Duolingo, Inc. (DUOL) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon and welcome to Duolingo's Second Quarter 2022 Earnings Webcast. Today after market close, we released our quarterly shareholder letter with our Q2 results and commentary which you can find on our IR website at investors.duolingo.com. With me today are Luis von Ahn, our Co-founder and CEO; Matt Skaruppa, our CFO; and Bob Meese, our Chief Business Officer. They'll begin with some brief remarks before opening the call to Q&A. [Operator Instructions]. Please note that this event is being recorded. And just a reminder that we will make forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties and have been set forth in the risk factors of our SEC filings. These forward-looking statements are based on assumptions that 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. And additionally, we will 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 with that, I will turn the call over to Luis.

Thank you, Debbie, and welcome, everyone. So we went public just over a year ago. And as part of that process, I wrote a letter to lay out my vision for what this company will do. It was a short letter and the whole thing said this. I'm just going to read it. The main thing you need to know is that I plan to dedicate my life to building a future in which through technology, every person on this planet has access to the best quality of education. And not only that, but a future in which people want to spend their time learning. Duolingo is the platform for building that future, and we are just getting started. Since I worked that letter, we have made a lot of progress towards that vision. We have increased our user base substantially. When we went public last year, we had about 9 million daily active users. Now we have over 13 million. We had about 38 million monthly active users. Now we have nearly 50 million. We had less than 2 million paying subscribers, and now we have 3.3 million. In the first half of last year, we had about $130 million in bookings. And in the first half of this year, we had nearly $200 million. As these numbers show, we've executed well and achieved or surpassed our targets. But the spirit of my IPO letter was that we are at the beginning of our journey, and I believe in that message now more than ever. We want to build a company that is iconic and durable. We want to build a company that last 100 years. So while we pay attention to the near-term macro environment, we always stay focused on the long term and on the future. And with that, I'll turn it over to Matt to talk about our financial outlook.

Thank you, Luis. We delivered strong results in the second quarter, beating expectations. We grew the top line at over 50%, and we were profitable on an adjusted EBITDA basis. It was also our fourth consecutive quarter with accelerating user growth. This gives us the confidence to increase our full year guidance while remaining appropriately prudent given the current uncertainty in the macro environment. So our guidance for Q3 2022 is $94 million to $97 million in total bookings, $93 million to $96 million in revenue, and an adjusted EBITDA of negative $4.5 million to negative $1.5 million. For the full year 2022, we are increasing our guidance to $404 million to $410 million in total bookings, $361 million to $367 million in revenue and an adjusted EBITDA of positive $4 million to $7 million. Our full year bookings guidance reflects 37% to 39% year-over-year growth, up from the 32% to 35% year-over-year growth that we guided to on our last earnings call. I also want to discuss foreign exchange rates and how they impact our guidance. We estimate that on a constant currency basis compared to Q2 of last year, our Q2 2022 bookings would have been just over 4% higher. This is a result of the dollar strengthening nearly 9% over the past year against the basket of currencies that make up our bookings and the fact that just over half of our bookings come from outside the U.S. Our updated guidance takes into account the strengthening of the dollar in the first half of the year and assumes current prevailing foreign exchange rates. Note that every 1% increase in the value of the dollar versus our basket of currencies would have about a $1 million impact on total bookings in the second half of the year. We continue to manage the business with fiscal discipline as we have since our founding. In the second half of 2022, we anticipate that R&D as a percentage of revenue will increase starting in Q3 as it does most years as we bring on new university hires. Sales and marketing will increase slightly as a percent of revenue in Q3. And then in Q4, we'll settle back down to where it has been year-to-date. And we should start seeing some slight leverage in G&A in the back half of the year. Finally, I want to note that we are on track to hit our dilution guidance of 2% to 3% for the year and that we ended the quarter with approximately 47.4 million fully diluted shares outstanding using the average Q2 closing price. And now I'll turn it back to Luis.

