Third Quarter 2026 Earnings Call - DUOLINGO INC

Financial Performance:

• Q3 revenue, bookings, and profitability exceeded expectations; bookings growth was in double digits across most regions.
• Q4 guidance: Year-over-year bookings growth of 13%, revenue growth of 14%, and adjusted EBITDA margin of 26.1%.
• Q4 adjusted EBITDA expected to be flat year-over-year at approximately $84 million due to operating expense growth (including a second portion of the user growth bonus) and slight gross margin compression.
• Full-year 2024 expectations: 12% bookings growth, 18% revenue growth, and 26.5% adjusted EBITDA margin.
• Q3 operating expenses included an $11 million bonus accrual for the team meeting user growth re-acceleration targets; the full bonus is expected to be paid in early 2027.
• Q3 gross margin was robust but expected to dip slightly in Q4 as video call is rolled out to all paid subscribers.

Guidance and Future Outlook:

• Management expects Q4 DAU growth to remain similar to Q3 levels (29% year-over-year).
• Full-year 2027 outlook will be provided in February 2027.
• Long-term goal remains reaching one billion learners; the business is prioritizing user growth and teaching quality now to enable future monetization at scale.
• Monetization focus is shifting in 2025 to include more A/B tests on new revenue levers without degrading the free experience.
• Video call feature is expected to drive revenue and retention after being moved to the Super tier.

Business Segments and Product Lines:

• Duolingo Max: Being sunset; Max individual subscribers are being migrated to the Super Family plan at a similar price point, while Max Family will be discontinued by year-end.
• Video Call: Costs per call reduced from ~30 cents to <1 cent via open-weight models; rolling out to all Super subscribers to increase reach by 10x compared to Max.
• Chess: Hit 10 million DAU; significantly under-monetized, presenting "low-hanging fruit" for future revenue generation.
• Math: Growing at the same rate as language courses; management hopes it can eventually match the growth velocity of Chess.
• Light Tier: Currently in A/B testing; not yet considered a "home run" and may be limited to specific regions pending further results.
• New Products: AI enabled the rapid deployment of Chess (idea to launch in 9 months); new course launches are expected to accelerate further.

Market and Competitive Landscape:

• DAU growth accelerated to 29% year-over-year in Q3, up from 23% in Q2; growth was broad-based across eight of the ten largest markets.
• Strategic partnerships with game publishers (e.g., Brawl Stars, Eggy Party) successfully drove user acquisition; these partnerships are cross-promotional with no monetary exchange.
• Management states Duolingo is now "better than a classroom" for language learning, though not yet equivalent to one-on-one human tutoring.
• Competition for user attention is high, but partnerships with game developers create mutual value rather than direct conflict.
• AI inference costs are being managed through a strategic shift to open-weight models, which are deemed "almost as good as frontier models" for most use cases.

Risks and Challenges:

• Gross Margin Pressure: Sequential decline expected in Q4 due to increased AI inference costs from rolling out video calls to a broader subscriber base.
• Monetization Lag: Paid subscriber growth has slowed relative to DAU; management attributes this to prior focus on user growth and extended free trials, expecting a lag effect to resolve as bookings rebound.
• Operational Complexity: Scaling A/B testing has shifted bottlenecks from engineering capacity to idea generation and non-engineer bug fixing.
• AI Cost/Usage Balance: While costs per DAU are falling, the absolute cost of deploying AI to free users is a consideration, though management plans to spend single-digit millions on inference for free users next year.
• Conversion Rates: Uncertainty remains on whether conversion rates will improve if free user experience cannot be degraded.

Management Commentary and Tone:

• Tone is confident and optimistic; management expressed pride in re-accelerating user growth and executing on their "green machine" optimization strategy.
• CEO Luis von All emphasized that the majority of DAU growth stems from product retention improvements rather than just partnerships.
• CFO Jillian Munson highlighted the success of paid marketing (profitable spend with improving LTV/CAC ratios) and the management of AI costs.
• Management reiterated a strict guardrail against degrading the free user experience to drive monetization.
• Confidence is high regarding the ability to run an "integer multiple" of A/B tests next year due to AI-driven internal productivity gains.

Analyst Questions and Answers:

• DAU Drivers: Luis von All clarified that product improvements (retention) are the primary growth driver, with partnerships providing a supplementary boost; partnerships yield high retention due to habit-building mechanics.
• Subscriber Growth vs. DAU: Management explained that subscription numbers follow revenue/booking trends; as bookings rebound from prior quarters, subscriber growth is expected to follow.
• Video Call Impact: Video call adoption is increasing (words spoken per user doubled), and testing its inclusion in Super confirmed positive impact on revenue and conversion, leading to the Max sunsetting decision.
• Partnership Scalability: Partnerships are not expected to happen "hundreds of times a year" but will occur a few times annually; they are additive to performance marketing efforts.
• Marketing Efficiency: Paid marketing is profitable and represents ~60% of non-comp spend; management continues to refine channel allocation for optimal LTV/CAC.
• AI Inference Costs: Costs per user are decreasing faster than usage per user increases due to the migration from frontier models to open-weight models.
• Direct Payments: Currently used selectively (e.g., performance marketing funnel); not expected to be a major primary driver for subscription revenue in the immediate future.
• Future AI Role: AI will become core to teaching, aiming to replicate the adaptability of human tutors within a gamified, scalable mobile experience.

Other Key Points:

• Testing Velocity: The number of A/B tests ran in the last month was up 90% year-over-year, driven by AI enabling non-engineers (product managers/designers) to ship small tests independently.
• Chess Growth: Chess is growing faster than language courses, though Math is growing at a similar pace to languages.
• Ads Business: Management has established a dedicated ad team and is transitioning from low-quality ad networks to higher-quality direct-sold ads, expecting significant improvement in 2027.
• Bonus Structure: The Q3 bonus was for hitting user growth targets; a second portion is included in Q4 guidance and will be paid out in early 2027.
• Super Family Plan: Moving Max users to Super Family is designed to maintain retention (due to group accountability) without materially impacting bookings or cannibalizing new individual acquisitions.