Duolingo (DUOL) Q2 2025 Earnings Call Transcript

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DATE

Wednesday, Aug. 6, 2025, at 5:30 p.m. ET

CALL PARTICIPANTS

• Co-Founder and Chief Executive Officer — Luis von Ahn
• Chief Financial Officer — Matt Skaruppa

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TAKEAWAYS

• Daily Active Users (DAUs)-- 40% year-over-year growth in Q2 2025, compared to 60% year-over-year growth in each of the prior two Q2 periods, falling at the low end of management’s previous 40%-45% guidance and attributed primarily to a shift in social media strategy that reduced viral campaign intensity in the U.S. and Canada.
• Monthly Active Users (MAUs)-- 24% year-over-year MAU growth, with a sequential decline in MAUs primarily due to elevated levels in the prior quarter (Q1) from the 'Dead Duo' campaign, and management stated that current MAU trends are not a concern.
• DAU to MAU Ratio-- Reached approximately 37% as of Q2 2025, increasing for almost every quarter in recent years, according to management, reflecting higher retention and engagement.
• Subscription Mix-- Max subscribers accounted for 8% of the total in Q2 2025, up from 7% in the previous quarter and 5% a couple of quarters ago; Max growth was offset by Super subscription growth exceeding expectations.
• Average Revenue Per User (ARPU)-- Increased by approximately 6%, with most of the increase attributed to FX and product mix shift rather than pricing.
• Gross Margin-- Outperformed management expectations due to lower AI-related costs, primarily from reduced API call and token expenses, with these cost reductions expected to continue but phased by accounting treatment.
• Energy System Rollout-- More than half of iOS daily active users had transitioned to the 'energy' pacing mechanic as of Q2 2025. Android rollout was less than half complete as of Q2 2025, with full rollout anticipated a couple of months after Q2 2025, Management reports higher DAUs, revenue, and time spent from the new system during the rollout in 2025.
• Regional Performance-- China identified as the fastest-growing market, benefitting from a promotional partnership with Luckin Coffee; Asia overall remains the top growth region, while US DAU growth continues to decelerate and trail the global average.
• Duolingo Max Availability in China-- Max subscription is not available in China due to regulatory requirements on local large language models (LLMs) awaiting government approval; management provided no timeline for launch.
• Alternative Payment Flow Testing-- Direct web purchase flow being tested for US iOS users, showing minimal bookings loss but significant profit improvement by lowering commission fees from Apple’s 30% to a provider fee near 2%, with the impact on profit recognized over the remaining months of the year due to GAAP revenue recognition for 12-month subscriptions; material financial impact this year is limited due to revenue amortization.
• Marketing Spend Shift-- No marketing spend historically in the U.S., but management plans to begin limited performance marketing there after observing accelerated growth in Mexico following similar investment.
• New Subject Engagement-- “Chess” surpassed math and music course launch performance among iPhone users with English UI; management is not expecting near-term revenue contribution from math, music, or chess as all are bundled in the core subscription and not selectively monetized yet.
• Duolingo English Test Dynamics-- Lower-than-expected Duolingo English Test performance was attributed to a decline in international university applications, specifically from US and UK macro trends impacting demand.
• Guidance Update-- Management raised full-year guidance in response to top-line outperformance and margin gains but did not provide updated explicit DAU growth guidance for future quarters, stating no large changes expected sequentially.

SUMMARY

Duolingo(DUOL 0.97%)management highlighted a shift in user acquisition and engagement strategies, emphasizing a deliberate reduction in viral social media campaigns and a transition to more positive sentiment postings. This directly impacted DAU growth rates in North America, resulting in Duolingo's 40% year-over-year DAU growth in Q2 2025, which was at the lower end of prior guidance due to these changes. They detailed continued margin improvement driven by lower AI compute and content generation costs, and confirmed incremental profitability from direct payment flows on iOS, even as adoption remains early in the implementation cycle. The impact on profitability is expected to be limited in the current year due to GAAP revenue recognition and the timing of rollout. Accelerated international expansion was noted, with China and Asia delivering above-average growth, supported by prominent partnership activity, while the US market’s slower growth has prompted the initiation of targeted marketing investment. Strategic product enhancement -- including rollout of the “energy” mechanic, ongoing upgrades to Max’s conversational AI feature, and rapid chess launch -- was positioned as supporting long-term total addressable market (TAM) expansion, though near-term monetization of new subjects remains de-emphasized by management.

• Von Ahn said, "We have about 130 million active users, give or take," emphasizing ongoing low penetration versus the estimated global language-learning population of 2 billion.
• Management affirmed that all anticipated impacts from lower-performing segments, such as the Duolingo English Test and subdued Max uptake in certain markets, have been incorporated into their updated full-year guidance.
• Von Ahn confirmed, "No downloads or app store ranking data is evaluated internally," indicating a clear focus on active usage and revenue over top-of-funnel indicators.

INDUSTRY GLOSSARY

• Energy (pacing mechanic): A usage-limiting system for free users in which exercises consume energy, with periodic rewards for correct answers, replacing the prior “hearts” penalty system.
• Dead Duo: A past viral marketing campaign leveraging the company’s mascot, credited with generating unusual spikes in engagement and user metrics.
• Max: Duolingo’s highest-tier subscription service, offering advanced conversational AI features such as video call practice.
• Super: Mid-tier subscription plan with fewer premium features than Max but higher adoption and growth this quarter.
• Duolingo English Test: The company’s standardized digital English proficiency exam targeted toward international university applicants.
• Video Call: A conversational AI functionality within Max subscription that allows users to engage in live, adaptive, language practice.
• LLMs (Large Language Models): Advanced AI models for understanding and generating human language, referenced as a regulatory constraint in China.

