Duolingo, Inc. (NASDAQ:DUOL) Q1 2025 Earnings Call Transcript

Duolingo, Inc. (NASDAQ:DUOL) Q1 2025 Earnings Call Transcript May 2, 2025

Deborah Belevan: Good evening, everyone and welcome to Duolingo’s First Quarter 2025 Earnings Webcast. Today, after market close, we released this quarter’s shareholder letter, a copy of which you can find on our IR website at investors.duolingo.com. On today’s call, we have Luis von Ahn, our Co-Founder and CEO; and Matt Skaruppa, our CFO. They’ll begin with some brief remarks before opening the call to questions. [Operator Instructions] And please note this event is being recorded. Just a reminder, we’ll make forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these risks have been set forth in the risk factors in our filings with the SEC.

These forward-looking statements are based on assumptions we believe to be reasonable as of today, and we have no obligation to update these statements as a result of new information or future events. Additionally, we’ll 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 now I will hand it over to Luis.

Luis von Ahn: Thank you, Debbie. Normally, we start this call with prepared remarks, which, in this case, probably would have included the term AI like 17 times. But as I’m sure you’ve read in our shareholder letter, things are going great. So we’re going to get right into questions.

Deborah Belevan: Alright. Thanks, Luis. Now I’ll pass it over to the moderator, who will begin the Q&A portion of the call.

Q&A Session

Operator: [Operator Instructions] Just a moment as our first question is connecting that will come from Curtis Nagle with Bank of America. Please unmute your audio and ask your question.

Curtis Nagle: Terrific. Thanks for taking the question. Maybe one first for Matt and then one for Luis. Matt, could you just talk through the cadence of the gross margin for the year, really nice outperformance on some of the Max efficiencies. I’m still expecting, I think, a 50 bps beat in 2Q and then ramping up in 2H. I guess why not more of a benefit in the second quarter and how should we think about kind of run-rates going into next year in terms of gross margin?

Matt Skaruppa: Thanks, Curtis. I appreciate the question. So we lay out in the shareholder letter the detailed gross margin guidance. So just to kind of reiterate what we put in there, you’re absolutely right. We continue to expect for the full year about a 150 basis point decline year-over-year. We did see Q1 come in better than we expected. We expected about a 300 basis point decline and we saw about a 200 basis point decline. For the most part, in Q1, Max was on plan in terms of its impact on gross margin, and we saw a slight benefit on ads, which helped. But as we lay out in the shareholder letter, we do expect Q2 to, sequentially, compared to Q1, decline 50 basis points. And then we’ll see gross margin ramp up in Q3 and Q4 such that by the end of the year, we end roughly back to where we started the year at the end of Q4 of last year.

Curtis Nagle: Okay. Awesome. That’s helpful. And then, Luis, for you, just maybe expectations in terms of the language modules chess, music, math, right? Do we still sort of see these largely as tools for engagement for streets, adding value to existing users or maybe increasingly so as potential monetization tools? What are your thoughts there?

Luis von Ahn: Yes. Thanks for the question, Curtis. So we’re very happy, we just added chess. It’s not quite yet live in the app, but it’s going to be live very soon. I should mention something amazing about chess is that it really started with a team of two people, neither of whom knew how to program, so they were not programmers. And they basically made prototypes and did the whole curriculum of chess by just using AI. Also, neither of them knew how to play chess. And we started that for several months. And eventually, when they had a really good prototype, we had a whole team to professionalize it and put it in the app. So we’re very happy with it. This is, at the moment, mainly going to be to increase users. We think there as a huge demand for chess.

There is hundreds of millions of people who want to play chess. And the same is true for math and music. I mean they’re growing really well. We are monetizing all of these subjects, by the way. The way you monetize them is the same way we monetize language learning, which is if you want to turn off ads, you can pay to subscribe. So we’re monetizing them already. But compared to language learning, they’re a lot smaller. But yes, we’re very excited about it.

Curtis Nagle: Okay, thank you.

Operator: Our next question will come from Ralph Schackart with William Blair. Please unmute your audio, video and ask your question.

Ralph Schackart: Great. Thanks for taking the question. Matt, maybe I’ll start with you. Maybe kind of give us a sense of any macro softness you may or may not be seeing. I think during the 2022 time frame after going public, you didn’t see much there. But just give us a sense there on the DAUs, kind of how broad-based was that? And then Luis, just on gen AI, not focused on Max, but obviously, you’ve been working with AI for a long time. Just give us a sense, when you’re testing now and developing products, what does gen AI allow you to do in terms of testing at scale and to develop products at scale? And then how does that sort of inform your roadmap to really sort of leverage that, to create, I guess, more products over time and potentially be able to roll them out faster? Thank you.