Thank you, Matt. Before we take your questions, I'd like to express my gratitude to our talented group of employees who put their collective hearts into our mission every day in order to serve our learners and change their lives through education. I guess I'm also supposed to remind everyone to do their Duolingo lessons today. I got it. I got it. Okay. We're going to do our lessons, okay? Okay. Anyways, I'd also like to remind everyone to watch Duocon on August 26, which is our annual conference for all things Duolingo. And now we would be happy to take your questions. I'll turn it back to Debbie to manage the queue.

All right. Thanks, Luis. So your first question comes from Andrew Boone of JMP Securities.

Hi guys, congrats on the strong results. And thanks for taking my questions. Can we just start with the outperformance in MAU and DAU, I'd love to understand that. And then just stepping back as we think about kind of growth on a go-forward basis and we start to look at 2023 with a little bit finer of point of pencil. Is it fair to think about 20% to 25% for DAU growth and kind of 10% to 15% for MAU growth, which I think was kind of the soft guidance at the point of the IPO?

Well, thank you, Andrew, for your question. I mean I'll talk a little bit about our current outperformance, and then I'm going to let Matt talk about our guidance. So for the outperformance I mean look, it's a number of factors, but I think if you ask me, the main factor is just something we've said from the time we IPO-ed, which is we're still in the early days of our journey. We're still in the early days of our DAU growth. We're still in the early days of our revenue growth. And so we're still in a nice part of the curve. And so there's that. I should say one thing, which is that -- the macro environment is pretty crazy, as you know. So far, we have seen no weakness in our numbers whatsoever, and we expect pretty strong numbers. But things are crazy. And I can't tell you that we're going to be immune forever to whatever is going on in the macro environment. But so far, no weakness in our numbers. I don't know, Matt, if you want to talk about the guidance.

Yes, for sure. Yes. So Andrew, we don't guide to MAU or DAU explicitly. When we went public, we did mention that historically, looking back, MAU grew between 10% and 15% and DAU grew between 20% and 25%. And as you've seen earlier this year, we've outperformed those numbers. But those numbers are pretty long dated times years data. So I don't think that those numbers are fundamentally changed. We've had nice outperformance here. But again, we're not going to guide formally to it, but if you just look at the long times years of data, those numbers are certainly in the range.

And then you guys now are live again in China. Can you just speak to the opportunity there and what that could possibly mean for the business over maybe three to five years, right, not near term, but kind of more medium? Thanks so much.

Yes. Thanks for the question about China. So we said in the shareholder letter, we're back live in China. So what happened in China was that we were taken down from the app stores a few months ago. And what that meant was that current users could still use Duolingo, but new users couldn't download it. We are back in the app stores, and we're back to the DAU and revenue levels that we had before we had been taken down. Now China is an interesting country. It's -- there's a lot of potential in China, but it's still a small market for us, and it's about 1% to 2% of our DAUs and MAUs and a little under 1% of our revenue. I think the thing to say about China is -- of course, it's the largest language learning market in the world, in particular, for learning English. But it is very hard for Western companies to do well there. So the way we see it is we're investing in it. We're not betting the company on it. And my guess is as good as yours about what's going to happen with the Chinese landscape.

Okay, great. And your next question comes from Eric Sheridan of Goldman Sachs.

Thanks so much for taking the question. Great to see everyone. I'm always intrigued when you put the stuff in the letter on the A/B testing. Anything to highlight there where you've seen elements of the A/B testing move out of testing mode and into the app that you're the most excited about either they're driving on the usage side or the monetization side. Just can we get a better sense of some of the bridging from testing into implementation in the business? That would be number one. And number two, any update on math as a product, both on the investment cycle behind it and how you think about launching it more widely as we move out into future quarters? Thanks so much.

