Duolingo, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, compared with Q1 2021. Duolingo operates a freemium language-learning platform and offers the Duolingo English Test. Revenue is primarily from subscriptions, with additional advertising, test and in-app purchase revenue. Unless stated otherwise, financial figures below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $81.2 million | $55.4 million | +47% |
| Gross profit / gross margin | $59.7 million / 73.5% | $40.3 million / 72.9% | Margin +0.6 percentage points |
| Operating expenses | $71.6 million | $53.8 million | +33% |
| Operating loss | $11.8 million | $13.4 million | Loss narrowed |
| Net loss | $12.2 million | $13.5 million | Loss narrowed 10% |
| Net loss per share, diluted | $0.31 | $1.04 | Loss per share narrowed |
| Operating cash flow | $20.6 million | $5.1 million | Increased |
| Capitalized software and property purchases | $2.4 million | $1.8 million | Increased |
| Adjusted EBITDA (non-GAAP) | $3.9 million | $0.9 million | Increased |
| Free cash flow (non-GAAP) | $18.9 million | $3.8 million | Increased |
Revenue by stream was $58.0 million from subscriptions (+45%), $11.7 million from advertising (+27%), $8.1 million from the Duolingo English Test (+60%), and $3.4 million from other revenue (+240%). Total bookings were $102.1 million (+55%); subscription bookings were $78.5 million (+56%). Bookings and the adjusted measures are non-GAAP or operating metrics, not substitutes for GAAP results.
Operating metrics increased year over year: monthly active users were 49.2 million (+23%), daily active users 12.5 million (+31%), and paid subscribers at quarter-end 2.9 million (+60%). The DAU/MAU ratio was 25%, versus 24% a year earlier.
Financial position and liquidity
At March 31, 2022, cash and cash equivalents were $577.3 million, total current assets $640.6 million, total assets $684.5 million, current liabilities $135.8 million, total liabilities $163.8 million, and stockholders’ equity $520.7 million. Cash increased $23.4 million during the quarter. The filing reports no borrowings or interest-bearing debt; it reports operating lease obligations, including $28.0 million long-term. Management said cash, cash equivalents and operating cash flow should support working capital and capital expenditures for at least the next 12 months.
Deferred revenue rose to $119.1 million from $98.3 million at year-end 2021 and is expected to be recognized over the following 12 months, subject to revenue-recognition criteria. Operating cash flow benefited from a $20.8 million increase in deferred revenue and $14.6 million of stock-based compensation.
Material changes and notable items
- Revenue growth was led by subscriptions, reflecting more paid subscribers; advertising, English Test and other revenue also grew.
- Gross margin improved modestly, primarily due to lower subscription payment-processing fees, including a change in Google’s fee structure; higher English Test proctoring costs partly offset the benefit.
- Research and development increased 32% to $29.8 million, while sales and marketing fell 24% to $14.9 million. The latter comparison benefited from $5.1 million of prior-year contributor awards and lower marketing spend.
- General and administrative expense rose 134% to $26.9 million. The increase included higher stock-based compensation, including $8.0 million of expense for founders’ performance-based awards, and increased public-company insurance and facilities costs.
- Total stock-based compensation was $14.6 million, versus $2.6 million in Q1 2021. The founder awards have stock-price hurdles and remaining unrecognized compensation expense; future expense may be substantial.
Outlook, risks and contingencies
The filing provides no numerical revenue, profit or margin guidance. Management expects continued investment in research and development, infrastructure, customer support and headcount; it expects sales and marketing to decline as a percentage of revenue over the long term and general and administrative expense to rise in absolute dollars as the business grows. These are expectations, not guarantees.
- Management reported no significant negative operating impact from COVID-19 to date, but noted uncertainty around consumer demand, user behavior and future pandemic developments.
- Material business risks include retaining and engaging users, converting free users to paid subscribers, competition, successful product investment, and dependence on Apple and Google for distribution, payments and a substantial share of revenue and bookings.
- The company relies on AWS and Google Cloud for significant portions of its technology infrastructure. It disclosed a five-hour AWS outage in December 2021 and risks from future service interruptions.
- Duolingo’s app was unavailable for download on most app stores in China beginning in fall 2021. The company said it believed the situation was temporary and was in discussions with authorities; restoration was not assured.
- Privacy, data security, evolving regulation, foreign currency movements, acceptance of the English Test, and the ability to scale operations are additional risks. Management reported no material legal proceedings, but disclosed estimated sales/use and VAT tax obligations and voluntary disclosures in certain jurisdictions; additional amounts could be due if authorities require them.
- Class B shares carry 20 votes per share. Insiders and certain large holders controlled 86.4% of voting power at March 31, 2022, limiting other shareholders’ influence.
Most important facts for investors to verify
- Whether user, paid-subscriber and bookings growth continues and converts into recognized revenue and sustainable cash generation.
- How much reported cash generation depends on deferred-revenue timing and non-cash stock-based compensation, and how non-GAAP measures reconcile to GAAP results.
- The trajectory of stock-based compensation and G&A expense, including founder awards and potential dilution from equity awards.
- Whether the China app-store restrictions are resolved, and whether reliance on Apple, Google and cloud providers creates material operational or financial exposure.
- The ultimate amounts and timing of any sales, use or VAT assessments, and developments in privacy, data security and other regulatory matters.