Full Conference Call Transcript

Luis von Ahn: Hi, everyone, and thanks for joining us today. We had another great quarter, record profitability, strong top-line growth, and solid performance across all subscription tiers. As a result, we're raising our full-year guidance again while still investing in both our core business and exciting new areas like chess, math, and music that we believe will drive long-term growth. All of this brings us one step closer to our mission, which is to develop the best education in the world and make it universally available. And now we'll take your questions.

Operator: We will now move to our question and answer session.

Nathan Feather: Hey, everyone, and congrats on the strong quarter. Two from my end. First, DAU growth was really strong but moderated a touch in February. Can you break down the primary drivers behind that and how we should think about the shape of user growth through the year and into the back half? Also, I want to touch on the Chinese market. Can you provide some color on what you're seeing in that region? Any recent product improvements that are resonating and when we might see video call out there? Thank you.

Luis von Ahn: Thank you, Nathan, for your questions. For DAUs, we just posted 40% year-over-year growth in Q2. That's lapping Q2 from last year, which was 60% year-over-year growth, which is lapping in turn 2023, which was also 60% year-over-year. We've had really tremendous growth over the last several years. Last time, we guided that our DAU growth was going to be somewhere between 40-45%. We normally don't guide to DAU growth, but we decided to do that last time because we had a really strong Q1 in particular because of our Dead Duo campaign. We had a really strong Q2 of last year, so we knew this was going to be somewhere between 40 and 45.

We came in at 40%, which is slightly on the lower end of what we thought. Everything is, you know, we feel very strong about this. The reason we came towards the lower end was because I said some stuff about AI, and I didn't give enough context. Because of that, we got some backlash on social media. The most important thing is we wanted to make the sentiment on our social media positive. We stopped posting edgy posts and started posting things that would get our sentiment more positive. That has worked. By now, the sentiment on our social media channels is all very positive.

But we still are not posting the extremely edgy things that are more likely to go viral. That's probably what had us come in slightly on the lower end. The effect of that was essentially all in the United States, including Canada and stuff like that, but it's essentially all in the United States and among young audiences. This impact is in the past. We typically only guide to DAU whenever there's going to be a big change. This time, we're not guiding to DAU, so that should tell you that at least for next quarter, we're not expecting a big change from where we are now. Regarding China, we feel really good about China. It's our fastest-growing market.

We've been growing a lot. We had an incredible partnership this time around with Luckin Coffee, where for a couple of weeks, a lot of their stores were decorated with Duolingo and had Duolingo cups, and there were drinks named after Duolingo. That was a pretty big boon for us. Our product feels really good in China. The one thing is we do not have Max in China yet. Because of regulations, we cannot use LLMs other than local LLMs. After you choose a local LLM, which we have, you need approval from the government, and that's completely outside of our control. We don't have approval from the government yet, but at some point soon, we'll have Max.

I cannot give you a timeline on that because I myself don't know it.

Nathan Feather: Very helpful. Thank you.

Operator: Thanks so much for your question. Our next question comes from Alex Sklar from Raymond James. Please unmute your audio and your video. Please ask your question.

Alex Sklar: Great. Thank you all. I want to ask about the paid conversion. You spoke to an increase on the super side and good traction on the Max side. Can you update us on where the Max stands today and any one to two changes that you put into place that drove that particular increase in conversion this quarter?

Luis von Ahn: We feel very good about Max and Super. Both are growing, and both are growing nicely. The percentage of subscribers that are Max subscribers has gone from 5% a couple of quarters ago to 7% last quarter, and then in Q2, it was 8%. So it's been growing. It actually grew a little less than we expected, but part of the reason for that is because Super grew even more. It's just the fraction between those two. Super is performing even better than we expected, while Max is performing a little less than we expected.

The reason for Max not growing as fast as Super or not growing as fast as we expected is because for more beginner users, the main feature for Max is video call. It's something that allows you to practice your conversation. For more beginner users, this feature is just a little too difficult. We're going to be working on that, of course. One of the problems for that feature is that at the moment, it is entirely monolingual, so it is entirely in the language that you're learning. But when you're just a beginner and you only know, like, 20 words, it's pretty hard to have a conversation entirely in that language.

One of the things we're going to be experimenting with is having a conversation that is bilingual. So if you're an English speaker learning Spanish, some of it is going to be in English, some of it is going to be in Spanish to ease you in. That's the type of stuff we're going to be seeing there. We're also going to be working on making the conversations more engaging. If you play with video call, you will see that now Lily has backgrounds. She's in different places, and she can talk about that. That's a really good conversation topic. We're doing a bunch of things to improve that one feature that is the killer feature for Max.

Alex Sklar: Great. Great color there. Maybe one follow-up, probably for you, Luis. Last quarter, you talked about testing, taking payments directly, maybe bypassing the App Store at least from test. Can you just update us where those tests stand today and any early learnings so far?

Luis von Ahn: We're testing it. There's a couple of things to say about that. This is on iPhones. On iOS, at least till the end of the year, we are able to have a web purchase flow. Something that takes you to a website to pay instead of paying through the Apple purchase flow in the United States. That is the ruling, not in other countries. We don't know if this ruling is going to stand, so we really only know towards the end of the year for this. Next year, who knows what will happen? But so far, the testing shows that we can send people to web purchase flow, minimally lose bookings.

We do lose some bookings by sending people to an external purchase flow because there's more friction. But it really significantly increases our profit. Instead of having to pay Apple for the first time to subscription fee, you pay them 30%. In this case, we only pay whichever provider we're using, like Stripe. We only pay, like, 2%, or some small fraction. It's a good change. We have not done the full push to all our users on that, but you'll likely see us do that.

I should say the impact on that, even though we're very happy with that, but the impact on that because of GAAP, the impact on that is not going to be felt all that much this year. By the way, all of this is in our guide. It's not going to be felt all that much this year because whenever you get a subscription, the main thing we sell is twelve-month subscriptions. You kind of have to amortize it over the twelve months, and the rest of this year, by the time we push this out to all our users, it's only going to be about three of the twelve months there.