Thank you, Eric, for the questions. Okay. So first of all, in terms of A/B testing, as we mentioned in the letter, we run about 500 A/B tests per quarter. So we're really testing all kinds of things. Some things are pretty tiny. Some of the A/B tests are just like one word of change in some button and some are pretty large features. Two of that we highlighted in the letter that I'm particularly pretty excited about. One, is the Quests tab. So it's a whole tab in the app. That's basically going to induce users to [indiscernible] actions and generally is to use the app more. And the thing about using the app more is, they use it more days in a row, every day that they use it, they spend more time on it. And we know that people who use the app more also are more likely to subscribe. So we really like that. That's one that we're really excited about. Another one that we mentioned in the letter that also, I'm particularly excited about is this thing called Side Quests, which are -- in the new home screen of the app, you're going to be able to tap on the animated characters and that's going to give you kind of these fun little mini games obviously to practice your language. Now to play them, you're going to have to pay with gems. And the gem economy on Duolingo is something that we're very excited about because it's going to help us with in-app purchases, which is something that we're going to be investing on for the next few years. Right now, our revenue for in-app purchases is relatively small. It's just a couple of percentage points. But we think we can grow that quite a bit. And we think that's pretty interesting, particularly in certain geographies where people don't love paying for recurring subscriptions. So that's kind of an A/B test. And you asked about math, and thank you for the question. That's something that we're very excited about. But I -- when people ask us about math or Duolingo ABC, which is our literacy app, I'd like to remind everyone that for the foreseeable future, I mean, certainly, this year, next year and even the year after that, we are primarily a language learning company. Language Learning is a massive opportunity. We're still really only scratching the surface. So the majority of our investment and the majority of our revenues are going to come from language learning for the next, call it, 3 to 5 years. Now with the Math app, we're -- I have it on my phone. I use it every single day. It turns out it's pretty fun. It turns out practicing third and fourth grade math is pretty fun, at least for nerds like me. But -- so we have it, we're likely to -- the plan is still going according to plan, and we're going to put it out -- we're going to put a beta version of the app to the whole world this year. So it's still going according to plan. And I'm particularly excited about it.

Okay, great. And your next question comes from Ralph Schackart of William Blair.

Great. Thanks for taking the question. And also good to see everybody. Just two if I could. Just in terms of the home screen, you talked about the excitement there to really improve engagement. Maybe just an update what you're seeing there with the testing. And then just an additional question on regional pricing, how is that effort going? [Technical Difficulty].

Thank you, Ralph. Okay. So you asked -- the first question was about the home screen. So the home screen just to remind everyone, we are completely changing the home screen of Duolingo, which is a pretty large change. So the home screen used to be this thing that we call the tree where users had a lot of options about where -- what to learn next to a linear path that where users -- we're basically going to be guiding users what to learn next. And we've talked about this. This is something that we're currently -- it's currently being still tested. We're being very careful with such large changes, we usually are pretty careful with them. So we're testing it, but it's currently live for a fraction of our users on iPhones, Androids and web. So on all our platforms, it's currently live. The results so far are great in that it's exactly what we expected. And just to remind everyone with what we expected with these results. This is a brand-new version of the home screen. The previous home screen was there for years. I don't know how many years, 5, 6 years or something like that. And it was hugely optimized. This new version is a brand new version that hasn't been optimized. And all we were looking for when we put this there is parity of metrics. If we're able to achieve parity of metrics with an unoptimized home screen versus the highly optimized sort of local maximum thing that we had before, then this is a really good position to be in because we can take the unoptimized one and then optimize it like crazy. And so far, it's looking like that. So far, it's looking like the metrics that we have pretty much parity of metrics. And so it's exactly what we wanted. My estimate is that we're going to be rolling it out to all our users like really, basically, there will be no users that don't have it by the end of the quarter. That's my estimate. And so we're looking pretty good with the home screen. The regional pricing, again, this is something else just to remind everyone, when we IPO-ed, we had the same price in every single geography. And that really was the price -- that was a good price for the United States and maybe Western Europe, but it was not a great price for most countries in the world. Over the last year, we've basically changed the prices in most countries. We've regionalized prices. It took us a while to do this because when we run the experiment to change the prices, we really are trying to measure what that's going to do for our long-term bookings and kind of we're looking for lifetime value of users and we're trying to see what it does for recurring digital subscriptions, so renewals and everything. So it took us a while to do this. But by now, the prices are pretty good for most countries as in they are what you would expect given the GDP of each country, for example. Now what that did is for countries like the U.S., the prices didn't change all that much, so that's good. And then most of the big changes were usually for poor countries, the prices went down quite a bit. And we see that as a first step of many that need to be taken to monetize the poor countries. So we obviously monetize countries like the U.S. or Western Europe. We monetize a lot better there than we would monetize in a country like Brazil or like Peru or Vietnam or something like that. And in order to really monetize well in those countries -- in the poor countries, I think just a number of things need to happen. The first step is that your price needs to be right. We did that. And so that was a win, and it increased -- it was an increase in bookings, but it wasn't like a 10x, like sometimes people think, Oh, now you have the right price. So you're just going to 10x bookings in Brazil or something not what happened and that we didn't expect that to happen because a number of other things need to happen in places like Brazil or like in India or something like that. For example, just people are not as used to paying for recurring digital subscriptions. So another thing that we need to do is probably we need to work on kind of more à la carte in-app purchases. To improve that, we also need to probably improve forms of payment that sometimes people just don't have the right form of payment. So this is just a number of things that we need to do, and this was step number one.

