Can you say "good job" in Spanish? How about in High Valaryian? Following another exceptional quarterly earnings call, the team at Duolingo (DUOL 3.86%) should be receiving praise from all corners of the globe, plus a few fantasy realms.
Motivating people to stick with a language course is practically impossible, but Duolingo and its increasingly popular smartphone app appear up to the challenge.
The company recently reported results from the last three months of 2021, the first full quarter since its stock began trading publicly last summer. Here's why you can be fairly confident that Duolingo isn't going to fizzle out like Rosetta Stone or require intense marketing like Babbel.
Duolingo is not your father's education software
Language courses like Babbel and Rosetta Stone offer free trials and intro lessons to rope users into longer subscriptions. Acquiring customers this way can be a lot more expensive than you might think. During the first six months of 2021, Babbel spent a frightening 87% of total revenue on sales and marketing alone.
Duolingo raised more than $500 million in its initial public offering last July but didn't splash out on marketing the way some investors had feared. Sales and marketing expenses rose ever so slightly in 2021 to $59 million, or 23.5% of total revenue.
Image source: Getty Images.
With sales and marketing expenses under control, the company was able to spend a whopping $104 million on research and development last year without pushing its bottom line deep into red territory. That makes it the only education software provider I've seen that spends significantly more on research and development than on marketing.
Unlike its competitors, all of Duolingo's lessons are available to both premium subscribers and free users on the same smartphone app. This gives Duolingo a lot of opportunities to learn about which new lessons and features turn users away and which ones inspire new premium subscriptions.
It's working
Duolingo's latest earnings call was full of signs that its heavy investment in research and development is creating an extremely popular product that sells itself. For example, Duolingo's TikTok channel costs the company practically nothing, but it's a powerful driver of new customers. The channel has over 3 million followers at the moment, and video clips with the company's adorable mascot regularly rack up millions of views.
Duolingo has also successfully integrated social interactions into its app in a way its competitors can only dream of. Around one-fourth of the app's daily active users follow at least three other people.
As a result of relentless testing, the percentage of free Duolingo users who eventually pay for premium features has risen by about one percentage point every year since the company launched those features in 2017. The company's conversion rate could be accelerating, too. The percentage of monthly active users who subscribe for premium features rose about two percentage points last year to reach 6.2% at the end of 2021.
Everyone learns English
At the moment, around 45% of Duolingo's total revenue comes from the U.S., a country with mostly native English speakers. Generally, demand from native English speakers for foreign language instruction is a drop in the bucket compared to the level of demand for English lessons.
Less than a year ago, Duolingo charged its users the same price in dollars for premium services regardless of which currency they earn a living in. Now, there are four countries with different pricing, and the company's still tailoring and testing new strategies all over the world.
It's cementing its position in the global market for English instruction with an increasingly popular proficiency test. At the end of 2021, over 3,000 higher education programs from universities such as Yale, Stanford, and MIT were accepting results from the Duolingo English test as proof of English proficiency for admission.
Be patient
Duolingo is relentless about testing new content and new pricing structures, but investors need to remember it will take time to measure annual recurring subscriptions.
The stock is trading at 10.7 times last year's sales, which is high enough to expect short-term volatility as analysts and investors argue about just how fast the company is growing. Shareholders who simply hang on, though, will probably come out way ahead over the long run.