So the impact this year on our finance is not going to be huge, but it is something that we're pretty excited about, especially if it holds past the end of the year.

Alex Sklar: Alright. Thanks for the color. We'll be on the lookout.

Luis von Ahn: Yep.

Operator: Thanks so much for your question, Alex. Our next question comes from Ralph Schackart from William Blair. Please unmute your mic and ask your question.

Ralph Schackart: Great. Two questions if I could assume you could hear me, Luis.

Luis von Ahn: Yep. Yep. Hi, Ralph.

Ralph Schackart: Great. Good. Hey. How's it going? Just maybe first, Matt, just on looking at the MAUs, it looked like they declined sequentially. Was that related to the social campaign? Then maybe just a broader question, Luis. Typically, you roll out new products like math or music, you sort of play them down in that, you know, it's not going to really impact the business, at least historically. But you called it out in the shareholder letter. So I'm asking, you highlighted chess as sort of contributing earlier. Maybe kind of speak what you're seeing with this product versus the other products, and it seems like there's some excitement there.

Could that contribute to the platform earlier perhaps than some of the other products? Thanks.

Matt Skaruppa: Thanks, Ralph. I'll start with MAU and just give my best Luis impression on MAU, which is in general, we don't have a team focused on MAU growth. We have a team focused on DAU growth because language learning is a daily practice, and so we're more focused on that metric. But as you said, MAU growth did come down. It was a set of factors. And if you look at the trend, I don't think the trend line was all that different than it was kind of in Q1 from Q4, etcetera. So we are not worried about MAU growth in that trend. And we think if anything, it's following the DAU growth trend.

Luis von Ahn: I should also say it is important when you look at Q1 versus Q2. In Q1, we had this amazing Dead Duo campaign. So the comparison between Q1 and Q2, you're going to see a little bit of a drop from that. In terms of math, music, and chess, we're very excited about all three. We specifically called out chess in the shareholder letter. It's just grown a lot. It's a project that has gone really fast. One year ago, we had not even written a single line of code for chess in our app. This project had not started. Within a year, less than a year, we launched it, and it's there on iPhones now, and it's been growing.

When you restrict only to iPhones and only to English user interface, already chess has surpassed math and music. We're seeing a lot of demand for that, and we're very happy with that. But that also does not mean that we're not excited about math and music. We just acquired a team for music, and we're super excited about that. They have made some really amazing music games. We're very excited about all these subjects.

In terms of you said we downplayed a lot, the thing that we do is we just want to be cautious about particularly investors getting very excited about the amount of revenue that these courses are going to provide because at the moment, we're just selling everything under the same subscription. We're not even trying to optimize revenue for math, music, or even chess. We're very excited. We think this is really going to help us grow the TAM because it's going to get way more people to want to use our product. But at the moment, we just don't have much to say in terms of this is going to contribute a certain percentage of our revenue, etcetera.

We don't have much to say on that. This is going to take a few years for it to be very meaningful.

Ralph Schackart: Understood. Thanks, Luis. Thanks, Matt.

Operator: Thanks for your question, Ralph. Our next question comes from Chris Kuntarich from UBS. Please unmute your audio and ask your question.

Chris Kuntarich: Thanks for taking my question. Just wanted to go back to Max for a second and specifically around retention. Are you seeing with some of your earlier larger cohorts as they're coming up for renewal? What are kind of the key drivers here of churn that you're seeing? And how is this really kind of comparing to what super churn is at this point?

Matt Skaruppa: I'm happy to jump in there. I think it's early. If you think about the kind of killer feature for Max, it's video call with Lily. That feature didn't really start to scale out to the majority of folks until Q3 or Q4 of last year. So we haven't seen those cohorts yet. The early renewal signs in Max, like we said on the last call, look attractive. Relative to super, again, we think it's too early to kind of really parse that too finely because we haven't seen these cohorts. We'll know more about that in Q3 and Q4.

But to just back up just one step, the overall thing we're optimizing for on the platform with supermax and these questions around mix is LTV for the platform. Because of Max's price point, the LTV is the highest of any subscription offering we have. As Max gains share as a percent of subscribers, our LTV is going up. I think we'll have more to say on the specifics on the renewal rates as we get more data on it, but in general, we like how Max is growing overall.

Chris Kuntarich: Got it. That's helpful. Maybe just one follow-up on gross margin and just help us think about the back half of the year. Kind of benefits from AI cost savings versus potentially any of that flow any of the web-based checkout flowing through the gross margin. Thanks.

Matt Skaruppa: I'll take the last one first. I think it's easiest. I don't think the web-based checkout will drive very much change in gross margin in the back half of the year just as Luis said, that's going to be an effect that takes time to feather in. Just given how the accounting works. So I don't think that'll be a big driver. I think the drivers that we saw in Q2, which were we outperformed our expectations on gross margin because AI costs overall did come down. A driver of that was lower API calls, token costs.

We've got a lot of data now from the first two quarters of the year that says that the trend we expected to see, which was lowering of those unit costs, coming down, that trend is likely to stay intact, and so that's reflected in the guide. As we laid it out. I think the Q2 performance was also helped a little bit by ad pricing. That remains to be seen over the course of the year.

Chris Kuntarich: Appreciate it.

Operator: Thanks for your question, Chris. Our next question comes from Justin Patterson from KeyBanc. Please unmute your line and video and ask your question. And just a reminder everyone, accept the promotion to panelists to ask your question on camera. Thank you. Looks like Justin's getting connected right now.

Justin Patterson: There we go. Sorry. That took a second. Right there with you, Luis.

Luis von Ahn: I like that. I like that.

