Guidance falls short of expectations, Duolingo plunges nearly 30% intraday! CEO: We'll focus on teaching well before making money | Earnings Report Highlights

Duolingo shares plunged nearly 30% during trading on Thursday after the company’s guidance released after market hours Wednesday fell short of expectations. The company said it is now more focused on user growth rather than short-term monetization.

Here are the key points from Duolingo’s third quarter earnings report:

Main financial data:

Revenue: Duolingo’s third quarter revenue grew 41% to $272 million, higher than the $260 million expected by analysts surveyed by LSEG.

Total bookings: Total bookings increased 33% year-over-year to about $282 million, also beating expectations.

Net income: Duolingo's third quarter net income increased to $292.2 million, compared to $23.4 million in the same period last year.

Earnings per share: Duolingo’s third quarter earnings per share were $5.95, compared with $0.49 in the same period last year. The company said net income was boosted by a one-time tax benefit of $222.7 million.

Paid subscribers: Paid subscribers in the third quarter rose to 11.5 million, higher than the 11.38 million expected by analysts.

Daily active users: Third quarter daily active users were 50.5 million, below analysts’ expectations of 51.2 million.

Monthly active users: Third quarter monthly active users were 135.3 million, also below analysts’ expectations of 137.4 million.

Guidance:

Q4 total bookings: Duolingo expects bookings between $329.5 million and $335.5 million, below the $344.3 million anticipated by analysts.

Q4 adjusted EBITDA: Adjusted EBITDA is expected to be between $75.4 million and $78.8 million, also lower than the market expectation of $80.5 million.

Full-year revenue: Duolingo raised its full-year revenue guidance to $1.0275-1.0315 billion, above the previous range of $1.01-1.02 billion.

Due to the lower-than-expected guidance, Duolingo’s shares fell nearly 30% intraday on Thursday.

CEO and co-founder Luis von Ahn said in a media interview that in recent months, the company has "clearly shifted its focus towards user growth."

“Over the past quarter, we’ve made some small adjustments in our investment direction. We are now investing more in long-term projects, as we see very significant future opportunities there.”

“We will still pay attention to monetization, but this balance is slightly changing. In the future, we will invest more in teaching quality, rather than focusing as much on monetization as before.”

In recent months, Duolingo launched a series of new AI tools, including interactive video chat features, to attract more paying users. The company has also used AI to launch more language courses at a record pace. Duolingo uses a “freemium” model, seeking to convert free users to paid ones, for example by offering “Super Duolingo” for an ad-free experience and “Duolingo Max” with generative AI features.

Von Ahn told the media:

“We are one of the few companies to have found a profitable way with AI. This business is actually profitable for us.”

“Some experiments can create conflicts between monetization and user growth, and one of my ongoing jobs is to strike a balance between those two.”

The earnings report showed that paid users surged 34% in the third quarter, reaching 11.5 million. Strong performance in the Chinese market also provided a boost. A partnership with Luckin Coffee in July this year improved Duolingo’s profile in China.

Management also reiterated that they are not worried about Apple’s AirPods real-time translation feature. Von Ahn noted that if you want to study or live in the U.S.,

“You can’t just walk around all the time with one AirPod in your ear.”

KeyBanc analyst Justin Patterson downgraded the stock rating from “Overweight” to “Sector Weight” because the company’s focus on long-term product investment will impact short-term growth and valuation.

He wrote that it may take “several quarters” for these measures to bring about “significant financial gains.”

Risk warnings and disclaimerThe market entails risk, and investment requires caution. This article does not constitute personal investment advice and does not take into account any particular user’s specific investment objective, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article apply to their specific case. Investment based on this article is at your own risk.