2023-08-11 12:36:24 ET
Summary
- Duolingo beat Q2 2023 revenue and EPS estimates and raised full-year guidance for all metrics.
- The company has seen improvements in EBITDA margins, cash flows, and stabilization in ARPU.
- Management left room to raise guidance again when it reports Q3 results.
- The introduction of Duolingo Max and the use of AI are expected to drive future growth and improve and speed up content creation.
Duolingo ( DUOL ) beat Q2 2023 revenue and EPS estimates and raised the full-year guidance for all metrics – total bookings, revenues, EBITDA, and EBITDA margin. This is what excellent execution looks like and while it is somewhat reflected in the share price already, I still see a long growth runway for the stock in the following years.
Looking at the Q2 numbers, they reflect what we have gotten used to from the company since it went public – all the numbers coming in above the high end of the quarterly guidance range and an increase in the full-year guidance range for all the mentioned metrics.
EBITDA margins and cash flows have improved considerably in the last few quarters and Duolingo is now a stable cash flow positive company.
What I found notable is the stabilization and sequential improvement in the ARPU (Average Revenue Per User). This too was in line with management comments from prior quarters, but still good to see. The ARPU is still declining Y/Y and there are some currency headwinds in there, but more importantly, the regional pricing changes from last year that are flowing through to the numbers.
Duolingo earnings reports
On the earnings call , management said we should see the Y/Y change go to zero by the fourth quarter and this implies further modest improvements compared to Q2 levels.
And the ARPU is very likely to turn into a tailwind in 2024 and beyond. Duolingo does not exactly have strong pricing power, but the key driver for higher ARPU in the following years is the higher-tier Duolingo Max subscription offering. This is still in the testing phase with a limited number of users, but management said that the price of Duolingo Max should be double the price of the existing basic offering. As a reminder, Duolingo Max utilizes OpenAI’s ChatGPT platform and has added options such as roleplay conversations, explain my answer, and now it also has a coaching feature where AI helps the user with answers.
This will take some time to roll out and any potential Duolingo Max bookings are not included in the full-year guidance. However, I would not expect a material impact this year and we should start to see the growth of Duolingo Max pick up sometime in 2024. This would be in line with the company’s historical feature implementation where big changes take approximately a year from the start of testing with a small base of users to global implementation.
This means that, in 2024 and beyond, we should see subscription revenue growth initially match and then exceed the growth in paid subscribers. I would not expect revenue growth acceleration (although I would not exclude it either) because it will be natural to see a deceleration in paid user growth in the following quarters.
One of the additional advantages of the use of AI is that it is likely to both lower the cost of content production for the existing subscription offering and it could also speed up content creation. The combination of lower cost and faster content creation should flow through to the bottom line and, perhaps, improve topline growth in the long run.
The guidance for Q3 and the full-year looks to be (traditionally) on the conservative side and we are likely to see another beat-and-raise quarter when Duolingo reports Q3 results in three months. With no sequential ARPU headwind and continued strong growth in user numbers, I would expect Q3 revenues to be at least $135 million while the company’s guidance range is $129.5-$132.5 million.
The full-year guidance range was raised from $500-$509 million to $510-$516 million and it does look like management left room for its beat-and-raise execution. I expect full-year revenues to be in the $520-$525 million range.
Conclusion
Duolingo continues to execute its growth strategy very well and the implementation of AI should provide a strong long-term tailwind on top of the improvements in the basic offerings that lead to better learning quality, but also improved user stickiness based on the gaming features of the app.
For further details see:
Duolingo: AI To Drive Growth In 2024 And Beyond