Justin Patterson: Yeah. And so does Matt from our last fireside together. But I'd like to touch on energy, actually. I thought it was really interesting that you brought up how it's uniquely moved three metrics. It's pretty rare for a feature to do that. I'd love to hear about just some of the early learnings from energy and how you hope to iterate on that more over time. And then maybe thinking just bigger picture in there, if I look at the app today, there's about four different modalities for education featured.

So if you consider jumping into some new areas over time, how do you prevent the consumer from getting too confused or overwhelmed by that experience as you launch into new courses? Thank you.

Luis von Ahn: Thank you for asking these questions. These are excellent. So energy, we're very excited about energy. Just to give context, what it is it's a different pacing mechanic for free users. Historically, we had this mechanic that we called hearts. Basically, you started with five hearts. If you made a mistake, you lost a heart. If you ran out of hearts, you couldn't continue unless you watched something like a rewarded video to gain some hearts. That was the hearts mechanic. Energy is different. You start with a larger amount of energy, like 25 units of energy. You spend one unit every time you do an exercise, whether you got it right or wrong.

We don't penalize you for getting something wrong. But if you get five in a row correct, we give you energy back, like a random reward back. What's really nice about it is that for the average user, we've substituted a carrot for a stick. It used to be the case that every time you made a mistake, you lost something. Now if you don't make mistakes, you gain something. That's quite rewarding. What we have seen when we're rolling this out is that this increases revenue or bookings on both. It increases daily active users, and it increases the median time spent using the app. We're really happy with this. We've been rolling it out.

You'll see us, it's taking some time to roll out, and it'll continue taking some time. But my sense is that significantly before the end of the year, we will have switched all of our users from hearts to energy. All of our free users from hearts to energy. This does not affect paid users, really. We're very happy with what this is going to do for our users. You asked about subjects being, you know, you said, well, we now teach four different things. We teach languages, we teach math, we teach music, and we teach chess. How is it not confusing to users? I mean, that's something that we think a lot about.

We'll probably add more subjects, by the way. I'm not announcing new subjects. We are not working on any new subjects at the moment or anything, but probably, at some point, it just stands to reason that we'll probably add more subjects at some point. So, yeah, this is something we think a lot about. We're going to be working on the multi-subject experience too. Because we're noticing that a lot of the people that use Duolingo, they're not just learning one thing anymore. They're learning, you know, it's like they're learning Italian and chess. I think we need to do a better job with that.

But I think at the moment, we're not seeing a lot of user confusion on that. But the main thing that we want to work on is just making people, you know, for example, switching from one subject to another much easier, giving rewards for learning multiple subjects, and stuff like that.

Justin Patterson: Great. Thank you.

Operator: Thanks for your question. Our next question comes from Wyatt Swanson from D. A. Davidson. Please unmute your line and video and ask your question. Give him a quick moment here. Let's see. He's loading.

Wyatt Swanson: Hi, guys. Can you hear me?

Luis von Ahn: Yep. Hi, Wyatt.

Wyatt Swanson: Great. I just have another quick one on the energy system. I realized that you're seeing positive changes in DAUs, time spent, subscriber conversion, and all that. But I've just observed some feedback from users on social media, Reddit, stuff of that sort. And they don't seem to really like the change. Have you seen any negative impacts to any cohorts demographics or anything like that as a result of that switch?

Luis von Ahn: Yeah. I mean, this is something that we knew would happen. Whenever we do a major switch to a mechanic on Duolingo, there's a number of people that don't like the change. One of the things that happens is that Duolingo is a habit-building app. We build a habit to use Duolingo every single day. The thing about habits is you want them to be the same every single day. That's what people like. But, of course, we like to continue improving the app. So there is some churn change aversion that we see. We saw this exactly happen about two years ago when we switched our home screen.

We used to have a tree, and we changed it to this linear path. There was a lot of backlash for that even though our metrics showed that this was actually good. In that case, that change for switching from a path to a tree was not about revenue. It's about simplifying the app, but our metrics were good. In this case, the metrics are really good. Both for daily active users, revenue, median time spent learning. We listened to the metrics. We did expect some people would not like it, and one cohort that would not like it is there is a group of people that had gotten really good at not paying and not making many mistakes.

So they could use the app for a while, whereas with energy, you basically get capped. If you're going to do a lot of lessons and not pay us, you're going to end up getting capped. This affects only a minority of users, but essentially, these are the people that are complaining because they are now not able to do as many lessons as they did when they had managed to find a way to not make that many mistakes.

Wyatt Swanson: Got it. That makes sense. And then I just had another quick one on active users. It looks like the DAU to MAU ratio improved pretty substantially. Sequentially, and we saw that step down in MAU growth. Was that driven by the MAU step down or is it DAUs getting more engaged, can you walk us through what happened there?

Luis von Ahn: Yeah. It's probably a little bit of both. The reality is if you look at our DAU to MAU trend, that trend of that ratio has been, I don't know if it's 100% monotonically, but essentially monotonically increasing almost every quarter. I think it's every quarter, actually. For the last several years. A few years ago, it was 20%, and then it just kind of has been creeping up to at this point, it's something like 37%. We like that. The reality is that the healthiest consumer products out there have high DAU to MAU ratios. We like the fact that keeps going up. For this particular quarter, it was a little bit of both.

We increased our retention of DAUs. The DAU to MAU ratio gets better when your DAUs retain better. We increased our retention of DAUs. That is one of the reasons why that got better. Also, it's the case that MAUs went down a little bit when compared to the previous quarter. But the main reason they went down a little bit when compared to the previous quarters, you gotta remember, in Q1, we had this crazy campaign of Dead Duo. That kind of slightly inflated MAUs that may not have been DAUs because we got a lot of people that may not have been very committed to just come in.

So we kind of passed that effect, and this is one of the reasons why the DAU to MAU ratio went up.

