Duolingo Inc

Previous wording

We regularly review a number of key operating metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends, prepare financial projections and make business decisions. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Monthly active users (MAUs) and daily active users (DAUs), along with paid subscribers, subscription bookings and total bookings, are operating metrics that help inform management about the underlying growth in users of our platform, and are a measure of our monetization efforts. To calculate the year-over-year change in MAUs and DAUs for a given period, we subtract the average for the same period in the previous year from the average for the same period in the current year and divide the result by the average for the same period in the previous year. Other companies, including companies in our industry, may calculate these measures differently or not at all, which reduces their usefulness as comparative measures.

Current wording

We regularly review a number of key operating metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends, prepare financial projections and make business decisions. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Monthly active users (MAUs) and daily active users (DAUs), along with paid subscribers, subscription bookings and total bookings, are operating metrics that help inform management about the underlying growth in users of our platform, and are a measure of our monetization efforts. To calculate the year-over-year change in MAUs and DAUs for a given period, we subtract the average for the same period in the previous year from the average for the same period in the current year and divide the result by the average for the same period in the previous year. Other companies, including companies in our industry, may calculate these measures differently or not at all, which reduces their usefulness as comparative measures.

Previous wording

We had approximately 103.6 million and 74.1 million MAUs for the three months ended June 30, 2024 and 2023, respectively, representing an increase of 40% from the prior year period. We grew MAUs through product initiatives designed to make the app more social and engaging, through marketing, and through improving our courses, all of which we believe helped us attract new users, retain existing users, and reengage the millions of former users who return to our Duolingo App.

Current wording

We had approximately 113.1 million and 83.1 million MAUs for the three months ended September 30, 2024 and 2023, respectively, representing an increase of 36% from the prior year period. We grew MAUs through product initiatives designed to make the app more social and engaging, through marketing, and through improving our courses, all of which we believe helped us attract new users, retain existing users, and reengage the millions of former users who return to our Duolingo App.

Previous wording

We had approximately 34.1 million and 21.4 million DAUs for the three months ended June 30, 2024 and 2023, respectively, representing an increase of 59% from the prior year period. The DAU / MAU ratio, which we believe is an indicator of user engagement, increased to 32.9% from 28.9% a year ago. We grew DAUs through many of the same product initiatives as we grew MAUs, such as making the product more fun and engaging.

Current wording

We had approximately 37.2 million and 24.2 million DAUs for the three months ended September 30, 2024 and 2023, respectively, representing an increase of 54% from the prior year period. The DAU / MAU ratio, which we believe is an indicator of user engagement, increased to 32.9% from 29.1% a year ago. We grew DAUs through many of the same marketing and product initiatives as we grew MAUs, such as making the product more fun and engaging.

Previous wording

As of June 30, 2024 and 2023, we had approximately 8.0 million and 5.2 million paid subscribers, respectively, representing an increase of 52% from the prior year period. We grew paid subscribers through product initiatives designed to make Duolingo subscription offerings more appealing, which we believe helped us attract new subscribers and retain existing subscribers.

Current wording

As of September 30, 2024 and 2023, we had approximately 8.6 million and 5.8 million paid subscribers, respectively, representing an increase of 47% from the prior year period. We grew paid subscribers through product initiatives designed to make Duolingo subscription offerings more appealing, which we believe helped us attract new subscribers and retain existing subscribers.

Previous wording

For the three months ended June 30, 2024 and 2023, we generated $156.5 million and $106.3 million of subscription bookings, respectively, representing an increase of 47% from the prior year period. For the six months ended June 30, 2024 and 2023, we generated $318.0 million and $216.4 million of subscription bookings, respectively, representing an increase of 47% from the prior year period. We grew subscription bookings by selling more first-time and renewal subscriptions.

Current wording

For the three months ended September 30, 2024 and 2023, we generated $176.3 million and $121.3 million of subscription bookings, respectively, representing an increase of 45% from the prior year period. For the nine months ended September 30, 2024 and 2023, we generated $494.3 million and $337.7 million of subscription bookings, respectively, representing an increase of 46% from the prior year period. We grew subscription bookings by selling more first-time and renewal subscriptions.

