Duolingo, Inc. (DUOL) Earnings

Management highlights

- User Growth and Retention: DAU growth accelerated to 23% YoY in Q2, slightly above expectations, with strong early trends for Q3. All core user retention metrics are at all-time highs, with the Current User Retention Rate (CUR) up 1 percentage point over the past year, driven by incremental product improvements that compound over time. The June Streak Revival campaign brought back over 15 million lapsed learners, and this cohort has shown better retention than typical re-engaged users. Top-of-funnel new user acquisition growth improved across almost all regions in Q2. Most growth remains organic, but new marketing channels (influencers/creators, performance marketing) are showing good traction, especially in high-priority markets like China, Indonesia, and India. Two-thirds of total social media impressions now come from influencer partnerships. - Product Development: Core language learning continues to improve, with expanded speaking practice for both free and paid users, and better engagement from intermediate/advanced learners. The Video Call conversational practice feature, previously reserved for the highest-tier Max subscription due to high costs, has had its cost reduced from ~30 cents per call to under 1 cent per call via adoption of open source AI models. The company is testing a new lower-priced ad-supported subscription tier called Superlight, priced ~50% lower than Super, for users who will not purchase full Super. New verticals (chess, math, music) are growing: chess is larger than math and music, which have single-digit millions of DAUs; math is now focused on younger learners rather than adult learners, with more product updates for music expected in the next 1-2 quarters. - Monetization Strategy: The company is shifting from 7-day to 1-month free trials, which increases trial uptake, boosts conversion to paid subscriptions, and improves DAU by removing ads and energy limits for trial users, creating a better user experience aligned with user growth. Management has shifted to a more constructive view of ad revenue: while the business will remain primarily subscription-focused, there is significant untapped ad revenue opportunity given the large active user base, and the company has built a dedicated, professional ad team to capture this opportunity. - AI Cost Optimization: The company is aggressively shifting to open-weight/open source AI models where quality is comparable to closed frontier models, driving significant AI cost savings. Open source models are preferred because they are far cheaper than closed models from providers like OpenAI or Anthropic, which remain used only when open source models do not meet quality requirements.

Guidance

- Maintained full-year 2026 bookings growth guidance at 10% to 12%, with a midpoint expectation of ~11% bookings growth; at constant FX rates from the prior call, bookings growth would be ~0.5 percentage point higher. - Maintained full-year 2026 revenue growth guidance at 15% to 18%, with a midpoint expectation of ~16% revenue growth. - Increased full-year adjusted EBITDA margin guidance from 25% to 26.5%, with an expected full-year adjusted EBITDA of approximately $320 million (a 25.5% margin). - Increased full-year gross margin guidance from 69% to ~70%, driven by AI content adoption that is offset by AI cost savings. - Expected full-year 2026 free cash flow is over $375 million. - For Q3 2026, management expects ~$307 million in bookings (9% YoY growth), ~$302 million in revenue (11% YoY growth), 71% gross margin, and ~$76 million adjusted EBITDA (a 25.2% margin). - The company has an outstanding bonus plan that triggers a payout in Q1 2027 if Q4 2026 DAU growth reaches 25% or higher; the expected payout would be ~$10 million (potentially higher for higher growth), and this is not included in 2026 guidance due to uncertainty around achievement. - Management reaffirmed the long-term target of reaching 100 million DAUs by 2028.

Segment performance

Duolingo does not break out separate financial performance for distinct product segments in this earnings call. The call reports overall company-level results: Q2 daily active users (DAUs) grew 23% year-over-year, accelerating from Q1 and beating expectations. Overall profitability was slightly ahead of internal plan, and the company generated $79 million in Q2 free cash flow, ending the quarter with $1.3 billion in cash and investments. The company repurchased $44 million of stock during the quarter, bringing cumulative repurchases to $72 million (approximately 700,000 shares). Newer verticals (math, music) have single-digit millions of DAUs, but their contribution to overall DAU growth is still small relative to the core 60+ million total DAU base.

Risks & headwinds

- China market regulatory risk: China is a growing market for Duolingo, and the company uses local AI models to comply with local rules, but there is inherent regulatory and data residency risk given changing local protectionist policies, and outcomes are partially outside of the company's control. - Monetization-user growth tradeoff: Historically, some monetization tactics (adding friction to the free product) hurt user growth, and the company still needs to balance new monetization initiatives (additional ads, new subscription tiers) with maintaining a positive free user experience aligned with the company's mission of universal accessible education. - Uncertainty around new product and monetization experiments: Outcomes of tests for new initiatives like the Superlight subscription tier, expanded Video Call access, and expanded advertising are still uncertain, and it is unclear which tests will ultimately scale and deliver positive results. - AI cost uncertainty: While costs for AI features like Video Call have dropped dramatically, future AI cost trends and the ability to shift more features to low-cost open source models remains partially uncertain.

Analyst Q&A

• Q: With DAU growth tracking above 20% YoY in the second half of 2026, why wasn't full-year bookings guidance raised more, since more users should translate to higher bookings even with a current focus on growth over monetization? /

  A: Duolingo uses a freemium model, and new users do not monetize immediately—it takes time for higher DAUs to flow through to higher revenue. The company reaffirmed its original plan to hold bookings growth in the 10-12% range this year, and is prioritizing DAU growth and product improvement over pushing for faster near-term monetization growth.

• Q: What is the status of the Video Call feature and the Max subscription tier, after your cost reductions for Video Call? /

  A: Video Call is an effective feature that improves conversational language learning, and engineering work has cut its cost from 30 cents per call to under 1 cent per call via open source models. The company's goal is to make Video Call available to all Super subscribers (not just the highest-priced Max tier), and sunsetting Max is a possible outcome. No final decisions have been made, and the company will continue experimenting with tier positioning.

• Q: Is the company shifting more focus to monetization while still prioritizing DAU growth, and how do falling AI costs impact margin and product velocity? /

  A: It is correct that the company is increasing focus on monetization after resetting tactics that were counter to DAU growth earlier this year, but there will be no sudden shift away from the 2028 100 million DAU target. AI cost savings from open source models are structurally improving margins even as the company expands access to high-cost speaking features; faster, cheaper AI is also increasing overall product development velocity.

• Q: What is your current view on advertising and marketing spend, and what is the regulatory approach for AI in China? /

  A: Management has become far more constructive on advertising over the past few years: while the business will remain primarily subscription-led, there is large untapped ad revenue opportunity given Duolingo's large active user base, and the company has built a dedicated professional ad team to capture this. For marketing, performance marketing is now used as a complement to organic and influencer marketing, and it is improving top-of-funnel growth. In China, Duolingo already uses local Chinese AI models to comply with local regulatory requirements, and while regulatory risk exists, management feels comfortable with current compliance and government outreach.