Matt Skaruppa: Yeah. And Wyatt, just to put numbers to that, I was looking it up for Ralph's question on the MAU trends. Q1 went up by about a point and a half on year-over-year growth rate versus Q4 for MAU growth and then went down from there to the 24% in Q2. What Luis is saying is that up was higher than it otherwise would have been. So that otherwise trend probably looks more normalized. So I think that is part of the math.

Wyatt Swanson: Got it. Alright. Thanks, guys.

Operator: Thanks for your question, Wyatt. Our next questions come from Ryan MacDonald from Needham and Company. Please unmute your audio and video and ask your question.

Ryan MacDonald: Hi. Thanks and congrats on a great quarter. Thanks for taking my questions. Maybe to start, Luis, I know one of the goals early on with Max and video call was really to continue to try to bring on and attract English learners to the platform. Just curious as you are seeing sort of video call and Max mature over the last nearly a year, are you starting to see that pick up on the non-English or the English learners coming to the platform, or is it more of a mix of sort of upgrades from the existing base?

Luis von Ahn: Yeah. We're definitely seeing growth in English learners. That is outpacing the growth overall of learners of other languages in particular. So we're very happy with that. We're also seeing the case that people who are learning English are using video call more. Also, intermediate learners are using video call more, and those are typically English learners. Also in Asia, we're seeing a pickup of not only using video call more but also a slightly higher propensity to buy Max when compared to the rest of the world because of video calls. So we're very happy with the early signals. I should say, we're still early in this.

But so far, we're very happy with what we're seeing, and it's exactly what we expected.

Ryan MacDonald: Maybe as a follow-up on the DAU commentary and sort of the slowdown with the AI comments. One, is there a potential impact where this goes beyond DAU growth slowdown into actual churn of subscribers and any concerns about sort of a knockdown effect of that as we get to the end of the year? And, Luis, not trying to get in trouble on social media again, but does this change your view in terms of the rate of internal adoption of AI within the company?

Luis von Ahn: On advice of counsel, I'm not saying anything. I'm kidding. Okay. So first of all, you saw what happened with the quarter. I mean, we beat bookings pretty healthily. The rest of what we expect is on our guide. We just don't believe that the effect of this is very material in terms of when you're looking at actual financial metrics. We do expect a little bit of, you know, if you were to look at what our guide includes, there's some positives, some good things that include, and there's some things that are not as positive. The things that it includes that are positives, you know, are super is doing really well, so that's in there.

Energy is another positive. Ads and IAPs are positive. So those are the positives. Bringing it down are things like Max is just not growing as fast as we expected. This is what I mentioned already. The Duolingo English test, we think that the main audience for the Duolingo English test, the main consumers are international students applying for universities here in the US or in the UK. Given the macro trends, we're seeing that there's just much fewer people applying to universities internationally because of that. So the Duolingo English test is lower than expected. There's something that we're putting in there which is about our social media at the moment is not in full force.

We have recovered sentiment, but we are not taking as many risks because honestly, we're skittish about it. But I think over the next few weeks, I don't know exactly how many weeks, weeks slash months, we're going to be recovering or posting more edgy things that are more likely to go viral. That does help booking some, but everything should be in our guide.

Matt Skaruppa: Yeah. Ryan, I would just round that out for Luis to kind of remind everyone that the impact of what you're asking about was really concentrated in the US. The US grows slower than the average because the rest of the world grows above the average growth rate. The US growth rate decelerated a bit over the course of the quarter, and now we think that we're past that, and it's stable. Once we go back on social media in an edgy way, we expect things to go back. All of that has an impact, as Luis said, on the guide. That's all in there. I would just point out that we beat by 9% on bookings.

A couple of points of that is FX. That's just if you mark that down, a couple of points of it was ads. My point is that when you're not doing edgy things on social media, the chance for a viral break hit, like a Dead Duo, goes down. So the chance for a real surprise to the upside also goes down. So that beat should not be carried forward as an expectation.

Ryan MacDonald: Appreciate it.

Operator: Thanks for your question, Ryan. Our next question comes from Ross Sandler from Barclays. Please unmute your audio and video and ask your question.

Ross Sandler: Great. Hey, everybody. Luis, so we've seen pretty rapid improvement in model capability and lower latency from a lot of these AI companies. As that improves, how does that change your thinking around how you evolve your service to take advantage of those improvements? The follow-up to that would be it sounds like the video call feature in Max is getting better engagement. Are there things that you're doing behind the scenes to improve the way that the interaction happens with the video call to then make it a better experience to drive higher Max adoption? Can you just talk about that, please?

Luis von Ahn: AI models are getting better. That is happening. In some cases, that helps us. In some, it doesn't do all that much. It depends on the use case. We have multiple use cases. One of our biggest use cases is just in the generation of content. Our language learning content, improvements in models or latency or all of that, doesn't help all that much for language learning content. It helps some, but it's not all that much because the models are already pretty good at language and have been for a while.

For example, for generating content for math, the improvements in the models actually help because if you remember kind of a year ago, the models simply couldn't do math. Today, the models can do math, so we're able to generate more math content. In the case of video call, latency certainly helps. Improvements in latencies certainly help. But also improvements in the model. One of the things that really helps us is whenever a new model comes out, what happens is that the previous one, they just lower the price. So that helps us a lot. Maybe we don't use the latest one, but we are using the still the same one, but the price just came down.

So it helps with that. Now in terms of video call, we're doing a number of things to make it more engaging. For example, we are training our own, fine-tuning our own models to make it more engaging. So what you'll see, the types of things you'll see, it may not look all that different in the product when you use it. The one change is Lily now has backgrounds, so that looks different. But most of it is not going to look all that different. It's just the conversations are going to flow a lot better, and they're going to adapt to your level a lot better. We're seeing basically changes on a weekly basis on that.