Previous wording

For the three months ended June 30, 2024 and 2023, we generated $190.1 million and $137.5 million total bookings, respectively, representing an increase of 38% from the prior year period. For the six months ended June 30, 2024 and 2023, we generated $387.5 million and $277.6 million total bookings, respectively, representing an increase of 40% from the prior year period. We grew total bookings through growth in subscription bookings noted above, in addition to growth in the Duolingo English Test, advertising and in-app purchases.

Current wording

For the three months ended September 30, 2024 and 2023, we generated $211.5 million and $153.6 million total bookings, respectively, representing an increase of 38% from the prior year period. For the nine months ended September 30, 2024 and 2023, we generated $599.0 million and $431.1 million total bookings, respectively, representing an increase of 39% from the prior year period. We grew total bookings primarily through growth in subscription bookings as noted above.

Previous wording

Adjusted EBITDA. Adjusted EBITDA is defined as net income excluding interest income, income taxes, depreciation and amortization, stock-based compensation expenses related to equity awards, transaction costs related to acquisitions, acquisition earn-out costs, and gain on sale of capitalized software. Adjusted EBITDA is used by management to evaluate the financial performance of our business and we present Adjusted EBITDA because we believe it is helpful in highlighting trends in our operating results and that it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The following table presents a reconciliation of our net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA.

Current wording

Adjusted EBITDA. Adjusted EBITDA is defined as net income excluding interest income, income taxes, depreciation and amortization, stock-based compensation expenses related to equity awards, transaction costs related to acquisitions, acquisition earn-out costs, gain on sale of capitalized software and loss on disposal of leasehold improvements. Adjusted EBITDA is used by management to evaluate the financial performance of our business and we present Adjusted EBITDA because we believe it is helpful in highlighting trends in our operating results and that it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The following table presents a reconciliation of our net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA.

Previous wording

(1)In addition to stock-based compensation expense of $26.7 million and $23.7 million for the three months ended June 30, 2024 and 2023, respectively, and $51.7 million and $44.8 million for the six months ended June 30, 2024 and 2023, respectively, this includes costs incurred related to taxes paid on equity transactions as follows:

Current wording

(1)In addition to stock-based compensation expense of $29.0 million and $25.4 million for the three months ended September 30, 2024 and 2023, respectively, and $80.7 million and $70.2 million for the nine months ended September 30, 2024 and 2023, respectively, this includes costs incurred related to taxes paid on equity transactions as follows:

Previous wording

(3)Represents costs incurred related to the earn-out payment on an acquisition, which is included within General and administrative within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

Current wording

(3)Represents costs incurred related to the earn-out payments on acquisitions, which is included within General and administrative expense within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

Previous wording

(4)Represents proceeds from a sale of capitalized software, which is included within Other expense, net of other income within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

Current wording

(4)Represents proceeds from a sale of capitalized software, which is included within Other income (expense), net within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

Previous wording

For the three months ended June 30, 2024 and 2023, we generated net income of $24.4 million and $3.7 million, respectively. For the six months ended June 30, 2024 and 2023, we generated net income of $51.3 million and $1.1 million, respectively. The increase in net income as compared to the comparative period was due to a combination of our growth in revenue and interest income in addition to a reduction in operating expenses as a percentage of revenue as compared to the prior year period.

Current wording

For the three months ended September 30, 2024 and 2023, we generated net income of $23.4 million and $2.8 million, respectively. For the nine months ended September 30, 2024 and 2023, we generated net income of $74.7 million and $4.0 million, respectively. The increase in net income as compared to the comparative period was due to a combination of our growth in revenue and interest income in addition to a reduction in operating expenses as a percentage of revenue as compared to the prior year period.

Previous wording

For the three months ended June 30, 2024 and 2023, we generated Adjusted EBITDA of $48.1 million and $20.9 million, respectively. For the six months ended June 30, 2024 and 2023, we generated Adjusted EBITDA of $92.1 million and $36.0 million, respectively. Adjusted EBITDA increased due to a combination of our growth in revenue and a reduction in operating expenses as a percentage of revenue as compared to the prior year periods.

