Duolingo, Inc. (DUOL) Q1 2022 Earnings Call Transcript

Duolingo, Inc. (DUOL -1.88%)
Q1 2022 Earnings Call
May 12, 2022, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Duolingo first quarter 2022 earnings call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up question.

[Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Debbie Belevan, head of investor relations. Please go ahead.

Debbie Belevan -- Head of Investor Relations

Thank you, operator, and welcome to Duolingo's first quarter 2022 earnings call. Today, after market close, we released a shareholder letter with our Q1 results and commentary, which you can find on our IR website at investors.duolingo.com. Today's call will be led by Luis von Ahn, our co-founder and CEO; Matt Skaruppa, our CFO; and Bob Meese, our chief business officer. We'll begin with some brief remarks before opening the call to Q&A.

Just to remind everyone, during this call, we'll make forward-looking statements regarding future events and our financial performance, which are subject to material risks and uncertainties that could cause actual results to differ materially. Some of these risks have been set forth in the risk factors of our periodic reports filed with the SEC. These forward-looking statements are based on assumptions that we believe to be reasonable as of today, and we undertake no obligation to update these statements as a result of new information or future events. Additionally, we will present both GAAP and non-GAAP financial measures on today's call.

These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results, and we encourage you to consider all measures when analyzing our performance. And with that, I'll turn the call over to Luis.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Thank you, Debbie, and welcome, everyone. As usual, I want to kick off the call by reminding you of our mission, which is to develop the best education in the world and make it universally available. We work to achieve this mission by continually innovating and improving our products so that they are fun and effective. Now on to our first quarter results.

Since a shareholder letter contains an in-depth discussion of this quarter's performance, Matt and I will provide some brief remarks and then get right into Q&A. Q1 of 2022 was our best quarter yet. We achieved new highs on nearly every metric. In fact, we surpassed our own performance expectations, which led us to raise our full year guidance.

We are now projecting full year bookings growth well above 30% and also expect to be profitable for the year on an adjusted EBITDA basis. The reason behind this stellar performance is clear: our product-focused strategy is working. Thousands of A/B tests that we run to make our products better are materializing in the form of stronger word-of-mouth user growth, stronger paying subscriber conversion rates, and higher overall retention. Our user growth accelerated from the previous quarter.

We converted a record number of new paid subscribers, and we retained more of our previous subscribers. All of this resulted in total bookings growth of 55% this quarter compared to Q1 of last year. And now Matt will discuss our updated outlook for 2022.

Matt Skaruppa -- Chief Financial Officer

Thank you, Luis. As Luis just highlighted, we had a tremendous quarter, and because of that, we are announcing that we are raising our full year guidance. For Q2 2022, we are guiding to $86 million to $89 million in total bookings, $84 million to $87 million in revenue, and an adjusted EBITDA of negative $4 million to negative $1 million. For the full year 2022, we are increasing our guidance to $388 million to $397 million in total bookings, $349 million to $358 million in revenue, and an adjusted EBITDA of zero to positive $3 million.

Our full year bookings guidance reflects 32% to 35% year-over-year growth, up from the 26% to 30% year-over-year growth we guided to on our last earnings call. In terms of our Q2 guidance, I'd like to point out that this is seasonally our softest quarter in terms of absolute bookings because we don't have our New Year's promotion or other big marketing events as we do in Q1, Q3, and Q4. We plan to continue managing the business with strong cost and capital discipline. For the full year, we expect to be profitable on an adjusted EBITDA basis even while we continue to invest in R&D as we have done historically.

We expect that non-GAAP R&D as a percentage of revenue should be roughly flat compared to last year. While we expect to continue to get leverage in non-GAAP sales and marketing through more efficient spend, we will see some deleveraging in non-GAAP G&A, primarily driven by our expanded office footprint and the fact that 2022 is our first full year as a public company. And now I'll turn it back to Luis.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Thank you, Matt. Before going to Q&A, I'd like to take this opportunity to thank our entire team for their dedication to delivering on our mission. I'd like to thank our learners who spread the word of our products to their friends and family, and I'd like to thank you, our shareholders, for your support. We look forward to sharing more with you in the coming quarters.

