Duolingo (Minutes): Adjusting Strategy to Mitigate AI Public Opinion Impact

The following is compiled by Dolphin Research regarding$Duolingo(DUOL.US) the Q2 2025 earnings call minutes. For earnings interpretation, please refer to "Duolingo: User Growth Under Pressure, High Ecosystem Stickiness Alleviates Monetization Concerns"

I. Overview of Financial Indicators

II. Q&A

Q: The daily active user (DAU) growth in the second quarter was strong but slowed down. What are the main driving factors? How does the company view the user growth trend for the full year and the second half?

A: DAU grew by 40% year-over-year in the second quarter, within the guidance range of 40%-45%, although slightly below expectations. The slowdown was mainly due to insufficient communication about AI, leading to negative sentiment on social media, particularly affecting young users in the U.S. The company has adjusted its social media strategy to publish positive content to restore user sentiment. No guidance was provided for next quarter's DAU, indicating no major changes are expected.

Q: Please introduce Duolingo's development in the Chinese market. Are there any recent product improvements that resonate? When will the video call feature be launched in China?

A:The Chinese market is performing excellently, being the fastest-growing market for the company. Recently, a successful collaboration with Luckin Coffee involved Duolingo-themed decorations in Luckin stores, effectively enhancing brand exposure. The product experience in the Chinese market is good, but the Max feature has not yet been launched, mainly due to regulatory constraints requiring the use of local large language models (LLM) and awaiting government approval. The specific launch time is still uncertain.

Q: Please update on the latest progress of Max and its proportion among total subscription users, and explain the key factors driving significant growth in paid conversion this quarter.

A:The proportion of Max subscription users continues to grow, increasing from 5% a few quarters ago to 8% this quarter, but growth is slightly below expectations. The main reason for Max's growth being below expectations is that its core video call feature is challenging for beginner users, currently in a monolingual mode. The company is continuously improving Max's key features by introducing bilingual conversations and enriching background content to enhance user attraction and experience.

Q: Please update on the latest progress of direct payment testing and its preliminary findings. Is this payment method likely to bypass app stores?

A: The company is testing direct web payment processes on the iOS platform, allowing users to pay on the website instead of through Apple. Current tests show that guiding users to external purchase processes may result in a minimal loss of booking volume but can significantly increase profit margins, as fees paid to services like Stripe are only about 2%, much lower than Apple's 30%.

The reason is that Duolingo mainly sells 12-month subscription services. Even if direct payment is fully implemented, by the end of this year, this revenue can only be amortized over about 3 months. Although the financial impact for the year is limited, the company is very satisfied with this change and may promote it to all users.

Q: Please explain the reasons for the month-over-month decline in monthly active users (MAU). Is this related to social media activities?

A: The month-over-month decline in MAU is the result of multiple factors, with the company mainly focusing on DAU growth. Q2 MAU growth rate was 24%, and the MAU decline trend is not significantly different from past quarters, following the DAU trend. Additionally, the "Dead Duo" event in the first quarter increased the base, leading to a decline in month-over-month data for the second quarter.

Q: The shareholder letter emphasizes that chess is expected to contribute platform value earlier. How does the company view its potential compared to other new products like math and music?

A: The company is excited about the potential of chess, math, and music. The chess project has developed rapidly, launching on iPhone in less than a year and continuing to grow, with its user numbers surpassing math and music in the English user interface, indicating huge market demand. The company recently acquired a music team. Currently, all new subjects are sold under the same subscription, and individual revenue optimization has not yet been achieved. Significant revenue contributions are expected to take several years, but they are expected to greatly expand the potential market.

Q: Please introduce the early retention performance of Max users and the main drivers of churn, and compare it with the current situation.

A: Max's core feature—video calls with Lilly was not widely promoted to most users until the third or fourth quarter of last year, so it's too early to evaluate early user renewal, and more data will be available in the third and fourth quarters. Preliminary signs show that Max's early renewal performance is attractive. Due to Max's higher price point, its user lifetime value (LTV) is the highest among all subscription products, and the increase in Max user proportion helps improve the overall platform LTV.