Current wording

For the three months ended September 30, 2024 and 2023, we generated Adjusted EBITDA of $47.5 million and $22.5 million, respectively. For the nine months ended September 30, 2024 and 2023, we generated Adjusted EBITDA of $139.6 million and $58.5 million, respectively. Adjusted EBITDA increased due to a combination of our growth in revenue and a reduction in operating expenses as a percentage of revenue as compared to the prior year periods.

Previous wording

Free Cash Flow. Free cash flow represents net cash provided by operating activities, reduced by capitalized software development costs and purchases of property and equipment and increased by taxes paid related to stock-based compensation equity awards and transaction costs related to acquisitions as we believe they are not indicative of future liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, investors and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Free cash flow has certain limitations in that it does not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:

Current wording

Free Cash Flow. Free cash flow represents net cash provided by operating activities, reduced by capitalized software development costs and purchases of property and equipment and increased by taxes paid related to stock-based compensation equity awards and transaction costs related to acquisitions as we believe such items are not indicative of future liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, investors and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Free cash flow has certain limitations in that it does not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:

Previous wording

For the three months ended June 30, 2024 and 2023, we generated $62.4 million and $37.2 million of net cash provided by operating activities, respectively, which was mainly due to our generation of positive net income as discussed under the heading Adjusted EBITDA above. For the six months ended June 30, 2024 and 2023, we generated $145.9 million and $66.8 million of net cash provided by operating activities, respectively. In addition to the generation of positive net income, timing of amounts received from our payment service providers in the current period as compared to the same period in the prior year caused the increase in net cash provided by operating activities for the six months ended June 30, 2024 and 2023.

Current wording

For the three months ended September 30, 2024 and 2023, we generated $56.3 million and $37.7 million of net cash provided by operating activities, respectively. For the nine months ended September 30, 2024 and 2023, we generated $202.2 million and $104.4 million of net cash provided by operating activities, respectively. The increases in both periods were mainly due to our increase in net income as discussed under the heading Adjusted EBITDA above.

Previous wording

For the three months ended June 30, 2024 and 2023, we generated $54.9 million and $34.3 million of free cash flow, respectively. For the six months ended June 30, 2024 and 2023, we generated $134.5 million and $63.1 million of free cash flow, respectively. The increase in free cash flow was mainly attributable to the increase in net cash provided by operating activities.

Current wording

For the three months ended September 30, 2024 and 2023, we generated $52.7 million and $33.5 million of free cash flow, respectively. For the nine months ended September 30, 2024 and 2023, we generated $187.2 million and $96.6 million of free cash flow, respectively. The increase in free cash flow was mainly attributable to the increase in net cash provided by operating activities.

Previous wording

Total revenues were $178.3 million for the three months ended June 30, 2024, which represents an increase of 41% on a reported basis and 42% on a constant currency basis over the three months ended June 30, 2023. Subscription revenues totaled $143.9 million for the three months ended June 30, 2024, which represented an increase of 51% on a reported basis and 52% on a constant currency basis over the three months ended June 30, 2023.

Current wording

Total revenues were $192.6 million for the three months ended September 30, 2024, which represents an increase of 40% on a reported basis and 41% on a constant currency basis over the three months ended September 30, 2023. Subscription revenues totaled $157.6 million for the three months ended September 30, 2024, which represented an increase of 49% on a reported basis and 50% on a constant currency basis over the three months ended September 30, 2023.

Previous wording

Total revenues were $345.9 million for the six months ended June 30, 2024, which represents an increase of 43% (on both a reported and constant currency basis) over the six months ended June 30, 2023. Subscription revenues totaled $275.6 million for the six months ended June 30, 2024, which represented an increase of 52% on a reported basis and 53% on a constant currency basis over the six months ended June 30, 2023.

Current wording

Total revenues were $538.5 million for the nine months ended September 30, 2024, which represents an increase of 42%, on both a reported and constant currency basis, over the nine months ended September 30, 2023. Subscription revenues totaled $433.2 million for the nine months ended September 30, 2024, which represented an increase of 51% on a reported basis and 52% on a constant currency basis over the nine months ended September 30, 2023.

