Duolingo, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited consolidated results. Duolingo operates a freemium language-learning app and website, plus the Duolingo English Test. Unless noted, financial amounts below are in millions of U.S. dollars.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $63.6 | $45.3 | $177.8 | $113.4 |
| Gross profit | $45.5 | $32.2 | $128.5 | $80.3 |
| Gross margin | 71.6% | 71.1% | 72.3% | 70.8% |
| Operating loss | $(28.7) | $(3.1) | $(42.6) | $(5.4) |
| Net loss | $(29.0) | $(3.2) | $(42.6) | $(5.4) |
| Adjusted EBITDA | $(6.0) | $(0.7) | $(1.4) | $0.7 |
| Operating cash flow | $4.5 | $0.8 | $8.7 | $14.0 |
| Free cash flow | $5.2 | $0.6 | $11.1 | $11.5 |
- Q3 revenue increased 40% year over year; nine-month revenue increased 57%. Subscription revenue was the largest stream: $46.0 million in Q3, up 42%, and $129.6 million for nine months, up 57%.
- Q3 operating expenses rose 110% to $74.2 million. Research and development was $29.3 million; sales and marketing $15.3 million; general and administrative $29.6 million. The latter included substantial IPO-related stock compensation.
- At September 30, cash and cash equivalents were $549.4 million, versus $120.5 million at year-end 2020. Current assets were $596.3 million and current liabilities $98.6 million. Deferred revenue was $80.5 million. The filing reports operating lease obligations but no conventional borrowings or debt balance.
- IPO proceeds materially increased cash and equity: the company received approximately $431.1 million net, and preferred stock converted to common stock. Total liabilities were $107.0 million and stockholders’ equity $510.7 million at quarter-end.
- Key Q3 metrics: 41.7 million average monthly active users, 9.8 million average daily active users, and 2.2 million paid subscribers at period-end. Year-over-year growth was 13%, 16%, and 49%, respectively. Total bookings rose 57% to $73.1 million; subscription bookings rose 64% to $55.4 million.
Changes, outlook, and notable items
- Gross margin improved modestly, which management attributed mainly to higher advertising revenue per daily active user and improved subscription retention and mix. Revenue growth was driven principally by paid subscribers, with growth also in advertising, the English Test, and in-app purchases.
- Losses widened as operating expenses grew faster than revenue. Q3 stock-based compensation was $20.7 million, compared with $1.7 million a year earlier. The quarter included $8.3 million of expense for founder performance-based RSUs and $5.6 million from accelerated vesting of executive stock options following the IPO. Nine-month results also included $5.6 million of tender-offer-related costs and $4.2 million of contributor awards.
- Management said existing cash and operating cash flow should fund working capital and capital expenditures for at least the next 12 months. The filing provides no numerical revenue, earnings, or bookings guidance. Management expects continued significant R&D investment and additional public-company costs.
- Management reported that COVID-19 had not significantly harmed operations to date and said pandemic-related acceptance of the English Test was expected to persist; future effects remain uncertain.
- Risks highlighted include dependence on Apple, Google, payment processors, and cloud providers; user engagement and paid conversion; privacy, cybersecurity, and regulation; international operations and China (the app was temporarily unavailable for download on most Chinese app stores); and competition. Apple, Google, and Stripe processed a large majority of Q3 revenue, as disclosed in the filing.
- A previously identified material weakness in internal control over financial reporting remained under remediation; management said remediation required further validation and testing. Disclosure controls were assessed as effective. The company reported no legal proceedings in the filing’s legal-proceedings item.
Important facts for investors to verify
- Whether user growth, engagement, paid-subscriber conversion, and bookings continue to support subscription revenue growth.
- How much future reported expense and dilution may arise from stock-based compensation, particularly founder awards with an estimated total compensation cost of approximately $110.8 million over their derived service periods.
- Whether expense growth moderates and the business progresses toward profitability; Q3 GAAP operating loss was $28.7 million despite positive operating cash flow.
- Whether the material weakness is fully remediated and whether subsequent testing identifies additional control issues.
- Potential effects of platform and payment-provider concentration, privacy and advertising changes, and regulatory conditions in China on distribution, monetization, and cash receipts.