And now we will be happy to take your questions.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] At this time, we'll now pause momentarily to assemble our rosters. Your first question comes from Eric Sheridan from Goldman Sachs. Please go ahead.

Eric Sheridan -- Goldman Sachs -- Analyst

Thanks for taking the question. Maybe staying focused on the investment commentary in your opening remarks. Can you remind us some of the key priorities on the product side that you're investing against in 2022 and how we should be thinking about that product roadmap beyond just the next 12 months but over the next couple of years? Thanks so much.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Thank you for the question, Eric. Can you hear me OK? All right. I welcome you, again. So, thank you for the question.

So, you know, the most important thing to understand is that we're going to be investing the majority of our resources on our language learning app. We think language learning is a massive opportunity. I mean it's about a $50 billion market, which is mostly shifting online, and we are the largest player online. So we're going to be investing mostly in our language learning app.

There, you know, we run [technical difficulty] metrics, and that's kind of the main thing for the next couple of years. Also, as we said in the shareholder letter, most of the changes that we make are relatively small changes, but we are working on a pretty large change that is going to be live in the next few months, which is a redesign of the home screen of the app. Hello?

Operator

Thank you. Your next -- I'm sorry.

Debbie Belevan -- Head of Investor Relations

Operator, can you hear us?

Operator

Yes, we can hear you. Your next question comes from Justin Patterson from KeyBanc. Please go ahead.

Justin Patterson -- KeyBanc Capital Markets -- Analyst

Great, thank you. Perhaps for Luis and Matt can tack on to this, how should we think about the potential impact to users and monetization from Super Duolingo and the new home screen versus past changes to the app like hearts? And then I have one follow-up.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Sorry, Justin, can you hear me OK?

Justin Patterson -- KeyBanc Capital Markets -- Analyst

Yeah, I can hear you, although you did cut out a little bit in your response to Eric.

Luis von Ahn -- Co-Founder and Chief Executive Officer

OK. Hopefully, I mean, I think we're having a little bit of phone trouble, but hopefully if I cut out, you can just ask again. But OK. So we're making some pretty big changes, I mean, the biggest one was the home screen on the app.

There's also a Super Duolingo. In terms of Super Duolingo, we don't think that, by itself, is going to have a pretty major impact on metrics. Super Duolingo, the main reason we're doing the redesign of what our subscription product looks like because we think it really fits in a lot more with our kind of gamify brand. In terms of the reason on the home screen of the app, we do think that's going to really set us up for pretty big improvements into our metrics, mainly in terms of engagement and teaching better.

So those are two things that we're going to be looking for. I should say also, for the redesign of the home screen, we've done -- we run thousands of A/B tests. We've done some pretty major redesigns roughly every three or four years, so we have experience doing this type of redesign. And there's a couple of things to say there.

The first one is we're going to really be looking at our metrics to make sure that everything increases when we launch it. By the time we launch the redesign, we will have a lot of confidence that the metrics will have increased. But one thing that I should kind of mention to people is that people don't like change, the users don't like change, and this is a pretty major change to the home screen of the app. So even though we know -- once we launch it, we'll know that our metrics are positive, we may see some negative sentiment here and there, but that's something that we're prepared for.

But that's something else, but these are two major changes we talked about in the shareholder letter.

Justin Patterson -- KeyBanc Capital Markets -- Analyst

OK, perfect. And then for my follow-up, I just wanted to hit on social features. It sounds like you're having some success there, even helping users find love. I guess you could probably spin that as a Duolingo love language app down the road.