Q: Please explain the potential benefits of AI cost savings on gross margin in the second half and the impact of web-based checkout methods on gross margin.

A: Web-based payment methods will not have a significant impact on gross margin in the second half, as accounting treatment takes time to manifest. The second quarter's gross margin exceeded expectations, mainly driven by a decrease in total AI costs, particularly API call and token costs. The company expects the trend of unit cost reduction to continue, which has been included in the guidance. Additionally, advertising pricing also contributed to the second quarter's performance, but the full-year impact remains to be seen.

Q: Please introduce the early experience of the "Energy" feature and its impact on user metrics, and how the feature will be iterated in the future?

A: The "Energy" feature is a pacing mechanism for free users, replacing the previous "Heart" system. The "Energy" mechanism no longer penalizes users for mistakes but rewards energy for consecutive correct answers. Early experience shows that this feature significantly enhances revenue or booking volume, DAU, and median usage time in the app. The company plans to promote this feature to most free users by the end of the year, and it is expected not to affect paid users.

Q: Given the multiple educational modes currently offered by the app, how does the company plan to prevent users from feeling confused or overwhelmed by the addition of new subjects?

A: The company currently offers four subjects: language, math, music, and chess, and may add more in the future. Managing the multi-disciplinary experience and preventing user confusion is a key focus for the company. No user confusion has been observed so far, but the company is working to improve the user experience, such as making subject switching more convenient and providing rewards for users learning multiple subjects to optimize the multi-disciplinary learning experience.

Q: The "Energy System" feature has shown positive performance in DAU, usage time, and subscription conversion, but there is negative feedback from users on social media. Is there a specific user group negatively affected?

A: The company acknowledges that every major mechanism change will cause dissatisfaction among some users, as Duolingo is a habit-forming app. Although the "Energy System" has brought positive improvements in DAU, revenue, and median learning time, there is indeed a small group of high-usage users who are unwilling to pay and rarely make mistakes, feeling dissatisfied with the new system because it limits their ability to take a large number of courses for free. The company will continue to be data-driven.

Q: The ratio of DAU to MAU has significantly improved quarter-over-quarter. Is this mainly due to the decline in MAU or the increase in DAU user engagement?

A: The improvement in the DAU to MAU ratio is the result of both factors: the increase in DAU retention rate is one of the main driving factors. At the same time, MAU slightly declined from the previous quarter, partly due to the "Dead DAU" event in the first quarter attracting a large number of low-engagement MAU users, leading to a high base, which has now passed. This ratio has been rising steadily over the past few years, currently around 37%, and the company believes a high DAU/MAU ratio is a hallmark of a healthy consumer product.

Q: With the maturity of Max and video call features, has there been a significant increase in the number of English learners, or is it more about upgrading existing users?

A: The company has clearly observed that the growth rate of English learners exceeds the overall growth rate of other language learners, and is pleased with this trend. English learners, especially intermediate learners, use the video call feature more. In Asia, the usage of video calls and the tendency to purchase Max have both increased. Although still in the early stages, these positive signals fully align with the company's expectations.

Q: Regarding the DAU growth slowdown caused by AI comments, is the company concerned that it may lead to subscriber churn or a chain reaction lasting until the end of the year? Has this event changed the company's internal view on the speed of AI adoption?

A: The company's booking volume exceeded expectations by 9%, indicating that negative AI sentiment has little impact on actual financial metrics. Although DAU growth in the U.S. slowed, the company believes this impact has passed, and expects to return to normal after resuming the publication of "out-of-the-box" content. The guidance already includes positive factors (such as Super, Energy feature, ads, IAPs) and drag factors (such as Max growth below expectations, Duolingo English Test affected by a decrease in international student applications). This event has not changed the speed of AI adoption within the company, and the company's goal for AI adoption is to better teach, attract users, and increase content.