Matt Skaruppa: Yes. Thanks, Ralph. So when it comes to the broader environment, you can see from our Q1 results, which were great, and the strength of our guide that we feel confident about the roadmap for 2025. We have a lot of exciting opportunities ahead of us. And so that’s what you see in the guide. So far in Q2, we’ve been monitoring the metrics we always monitor, and we haven’t seen any real change in the trends based on any macro environment. So we feel good about that. I’d just remind you also that we’re a global business. A majority of our bookings and revenue come from outside the U.S. And we offer a really attractive, in my view, value-to-price relationship. Our average revenue per user is in the $6 range. So we feel good about it, and that’s what you see in the guide, Ralph.

Luis von Ahn: And in terms of gen AI, I mean, in general, gen AI is allowing us – there’s three places where it’s helping us. I mean one is data creation. Teaching requires quite a bit of content. It used to be the case that a lot of this content was made by hand with some automation, but a lot of it by hand. By now, we are able to make the content for all of our subjects mostly, close to 100%, automatically. So that allows us to just have a lot more content that is made a lot faster and much cheaper. So that’s one place where it’s helping us. Another place where it’s helping us is just creating new features that were just not possible for like Video Call with Lily. That was just impossible to practice conversation with a computer 2 years ago.

And then the last place is it’s just helping us with efficiencies everywhere in the company. And the fact that, for example, chess is a really good example. This is what I mentioned in the last answer. The fact that two people who were not engineers really were able to get to a pretty far in chess, I mean they didn’t make a production version of chess, but what they made is really, really good prototypes. And so this is really – this is showing what the future is going to look like. We’re going to have a lot of people in the company that are playing around with new subjects or with new ideas. And I think that’s going to speed up the development of our features.

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

Operator: Our next question will come from Chris Kuntarich with UBS. Please unmute your video, audio and ask your question.

Chris Kuntarich: Thanks for taking the question. Maybe the first would just be on the Max side of things. Any update on retention trends for Max and just percentage of overall subs? And just how should we be thinking about kind of where Max retention is versus Super at this point? And I guess my second question would really be on the 148 new language courses and kind of pushing on that thread a little bit more here. You said it took 12 years to add the first 100. I guess, is it more – are we at the point now where we kind of reached saturation here as far as the available courses that you’re looking to offer here and it’s about pushing deeper into certain markets or is there another 100 courses potentially that we should be looking here that will be driving those – really driving the funnel here? Thanks.

Matt Skaruppa: Yes. So on the Max retention rates, we feel good about how Max is progressing. It’s about 7% of subscribers at quarter end, which is an impressive set of growth, and it helped to deliver a really strong Q1 for us, and it’s going well. I think on the retention rates, it’s kind of as expected. It’s early days, but we feel confident that it’s going well on the overall retention rates for Max at this point.

Luis von Ahn: Yes. And in terms of the language courses, we added 148 new language courses. All of this content was done with AI, and it really took us about a year to add these 148 language courses. And like you mentioned, the previous 100ish courses took us about 12 years to make. So this is an incredible speedup. Now to clarify what these courses are, these are not new languages. So these are the same languages that we were teaching, but for other base languages. So for example, we used to – if you were a Portuguese speaker, you couldn’t learn Korean. But now you can. So that’s the type of thing. We’re basically filling in all the gaps that we had. At this point, we are teaching all the major languages to the majority of the countries that we serve.

So we’re very happy with that. We’re still going to add other languages, likely. And there’s demand for that, but there really is diminishing returns. I mean, in total, different languages, we only teach about 40 of them. And these 148 courses mainly pertain to about 8 of our top languages that now we’re teaching in the different geographies. So there’s not that much in terms of new courses to add, but we are going to continue improving the courses that we have and also getting them to teach to more advanced levels.

Operator: Our next question will come from Bryan Smilek with JPMorgan. Please unmute your audio, video and ask your question.

Bryan Smilek: Great. Thanks for taking the questions. On daily active users, I mean, continue to see such strong and impressive growth rates, I believe last quarter, you had talked about mature regions growing still very strong. So just curious, what are you seeing on the product optimization cycle that’s driving better resurrected user growth, anything that stands out to keep in mind there? And then secondarily and kind of related as well, more on the English learning side, still under-indexing towards English language learning, as you continue to scale course units published, add new content and efficacy over time, how should we think about user growth across English language learning and the opportunity longer term? Thank you.

Luis von Ahn: Yes. Thank you, Bryan. In terms of DAUs, it’s a similar story to last quarter. I mean we’re getting very strong growth. I mean, we just posted a 49% year-over-year growth in DAUs, which to remind you, that is lapping the same quarter, but the year before was doing 60% year-over-year growth; and before that, another 60% year-over-year growth. So it’s really growing quite fast. The growth is from all regions. Of course, some regions are growing faster than others, but really all of them are growing. And the same thing is true as last time. Some of our more mature markets are actually growing the fastest. So we’re very happy with that. And what that tells us is that we really are not reaching the point of saturation in really any market.