But I'm curious to hear as to how those social features are benefiting the KPIs, whether it's daily engagement or just better conversion over time, less churn on the app. Thank you.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah. The social features, the beautiful thing about social features is that they help every single metric. Really what they do is they get users to come back more often because their friends who are on Duolingo contact them on Duolingo, so we get users to come back more often. They get users to spend more time on the app.

They increase user retention. And because people spend more time on the app, they also learn more and also subscribe more and actually pay us more. So it really -- the social metrics really increase everything and this is why we're investing in them.

Justin Patterson -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. Your next question comes from Mario Lu from Barclays. Please go ahead.

Mario Lu -- Barclays -- Analyst

Great. Thanks for taking question. So the first one is on the strong bookings number this quarter. I believe you came in 9 points above your guidance at the midpoint.

So just curious if you could provide more color in terms of what led to the outperformance. You guys mentioned the New Year's campaign, but anything else to kind of point to that led to this? Thanks.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah. Great question, Mario. I mean, the result of our performance, it really is the -- our outperformance really is the result of just hundreds of A/B tests that we've been running -- I mean, thousands, actually, of A/B tests that we've been running over the last couple of years, and it's just a compounding effect. I mean, if you look at the outperformance on revenue, that comes from basically increased users, also increased conversion to paying subscribers, and also increased retention of paying subscribers.

So basically, all our KPIs are up. And it really is just the result of compounding effects from just [Inaudible]. We had a good New Year's campaign, but in addition to that, the month after that, it's also continue outperforming.

Mario Lu -- Barclays -- Analyst

Great. Thanks, Luis. And then just a follow-up on the full year guide, that's great. I guess how should we think about that raise in the context of the first quarter peak? And then any embedded impact from FX or impacts from Russia that you guys can call out?

Matt Skaruppa -- Chief Financial Officer

Yeah, thanks. I'm happy to answer that. So obviously, the full year guide takes into account the results of Q1 patch rolls. The outperformance that Luis was talking about is really broad-based, as we've mentioned so it's not just any one thing in the business.

It's improved user growth, conversion, and retention. And so the guide takes into account all of those things. Now I just do want to mention that the world is obviously an uncertain place, and we're obviously paying very close attention to what's going on with the war you mentioned in Ukraine, inflation, interest rates, and all those things. And so we've taken a prudent approach to the guide for the rest of the year, just knowing that there is a lot of uncertainty out there.

Mario Lu -- Barclays -- Analyst

Got it. Thanks, Matt. [Technical difficulty]

Debbie Belevan -- Head of Investor Relations

Operator, are you there?

Luis von Ahn -- Co-Founder and Chief Executive Officer

Everybody, I think you can all still hear us. It seems like the operator essentially disappeared, so we are trying to figure out what to do with the operator for now. Sorry about that. This is Luis again.

I think we just lost the operator. How about I tell some jokes? I'm kidding. [Technical difficulty]

Operator

Excuse me, but one moment. We'll go ahead and proceed with Q&A here. And it looks like we currently still have Mario Lu within the question queue.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Mario, can you hear us?

Operator

Mr. Lu?

Mario Lu -- Barclays -- Analyst

Yeah, I can hear them. I think I'm good for now. I'll just jump back in the queue.

Operator

OK. I do apologize, everyone. It looks like we were experiencing technical difficulties. Mr.

Lu, we'll then remove you from the queue, sir. Appreciate it. And next, we will take Ralph Schackart of William Blair.

Ralph Schackart -- William Blair -- Analyst

Thanks for taking the question. But Luis, if you have a joke, first, that you wanted to say, feel free.

Luis von Ahn -- Co-Founder and Chief Executive Officer

I got many, but let's do this.