Q: As AI model capabilities and latency rapidly improve, how will the company develop services to fully leverage these technological advancements?

A: The improvement of AI models has different impacts on various use cases. It provides little help for language learning content generation, as language models are already mature. However, it significantly helps in math content generation, as models can now perform mathematical operations, allowing the company to generate more related content. In video calls, improvements in latency and models are beneficial. More importantly, the release of new models leads to a decrease in the price of old models, reducing the company's operating costs, even if the latest models are not adopted.

Q: Given the increased user engagement with the video call feature in Max, what behind-the-scenes measures has the company taken to improve interaction methods to enhance user experience and Max adoption rate?

A: To enhance the attractiveness of Max video calls, the company is training and fine-tuning its own models to achieve smoother, more level-appropriate conversations. Although there are few visual changes (except for Lilly's background), the experience has significantly improved. The company is now optimizing the key metric "average number of spoken words per Max subscriber," which encourages the model to learn how to keep users engaged by asking open-ended questions, encouraging more speaking practice, thereby continuously improving video call quality.

Q: How does the company evaluate Duolingo's voice product experience and compare it with other AI-based voice translation products in the market?

A: The company points out that Duolingo focuses on language teaching rather than voice-to-voice translation. For the video call service provided by the company, its core goal is teaching and attraction, and the company is very satisfied with this. Therefore, directly comparing Duolingo's voice product experience with AI products in the market that focus on voice translation may not be entirely fair.

Q: Has the company observed any specific trends in app downloads in the U.S. or overseas markets?

A: Company executives clearly state that they do not focus on app download volume as a metric, so they cannot provide specific trends in download volume in the U.S. or overseas markets. This reflects the company's low attention to this data when measuring business performance.

Q: What are the characteristics of user engagement trends, particularly DAU trends in the U.S. and other regions?

A: The company is very satisfied with the 40% year-over-year growth in DAU. Different countries have different growth rates, the DAU growth rate in the U.S. has been below the company's overall average for several consecutive quarters and continues to slow down. This is mainly due to the company's reliance on social media dissemination in the U.S. without investing marketing funds, unlike the strategy of effect marketing and influencer collaboration in other markets. Drawing from the experience of significantly increasing DAU growth rate in the Mexican market with a small amount of marketing investment, the company plans to make small marketing investments in the U.S. in the future to reach a wider audience.

Q: What investments does the company plan to make to drive deeper engagement and overall adoption rate of English learners on the platform?

A:English learners are the company's largest potential market (TAM). The company is continuously investing a lot of effort, not only increasing but also improving many English learning content and learning features. The number of daily active intermediate and advanced English learners has significantly increased from over 2 million previously, and the company is very satisfied with this progress. The company will continue to invest in English learning content and features to drive deeper user engagement and adoption rate.

Q: With the decline in computing costs and future growth in Max's gross margin, how does the company view the overall pricing strategy for Max in international markets?

A: As computing costs continue to decline, the company has more room for experimentation in Max pricing, allowing for tiering of low-computing-demand features to optimize user lifetime value (LTV). Max's pricing strategy is closely related to computing costs, gross margin, and the relative value compared to other subscription products (such as Super and family plans). The company will experiment with the relative pricing of Max, Super, and family plans. If costs drop significantly, it will provide opportunities for Max to expand into international markets that are not currently covered.

Q: Please update on the pricing experiment of the Super subscription service and its impact on booking volume and average revenue per user (ARPU).

A: Earlier this year, the company conducted a Super pricing experiment to test sales prices and optimize user lifetime value (LTV). These experiments had a positive impact on booking volume, prompting a price increase, contributing slightly to second-quarter performance. This quarter's average revenue per user (ARPU) grew by about 5% or 6%, mainly driven by exchange rate changes and users shifting to higher-priced family plans and Max subscriptions.