Thanks, Luis.

And your next question comes from Ryan MacDonald of Needham.

Thanks for taking my question. Luis, I wanted to first start with Duolingo English Test. Obviously, some really strong growth that accelerated on a year-over-year basis. I'm curious what you're seeing there between whether it's just a mix of stronger international enrollments back in the IR domestically? Or if this is a result of sort of the increase in number of universities that you have on the platform?

Yes. Thank you for asking about the Duolingo English Test because it's something -- it's a project that is very near and dear to my heart, and it's something that we're very excited about. Just kind of again to set the stage and to remind everyone because not as many people know about the Duolingo English Test. So this is our second largest product. Most people know us for our language learning app. The Duolingo English Test is the second largest product. It's a standardized English proficiency exam. So you go to our website and you take a test and it tells you how good your English is. It turns out, those are used for a lot of things, the standardized English exam. One of the main users, not the number one users, but one of the main uses for standardized English exams is university admissions. So for foreign students. So when people want to come to the U.S. to study say, Stanford or Duke or something, they have to apply and they have to prove that they can speak English. So they can take the Duolingo English Test to prove that they can speak English. That business is growing really, really nicely for us. And the main place where it's growing. It's just -- we're just getting a lot more adoption of institutions, accepting our test. So it means -- and it's mainly universities. Historically, we started with U.S. universities. And by now, depending on how you measure, but about 80% of U.S. universities are accepting our test. We are increasing our efforts in the U.S., obviously, to get to 100%, that's what we'd like to get. But also we're increasing our efforts in other big markets of English proficiency exams, that's Canada, the U.K. and Australia. And those were increasing again. And so the combo of just a lot more institutions accepting our test is what has led to more people taking the test. The other thing that has led to that is because now -- in the U.S., we just have quite a bit of acceptance. If you apply to U.S., for example, the top 25 universities in the U.S. in terms of international student enrollment 100% of them, 25 of the top 25 accepted Duolingo English Test. So by now, if you're applying to the U.S. it is likely that those universities will take the Duolingo English Test. So the other thing that we're doing is just getting the word out that this is the case, and this has helped quite a bit in countries like India or China which is where most of the test takers are just getting the word out that we are as accepted as the other tests has helped quite a bit. And I think that, that will continue happening.

