3 net income followed an operating loss and included $8.6m of interest income, compared with $2.3m a year earlier. Nine-month interest income was $21.8m versus $3.0m. Management attributed the improvement in results primarily to revenue growth, lower operating expenses as a share of revenue, and higher interest income. Stock-based compensation was $25.4m in Q3 and $70.2m for the nine months.
Operating metrics expanded year over year: MAUs were 83.1m (+47%), DAUs 24.2m (+63%), paid subscribers 5.8m (+60%), and the DAU/MAU ratio was 29.1%, versus 26.3%. Q3 subscription bookings were $121.3m (+54%) and total bookings $153.6m (+49%).
Financial position and cash flows
- Cash and cash equivalents were $701.7m at September 30, 2023, up from $608.2m at December 31, 2022; $638.4m was held in money market funds.
- Current assets were $819.1m and current liabilities $234.9m. Deferred revenue was $208.9m, mostly subscription billings expected to be recognized within 12 months.
- Total liabilities were $255.9m, including $21.0m of long-term operating lease obligations. The balance sheet reports no borrowings or other financial debt.
- Nine-month operating cash flow was $104.4m; investing cash outflow was $9.4m and financing cash outflow was $1.4m. Cash increased $93.6m during the period.
Outlook, risks, and notable items
Management stated that existing cash and cash equivalents and operating cash flow should support working capital and capital expenditure needs for at least the next 12 months. The filing provides no specific revenue, earnings, or margin guidance. Management expects continued significant research and development investment; it also expects sales and marketing and general and administrative expenses to decline or remain steady as a percentage of revenue over the long term.
- Key risks include retaining and engaging users, converting users to paid subscriptions, competition and rapid product changes, and sustaining profitability as costs and investment grow.
- Duolingo depends heavily on Apple and Google for distribution and payments. For the first nine months, those stores accounted for 58% and 20% of revenue, respectively; the company generally pays 15%–30% of revenue from applicable in-app transactions to platform providers.
- Three service providers—Apple, Google, and Stripe—accounted for 67.2%, 18.1%, and 10.2% of accounts receivable at quarter-end. Cloud-provider outages, data privacy and cybersecurity events, changing regulations, foreign exchange, and advertising pricing also pose risks.
- Management reported no material legal proceedings, no subsequent events, and effective disclosure controls as of quarter-end. It reported a $1.3m nine-month income tax benefit, primarily related to excess tax benefits from stock-based compensation; the company maintained a full valuation allowance on U.S. federal and state deferred tax assets.
- Class B shares carry 20 votes per share; directors, executives, and 5% stockholders and affiliates held 79.8% of voting power at September 30, 2023.
Important facts for investors to verify
- Whether user, paid-subscriber, bookings, and revenue growth continue, and whether internally calculated operating metrics remain comparable over time.
- How much of reported profitability and adjusted EBITDA improvement reflects core operations versus interest income and excluded non-GAAP items; review stock-based compensation and potential dilution.
- Whether operating cash generation and deferred-revenue growth are sustainable, and whether cash needs change with product investment, hiring, or platform payment timing.
- Exposure to app-store fees and concentration in payment processors, cloud providers, advertising channels, and international markets.
- Whether the company sustains gross-margin gains while investing in research and development, and whether risks around privacy, cybersecurity, AI regulation, and the Duolingo English Test develop materially.