Ralph Schackart -- William Blair -- Analyst

Just in terms of subscription revenue growth in the shareholder letter, obviously, you talked about new and renewing paid users. Maybe just kind of zeroing in on the renewing paid users. Did you change anything maybe on the testing side or product side? Just kind of curious how you're bringing back previous subscribers. And then I have a follow-up.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah. I mean we're always running A/B tests to try to continue increasing our number of subscribers. One of the main things that we have been doing to increase renewal rates is increasing the fraction of people that get into the Family Plan. The Family Plan is really good for retention because if you think about it, if you're -- if you have a Family Plan and you're using Duolingo and also your significant other is using Duolingo and also your child is using Duolingo, as long as anybody is still using it, you're going to continue paying.

So that's something that we've been -- the fraction of people that are on the Family Plan keeps going up. It's, in fact, doubled since the beginning of the year, and that's really helped us with renewal rates. But other than that, we just continue making the app more and more engaging and that just gets more and more people to subscribe and stay subscribed.

Ralph Schackart -- William Blair -- Analyst

Great. Maybe a follow-up. Just as travel continues to return, just curious how is that impacting engagement and user and subscriber growth. Is that sort of a primary use case? Just kind of curious how that's impacting the quarter and the sub base.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Travel is one of the many use cases for Duolingo if not the primary use case, and it really, of course, depends on the geography, in some places a little bigger than others, but it's a minority use case. And we do see it, but I don't think that's having -- it's not something that we're keeping an eye on in terms of having a major impact on. So we know people are traveling more. And we do see it, but I just don't think that's had a major impact on our numbers.

Ralph Schackart -- William Blair -- Analyst

OK. Thanks, Luis.

Operator

And next, we have Andrew Boone of JMP Securities.

Andrew Boone -- JMP Securities -- Analyst

Hi, thanks for taking my questions. To start, can we have an update on local pricing, just the testing that you were doing around, I think, it was four countries? And then secondly, in the letter, you talked about expanding the language learning market. Can you talk about, just given the fact that we just saw users kind of accelerate through 1Q, how are you going about expanding the top of the funnel to just be more inclusive and bring more users into Duolingo? Thanks so much.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah. Great question. Let me first talk about expanding the language learning market. I mean this is something that we've noticed in many of our markets.

Actually, in the United States, when we asked our users, approximately 80% of our users in the United States were not in the language learning market before Duolingo. So they were not learning a language before us. And so, in certain countries, we really are just expanding the market. And I think the reason that happens is we just have -- we have a really iconic brand that a lot of people talk about.

And it's also -- it's just really easy to learn with Duolingo. And people tell that to each other. I mean the main way in which we grow is through word of mouth. And the things that people say to each other are just like, "Oh, have you tried Duolingo? It's really easy." And I think that's basically how we're expanding the market.

That was one question. What was the other question?

Matt Skaruppa -- Chief Financial Officer

Regional pricing.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Regional pricing. Yeah, regional pricing question. Yes, so with regional pricing, we continue making progress. We are changing prices in more and more countries.

By the way, just for reference, we talked about regional pricing during the IPO. Before the IPO, we really just had one price in every single country. We understand that is not optimal. Over the last few months, we have been changing the prices in countries.

In the majority of countries, that means reducing the price because the price that we had made a lot of sense for the United States, but the United States is kind of one of the wealthier countries in the world. So the majority of countries, we've been testing reducing prices, and that's been happening. And it is having an impact. But the thing that I really want to emphasize about regional pricing is it's just one of literally dozens of levers that we have.

And that's -- it is having an impact but it's not a massive impact, like it's not like, oh, because the price is cheaper in some countries, we're suddenly doubling our revenue or anything like that. It's a modest impact. And the reason it's a modest impact is because in most of these countries that we're changing the price, these are countries where also digital subscriptions are not very mature. So now the price makes sense but we still probably -- some time has to pass for people to really become used to digital subscription.

So that -- so the way we see the regional pricing is it's something that -- it's a necessary condition to really increase our penetration of subscribers in these countries but not a sufficient condition.

Andrew Boone -- JMP Securities -- Analyst

Thank you.