Super helpful color. And then maybe just from a follow-up perspective. On the core language learning app, obviously, it's great to see no macro negative impacts thus far. But -- as we think about potential recession or a tightening of the consumer discretionary budget, do you do much research on where your users are coming from? And I ask the reason of is there a potential here of seeing an acceleration in the shift from offline language learning to online, given that it's $30 to $60 an hour for a language tutor in person versus obviously, that's nearly the price of an annual subscription. Just curious your thoughts there? Thanks.

Yes, that's a really good hypothesis, one that I wish were true. And I don't know if it's going to be true or not. I mean, because we just haven't really hit the recession, at least for that. But I think we believe that. We believe that -- not just a recession. I actually think, over time, we believe that the market is going to shift more online. And just to remind you, in terms of the language learning market, the language learning market is about $60 billion a year. The vast majority of it is still offline, where people are basically paying to take night classes in Brazil to learn English or something like that. Like that's the majority of the market. Over the years, we've seen a slightly shift online. And by the way, we've basically helped a lot with the online shift. We're hoping that this will continue happening. And it's a good question about whether the recession is going to help with that just because off-line language learning is a lot more expensive. The honest answer is I don't know if that will be the case, but it stands the reason that it will, but I'm just -- I don't know.

Thanks for the color. Congrats again.

Thank you.

And your next question comes from Justin Patterson of KeyBanc.

Great, thank you very much. Perhaps as a variance of Eric's question, it looks like there's been a lot more iteration on more products, consumer user-facing features recently. I'd love to hear about just how the pace of innovation has improved as that DAU and MAU base as it resulted at more A/B test. And then secondly, you mentioned Duocon, Luis, anything you're particularly excited about coming up? Thank you.

Okay. So first, in terms of the pace of innovation. So two things affect our pace of innovation. One is the number of users that we have to experiment with. As they increase, we can run more experiments at a time. That helps. The other thing that helps, of course, is the number of people working on the product. And so the number of engineers, the number of product managers and the number of designers that we have working on the product help us run more experiments. And so that's basically what's happening. We are hiring more and more people. Of course, we are hiring prudently. You're not going to see us doing layoffs or anything like that. We're hiring pretty prudently as we have for the whole time. But that's basically what increases the pace of innovation. And so you are right, we are running more A/B tests. Every quarter -- it's pretty much the case that every quarter, we run more A/B test than the previous quarter. And it's just we have more people working on them. So that's the A/B testing. And in terms of Duocon, you should just tune in. There's a lot of really cool stuff coming in -- coming up.

You missed a great opportunity for DUO to just lock in behind you again.

Duo has a very hard job. It's like Santa Claus. He has to be everywhere at once, reminding everybody to do their lessons. So I don't know where he is.

Thank you.

All right. And the next question comes from Aaron Kessler of Raymond James.

Great, thank you. One, you shared some nice marketing leverage in the quarter. Can you just talk about that? Should we expect a little bit maybe deleverage in the back half on the marketing side and maybe with kind of ad rates are apparently coming down a bit. Just wondering if that's helping you on the marketing efficiency side. On the other hand, are you seeing any negative implications on your advertising revenues from kind of lower performance-based advertising that we've seen this quarter? Thank you.

Yes, I'm happy to take that. So part of the advertising leverage this quarter was driven by just a shift in spend. So we were going to spend it this quarter. We're going to spend it next quarter. That's about -- it will shake out to be between around $1 million to $2 million. So there's some of that. But in the back half of the year, we would expect to see some deleveraging in Q3 because of what I just said that shift. But then in Q4 it should be right back to kind of where it was this quarter-ish. So nothing kind of seminal or crazy going on in the S&M line. The second part of your question is true. We did see average revenue per DAU go down on the marketing side of the business, just like I think other folks who are taking in marketing dollars saw. The good news for us was that if that went down in the order of 10% because DAUs went up so much, the net effect turned out to be -- that advertising dollars still grew relatively nicely for the quarter. So we're still monitoring that. That does seem to be something that could persist throughout the rest of the year is that average revenue per DAU going down. But like I said, with user growth, we can offset that.

