Duolingo, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Duolingo operates a freemium learning platform, subscription services, and the Duolingo English Test. Financial statements are unaudited and presented under U.S. GAAP.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $115.7 million | $81.2 million | +42% |
| Gross profit / margin | $84.2 million / 72.8% | $59.7 million / 73.5% | Margin down 0.7 percentage points |
| Operating expenses | $92.7 million | $71.6 million | +29% |
| Operating loss | $8.5 million | $11.8 million | Loss narrowed |
| Net loss | $2.6 million | $12.2 million | Loss narrowed 79% |
| Net loss per share, diluted | $0.06 | $0.31 | Loss per share narrowed |
| Operating cash flow | $29.6 million | $20.6 million | +44% |
| Free cash flow (non-GAAP) | $28.8 million | $18.9 million | Increased |
| Adjusted EBITDA (non-GAAP) | $15.1 million | $3.9 million | Increased |
Revenue by stream: subscriptions $86.2 million (+49%); advertising $11.6 million (-1%); Duolingo English Test $10.0 million (+23%); and other revenue, mainly virtual goods, $7.9 million (+133%). Management attributed subscription growth chiefly to more paid subscribers and advertising revenue’s slight decline to lower ad pricing. Gross margin eased mainly because of lower advertising margins and higher software amortization, partly offset by improved subscription margins.
Research and development expense rose 54% to $45.8 million, primarily reflecting higher employee costs and headcount. Sales and marketing increased 11% to $16.6 million; general and administrative increased 13% to $30.2 million. Stock-based compensation was $21.1 million, up from $14.6 million.
Users, liquidity, and balance sheet
- Average MAUs were 72.6 million (+47%); average DAUs were 20.3 million (+62%). The DAU/MAU ratio rose to 28.0% from 25.4%.
- Paid subscribers reached 4.8 million at period end, up 63%. Subscription bookings were $110.1 million (+40%); total bookings were $140.1 million (+37%). Bookings are not GAAP revenue and reflect purchases received, including subscriptions recognized over time.
- Cash and cash equivalents totaled $641.1 million at March 31, versus $608.2 million at December 31, 2022; $592.6 million was held in money market funds. Cash increased $32.9 million during Q1.
- Deferred revenue was $181.9 million, up from $157.6 million at year-end; the company expected it to be recognized within the next 12 months, subject to revenue-recognition criteria. Current assets were $741.2 million and current liabilities $202.8 million.
- The filing does not report borrowings or a conventional debt balance. It reports operating lease obligations of $22.4 million long term, plus current lease obligations included in accrued liabilities.
Outlook, commentary, and risks
- Management said existing cash and expected operating cash flow should support working capital and capital expenditure needs for at least the next 12 months. Future capital needs depend on subscriber growth and renewals, payment timing, marketing, product launches, and market conditions.
- No numerical revenue, earnings, or bookings guidance is provided in the filing. Management expects continued significant research and development investment; it expects sales and marketing to decline as a share of revenue over the long term and G&A to remain steady or decline as a share of revenue over the long term.
- In Q1, Duolingo began offering a higher subscription tier in certain markets with AI-powered answer explanations and text-based roleplay. Management cautioned that evolving AI regulation could raise costs or affect product use.
- Key risks include retaining and engaging users and converting them to paid subscribers; competition; reliance on Apple and Google app stores and payment systems; reliance on AWS and Google Cloud; privacy, cybersecurity, and changing regulation; and uncertainty in international markets, including China. Apple and Google processed approximately 57% and 26% of Q1 revenue, respectively.
- Operating metrics are based on internally developed analytics and have not been independently validated; methodologies may change and affect comparability. The company reported no material legal proceedings and no material changes in internal control during the quarter; management said disclosure controls were effective at period end.
Important facts for investors to verify
- Whether subscriber growth and bookings continue to convert into recognized subscription revenue and sustainable margins.
- How much reported improvement in Adjusted EBITDA and cash generation depends on stock-based compensation and other non-GAAP adjustments; stock-based compensation was $21.1 million in the quarter.
- Whether lower advertising pricing, rising product-development costs, and software amortization continue to pressure gross margin and operating results.
- The durability of user and paid-subscriber metrics, including the company’s measurement methodology and any future revisions.
- Exposure to app-store distribution and payment terms, cloud-service concentration, privacy and AI regulation, and international operating risks.
- The effect of dual-class shares: Class B shares carry 20 votes each, and insiders and certain large holders collectively held 82.5% of voting power at March 31, 2023.