Operator

The next question we have will come from Mark Mahaney of Evercore ISI.

Mark Mahaney -- Evercore ISI -- Analyst

OK, thanks. Two questions. So you had this record number of MAUs or new users. Could you provide a little bit -- and I understand all the A/B testing that helped convert them and helped retain them.

But could you just talk about how you brought them in, in the first place? And maybe more color, was it particular markets where you're starting to really break through in markets like India or something like that? Just more color on where this record number of new users came from. Thank you.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah. Hi, Mark. So, OK, the first thing to say is that we're growing in every single region. We are growing a little faster in certain regions.

Asia, in particular, and India, of course, is one of our fastest-growing countries, but we're also growing pretty fast in the United States. So we're growing in pretty much every region. And you asked how they came in. The vast majority of our users come in through word of mouth, and that's how they're coming in.

And historically, that's been the case for Duolingo, it's organic growth. We have had some marketing campaigns that have been pretty efficient. In particular, in Asian countries, we have found that influencers -- paid influencers really work. And it's not like we've spent a ton of money on that, but that has been really good for us.

The other thing that has been really good for us in bringing new users is our use of social media, in particular, our TikTok has been -- at least for English-speaking countries like the U.S. and the U.K., our TikTok has been pretty good at getting the word out. But still, the vast majority of our growth comes from word of mouth.

Mark Mahaney -- Evercore ISI -- Analyst

OK. And then to date, you've -- just kind of state the obvious question, you've been a language learning app and a really interesting one. And your goal here is much broader than that when you're talking about education. So just talk about the timeline and let's set some expectations.

Remind us of when Math is coming out, the Duolingo Math product. And then there's obviously a lot more to education than just math and language. So just what else should we -- what else could we see and when could we see it? Thank you.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Yeah, that's a great question. And it's true, our ambitions are pretty large. I mean we really do want to do all of education. I do want to say a couple of things.

The first is the language learning market is humongous, and we are still -- there's still a lot of runway there. We're just getting started in our monetization and we're just getting started in penetrating the market. So for the foreseeable future, you will see the majority of our growth and certainly of our revenue come from language learning. We are working on these other apps.

We already launched Duolingo ABC, which is for literacy. We are going to have a public beta of our Math app later this year, and that's going to happen. And that's going to grow from there. In terms of contributions to revenue, I don't think you should expect anything this year or even next year.

And if there's any, it will be minimal. And the majority -- the main reason for that is just our language learning product is growing so much that it's going to take some time to catch up for that to become meaningful.

Mark Mahaney -- Evercore ISI -- Analyst

OK, that makes sense. Thank you very much, Luis.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Thank you, Mark.

Operator

Again, everyone, I do apologize for the technical delay earlier. [Operator instructions] The next question we have comes from Arvind Ramnani of Piper.

Arvind Ramnani -- Piper Sandler -- Analyst

Hi, and thanks for taking my question. Yeah. I just wanted to ask, when I look at some of the other sort of digital learning firms, clearly, very different business models but many of them are facing various sort of headwinds. And it kind of looks like you all haven't got any -- you haven't got a memo on kind of the post-pandemic sort of slowdown.

In fact, you're kind of seeing pretty good growth. Just wanted to get a sense of maybe from a high-level perspective, like what is so unique about the model where you're not seeing any slowdown? Or is it -- or should we expect a slowdown in the next two or three quarters?

Luis von Ahn -- Co-Founder and Chief Executive Officer

We have no reason to believe there's going to be a slowdown. In fact, our user -- our growth numbers are accelerating for now. We just -- it's a number of things. The first thing to say is that we really are not.

I think when you see a lot of, particularly education things, they really were a COVID story. We are not. If you look at our growth numbers, our user numbers, and basically, we had an organic growth rate before COVID. Then the early kind of lockdown around 2020 of March through May, we did see an increase in demand.