And it’s because there really are – the total number of people learning a language in the world is about 2 billion, where we just posted 130 million active users. So there’s a lot of room for that. In terms of what drives the growth, it’s the same story as has been. Two things drive our growth. One is product improvements and the product improvements basically get improved retention of the product and also get people to tell their friends, so word-of-mouth. And then the other thing that drives the growth is our excellent marketing campaigns. I mean this last quarter, you saw that we had this campaign where Duo owl faked his own death. We didn’t know he was going to do that. This is a kind of quirky guy that decides to do this type of stuff.

But that campaign, for example, got 1.7 billion impressions. And the cost of that campaign really was essentially nothing. So that’s what’s generating the growth. In terms of English learners, we’re very excited by it. We’re still under-indexed, as you rightly said. If you look at language learning as a whole, 80% of the people that are learning a language are learning English. But on Duolingo, it’s a little around 50%. That percentage is increasing, which is good and because English learners, in general, are growing faster than the rest of our growth. So we see a lot of potential there. And just to remind everyone, the reason that English learners are now growing faster is because we’ve added a lot of content for them, in particular, intermediate and advanced content.

And that’s really helping us grow. Now one of the things that we’ve said last time, and we’re going to continue saying here is, it’s going to take some time for this adoption to happen for English learners because the word got around. I mean the main way Duolingo grows is through word-of-mouth. And the word got around that we were mainly good for beginner English learners. And now that we have content for more intermediate and advanced learners, the word has to get around. We’re trying to speed that up with some marketing initiatives. But generally, we expect that most of this is going to be word-of-mouth. And so in some time and I don’t know what that timeframe is, but it’s not months, it’s probably years. We do expect that English learners are going to hopefully get to the 80%, but it’s going to take some time.

Bryan Smilek: Awesome. Thank you. And I guess just one quick follow-up on English learning. Could you share any insights on just overall conversion rates? And I mean, right, like how that would vary versus a Western world user? Anything would be super helpful? Thank you.

Luis von Ahn: Yes. I mean, English learners, a lot of them are in regions that don’t convert very well. Some of them are in regions that convert very well, for example, Japan. Japan converts very well. But if they are in low GDP per capita countries, they don’t convert super well. However, we are seeing something really awesome with Duolingo Max. And it is that they really have – because Max really helps you try to practice conversation a lot more, there are a lot more interest in it. So we’re seeing more adoption of Video Call with Lily by English learners than non-English learners. And we’re also seeing that, like we said, 7% of our subscribers are paying for Max. But actually, if you restrict to English learners, that number is actually higher than 7% and non-English learners, that’s lower than 7%.

So the average is 7%, but English learners – the fraction of subscribers that are English learners that are Max is higher than for non-English learners. So we like that.

Bryan Smilek: Awesome. Thank you.

Operator: Our next question comes from Justin Patterson with KeyBanc. Please unmute your audio, video and ask your question.

Justin Patterson: Great. Thank you very much. It looks like cost optimizations are occurring faster than expected. You’ve got better line of sight on AI costs. How does that change just your desire to make Duo Max more affordable or even just provide more features to some of those English learners? And then related to that, the 3D Lily update for video call looks pretty interesting, talk about how you think that’s going to influence both engagement with Lily and conversion rates? Thank you.

Matt Skaruppa: So I can take the first part and you can jump in on the next one. Yes, Justin, on the optimizations, it’s actually, in our opinion, trending as we expected. So there were a little – there were some smaller optimizations that we were able to kind of do in Q1 that were faster than we expected, but they are pretty small. In general, the optimization of video call and Max is on trend with what we expected on the last call. And that’s good news for us because it does lead to margin expansion in the back half of the year like we thought. And we also saw evidence in the first quarter that rates were coming down for those type of API calls. So just in general, we feel confident with the current course and speed of those optimizations.

Luis von Ahn: Yes. And related to Max cost, I should say, it is still the case that Max in certain countries like India, India is a good example, is too expensive. We have not lowered the price. Max in India is about $70 per year. We feel confident that probably in a few months, we’ll be able to lower that price because prices are coming down. And at that point, we’re going to see more adoption, but it’s going to take a little bit of time. So that’s Max. In terms of 3D video call, we’re super excited about it. It just – I mean, if you actually played with it and some users already have it, not everybody has it, it’s a lot more engaging. Now you can start asking Lily about her dog, which you can see it right there and everything.