Another thing that I'll say with video call is early on, we didn't really have a metric that we were optimizing for video call. We just kind of wanted people to use it more. Now we have a really good metric that we're optimizing for, which is the average number of words spoken per Max subscriber. It's a really good metric because we can move it and because it exactly captures what we want people to do, which is to speak more.

Ever since we started optimizing that, I think our video calls just started getting better and better in the sense that now the models are starting to learn that it is better to do things to keep you engaged. So asking more questions, etcetera, to keep you engaged, and also asking you open-ended questions as opposed to yes-no questions to get you to practice more. That's the type of stuff that we're doing, and I'm very happy with the progress.

Operator: Thanks for your question, Ross. Our next question comes from Shweta Khajuria from Wolfe Research. Please unmute your audio and video and ask your question.

Shweta Khajuria: Hi. Thank you for taking my question. I'm sorry for the lag. I guess, Mike, I have a follow-up to the prior question. Do you think the product experience is for voice on Duolingo versus perhaps some of the other AI-based voice because if we look through Reddit, there is some feedback that it's maybe a bit slower. So where are you with that, and is that a fair comparison? That's the first question. And then second, is just on download. I know it's not a metric you report, but did you see any particular trends in the US or abroad on how your app downloads are tracking? Thanks a lot.

Luis von Ahn: In terms of how or I'm not entirely sure I understand the question. There are translation apps that are really good for voice-to-voice translation, etcetera. We do teaching, and in that case, we feel really good about our offering with video call. The most important thing is that it is engaging, and we feel really good about that. In terms of downloads, I honestly don't know the answer to that. I don't even look at that. So I don't know if Matt does, but I don't know.

Matt Skaruppa: No. I was just thinking, Shweta, I'm sorry. I don't actually know the trend in downloads.

Luis von Ahn: That tells you how much we look at this.

Shweta Khajuria: Well, as you may know, intra-quarter, there was some growing fear around engagement, not only around DAUs and MAUs but also downloads. So if that's not something that you care about, that's fine. If I could do a quick follow-up on DAUs. Anything in particular that you saw across geographies on engagement? How did US trend versus certain other geographies on engagement?

Luis von Ahn: In terms of our DAUs, they are growing very nicely, 40% year over year. Again, that laps a year that was 60%, which last year was 60%, etcetera. So we're very happy with the DAU growth. Not all countries are growing equally. Some countries obviously are growing faster than others. The US has been growing below our overall average for a few quarters. It has actually kind of been the year-over-year growth over the US has kind of been slowing down over time. We think the main reason for that is because the US is unique when compared to every other country that we operate in. We don't spend any marketing money in the US.

Historically, we have not spent any marketing money in the US. In every other country, at least the ones that are large enough markets, we actually spend money with performance marketing, with influencers, some brand, etcetera. In the US, because our internal thought was, well, we're growing really nicely in the US historically. We've been growing really nicely in the US. It's so expensive to market in the US that we're like, we're just going to not spend money there, and we'll spend money everywhere else. We think that is contributing to the slowdown in growth. We're comparing it a lot with the situation of Mexico. For a while, we were also not spending at all in Mexico.

We were entirely relying on our social media, and we've noticed that Mexico DAU growth, I mean, it's always been growing, but DAU growth was also slowing down, and it had gotten pretty low at some point. Then we decided to start spending in Mexico, and it's not a large spend. I mean, you see how much spend we have in our filings. We don't spend a lot on marketing. But we started spending a little bit on performance marketing and a little bit of influencers, and that made it so that year-over-year growth in Mexico at this point, Mexico is significantly above average because we spend some amount.

So what we think we're going to be doing in the US, you will see us start spending some in the US. Again, we're not going to be spending $100 million in the US or anything like that. These are small amounts, but we believe that helps because it just helps you reach different audiences. So that's kind of how we see it in the US.

Shweta Khajuria: Yep. Thanks, Luis. Thanks, Matt.

Operator: Thanks for your question, Shweta. Our next questions come from Bryan Smilek from JPMorgan. Please unmute your audio and video and ask your question.

Bryan Smilek: Great. Thanks for taking the questions, Matt and Luis. Luis, I guess just to start, a few quarters ago, you had mentioned that north of 2 million daily active or intermediate or advanced English learners on the platform. Just curious, what are the investments needed to drive deeper efficacy and just overall broader engagement and adoption of English learners on the platform, given it is the vast majority of the TAM? Conversely, as well on monetization, Matt, how do you think about overall pricing of Max in some of these international markets as the cost of compute comes down? And Max approaches potential gross margin accretion over time. Thank you.

Luis von Ahn: English learners are very important. We've been talking about them for a while. English learners, not just advanced, but all English learners, including beginner English learners. That's the largest TAM. We've been working on that. We've been adding not only adding but also improving a lot of our content for English learning, and we're going to continue doing that. Most of our features for learning, we spend a lot of the effort on the English, and we're seeing that 2 million number is now a lot higher. I don't know if we report on that, but it is now a lot higher than 2 million. We're very happy with that progress. I'll let Matt talk about the pricing experimentation.

Matt Skaruppa: Yeah. Bryan, it's a great question because it allows us to talk about two, well, three concepts. The three concepts are LTV optimization, relative price of our subscription offerings, and then the cost of compute. We'll take the last one first. Cost of compute is coming down, as we've talked about, I think, is widely expected to continue not just by us. The good news about that is it gives us options to do more experiments with pricing of Max. To put more Max features that maybe use less compute in different tiers. It gives us options, basically.

We're going to experiment with that over time as those costs come down, being mindful of not only gross margin but ultimately that LTV. Again, I just want to reiterate what we're doing with Max and the family plan in particular. People ask about ARPU and bookings, and those things are important. But what we're trying to do is optimize LTV. The pricing of Max not only matters about the cost to compute and its gross margin accretion or dilution, it matters on how does it help us relative to our other tiers.