Previous wording

Cost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels in addition to hosting fees. To a much lesser extent, cost of revenues includes customer support costs, such as contractor fees, wages and stock-based compensation for certain employees working in customer support, in addition to amortization of revenue generating capitalized software, and depreciation of certain property and equipment.

Current wording

Cost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels in addition to hosting fees. To a much lesser extent, cost of revenues includes customer support costs, such as contractor fees, wages and stock-based compensation for certain employees working in customer support. It also includes the amortization of revenue generating capitalized software, and depreciation of certain property and equipment.

Previous wording

Interest income consists of income earned on our money market funds included in cash and cash equivalents and on our marketable securities.

Current wording

Interest income consists of income earned on our money market funds included in cash and cash equivalents and income earned and net accretion on our marketable securities.

Previous wording

Other expense, net of other income consists primarily of foreign currency exchange gains and losses.

Current wording

Other income (expense), net consists primarily of foreign currency exchange gains and losses.

Previous wording

Comparison of the three and six months ended June 30, 2024 and 2023

Current wording

Comparison of the three and nine months ended September 30, 2024 and 2023

Previous wording

Revenues increased $51.5 million, or 41%, to $178.3 million during the three months ended June 30, 2024, from revenues of $126.8 million during the three months ended June 30, 2023. Revenues increased $103.4 million, or 43%, to $345.9 million during the six months ended June 30, 2024, from revenues of $242.5 million during the six months ended June 30, 2023. The main drivers of the increase were:

Current wording

Revenues increased $55.0 million, or 40%, to $192.6 million during the three months ended September 30, 2024, from revenues of $137.6 million during the three months ended September 30, 2023. Revenues increased $158.4 million, or 42%, to $538.5 million during the nine months ended September 30, 2024, from revenues of $380.1 million during the nine months ended September 30, 2023. The main drivers of the increase were:

Previous wording

•Subscription revenue increased $48.8 million, or 51%, to $143.9 million during the three months ended June 30, 2024, and $94.3 million, or 52%, to $275.6 million during the six months ended June 30, 2024, primarily due to an increase in the average number of paid subscribers during the period;

Current wording

•Subscription revenue increased $51.7 million, or 49%, to $157.6 million during the three months ended September 30, 2024, and $146.0 million, or 51%, to $433.2 million during the nine months ended September 30, 2024, primarily due to an increase in the average number of paid subscribers during the period;

Previous wording

•Other revenue increased by $2.7 million, or 9%, to $34.4 million during the three months ended June 30, 2024, primarily due to increased In-App Purchases of $1.5 million which was driven by the increase in DAU.

Current wording

•Other revenue increased by $3.2 million, or 10%, to $35.0 million during the three months ended September 30, 2024, primarily due to increased advertising revenue of $2.7 million which was driven by the increase in DAUs which resulted in increased advertisements served.

Previous wording

•Other revenue increased by $9.1 million, or 15%, to $70.3 million during the six months ended June 30, 2024, due to increased Duolingo English Test revenue of $3.7 million. The increase was mainly driven by increases in the average revenue per test. Additionally, In-App Purchases revenue increased by $3.6 million primarily driven by the increase in DAUs and Advertising revenue increased by $1.5 million driven by the increase in DAUs, which resulted in increased advertisements served, offset by decreases in average revenue per DAU.

Current wording

•Other revenue increased by $12.4 million, or 13%, to $105.3 million during the nine months ended September 30, 2024, driven by increased advertising revenue of $4.2 million and In-App Purchases of $3.8 million, primarily driven by the increase in DAUs. Additionally, other revenue increased by $3.8 million from Duolingo English Test revenue, which was driven by increases in the average revenue per test.

Previous wording

Cost of Revenues and Gross Margin. Total gross margin was 73.4% during both the three months ended June 30, 2024 and 2023. This was primarily due to higher subscription gross margin contribution from an increase in subscriber revenue as a percentage of total revenue, offset by a decline in Advertising margins, which was due to decreases in average revenue per DAU.

