Duolingo, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Duolingo operates a freemium language-learning platform and offers subscriptions, advertising, the Duolingo English Test, and in-app purchases. Dollar figures below are in millions unless otherwise noted.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $96.1 | $63.6 | +51% |
| Gross profit / margin | $69.8 / 72.6% | $45.5 / 71.6% | Margin +1.0 percentage point |
| Operating loss | $(20.2) | $(28.7) | Loss narrowed |
| Net loss | $(18.4) | $(29.0) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $2.1 | $(6.0) | Improved |
| Operating cash flow | $8.8 | $4.5 | Improved |
| Free cash flow (non-GAAP) | $6.1 | $5.2 | Improved |
Nine-month results: Revenue was $265.7 million, up 49%; gross profit was $194.0 million and gross margin was 73.0%, compared with 72.3%. Operating loss was $47.0 million versus $42.6 million, and net loss was $45.6 million versus $42.6 million. Adjusted EBITDA was $10.3 million versus a $1.4 million loss. Operating cash flow was $42.0 million versus $8.7 million, and free cash flow was $34.9 million versus $11.1 million.
Revenue mix in Q3: Subscriptions $72.2 million (+57%); advertising $10.6 million (+18%); Duolingo English Test $8.2 million (+22%); and other revenue $5.1 million (+176%). Management attributed growth chiefly to higher average paid subscribers, more advertising impressions, increased test volume, and in-app purchases.
Operating metrics: MAUs were 56.5 million (+35% year over year), DAUs 14.9 million (+51%), and paid subscribers 3.7 million (+68%). DAU/MAU engagement rose to 26.3% from 23.5%. Total bookings were $102.7 million in Q3 (+41%); subscription bookings were $78.9 million (+42%). The company cautions that its user metrics rely on internal analytics and are not independently validated.
Financial position and liquidity
At September 30, 2022, cash and cash equivalents were $600.0 million, compared with $553.9 million at December 31, 2021. Current assets were $668.3 million and current liabilities $155.6 million. Deferred revenue was $134.9 million, mostly subscription billings expected to be recognized over the following 12 months. The filing reports no borrowings; operating lease obligations include $4.6 million current and $24.2 million long-term. Stockholders’ equity was $533.8 million.
For the first nine months, investing cash outflow was $9.2 million, principally capitalized software and property and equipment; financing cash inflow was $13.2 million, mainly stock-option exercises. Management said existing cash and operating cash flow should support working capital and capital expenditures for at least the next 12 months, while noting future needs depend on growth, product investment, marketing, and market conditions.
Changes, outlook, and notable items
- Revenue growth and higher gross margin coincided with a narrower Q3 operating and net loss. For the nine-month period, however, operating and net losses were higher year over year, reflecting growing operating expenses.
- Research and development expense rose 43% in Q3 and 44% for nine months, largely due to headcount growth. Nine-month general and administrative expense rose 66%, including higher stock-based compensation, personnel, travel, facilities, and public-company costs.
- Stock-based compensation was $20.5 million in Q3 and $53.2 million for nine months, versus $20.7 million and $26.1 million, respectively, in 2021. Adjusted EBITDA excludes specified items, including stock-based compensation; it is a non-GAAP measure and should be considered alongside GAAP results.
- No quantitative revenue or earnings guidance is provided in the filing. Management expects continued investment in research and development and says sales and marketing and general and administrative expenses may decline or remain steady as a percentage of revenue over the long term; these expectations are forward-looking and uncertain.
- On October 3, 2022, after quarter-end, Duolingo acquired the assets of Gunner Made, a design and animation studio, for $4.5 million: $4.0 million paid at closing and $0.5 million contingent on continued service. Purchase accounting was still preliminary.
- The company is pursuing voluntary disclosures and estimated remittances for sales, use, and VAT taxes in certain jurisdictions; additional amounts could be assessed. It reported no material legal proceedings.
Principal risks and contingencies
Key risks include retaining and engaging users and converting them to paid subscribers; intense competition; dependence on Apple and Google for distribution, payments, and revenue processing; reliance on AWS and Google Cloud; privacy, data-security, and regulatory compliance; advertising pricing and targeting changes; international and China-related regulatory exposure; and the ability to manage growth and investments while pursuing profitability. Apple and Google processed substantial portions of revenue, and the filing notes platform fees generally range from 15% to 30%. The dual-class structure gives insiders and other specified holders 82.1% of voting power as of September 30, 2022. Management reported disclosure controls were effective at quarter-end and no material change in internal control during the quarter.
Investor verification checklist
- Confirm the sustainability of subscriber, bookings, and revenue growth, and whether strong user engagement translates into durable paid conversion and retention.
- Track operating expense growth, stock-based compensation, and progress toward GAAP profitability; distinguish reported results from non-GAAP Adjusted EBITDA and free cash flow.
- Assess cash generation and the contribution of deferred revenue, alongside capitalized software investment and lease obligations.
- Monitor dependence on app stores and cloud providers, advertising monetization, privacy and regulatory developments, and the potential for additional sales/VAT assessments.
- Review the final purchase-price allocation and subsequent results for the Gunner Made acquisition, and consider the implications of concentrated voting control.