One of the things Luis said was it was growing a little slower than we expected, and that was partially offset because super experiments were growing faster than we expected. Again, that is not like when you show a Max price and a super price, you get some relative comparative value math going on in the consumer's head. This is all along with a way of introducing three concepts just to say that as compute comes down, we have now more to experiment. Experimenting is our sweet spot. I would expect us to run some experiments around relative pricing for Max and super for family plan and geographically.

Again, if costs come way down, it does open up a couple of really interesting markets for us that right now we're not really offering Max in. That could be interesting down the line.

Bryan Smilek: Great. Thank you both.

Operator: Thanks for your question, Bryan. Our next question comes from Mark Mahaney from Evercore. Please unmute your audio and video and ask your question. Let's give Mark a second here. It looks like alright. Great. He should be in. Mark, can you hear us?

Mark Mahaney: Can. Alright. Let me throw two questions. One, Matt, you talked about the pricing on super. Just update us. I know you did some experimentation with super pricing in March, and I think you rolled it out globally. Just talk about what kind of response you saw to that. Then, Luis, I want to ask you a question, and maybe a little bit rude, but I'll ask it to you anyway, which is what if you, John, what kind of lessons in terms of leadership lessons have you drawn from what happened in the controversy? Do you think the messaging was bad? The message was bad? How do you learn from that? How do you improve going forwards?

Then I also want to ask you to at the same time, address other concerns. Is the growth somehow a reflection of maturation or saturation of end markets, or are there much greater competitive pressures in the market? So I'm throwing a lot by you, Luis, but I know you can answer them.

Matt Skaruppa: Yeah. Those are good questions for Luis. I will answer the easy one, Mark, on pricing. We ran some pricing experiments earlier in the year. The way our pricing experiments work, like I just mentioned, is we're testing volume price and trying to calculate and get a sense of LTV, although it's not perfect. They were beneficial to bookings. They increased bookings. So we raised prices, and that had a small impact. It wasn't a very large part of the movement you saw in Q2. Our ARPU has gone up really nicely. I think Q2 ARPU was up around five or 6%. Most of that didn't come from this price change.

It either came from FX or plan mix shift to higher price plans. Again, I can't control FX, but what we can try to control is more family plan and Max over time. That will be the larger driver of ARPU, not price point increases. Now over to Luis for the other questions.

Luis von Ahn: Yeah. So, Mark, what I've learned as a leadership is just don't post on LinkedIn. I'm kidding. Look. I think, ultimately, I did not give enough context on our post internally. When I sent that email to the company, this was not controversial. We know internally that it has always been since the beginning of this company, many years ago, many years before LLMs were a thing, we have decided that what we're going to do is we're going to teach people with a computer. That ultimately means we're using AI. The goal for us to use AI is to teach better and to reach more users and have more content. That is the goal.

I think I did not give enough context to say that is the goal. What people understood from my message, which is not the intention, is that we just wanted to fire all our employees, which is not what we did and not what we want to do. We love our employees. I've learned that I need to be a lot more careful when talking externally versus internally and give enough context. Sometimes it's just the external world thinks about things very differently than the internals of just us and other tech companies. That's my sense. In the case of maturation, we're not worried about this.

If you look at our DAU growth, some of our most penetrated markets are actually the ones that are growing fastest. We don't see that we've reached the level that allows us to grow slow everywhere. We don't see that. Some countries are growing faster than others, but the penetration is not something we're worried about. I just want to remind you, there are 2 billion people learning a language in the world. We have about 130 million active users, give or take. There's a lot of room there. Now we're also adding other subjects. There are hundreds of millions of people that are interested or already playing chess. The same is true for math.

The same is true for music. I just don't think that we're anywhere near our full TAM.

Mark Mahaney: Okay. Thank you, Luis. Thank you, Matt.

Matt Skaruppa: Thanks, Mark.

Operator: Thanks for your question, Mark. Our next question comes from Andrew Boone from Citizens. Please unmute your audio and video and ask your question.

Andrew Boone: Hi, guys. Thanks so much for taking the question. I wanted to go back to Max and talk about incrementality. Matt, you've kind of talked about it in a couple of ways in terms of solving for LTV. How do we think about your ability to actually increase conversion given Max's offering, especially with more advanced learners and some of the testing that you guys have put out that shows it's efficacious? Is that the right word? That's right. Then very specifically in terms of the guide and think through the numbers, ARPU has continued to go up.

Matt, can you break that down a little bit further than just kind of FX and some of the stuff that you talked about? How do we think about that going forward in terms of relating it to the guide for the back half of the year? Thanks so much.

Matt Skaruppa: Luis, you want to start with the Max how we think about conversion, or do you want me to jump in on ARPU first?

Luis von Ahn: You can jump in on ARPU.

Matt Skaruppa: Yeah. So, Andrew, I think the way to think about it for the guide on ARPU is that we were up around 6% this quarter. Again, I think it's around five or 6%. Again, that came from mix shift of plans, and I don't really think that ARPU number is certainly not going back down. I think it's going to stay in that range consistently. Low single-digit positive. We have good visibility into some of the revenue that came from bookings in the past that flows through. We hope to continue to mix shift it up on the guide. I would say that FX has been a nice tailwind, as you can tell in the report from Q2.

We had a nice tailwind to bookings from FX, and that's certainly driving a meaningful part of the guide, the majority or vast majority of the guide, for the back half is we have a nice FX tailwind. I think that's how we're thinking about FX playing out through the guide and then peppering in through ARPU, but that takes more time. The ARPU impact FX is spread out over four quarters.

Luis von Ahn: In terms of Max and our different plans, the way we think about it, we now have a bunch of different plans to offer. There's the free plan, of course, but then there's super. There's super family. There's Max. There's Max family. We need to, we are always trying to figure out what is the right plan to offer to the right person or at the right time. Of course, it is best for us if people go all the way to family. That's kind of what's best for us because that's my favorite one to do. Yeah. That's Max's favorite. But there are just some users for whom super is probably a better thing or super family or something.