Current wording

Cost of Revenues and Gross Margin. Total gross margin was 72.9% during the three months ended September 30, 2024, a decrease from 73.7% in the three months ended September 30, 2023. This was due to a combination of lower margins in Other revenue offset by an increase in Subscription revenue as a percentage of total revenue.

Previous wording

Total gross margin increased slightly to 73.2% from 73.1% during the six months ended June 30, 2024 and 2023. This was primarily due to higher subscription gross margin contribution from an increase in subscriber revenue as a percentage of total revenue, partially offset by a decline in Advertising margins, which was due to decreases in average revenue per DAU.

Current wording

Total gross margin decreased slightly to 73.1% from 73.3% during the nine months ended September 30, 2024 and 2023. This was due to a combination of lower margins in Other revenue offset by an increase in Subscription revenue as a percentage of total revenue.

Previous wording

Research and Development. Research and development expense increased by $7.2 million, or 15%, to $55.1 million during the three months ended June 30, 2024 from $47.9 million during the three months ended June 30, 2023. The increase was mainly due to:

Current wording

Research and Development. Research and development expense increased by $12.6 million, or 25%, to $62.9 million during the three months ended September 30, 2024 from $50.3 million during the three months ended September 30, 2023. The increase was mainly due to:

Previous wording

•Increased other costs of $0.8 million.

Current wording

•Increased other costs of $0.6 million.

Previous wording

The above increases were partially offset by a decrease in net contractor costs of $1.8 million.

Current wording

The above increases were partially offset by a decrease in net contractor costs of $0.7 million.

Previous wording

Research and development expense increased by $12.2 million, or 13%, to $106.0 million during the six months ended June 30, 2024 from $93.8 million during the six months ended June 30, 2023. The increase was mainly due to:

Current wording

Research and development expense increased by $24.8 million, or 17%, to $168.9 million during the nine months ended September 30, 2024 from $144.1 million during the nine months ended September 30, 2023. The increase was mainly due to:

Previous wording

•Increased net personnel costs of $7.9 million, driven primarily by the growth in headcount. Total gross personnel costs increased by $8.2 million, of which $3.2 million of the increase was related to stock-based compensation expense. This increase was reduced by $0.3 million of wages recorded as capitalized software as compared to the same period in the prior year;

Current wording

•Increased net personnel costs of $25.4 million, driven primarily by the growth in headcount. Total gross personnel costs increased by $26.4 million, of which $11.3 million of the increase was related to stock-based compensation expense. This increase was reduced by $1.0 million of wages recorded as capitalized software as compared to the same period in the prior year;

Previous wording

•Increased web services and technology costs of $1.0 million;

Current wording

•Increased travel and other costs of $1.0 million.

Previous wording

The above increases were partially offset by a decrease in net contractor costs of $3.2 million.

Current wording

The above increases were partially offset by a decrease in net contractor costs of $3.8 million.

Previous wording

Sales and Marketing. Sales and marketing expense increased by $2.4 million, or 14%, to $20.2 million during the three months ended June 30, 2024 from $17.7 million during the three months ended June 30, 2023.

Current wording

Sales and Marketing. Sales and marketing expense increased by $3.2 million, or 15%, to $25.6 million during the three months ended September 30, 2024 from $22.3 million during the three months ended September 30, 2023.

Previous wording

•Increased direct marketing and other expenses of $1.5 million; and

Current wording

•Increased direct marketing and other expenses of $2.5 million; and

Previous wording

•Increased personnel costs of $0.9 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.2 million.

Current wording

•Increased personnel costs of $0.7 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.2 million.

Previous wording

Sales and marketing expense increased by $5.8 million, or 17%, to $40.1 million during the six months ended June 30, 2024 from $34.3 million during the six months ended June 30, 2023.

Current wording

Sales and marketing expense increased by $9.0 million, or 16%, to $65.7 million during the nine months ended September 30, 2024 from $56.7 million during the nine months ended September 30, 2023.

Previous wording

•Increased direct marketing and other expenses of $4.4 million; and

Current wording

•Increased direct marketing and other expenses of $7.0 million; and

Previous wording

•Increased personnel costs of $1.4 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.5 million.

Current wording

•Increased personnel costs of $2.0 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.7 million.