So I think that’s going to increase engagement. And the good news about engagement is it increases a number of things. It increases word-of-mouth of Max itself. So basically, people are like, you should get Max. I know you’re a Duolingo user, but you should get Max because you can talk to Lily. It also, of course, increases retention. So it’s just generally going to be good. I don’t know exactly what the results are going to be of the A/B test. I mean this is an A/B test at the moment, but we are pretty excited about it.

Operator: Our next question will come from Nathan Feather with Morgan Stanley. Please unmute your audio, video and ask your question.

Nathan Feather: Hey, everyone. Thanks so much for the question. Really encouraging results. It’s exciting to see the expansion and additional language courses. But given that there is a diminishing return at the additional languages, do you ever think your relative prioritization list for new content production now between further language courses, more advanced content, new subjects?

Luis von Ahn: Yes. In terms of relative prioritization, I mean, at the moment, of course, language learning is our largest business and it is growing very fast. So the majority of our efforts still go into that. Now in terms of creating content, we may not be adding new languages, but we’re always improving the content for the languages that we have and making it more and more advanced. And what’s nice about this is because we now have this pipeline on AI, we can actually regenerate the content super fast, but in an improved manner. So you’ll just see us improve things a lot. And it pays to live. So for example, you’ll see us improve our Spanish course, which is one of our largest courses and people all over the world will be able to learn Spanish faster.

We are, of course, also investing in math and music and chess. We’re spending less effort on that because they are much smaller businesses than language learning. But you’ll see us – for example, for math, you’ll see us vastly increase the content because of AI within the next few months, the content is probably going to quadruple that we have in math because of AI in, call it, I don’t know, a quarter or so.

Nathan Feather: Very helpful. Thank you.

Operator: Our next question will come from Arvind Ramnani with Piper Sandler. Please unmute your audio, video and ask your question.

Arvind Ramnani: Hi. Thanks, Luis. Thanks, Matt.

Luis von Ahn: Good background.

Arvind Ramnani: I love it too.

Luis von Ahn: Well done.

Arvind Ramnani: I use it for all my calls, all my Zoom calls.

Luis von Ahn: Yes, I believe you.

Arvind Ramnani: Look, I mean, you launched math and music back in 2023. Now you’re launching chess. And I’m really trying to better understand your business strategy. I mean I fully appreciate that the investment costs are minimal. Even with math, I believe it was with just a couple of engineers. And I appreciate that part of the equation. But also over the past couple of years, you’ve insisted that don’t look at math and music, and I know chess is going to be free, don’t look at it as a monetization lever. But there is clearly like a kind of a business strategy for expanding product. I’m just trying to get a clear understanding of that?

Luis von Ahn: Yes. To clarify one thing, all of our new subjects, math, music and chess, when it launches, which is going to happen in a few days, they all have monetization. They do make us money. And it’s because the same subscription works for everything. And if you’re not subscribed and you’re doing math, you have to see ads at the end of a math lesson and all the standard things that get you to subscribe will get you to subscribe. So we do get subscriptions from people who are using math or people who are using music. And soon, it will be people who are using chess. But they are proportional to the number of daily active users that we have in those subjects, which is significantly smaller than language learning. Now they’re growing.

The good news is these new subjects are growing a lot faster than language learning. And now they have millions of daily active users. So there is some monetization there. It’s just we’re not breaking it out yet. But in general, the strategy is really to become not just a language learning app, but an app that teaches you subjects that take a long time to learn, and these are all going to be subjects that hundreds of millions of people want to learn and that take a long time to learn and that are also good for the world. We believe that getting better at math, getting better at music, getting better at chess are all things that make people smarter and are good for the world. So that’s the strategy at the moment, and we’re very excited.

But we’ve known – and you are right, we’ve been kind of cautioning people, we know that it takes a while to grow each of these subjects. I mean it took us 10 years to grow language learning to a big scale. So it takes a while to grow these subjects, but we are very happy with the growth so far for them.

Arvind Ramnani: Perfect. And just a quick follow-up, what’s the sort of like common theme in learners? I mean I listened to an interview a couple of weeks back where you talked about you’re looking for large markets and all of that. But is there a common thread where like the person who learns math is also learning music or learning, what’s the common thread?

Luis von Ahn: There is definitely overlap in all of our subjects between them. The general common thread is people who want to improve themselves in one way or another and who used to – probably a lot of these people used to spend all of their time on playing either mobile games or doomscrolling on social media, and now they are spending some of that time improving themselves either by getting better at math or music or languages. I mean that’s a common theme, and there’s some overlap between them. It’s not 100% overlap, there is many users only learn one thing. But quite a few users are learning multiple of our subjects, including multiple of our languages.

Arvind Ramnani: Perfect. Thank you.

