Duolingo, Inc.

(NASDAQ Global Select)
Back to all articles
Bullish +72

What Duolingo (DUOL) Said on Its Q3 Earnings Call

Customer growth Earnings report New AI features AI-generated analysis

๐Ÿ“ˆ Daily active users accelerated 29% year over year in Q3, driven by product improvements and retention gains across eight of the top ten countries.

๐Ÿ’ฐ The company is pivoting to monetization strategies including testing in-app purchases, advertising, and subscriptions without adding friction for free users.

๐Ÿ”„ Duolingo moved the AI Video Call feature from Max to Super due to costs dropping below $0.01 per call, expanding access to a broader subscriber base.

๐Ÿ“… Q4 guidance projects 13% bookings growth, 14% revenue growth, and a 26.1% adjusted EBITDA margin.

๐Ÿš€ Full-year outlook includes 12% bookings growth, 18% revenue growth, and a 26.5% adjusted EBITDA margin.

๐Ÿงช The 'Green Machine' optimization process involves running hundreds of A/B tests weekly to improve retention and user experience.

๐ŸŽฎ Partnerships with games like Brawl Stars and Eggy Party successfully brought in users who retained well due to reward-based mechanics.

๐Ÿ“‰ Paid subscriber growth has lagged behind DAU acceleration, but management expects figures to bottom out as bookings from earlier periods are recognized.

๐Ÿค– AI inference costs for free users are projected to be single-digit millions next year while expanding AI-powered learning features.

๐Ÿ’ธ Q4 operating expenses are expected to rise faster than revenue due to continued investment and a second portion of an employee bonus tied to growth targets.

Bullish Signals
  • Daily active users rose 29% year over year in Q3, accelerating from 23% in Q2, indicating strong product-market fit.
  • The company successfully moved the AI Video Call feature to the Super tier by reducing costs to under $0.01 per call using open-source models.
  • Duolingo expects fourth-quarter bookings growth of 13% and revenue growth of 14%, exceeding prior expectations.
  • The 'Green Machine' A/B testing process, with experiments up 90% year over year, has primarily improved user retention.
  • Partnerships with gaming titles like Brawl Stars drove significant user acquisition without direct payment exchanges, establishing new habits.
  • Paid marketing spend of over $100 million in 2026 is profitable, with improving returns on customer acquisition efforts.
  • Chess reached 10 million daily active users and remains completely under-monetized, representing a significant future revenue opportunity.
  • Management confirmed that longer free trials have improved conversion rates in testing, supporting the monetization strategy.
Risk Factors
  • Paid subscriber growth has continued to lag behind the recent acceleration in daily active users, creating a potential short-term revenue gap.
  • Fourth-quarter gross margin is expected to decline slightly as the AI Video Call feature becomes available to all paid subscribers under the new Super tier structure.
  • Operating expenses are projected to rise faster than revenue in Q4 due to continued investment and an additional employee bonus portion tied to reaccelerating user growth.
Full Analysis
Duolingo (DUOL) reported accelerating user growth in its third quarter, with daily active users rising 29% year over year, up from 23% in the prior quarter. This acceleration occurred across eight of the company's ten largest countries, driven primarily by product improvements and retention gains rather than marketing events. CEO Luis von Ahn highlighted the success of their 'Green Machine' optimization process, which involves running hundreds of A/B tests weekly to enhance user engagement. The company is shifting its strategic focus toward monetization while maintaining a friction-free experience for free users. Key initiatives include moving the AI-powered Video Call feature from the premium Max tier to the broader Super Duolingo subscription due to significantly reduced operating costs using open-source models. Additionally, Duolingo plans to sunset the Max Individual tier and transition those subscribers to Super Family, aiming to expand its paid user base without degrading the core free product. For the fourth quarter, Duolingo provided guidance expecting 13% year-over-year bookings growth, 14% revenue growth, and an adjusted EBITDA margin of 26.1%. Full-year expectations include 12% bookings growth, 18% revenue growth, and a 26.5% adjusted EBITDA margin. Management noted that while operating expenses will rise due to continued investment and employee bonuses tied to user growth reacceleration, the company remains confident in its ability to monetize its large, growing audience over time.