Average revenue per DAU on advertising.

On advertising. Yes, exactly.

Great, thank you.

And your next question comes from Mario Lu of Barclays.

Great, thanks for taking the questions. So the first one is on the bookings fee in the second quarter. I believe you beat your guide by 11% at the midpoint. So just wondering if you could provide some color into, what were the main drivers for the outperformance. Any user acquisition channels you can call out there?

Yes, so the beat on the guide was driven in part by the fact that when we issued that guide, we were early on in the quarter, there was a lot of macro uncertainty, and so we were being appropriately prudent. There was also outperformance even over internal expectations on certain metrics like user growth we performed really well on conversion and retention. And so those are really the core components of what led to the bookings beat. And so -- and then when we look to guidance going forward, we're taking all those outperformance into account for the rest of the year. But then also, we're still layering on a prudent outlook given there is so much uncertainty, as Luis mentioned.

Got it, thank you. And then just a follow-up on the Side Quests and Quests. Those both look very exciting. I guess just at a high level, you said Side Quests is to increase revenue, Quests is to increase engagement. But I guess in terms of being a language app, I guess can you remind us what incentive users have in order to kind of spin more gems or is that still being tested?

In terms of spending more gems, it's just the whole gamification of Duolingo. People really get into it. And it's a pretty complex ecosystem. So one of the things that happens is the user journey would be something like this. A user is using Duolingo, and they get really into the leaderboards. The leaderboards, by the way are these kind of groups of people or 50 random people you're there. And if you're in the top -- well, it's actually 30 random people. And if you're in the top 10, you increase to the next league, et cetera. They get really into that. And then they're really trying to figure out how to get more and more X fee per minute, more points per minute. And then it turns out that things like Side Quests give a good number of X fee, so people try them and then they really enjoy that. And so they enjoy it and also gives them a lot of X fees. So that will get them to spend gems. So it's stuff like that, that gets people to really do this. So it's basically kind of a tight gamification loop.

Great. Well, just don't make too much pay-to-win, like some games.

Don't worry. We spend a lot of effort on that. We really do want to make sure that everything that we do is really good for learning in the end, too. I mean this is -- we spend a lot of effort making sure that the Side Quests that basically, when you're earning X fee, we try to make it so that you're learning proportional to how many X fee you're getting.

Great, thank you.

All right. And the next question comes from Arvind Ramnani at Piper Sandler.

Hey, thanks guys. So just a couple of questions. Certainly, this is the first time you're talking about potential impact of macro. And I'm not sure if you'll have seen this prior sort of macro cycle. So maybe when you did you were a different company or private company at that time. But assuming that we see some impact on the business from a macro perspective, do you think the impact will be more on the mid-teen top of the funnel growth or more on the conversion to -- where do you anticipate kind of the first sort of hit to be?

Arvind, great question. I don't know. I mean it's very hard to know. I mean, so far, we have seen no weakness in our numbers. And so it's hard to know if I could think about it and theorize about it, for example, my guess is that free users are not going to -- like basically, our free user growth is going to continue equally. And then probably if people are having real tough time economically, they may be less likely to subscribe. Now one thing that I should say is that this is just a hypothesis, by the way, about why we are a little less immune by this. That -- I don't know if this is true or not. But the fact that we're a freemium model and that our free product is so good. What it means is that already the people that are paying or the people that are not paying, a lot of them -- or the people that are having trouble, sorry, paying a lot of them, anyways were just using the product for free. And that may be the case of -- and we have users everywhere in the world, in poor countries, a country like India or something, just very few people are paying us and they're just using Duolingo for free. Now we don't mind that because that's actually good for us because people tell their friends, and this is how we grow. And also when people use Duolingo, we have more users and we can run more A/B test and make the whole product better, et cetera. So we don't mind that. But it's -- ultimately, it's just very hard to know what's going to happen. So far, we have seen no weakness in our numbers though.