Operator: Our next question comes from Wyatt Swanson with D.A. Davidson. Please unmute your audio, video and ask your question.

Wyatt Swanson: Hey, guys. Just kind of following up on chess here, could you provide details around time line and plans for rolling out the course to more users’ devices? At what point do you think it will be widely available? And what are your plans around driving engagement and making it well known that you also teach chess? And then just looking out a little bit further, how do you expect it to contribute to engagement revenue 12 to 18 months or even further down the line?

Luis von Ahn: Yes. Thanks for the question. Okay. So chess, I literally, a few minutes ago, promised the product manager of the chess team that I would not give a specific date, but it really is in the next few weeks. It’s like very soon. It will be there. It will first be on iPhones and then soon after, it will be on Android phones. By the end of the year, this will be widely available to everybody. In terms of how we’re going to get the word across, it’s kind of similar to math and music. Most of it is word-of-mouth, but we’re going to speed it up with our marketing. Certainly, you’ll probably see a lot of kind of TikTok or Instagram videos of our owl mascot doing unhinged things related to chess. So that’s going to get the word out.

We’re probably going to test our different – we’re going to point our marketing engine towards this and including also towards math and music. So I think we’re going to see quite a bit of growth from this for these new subjects. In terms of the contribution of chess, it’s similar to math and music. There is a business there, as in already people are going to be – as soon as we launch it, people are going to be able to pay for a subscription for chess and that removes the ads and thus all the things that a subscription does. So there is going to be a contribution there. But it will depend on the daily active users. And like I said in the previous answer, it takes time for daily active users of a given subject to grow from zero. So I don’t really know what the contribution is going to be in 12 months.

But compared to language learning, it’s probably going to be small.

Wyatt Swanson: Got it. Okay. Thank you guys.

Operator: Our next question will come from Edison Kai [ph] with Citic. Please unmute your audio, video and ask your question.

Unidentified Analyst: Hi, Luis. It’s great to see such a strong performance given that it’s really early in China right now, but very good performance. And I do have one question on marketing campaign and the market depth that you’re diving into because last quarter, you talked about how your marketing campaign is shifting from growing the user base into more like to let the users know how your in-depth English content is growing. And now you are doing chess content, which I think is another like [indiscernible] given that there are already mature service providers like Chess.com. So how do you think that your marketing campaign and user base growth is going to shift from current situation given you’re diving deeper into the market in both language learning and the new markets like chess playing, which is more competitive. So I would like to know more about that?

Luis von Ahn: Yes. Thanks for the question. Okay. So our marketing, what’s amazing about our marketing is that it’s incredibly efficient. I mean most of our marketing efforts are social media efforts, either on TikTok or Instagram or different social media sites, including Chinese sites. And we basically have a really good playbook for doing this type of marketing on social media where we don’t spend very much money. The majority of our efforts are going to continue in the same way that they have been so far, which is making content that goes viral. Almost every single day, some content related to Duolingo, either made by us or made by our audience, goes viral. And by that, I mean it gets millions of views. That will continue, and we are not going to stop investing in that.

Additionally, what I mentioned last quarter is, if we are trying to get things like the word out that Duolingo is now good for more advanced English learners, we are probably going to do some things related to that. This includes things like influencers. And it also includes things in certain geographies, for example, in Japan, where we ran a TV campaign that actually had a Video Call with Lily. So, you will see us do stuff like that, but the majority of our efforts will continue being kind of the owl doing unhinged things. And when it comes to things like chess, probably the owl will do unhinged things related to chess. And I think that will get the word out that we teach chess.

Unidentified Analyst: Got it. Thank you.

Operator: Our next question comes from Alex Sklar with Raymond James. Please un-mute your audio/video and ask your question.

Alex Sklar: Alright. Thank you all. Luis, just starting off on packaging across your tiers, you have talked about testing pricing and also potentially moving some certain features across the tiers. What have you kind of learned so far this year from those tests? How are you thinking about it? And any change in terms of new features still to come, including those in the premium version versus wanting to put them in one of the paid plans?

Luis von Ahn: Yes, great question. I mean with packaging and pricing, it’s the same story that it’s always been, which is we are testing a lot of things, and we continue testing. I mean for example, we have continued testing pricing in terms of geographically, in different countries, we are testing different prices. This last quarter, we actually tested a price increase for new users and, in fact increased the price for Super Duolingo for new users because of that. So, you will see us continue doing that. Going forward, we are always testing things. We have not moved things between packages. So, for example, between tiers at the moment, Max still contains Roleplay and Video Call and Explain My Answer, and Super still contains what Super has been having this whole time.