But after that, we were back to the kind of pre-COVID growth rates. So I think just kind of for us, COVID was just not what it was for some other companies. That's one thing. I think another thing that is important to say is we are mainly a product-driven company.

And if you look at a lot of education companies or many of these other companies, they spend a lot of their resources on marketing, etc. We spend the vast majority of our resources on just making a really excellent product that works, that grows through word of mouth. And I think the results are just showing. I mean, basically, the compounding of thousands of A/B tests is making it so the product is just better and better.

I just want to say one other thing, which additionally, we also just -- language learning is interesting. I mean it is a huge, huge market. And the fact that we're just -- we really are just getting started with this market, with not only with the user growth but also with monetization. I think we're just in a point of the curve that you just continue seeing growth.

Arvind Ramnani -- Piper Sandler -- Analyst

Terrific. And just from a product perspective, some of the other ancillary -- not ancillary, sort of like tangential like learning, that's repetitive in nature, for example, Math, is there like a timeline you'll have that you're able to share? Or is it kind of things like Math not in the near future.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Sorry, can you hear me?

Operator

We can hear you. I do apologize.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Sorry, can you -- OK. So I was going to say, so with Math, we should see -- we're probably going to release -- not probably, we are going to release a public beta version of the Math app later this year. So it'll be there. But one of the things that I wanted to emphasize again is just that you should not expect any meaningful revenue contribution from the Math app or from these other things, mainly because our language learning is just growing so much that over the next few years, that's where the contribution is going to come from mainly.

Arvind Ramnani -- Piper Sandler -- Analyst

Terrific. Thank you very much.

Luis von Ahn -- Co-Founder and Chief Executive Officer

Thank you.

Operator

And next, we have a question from Nat Schindler of Bank of America.

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Yeah. Hi, guys. I just wanted to follow up on that Math comment. I can understand that you're not looking to monetize very quickly.

And -- but more what are your thoughts? Most of your subscribers have not been children. There've been adult users historically for Duolingo. People do language learning their whole life. I don't see a lot of people -- and I'm an engineer and a geek, and I don't see a lot of people who sit and do math learning later in life.

So is there a real market for adults paying for math learning?

Luis von Ahn -- Co-Founder and Chief Executive Officer

That's a great question. I mean so the first thing to say is this is -- these are new products and we're going to develop them. We're very bullish on Math because we think this is something that pretty much everybody needs to learn. The majority of the people that are going to be using it are probably not going to be adults, although we think that there's some market for adults related to brain training.

But we think it's going to be mainly children. Now the thing to say about that is this is what -- we have a lot of children users of Duolingo. And in addition to that, this is one of the reasons why we're so excited about our Family Plan. We're increasing the fraction of our subscribers that are in the Family Plan, and the idea is going to be to bundle the multiple learning products into this Family Plan.

And that's something that we think will be very successful.

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Well, at this time, we're showing no further questions. I will then plan to conclude today's Q&A. At this time, I'd like to hand the conference back over to the management team for any closing remarks. Sir?

Luis von Ahn -- Co-Founder and Chief Executive Officer

Just thank you. Thank you very much, everybody, for the great questions. And yeah, we look forward to speaking again next quarter, and sorry about the operator dropping off. They probably went and got addicted to Duolingo.

OK, bye.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Debbie Belevan -- Head of Investor Relations

Luis von Ahn -- Co-Founder and Chief Executive Officer

Matt Skaruppa -- Chief Financial Officer

Eric Sheridan -- Goldman Sachs -- Analyst

Justin Patterson -- KeyBanc Capital Markets -- Analyst

Mario Lu -- Barclays -- Analyst

Ralph Schackart -- William Blair -- Analyst

Andrew Boone -- JMP Securities -- Analyst

Mark Mahaney -- Evercore ISI -- Analyst

Arvind Ramnani -- Piper Sandler -- Analyst

Nat Schindler -- Bank of America Merrill Lynch -- Analyst

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