Perfect. And then from a pricing perspective, like you even go back like two years when you are private -- you had kind of one pricing model. Now you have multiple -- you're starting to introduce more pricing models. I think kind of the family plan is kind of probably the newest pricing model. How should we think about your pricing models? Are they going to be like additional ones coming about, like, I mean, as you anticipate potentially some macro headwinds, are you being a little bit more creative on pricing? Should we expect some of that over the next six months or so?

So the first thing to say about pricing is that we're always experimenting not only -- in terms of pricing and in different geographies and in terms of packages, what is the relative price of the family plan versus the individual plan versus the year levers, the monthly, we're always experimenting. So you're going to see us continue experimenting. And if we see something that wins, and by the way, wins means not just short-term wins, but long-term. So whenever we do the experiments, we really try to see that they actually increase the lifetime value of users. Whenever something wins, you'll see us change it, but it's very hard to say what will happen in the next six months. I don't think you'll see anything -- I don't think you'll see any new fundamentally different packages because we're not working on anything like that. I mean the actual packages that we have, there's the monthly, the yearly and annual plan, which could be monthly or yearly. I don't think you're going to see any fundamentally new thing, but you may see kind of different prices. And it's just very hard to say what will happen because we're just going to continue experimenting.

Great. And just last question. Certainly, you've, I think, 450, 500 A/B sort of testing. Of those, which one do you think has sort of the biggest potential part to impact your revenue or your margins?

Out of all the 500 tests that we're running, which do you think the single one has the most potential? I don't know. I mean the two that I'm most excited about are the ones that I put in our shareholder letter. I'm most excited about those two, Side Quests and the Quests tab. But I am sometimes good at predicting what's going to be really big. And sometimes, I'm actually really bad predicting what's going to be really big. So -- those are the ones that I put there that I like.

All right, perfect. Looking forward to seeing you at Duocon, turning to Duocon.

It is going to be good.

Yes, I'm sure. Thanks.

Thanks, Arvind.

All right. The next question comes from Mark Mahaney at Evercore.

Two questions, please. One on where you think penetration rates can go for subscribers as a percentage of MAUs. I asked the question because I think at the time of the IPO a couple of years ago, maybe you thought I could -- looking at some of the dating app, maybe you could get to double-digits. I don't know if you said that or the market certainly thought something like that. If you look at that chart that you have in your shareholder letter, that curve looks pretty darn good. Like I don't know -- my guess is that it may even be going faster than you would have thought. So I don't know, just new thoughts you may have on where that penetration could go long term? And then secondly, I just want to ask about two markets, China and India. I know somebody already asked you about India, but I want to phrase the question this way. The risk reward there seems so asymmetric to me. I don't think you -- I think you've talked about country launches before not necessarily being dramatically capital intensive. You've had viral growth in so many markets. But the number of potential MAUs and subscribers out of China just would seem to be dramatic, especially for what you're offering. And so I wanted to just ask you to talk about that a little bit. I understand all the volatility about being allowed and not allowed in but just seems so asymmetric the opportunity there. And just give us a quick update on India, where things are because I think that's been one of your better markets. But I also think growth markets, but I also think you may have had some regulatory issues there. So any update on that. So those are the three questions. Thank you.

Great, okay. So penetration. So you're right. I'd say our penetration of the fraction of paying subscribers to MAUs has definitely outperformed what I thought would happen. When we IPO-ed, we had been seeing kind of a one percentage point growth per year. So each year, it would go from like 3% to 4%, from 4% to 5%. The last couple -- since IPO, it seems we're up to about two percentage points per year. So it is more than I expected. And I think that we're very happy with that. And your question is how high can I get? We still don't know. I don't see a reason why this can't get to the mid-teens. I don't see a reason why this can't happen. But it's very hard to say. Now I'll say one other thing, which I think a lot of people concentrate on this metric of percentage of paying subscribers versus MAUs. This is not a metric that we inside the company operate against. We don't have a team trying to improve this metric. We're not trying to do that. And part of the reason is because what we're really trying to improve is kind of long-term bookings. And for some stuff, one easy way to increase that metric, for example, is to lower our price significantly. And that metric could go up quite a bit. But we may be making less revenues. So it's not clear exactly what will happen. There are some experiments. Certainly, when we did a regional pricing, that probably made it go a little faster because we lowered our price in many countries, and that made it go a little faster. So stuff like that. But it's just -- it's not something that we necessarily obsessed about, but it is something that it seems like certainly, Wall Street seems to care about. So we talk about it.