You will see us change a few things – I mean not change, test a few things. I don’t know what we will end up launching, so far, nothing. No changes have launched, but you will see us doing that. It is likely that some of the Max features that are cheaper for us to give, we may bring them down to packages. For example, Explain My Answer is relatively cheap for us to do. That is not the core feature of Max. The core feature of Max is video call. But that’s a feature that’s in Max. We may try it on Super or even Free. So, we will try that. But at the moment, nothing has changed.

Alex Sklar: Okay. Great. And Matt maybe one follow-up for you, you have given some stats on annual and family plan penetration in the past. How does that mix look for your Max base versus the other Super base, any difference in kind of annual or family plan adoption between those tiers?

Matt Skaruppa: Yes, sure. I think that the theory or the case for us is providing the right package to the right user at the right time and servicing that. That’s primarily how we drive Max and Super and family plan adoption. And right now, the mix is different for Max than I would say, annual or family plan. That will evolve over time, right. It’s still very early days. It’s 7% of subs is Max. And so as we move features around and then decide how and when to surface family plan for Max to users, that will evolve, but it’s too early to kind of hone in on what that’s going to look like in the longer term.

Alex Sklar: Alright. Great. Thank you, both.

Operator: Our next question comes from Ryan MacDonald with Needham. Please un-mute your audio/video and ask your question.

Ryan MacDonald: Thanks for taking my questions and congrats on a great quarter. Two questions on AI. Luis, first for you, can you talk about the level of urgency internally in terms of new generative AI features, particularly as we are seeing more funding going into the space for gen AI and language, whether it’s speak or Preply, but then also the announcement that Google has some lightweight gen AI language learning now. And then conversely, on the cost side, Matt, there was this e-mail, obviously, that you published about internally sort of this new approach and evaluation of use of AI. And as we incrementally hire, let’s see if we can automate things first. Can you just talk about sort of how quickly that approach can translate to improve the unit economics? And does this change your view on the long-term sort of structural profitability of the business? Thanks.

Luis von Ahn: Yes. Thanks for the question. I mean we are – AI, we believe that AI is really transformative for our business, and I think it’s probably transformative for a lot of businesses, but we believe AI is very transformative for our business. It helps us teach better. It helps us create content a lot faster. It helps us create content that was just infeasible to do before. I mean a good example is we just released 148 language courses. We wouldn’t have done that if it wasn’t for AI. We are really going all in as a company on AI, because it’s a technology that particularly applies to us, because the main improvement in AI in the last couple of years is large language models and language is what we teach. So, it particularly applies to us.

So, you will see us – I mean we really are – a lot of features are being developed that are related to AI, and you will see us develop the right features for the users. So, we really want to stay ahead with it. And we believe that we are far ahead of everybody else on this. I should mention that in terms of my e-mail to everyone, I did say that we are going to be AI first. We are going to try to automate everything. In terms of costs, we are not changing, and I will let Matt talk a little bit about this. We are not changing our estimates because, yes, this is going to save us some costs on things that humans used to do that now AI can do. However, we are going to apply all of that, I mean and many of those same people, but we are going to apply not just with people, but all of that to develop AI features.

We think this is an amazing opportunity for us. So, the cost savings are going to be offset by the fact that we are just investing a lot in making the right features. I don’t know if Matt has more to say about that, but that’s how we are seeing it.

Matt Skaruppa: No. Ryan, just to underline that last point, we have done things because of AI that we wouldn’t have been able to do before, so that’s not taking the savings to the bottom line. That’s investing in the enormous opportunity ahead of us. And that’s what we are going to continue to do. I think we, first and foremost, prioritize reinvesting to go tackle all of the opportunities. And that’s how we are going to use this.

Ryan MacDonald: Thanks a lot. Thanks again for the color.

Operator: Our next question comes from Andrew Boone with Citizens JMP. Please un-mute your audio/video and ask your question.

Andrew Boone: Hi guys. Thanks so much for taking the question. I wanted to ask about subscriber conversion rates. It’s been a steady progression up kind of over the last four quarters, call it, 10 basis points a quarter if you look at kind of trailing 12-month MAU. Can you speak to the incrementality of Max, though, as it affects that? Should we expect kind of that step-up as you guys do start to unlock maybe what is Max in terms of a lower price or connect that metric to Max and incrementality of that subscription product? And then I wanted to add on to Ryan’s question, right, like Zach just talked about this. He talked about the unlock of what is an AI engineer that’s going to be a mid-level engineer that’s coming in the next kind of year. Luis, you dropped out of college, you have a PhD, right? Help us understand your view of the AI software developer. And how do we think about the efficiency of kind of your OpEx and workforce on a go-forward basis?

Luis von Ahn: Matt, do you want to take the first part?

Matt Skaruppa: Do you want to start with the second part first?

