Third Quarter 2026 Earnings Call - DUOLINGO INC

Explicit Guidance:

• Q4 2026 Full Year Outlook: Expects year-over-year bookings growth of 13%, revenue growth of 14%, and an adjusted EBITDA margin of 26.1%.
• Q4 2026 Specific Metrics: Anticipates adjusted EBITDA to be roughly flat year-over-year at $84 million. Gross margin is expected to decline slightly from Q3 levels due to the rollout of video calls to all paid subscribers. Operating expenses are projected to grow faster than revenue, driven by continued investments and a second portion of an $11 million bonus accrual (to be paid in early 2027).
• Full Year 2026: Projects 12% year-over-year bookings growth and 18% revenue growth with an adjusted EBITDA margin of 26.5%.
• Future Guidance: Management plans to provide full year 2027 outlook in February 2027. No specific revenue or earnings guidance provided for 2027.

Business-Segment Outlook:

• Monetization Strategy: Shifting focus to monetize more aggressively in 2027 without degrading the free user experience. Key levers include expanding IAPs (e.g., avatar suits), improving ad quality, and increasing video call accessibility in the "Super" tier.
• Product Roadmap:
  • Video Call: Rolling out to all paid "Super" subscribers by end of year; costs reduced from ~$0.30 to <$0.01 per call via open-source models. Expected to drive retention and conversion.
  • Chess: Recently hit 10 million DAUs; identified as "completely under-monetized" with significant low-hanging revenue opportunities.
  • Math: Growing at rates similar to languages; management aims to accelerate growth to match Chess and increase teaching content volume.
  • Duolingo Max: Deprecating "Max" subscription tier; moving Max Individual users to "Super Family" at a similar price point, expected to be net positive for bookings long-term with minimal short-term impact.
  • Light Tier: Currently being tested; uncertain future scale, potentially restricted to lower GDP regions if A/B tests do not yield "home run" results.
• User Growth: Q4 DAU growth expected to be similar to Q3 (accelerated 29% YoY). Momentum is attributed to product improvements (A/B testing "green machine"), retention optimization, and partnerships (Brawl Stars, Eggie Party).

Market and Competitive Outlook:

• Competitive Landscape: Believes AI capabilities will eventually match or exceed one-on-one human tutors, but will maintain a gamified experience to combat user churn.
• Partnerships: Scaling gaming partnerships (Brawl Stars, Eggie Party) as a user acquisition channel; expects these to occur a few times per year via cross-promotion (no monetary exchange).
• Advertising: Launching a dedicated direct sales team and transitioning to higher-quality ads from third-party networks; ads business is expected to grow in 2027.
• Experimentation: Planning to run an "integer multiple" (potentially 3x to 10x) of A/B tests in 2027 compared to 2026, driven by AI-enabled internal tools allowing non-engineers to deploy tests.

Macro / Industry Outlook:

• AI Cost Deflation: Significant reduction in inference costs (90-95% drop) due to migration from frontier models to open-weight models, enabling broader AI feature deployment.
• Geography: DAU growth accelerated in 8 of the 10 largest markets; growth remains broad-based across regions.
• Regulatory/Compliance: Management notes ongoing work regarding paid marketing efficiency (LTV:CAC) and potential direct payment expansion outside app stores for performance marketing, though not a primary driver yet.

Strategic Initiatives:

• AI Integration: Deploying AI to improve internal productivity (shipping tests faster) and product features (conversational AI, personalized learning paths).
• Capacity & Infrastructure: Testing internal compute vs. using inference providers; aiming to maintain cost efficiency as scale increases.
• Marketing Efficiency: Paid marketing remains profitable (~60% of non-comp spend); team plans to increase spend in 2027 while optimizing LTV:CAC ratios.
• Retention Focus: Continued emphasis on the "green machine" optimization system and "Streak Revival" events to drive daily active users.

Risks and Headwinds to Outlook:

• Gross Margin Pressure: Expected sequential decline in Q4 gross margin due to video call rollout costs, though AI cost reductions are mitigating this trend.
• Monetization Friction: Strict internal guardrail to avoid degrading the free user experience could limit conversion rate improvements.
• Execution Risks: Scaling A/B testing may face new bottlenecks (e.g., idea generation, bug fixing by non-engineers).
• Competition: Potential competition for consumer attention from gaming partners and social media platforms; reliance on successful partnerships for user acquisition.
• Guidance Uncertainty: Full 2027 outlook is not yet provided; management cautions that specific numbers (e.g., experiment volume, conversion rates) depend on evolving AI capabilities and process improvements.

Management Tone on the Future:

• Confidence: Management expresses high confidence ("extremely bullish") in the long-term opportunity to reach one billion learners.
• Strategic Shift: Clear transition from prioritizing user growth at all costs to a balanced approach of growth + monetization in 2027.
• Optimism on AI: Strong belief in AI's ability to lower costs and improve teaching efficacy, viewing it as a core competitive advantage and efficiency driver.
• Hedges: Repeated emphasis on "A/B testing" and "guardrails" to manage risk, specifically regarding free experience integrity and financial flexibility.

Miscellaneous:

• Bonus Accrual: $11 million bonus recorded in Q3 for re-accelerating user growth; second portion included in Q4 guidance, with full payment expected in early 2027.
• Direct Payments: Testing expansion of direct payments in-app for specific regions/users, primarily to support performance marketing channels, though not currently a major strategic pivot.