Yes, one second on that penetration rate. So Mark, part of that acceleration that you're seeing, and it is an acceleration came from the fact that we have a higher mix of annual plans now. So over the past four quarters, we've increased the annual plan mix because of what Luis mentioned, which is we view that as a 2x -- 2x as big LTV as the monthly plan. And so part of that penetration rate going from 1% to 2% was the natural impact of that mix shift. And so over time, since we're now almost at 90% annual plan you would expect that to trend back towards the middle of that 1% to 2% range. So I think that's an example of what Luis is talking about, which is the metric we care about is LTV and it has these derivative effects which are increasing the paid penetration. But the metric is LTV.

Great, so then your next question was about China and India. Let me talk about India first because I think it's a little easier. So we haven't had any regulatory issues in India. That's just not something that we've ever had. India has been very nice to us. So India is a very interesting market for us. It is one of our fastest -- at times, it is the fastest. I don't know if today it is the fastest, but at times, it is the fastest-growing country in the whole world for us in terms of daily active users. It keeps growing. It is now one of our top 5 markets. A while ago, it wasn't even in the top 20. And there's just a ton of people in India -- now the thing with India is that it has been great for user growth, free user growth in particular. For revenue, we have not monetized it. And in fact, for a while, we actually had revenue turned off in India. And we're in the process of turning it back on. And I'll tell you the reason why we have turned it off. It just turns out that the Indian consumers are just not very used to freemium models. And so when we would give the offer to subscribe, they thought that it was a hard paywall and they would stop using Duolingo. They were like, we're getting out of here. So what we did is temporarily turned that off. And so we were making no money from India for a while. And we're back -- we're either -- like either we're already back -- we're about to be back. This is one of those things we're experimenting on to be making money in India. But so far, I think it's a lot of users. There's a lot of great opportunity. And I think -- but I think the challenge with India is just getting people to pay is -- I think a lot of companies have a hard time with that. So that's India. China, so we have an office in China. We have an office in Beijing. They are very high performing. The reason we originally opened that office was to grow in China. And they did a really good job. I mean we really started growing quite a bit in China before we got turned off in the app stores as China was our fastest-growing market. The other nice thing about China is that consumers actually also pay and it is the largest English learning market in the world. So it is something we're going to continue investing in, but we're prudent. I mean I think it would be foolish for us just having seen what has happened to all the majority of Western companies that invest a lot in China, I think it will be foolish for us to suddenly invest $200 million to grow in China, that's just unlikely to happen. But we're going to continue investing and it will continue growing. Now the nice thing about Duolingo is that it grows organically. So we haven't needed to go and spend $50 million in a given market to grow or anything. It just -- we do something where we spend maybe $1 million on some influencer marketing or something and from then on the flywheel takes over. So the nice thing is we don't have to spend that much and then we're going to see -- we're hopefully going to see it grow. So I think it's a pretty nice -- we're very excited about China, but we're cautious about it. And I think it will be foolish not to be cautious about it.

Thanks, Mark.

Thanks, Luis, thanks Matt, thanks Debbie.

Great, and it looks like there are no other questions. So I'll just turn it back to Luis.

Well, I think that's it. Thank you so much. Thank you for all the questions. And just once again, please watch Duocon on August 26. And remember to do your lessons otherwise, Duo's going to come back here and kidnap my family.