Luis von Ahn: Sure. I am happy to talk about it. I mean look, in particular, for engineering, AI is getting a lot better. That is just the case. So, we are going to see a lot more efficiency from engineers. We are already seeing it. In terms of what it’s good at and what it’s bad at, I think AI coding is really good at creating something from scratch. It’s not as good at taking a large code base, which is what we have on Duolingo, fully understanding it and making modifications for it, it’s not as good at that. And that’s going to take some time to be really good at that. And so my sense is what’s going to happen, I truly do not believe that over the next, at least the foreseeable future, it’s going to be the case that we are not going to need engineers.

In fact, if you look all of these companies, even the companies that are developing the AI, are hiring engineers, and there is a reason for that. I think we are going to need them, and we are going to need them in part because they are going to be so much more effective than they are inefficient than they are now. So, I think that’s what’s going to happen. We are just going to see them be a lot more efficient. Another thing that is really exciting is that now also non-engineers can do stuff, maybe not production code, but just kind of play around with things. One of our goals internally at the company is that 100% of our employees, and I am not just talking about engineers, really 100% of our employees, will have coded something with AI.

We want everybody here to know how to automate things. And I think just the whole workforce is going to get a lot more efficient because of that.

Matt Skaruppa: Andrew, sorry, in that context, what was your first part of your question?

Andrew Boone: So, I want to focus on the incrementality of Max, right? So, if I think about the conversion rate…

Matt Skaruppa: Sorry, I was thinking about…

Luis von Ahn: Matt was worried that he is going to have to vibe code something himself.

Matt Skaruppa: Oh, I love vibe coding. I do it most days. So, when we think about the incrementality, Andrew, when we run our A/B tests for Max, again, we are not optimizing for – in the very specific sense, we are not optimizing for a Max subscriber or an ARPU or this or that. We are optimizing for platform LTV. And so when we run our A/B tests, we have to take into account, are these Max subs incremental or not in figuring out the overall impact on platform LTV. And that’s why we launched Max is because we ran enough of the experiment to figure out that they were incremental. There were enough incrementality to it that it was platform LTV positive. And we still think that’s true. And in fact, we think it will become more true over time.

And so that’s really my answer to your question is that, again, we are not trying to drive a Max penetration rate. We are not trying to drive a subscriber penetration rate. We are trying to drive platform LTV higher by driving mix shift to higher LTV plans. That’s Max. And we see also there is a lot of upgrades, part of the Q1 outperformance was driven by the fact that Super subscribers were converting up to Max subscribers. And that’s what I said to the answer to another question, which is showing our current users, free and paid, the right plan at the right time to get to the right LTV. So, we feel really good about the incrementality and the overall platform LTV increase we are seeing from Max.

Andrew Boone: Thank you.

Operator: Our next question will come from Mark Mahaney with Evercore ISI. Please un-mute your audio/video and ask your question.

Mark Mahaney: Okay. Thank you. I may have missed this, but I know you disclosed the Max penetration, I guess at 7%. Did you provide an update on math and music adoption? And then you talked a little bit, Luis, I think about pricing for Super. And I think your logic is kind of – I don’t think you have changed pricing in Super in quite some time. And as you improve the product, you prove more of the functionality, make it better and better that you warrant – you create greater value so that you can potentially ask people to pay more for it. So, a long way of answering, are you thinking about raising prices kind of across the board on Super? And then what would be the key factors that would make you decide to do that now versus never doing it or doing it next year? Thank you.

Luis von Ahn: Thank you, Mark. In terms of adoption for math and music, there is no update from last time that we talked about it, I mean which we said we had about 3 million daily active users learning either math or music. It’s higher now. It’s growing. And math and music are growing faster than language learning. But compared to language learning, they are still small. And now in terms of prices, we are just always testing different things. So, at the moment, we are testing prices in different countries and everything. My sense is there will be increases, but I don’t know what the A/B test will tell us. And generally, we are just going to be data-driven on this.

Mark Mahaney: Thank you.

Operator: Our next question will come from John Colantuoni with Jefferies. Please un-mute your audio/video and ask your question.

John Colantuoni: Great. Thanks for taking my questions. First, I wanted to come back to the topic of incrementality of Max. Can you give us a sense for what portion of recent Max subscribers are new to Duolingo? And what portion are intermediate English learners? Just to give us a sense for that incrementality. And second, turning to gross margins for Max, you would originally characterize the subscription tier as dilutive to gross margin, but accretive to gross profit dollars. Has that changed as more cost-effective AI models have been released since you first made those comments? Thanks.

