Duolingo, Inc. Class A Common Stock 2026 Q2 Earnings Call

Good evening, everyone, and welcome to Duolingo's second quarter 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 Gillian Munson, our CFO. They'll begin with prepared remarks before we open the call for questions. Analysts may ask a question by using the raise hand feature. Please note this call is being recorded, and all participants are currently in listen-only mode. Before we begin, please note that we'll make forward-looking statements regarding future events and financial performance. These statements are subject to risks and uncertainties described in our SEC filings and are based on assumptions we believe to be reasonable as of today. We undertake no obligation to update them. We'll also discuss both GAAP and non-GAAP financial measures.

Reconciliations of the two can be found in our earnings materials. We encourage you to review them when evaluating our performance. Now I will turn it over to Luis.

Thanks, Debbie, and thank you all for joining. Q2 was a strong quarter. DAUs grew 23% year-over-year, accelerating from Q1 and coming in slightly ahead of our expectations. We're encouraged by what we're seeing so far in Q3. The vast majority of that growth came from the work we do every day through what we call The Green Machine. We test hundreds of product changes, measure their impact, and double down on what works. Most changes are small, but they compound over time. As I discuss in our shareholder letter, that's also what's driving CUR, a measure of user retention, to an all-time high. Another highlight of the quarter was Streak Revival, a one-time campaign we ran in June. The idea was simple: Give learners who lost their longest streak a chance to earn it back by completing three lessons.

More than 15 million learners revived their streaks. What's particularly encouraging is that these users are also showing better retention than a typical re-engaged cohort. We brought learners back to a product that keeps getting better at teaching languages, Chess, Math, and Music, and they're staying. We're still early in executing our strategy of prioritizing user growth and teaching better, but Q2 gave us more confidence that we're on the right track. With that, I'll turn it over to Gillian.

Thanks, Luis. Welcome, everyone. As Luis said, Q2 was a strong quarter. In addition to the DAU acceleration Luis just mentioned, top-line results were in line with our expectations, and profitability was slightly ahead of our plan. As we look at the remainder of 2026, I want to reiterate how we're managing the business. We are investing deliberately in the opportunities that we believe can make Duolingo a significantly larger business over the long term. At the same time, our team continues to operate with discipline. We continue to execute to our full year bookings and revenue target ranges of 10%-12% bookings growth and 15%-18% revenue growth. We have increased our target adjusted EBITDA outlook to 26.5% from the 25% we outlined at the start of the year. As for point estimates to help you build your models, please keep in mind the following.

For the full year, we expect bookings growth of approximately 11% and revenue growth of roughly 16%. At constant FX rates from our last call, the bookings growth rate would be about half a point higher. For gross margin, we now expect to end the year closer to 70% as compared to the 69% we initially expected, as we drive more AI content into our products, offset by AI cost savings. We expect adjusted EBITDA to be approximately $320 million at the margin of roughly 25.5% I just mentioned, and we expect to generate over $375 million of free cash flow this year. While it is not included in our 2026 guidance, we do want you to know that the company has a bonus plan that will trigger if Q4 DAU growth is 25% or higher and would be paid out during Q1.

Since it's currently uncertain whether that threshold will be met, we have not included it in our 2026 guidance. If it were achieved, we would expect the payout to be roughly $10 million in cash, potentially higher if DAU growth is higher. For Q3 itself, we expect bookings of approximately $307 million, or growth of 9%. Revenue of $302 million, representing growth of 11%. We expect gross margin to be 71% and adjusted EBITDA of roughly $76 million, representing a margin of 25.2%. Our balance sheet and cash flow potential remains strong. We ended the quarter with $1.3 billion in cash and investments and generated $79 million in free cash flow. We repurchased about $44 million of stock during the quarter, bringing cumulative repurchases under our authorization to $72 million, or approximately 700,000 shares. Putting it all together, our user momentum is strong.

Our business model continues to generate significant cash flow, our team is executing well in an important investment year. We remain focused on reaching 100 million DAUs in 2028, and we believe the path there can create a significantly more valuable business for our shareholders. Now I'll turn it back to the operator, and we're happy to take your questions.

Yeah, I think that's a great question. The first thing to note is that our users don't monetize immediately. Some of them monetize, it takes a while for them to monetize because we have this freemium model. We do expect that higher DAUs will imply higher revenue, but it's going to take some time. The second reason is exactly what you said. We said at the beginning of this year that we were going to operate in this box, in terms of revenue, and we are going to continue with this box. Basically, roughly 11% year-over-year bookings growth. The rest of the efforts are in increasing DAUs and in teaching better.