Duolingo, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Unaudited consolidated financial statements. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context and operating performance
Duolingo operates a freemium mobile and web learning platform, primarily monetized through subscriptions, with additional revenue from advertising, the Duolingo English Test, and in-app purchases. Management cited product improvements and increased user engagement as drivers of user and subscriber growth.
- Q2 average monthly active users were 74.1 million, up 50%; daily active users were 21.4 million, up 62%; and paid subscribers at quarter-end were 5.2 million, up 59% year over year. The DAU/MAU ratio rose to 28.9% from 26.6%.
- Q2 subscription bookings increased 43% to $106.3 million; total bookings increased 41% to $137.5 million. For the first half, subscription bookings rose 42% to $216.4 million and total bookings rose 39% to $277.6 million.
Financial results
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $126.8M | $88.4M | $242.5M | $169.6M |
| Gross profit / margin | $93.1M / 73.4% | $64.5M / 73.0% | $177.2M / 73.1% | $124.2M / 73.3% |
| Operating loss | $(4.9)M | $(15.0)M | $(13.4)M | $(26.9)M |
| Net income (loss) | $3.7M | $(15.0)M | $1.1M | $(27.2)M |
| Adjusted EBITDA | $20.9M | $4.2M | $36.0M | $8.1M |
| Operating cash flow | $37.2M | $12.7M | $66.8M | $33.3M |
| Free cash flow | $34.3M | $9.9M | $63.1M | $28.8M |
- Revenue grew 44% in Q2 and 43% in H1. Q2 subscription revenue was $95.2 million, up 46%; advertising was $13.1 million, up 16%; Duolingo English Test revenue was $9.8 million, up 22%; and other revenue was $8.8 million, more than double the prior-year quarter.
- Q2 operating expenses rose 23% to $97.9 million, slower than revenue growth. Research and development increased 40% to $47.9 million, primarily reflecting headcount growth. Sales and marketing rose 16% to $17.7 million; general and administrative rose 7% to $32.2 million.
- Net income contrasted with an operating loss, principally because Q2 interest income was $7.5 million, compared with $0.7 million a year earlier. H1 interest income was $13.2 million versus $0.7 million.
- Stock-based compensation was $23.7 million in Q2 and $44.8 million in H1, up from $18.1 million and $32.7 million, respectively, in 2022. Adjusted EBITDA and free cash flow are non-GAAP measures and include specified adjustments.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $678.7 million at June 30, 2023, versus $608.2 million at December 31, 2022; $655.1 million was held in money market funds.
- Current assets were $784.9 million and current liabilities $217.1 million. Deferred revenue, mostly advance subscription billings, was $192.8 million, expected to be recognized over the following 12 months subject to revenue-recognition criteria.
- The balance sheet reports no borrowings; long-term operating lease obligations were $21.3 million, in addition to current lease obligations. Total liabilities were $238.4 million.
- H1 operating cash flow was $66.8 million; investing activities used $4.7 million and financing activities provided $8.4 million, primarily from stock-option exercises. Cash increased $70.5 million during the half.
Outlook, risks and notable items
- Management said existing cash and cash flow from operations should be sufficient for working capital and capital expenditure needs for at least the next 12 months. The filing provides no specific numerical revenue or earnings guidance.
- Management expects continued significant research and development investment; it expects sales and marketing to decline as a percentage of revenue over the long term, and general and administrative costs to remain steady or decline as a percentage over the long term.
- Management attributed revenue growth mainly to more paid subscribers. Advertising growth was partly offset by lower advertising pricing and lower average revenue per DAU; English Test revenue growth reflected higher average test prices, while Q2 test volume declined.
- Key risks include retaining and engaging users and converting them to paid subscribers; intense competition; reliance on Apple and Google for distribution, payments and revenue collection; reliance on cloud providers; privacy, cybersecurity and evolving AI regulation; and international, foreign-exchange and macroeconomic risks. Apple and Google processed 58.2% and 26.1% of Q2 revenue, respectively; for H1, they processed 57.7% and 26.2%.
- Operating cash generation benefited in part from deferred revenue and noncash stock-based compensation. User metrics are internally calculated, not independently validated, and may not be directly comparable if methodologies change.
- The company reported no material legal proceedings and no material changes in internal control over financial reporting during Q2. It reported a $1.3 million Q2 tax benefit, primarily related to excess tax benefits from stock-based compensation, and continues to maintain a full valuation allowance on U.S. federal and state deferred tax assets.
Important facts for investors to verify
- Whether user, subscriber and bookings growth continues and converts into recognized revenue and sustainable operating profitability.
- How much reported net income and adjusted EBITDA depend on interest income and stock-based compensation adjustments.
- Whether gross margins hold as advertising monetization, payment-processing fees and infrastructure costs change.
- The durability of cash generation, including the effect of advance billings and deferred revenue on operating cash flow.
- Exposure to Apple and Google platform economics, cloud-provider interruptions, privacy and AI regulation, and the accuracy and comparability of company-reported user metrics.
- The implications of substantial equity compensation and the dual-class structure; Class B shares carry 20 votes each, and insiders and certain major holders collectively held 79.8% of voting power at June 30, 2023.