We're always experimenting about what actually increases platform LTV. That's the driving factor here. Thank you.

Matt Skaruppa: Thanks, Andrew.

Operator: Thanks for your question, Andrew. Our next questions come from Curtis Nagle from Bank of America. Please unmute your audio and video and ask your question.

Curtis Nagle: Awesome. Great. Thanks very much. Matt, maybe just a few first. Just kind of going back to DAUs. I think you said you're not expecting a big change from 3Q to 2Q. Could you elaborate on this? Is this sequential basis? Is it year over year? And in line with the 40% in 2Q? Just some clarification on that would be helpful. Then a question for Luis.

Matt Skaruppa: Yeah. So, Curtis, what we're basically telling you is that, in general, we try not and haven't historically guided to DAU. Last quarter, we did because we had this amazing Q1. 49% year over year. Fifty-one. Oh, yeah. 50 around 50% DAU growth in Q1. Then we knew because of that peak from Dead Duo and the tough comps Luis already mentioned, it was going to be in the 40 to 45% range. So we told you that because we didn't want anyone to get surprised. When it's a change of that scale and size and there's clear predictability about it, we want to tell you about it.

When there's not something like that, we're not going to opine on the exact numbers. That's what Luis mentioned earlier. You can take it as year-over-year growth rate sequentially as that framework that we just laid out for you.

Luis von Ahn: Yeah. I meant year-over-year growth sequentially. We don't expect a big change.

Curtis Nagle: Okay. That's helpful. Then maybe just going back to the switch from energy to hearts and the higher revenue. In terms of what's driving that, is it that cohort of the high usage, non-mistaking users who just didn't want to pay, they're converting, or is there something else going on? When is the energy feature fully rolling out? I don't think I have a piece of mind. So yeah, just some thoughts on that would be great.

Luis von Ahn: What's going on is the following. Internally, we just had a belief, and this is executing on that belief. If you use Duolingo a lot, and you are able to pay, for example, if you use Duolingo a lot and you pay for Netflix, you should pay us. That is how we see it. Energy basically accomplishes that. It used to be the case that there's the type of person that is always going to pay. Never mind. They'll pay with whatever they just don't like ads, etcetera. But the pacing mechanic, I mean, energy biases towards if you make a lot of mistakes, you have to pay us.

Whereas this just biases to if you use it a lot, it would be good if you paid us. That's what we're seeing. Sorry. What else? Oh, rollout. We're rolling it out. It's more than half rolled out on iOS now. More than half of daily active users of iOS have energy. Android is less than half, so Android is behind iOS. I don't know exactly when we'll be done, but it'll be a couple of months, give or take, we'll essentially be done.

Curtis Nagle: Okay. Thank you. Appreciate it.

Operator: Thank you, Curtis. Our next question comes from Han Yee Kao from Citi. Please unmute your audio and video and ask your question.

Han Yee Kao: Oh, hi, Luis. Hi. It's another strong quarter. Congratulations on the result. I have this nice notebook, your collaboration with Luckin in China.

Luis von Ahn: Nice. Nice. We love that collaboration. It was awesome.

Han Yee Kao: Yeah. It was awesome. I do want to know more about the regional mix that you mentioned in prior questions. You can see the fast-growing country right now is in China. But in China, you haven't rolled out the Max. Is that a part of the reason why you're thinking that the Max is behind your expectation because you're expanding new users in a new market, lower penetrated market, and they are not Max users yet? Then my second question related to your investment because as we can see, the first half you have adjusted EBITDA ratio. Calculating correctly, 29%, and your guidance for the full year is around, like, 28.5 to 29%.

I want to know more, like, what you're investing in the next half of the year and will be related to new content or it will be related to the new features in AI.

Luis von Ahn: I'll take the first question, and then, Matt, you can take the end of that question. We're very happy with our growth in all of Asia, really. Asia is growing, it's the fastest-growing region. China was a positive surprise this quarter. It grew faster than we expected. Part of that was the partnership with Luckin. For people who are in the US, I don't think you know, it's hard to explain the prevalence of Luckin in China. That grew faster than expected. Probably some of that has to do with super growing even faster than Max because of that. My sense is that's probably a small amount.

My sense is that the reality is just that super has been, we've just been doing a better job with super than with Max. That's my sense.

Matt Skaruppa: On the investment side, again, we feel very happy about the fact that we're able to grow so quickly, expand margins, and reinvest. In the back half of the year, doing what we think is the most important thing for the long-term growth of the business, which is investing back in the product, which is mainly, we do a bunch of hiring. We have a bunch of new grads who start in Q3. We also are bringing on a group of people who we're really excited about who are going to help us grow our music roadmap.

Luis von Ahn: Extremely excited about that group of people, and I'm going to go have drinks with them very soon.

Matt Skaruppa: Yes. We're doing those things to invest back in the product. That's a chunk of it. Then as Luis already mentioned, we're going to spend a small amount of money on marketing in the back half of the year. I think the overall thing I would say is if you look at the trend in our guide around EBITDA margin by quarter, the guide lines up very closely with what happened last year in actuality in terms of the shape of that curve. I think this is kind of more normal course as you'd expect. Last year, Q2 was our highest quarterly EBITDA margin, and I think that's what we're implying is going to be the case this year.

Han Yee Kao: Okay. Thank you. Thank you, Matthew. Thank you, Luis.

Luis von Ahn: Thank you.

Operator: Thank you for your questions, Hanhee. I am showing no further questions. This concludes the Q&A section of the call. I would now like to turn the call back to Luis for closing remarks.

Luis von Ahn: Thank you, everyone, for tuning in, and thank you to all the analysts for their questions. We'll see you next time.