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Duolingo's User Surge Starts Paying Off: Rapid Earnings Reaction
Key Points
Duolingo's daily users grew 29%, and subscription bookings growth sped up to 16%.
Operating profit fell as spending, including a new bonus tied to user growth, rose 24%.
Paid subscribers grew only about half as fast as daily users.
Duolingo (NASDAQ:DUOL) grew daily active users 29% in the third quarter, its second straight quarter of faster growth. Shares jumped about 34% in early trading Wednesday. The plan to put user growth ahead of near-term profit is now turning into faster subscription sales, but margins are paying for it.
Key numbers
- Daily active users: 64.9 million, up 29% from 50.5 million.
- Subscription bookings: $278.4 million, up 16% year over year.
- Revenue: $309.0 million, up 14% year over year.
- GAAP operating income: $24.2 million, down from $35.2 million.
What it means
Bookings are the number to watch, and they're speeding up. Duolingo books a subscription when a learner pays, then spreads the revenue across the plan, and most plans run 12 months. That's why revenue growth lags. Management raised its full-year bookings outlook to about $1.3 billion, so revenue growth should follow in the quarters ahead.
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The cost of that growth shows up in profit. Operating expenses grew 24%, far faster than revenue, driven by heavier research spending and a new companywide bonus. That bonus pays out only if Q4 user growth hits 25% or more, which ties staff pay directly to daily users. Investors should look closely at how those users are won.
Payers are the weak spot. Paid subscribers rose 14%, about half the pace of daily users. Game tie-ins with Brawl Stars and Eggy Party brought in millions of new and returning users, but the release doesn't say how many of them stay or pay. More users only build a bigger business if more of them start paying.
What to watch next
Watch whether paid subscriber growth closes the gap with user growth in Q4, as unlimited Video Call reaches all Super subscribers and the Max tier goes away.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Duolingo. The Motley Fool has a disclosure policy.