Matt Skaruppa: Yes. So, we are seeing, like I mentioned to Andrew, we are seeing good incrementality. We like the increase in platform LTV from Max. A lot of that comes from the fact that a lot of new to the platform or new to paid subscribers are choosing Max for the first time, but we are also seeing a relatively high proportion of folks upgrading into Max. So, of total Max subscribers, a good chunk of those are coming from folks who currently are paying us and then start paying us more. So, in general, the bookings incrementality of Max is attractive, and we like how that’s trending. In terms of the gross margin for Max, nothing that you mentioned has changed. It’s still the same lower gross margin percent, higher gross profit dollars.

That will change over time as two things happen. One, as the price of the generative AI used for our Video Call, for example, comes down. And we saw in Q1, new models released with lower pricing. And then we are also going to run optimizations in the back half of the year. So, we would expect the gross margin of Max to increase. But again, the goal of Max is, right now, to drive incremental subscriptions and bookings and LTV and still make a really attractive gross profit dollar return. We are on track, like we mentioned on the last call, to do that better and better throughout the course of the year.

John Colantuoni: Thanks so much.

Operator: Our next question will come from Ross Sandler with Barclays. Please un-mute your audio/video and ask your question.

Ross Sandler: Hi guys. So, I wanted to ask a question sort of for Matt Skaruppa, but maybe for Luis, because we might need a PhD to answer this. But yesterday, Apple was finally dealt a fairly definitive blow on the conjunction with Epic around like high-quality developers like Fortnite or Duolingo, redirecting users to pay for subscriptions off the app store billing. And it seems like you won’t be discriminated against if you do that now. So, I know 60% of bookings comes from in-app payments, I think is what it says in your filings. So, Luis, I guess have you guys looked at testing the flow of directing people to the web? And Matt, what percent of COGS does this represent? And kind of where do you guys see this going? Is this an opportunity to drive a little bit of leverage?

Luis von Ahn: Yes. I mean first of all, this ruling is brand new. Obviously, we saw it. The app stores, both Apple and Google, have been great partners to us. One of the things that they really help with is just ease of payment. I mean people’s credit card is already in there, and it’s usually just kind of like a double-click that you have to do and you pay. So, that’s great, and that has really helped us. My sense is that if we were to try to send people to the web, we wouldn’t have to pay Apple or Google, but we would see slightly fewer people actually converting because there is more friction. We are obviously going to test something here given the ruling. We are obviously going to test something and we will see what happens. But at the moment, there is no – I can’t give you results. It’s hard to know exactly how much this will help. It may help, but it’s hard to know by how much.

Matt Skaruppa: And then on the gross margin on the COGS side, Ross, I mean it’s the majority. Well over a majority of our COGS are payments to payment providers. And so to the extent that you would take a chunk out of those, it would be definitely accretive to gross margins. But as Luis said, it’s early days for us, and we are going to run A/B tests and green machine any change we make. So, it would happen over time, and we would just have to wait and see. It certainly seems like it’s potential optionality. But again, it’s not something that we run experiments on given the recency of the news.

Luis von Ahn: We would be foolish not to test this.

Ross Sandler: Thanks.

Operator: Our next question comes from Shweta Khajuria with Wolfe Research. Please un-mute your audio/video and ask your question.

Shweta Khajuria: Hello. Thanks for taking my question. Luis, I have one for you. How do – what is your vision for the Video Call feature? As it evolves over the next 1 year, 2 years, 3 years, what are you working towards? What’s a good, not end state, but close to an end state solution look like?

Luis von Ahn: Yes. I mean for video call, the main thing we want is to be able to get you to practice conversation. That’s a very important part of language learning. And so the more time we get people to spend on practicing conversation, the better they will get at the language that they are learning. We know that. So, what we want to do is just get people to spend more time on it. How do we do that, by making it a lot more engaging and by making it a lot snappier. So, for example, right now, there is still a little bit of latency between when you say something and when Lily responds. We need to decrease that. It is still the case that sometimes she cuts you off a little too soon. We need to get better at – she needs to get better at knowing when the conversation has faded out.

Humans are actually really good at basically saying, I now know you are not so interested in talking to me, so I am just going to leave. Humans are very good at that. Lily is not very good at that. So, there is that type of stuff we got to get better at. And then we are going to have a whole world for her where she is going to be able to change her background immediately and start pretending that she is like your taxi driver or something. So, we are really – the idea is to practice as much language as possible and to increase engagement. And the more we increase the engagement, the more people will tell their friends not only to use Duolingo, but if they are a Duolingo user, they should get Duolingo Max to be able to practice with Lily.

Shweta Khajuria: Thanks guys.

Operator: I am showing no further questions. This concludes the question-and-answer session of the call. I would now like to turn the call back to the host for closing remarks.

Luis von Ahn: Just want to say thank you. Thank you for the great questions. But more importantly, thank you to our excellent Duolingo employees for yet another great quarter. The team is firing on all cylinders. So, thank you and thank you everybody.