Q: What leadership lessons have been learned from recent controversies surrounding AI? Does the company believe the growth slowdown reflects market maturity or saturation, or faces greater competitive pressure?

A: The leadership lesson learned from AI controversies is that external communication needs to be more cautious and provide sufficient background information to avoid misunderstanding the company's true goals of using AI, which are teaching, attracting users, and increasing content, rather than laying off employees. Regarding market maturity, the company is not worried because even in the most penetrated markets, DAU growth remains strong. There are 2 billion language learners globally, and the company has only 130 million active users, and is expanding into new subjects like chess, math, and music, with huge market potential far from reaching the total addressable market (TAM) limit.

Q: Considering the Max product and its appeal to advanced learners, as well as its effectiveness test results, how does the company view its ability to improve Max conversion rate?

A: The company offers multiple plans, including free, Super, Super Family, Max, and Max Family. The company's goal is to provide users with the most suitable plan at the right time. Although Max Family is the preferred choice, Super or Super Family may be more suitable for some users. The company will continue to experiment to determine which plan can effectively enhance the platform's user lifetime value (LTV), which is the driving factor for improving Max conversion rate.

Q: Please elaborate on the continuous growth of average revenue per user (ARPU) and its relationship with the second-half performance guidance.

A: This quarter's average revenue per user (ARPU) grew by about 5%-6%, mainly due to changes in the subscription plan mix. The company expects ARPU to continue to maintain low single-digit positive growth, as it has good visibility into the revenue brought by past booking volumes and plans to continue optimizing the product mix. For the second-half performance guidance, exchange rates are a significant positive factor, having a positive impact on booking volume, constituting a major part of the guidance. The impact of exchange rates on ARPU will gradually permeate.

Q: The company expects the year-over-year growth rate of daily active users (DAU) in the third quarter to be similar to the second quarter. Can you clarify whether this is based on quarter-over-quarter or year-over-year growth, and explain why no specific guidance is provided?

A: The company typically does not provide DAU guidance. Guidance was provided last quarter because DAU grew by about 50% year-over-year in the first quarter, and it was expected that the growth rate in the second quarter would be between 40%-45% due to the "Dead Duo" event peak and high base effect. Guidance will only be provided in the future when there are clear, predictable major changes. The company expects the year-over-year growth rate of DAU in the third quarter to be consistent with the second quarter's 40%, with no major changes.

Q: How does the transition from "Heart" to "Energy" affect revenue growth? When will this feature be fully launched?

A: The "Energy System" is designed to encourage high-usage, payment-capable users to pay. Compared to the old "Heart" mechanism, the "Energy System" is more inclined to charge high-frequency users, thereby driving revenue growth. Currently, this feature has been promoted on more than half of the iOS platform, with slower progress on the Android platform. It is expected that this feature will be fully launched on all platforms in the coming months.

Q: Given that China is the company's fastest-growing market but the Max feature has not yet been launched, does this affect Max's overall performance?

A: The company is very satisfied with the growth in Asia, especially in China, where the growth rate this quarter exceeded expectations, partly due to the successful collaboration with Luckin Coffee. The fact that Max has not yet been launched in China may have a slight impact on Max's overall performance, but the main reason is that Super's performance has exceeded Max. The company is heavily investing in products, including extensive recruitment and the introduction of a music product development team.

Q: The adjusted EBITDA profit margin for the first half was 29%, but the full-year guidance is 28.5%-29%. What additional investments will be concentrated in the second half, and how will this affect the profit margin?

A: The company will continue to increase product investment in the second half, mainly reflected in extensive recruitment of new graduates and the introduction of a music product development team. Additionally, a small amount of marketing funds will be invested in the second half. The company notes that the trend of quarterly EBITDA profit margin aligns with last year's actual curve shape, with the second quarter expected to be the highest profit margin quarter, and the performance in the second half is normal expectations.

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