In the silent language training track, many neighboring countries are emerging.
After turning losses in the second quarter, Duolingo once again recorded a net profit of $2.807 million in the third quarter of this year, turning losses into profits compared to a net loss of $18.445 million in the same period last year.
In the secondary market, the stock price of Duolingo has reached a new high since its listing. As of November 27, 2023, the company's stock price once reached $226.79, far exceeding the education industry leader TAL Education's $10.9 and New Oriental's $78.35. Since the beginning of this year, the company's stock price has risen by as much as 200%.
Why does the market favor neighboring countries so much?
Pushing the clouds open, I see the moon shining brightly
In the third quarter of this year, multiple neighboring countries saw growth in their business data.
During the reporting period, Duolingo achieved a revenue of 138 million US dollars, an increase of 43% compared to the same period in fiscal year 2022, which was 96.07 million US dollars. Among them, subscription revenue amounted to 106 million US dollars, a year-on-year increase of 47%; Advertising revenue was 11.678 million US dollars, a year-on-year increase of 10%; The English test revenue was 10.612 million US dollars, a year-on-year increase of 30%; Other income was 9.447 million US dollars, a year-on-year increase of 86%.
For the growth of income, many neighboring countries claim that it is mainly due to an increase in the number of paying users and daily active users. As of September 30, 2023, the number of paying users in Duolingo reached 5.8 million, a year-on-year increase of 60%, with monthly and daily active users increasing by 47% and 63% respectively to 83.1 million and 24.2 million, respectively.
As of the end of the third quarter, the total booking amount for Duolingo was $154 million, a 49% increase compared to the same period last year, and deferred income was $209 million, a 34% increase compared to $156 million at the end of the previous fiscal year. It is predicted that in the next fiscal quarter, the income of many neighboring countries should not experience a significant decline.
In the past two years, many neighboring countries have repeatedly set new highs in revenue and user base, and are on an upward trend. Therefore, the growth in the third quarter is not surprising. However, the company has always performed poorly in terms of profitability. From Q1 2021 to Q1 2023, Duolingo suffered consecutive losses for 9 quarters, and the curse of "increasing revenue without increasing profits" was once difficult for the company to break. It was not until the second quarter of this year that Duolingo made a profit of 3.7 million US dollars, and it was only then that they were able to see the light of the moon.
In the third quarter, Duolingo continued to maintain positive profits, recording a net profit of 2.8 million US dollars, turning a net loss of 18.445 million US dollars from the same period last year into a profit, with a total gross profit of 101 million US dollars, a year-on-year increase of 45%. Due to the decrease in third-party payment fees for users and the increase in single English test revenue, the gross profit margin of Duolingo increased by 1.1 percentage points year-on-year to 73.7%, further exceeding its originally high level, demonstrating a broad profit imagination.
In terms of cash, Duolingo's operating activities generated a net cash inflow of $37.7 million in the third quarter, compared to $8.8 million in the same period last year. As of September 30, 2023, the cash and cash equivalents balance of Duolingo was 702 million US dollars, an increase of approximately 15.38% compared to the end of the previous fiscal year.
Revenue and user growth are good, profits are gradually recovering, and cash is abundant In the financial report, Louis von An, co-founder and CEO of Duolingo, stated that the performance exceeded high expectations.
Expanding science+AI, frequent actions
Supported by solid performance, Duolingo's business actions have become more diverse.
Firstly, there is the expansion of technology. Duolingo Math has already landed on the Apple App Store. Last month, Duo ReMi announced that it will launch a new music course on iOS, which will provide learners with basic music knowledge such as how to use a screen keyboard to read notes and play simple songs.
At the financial report meeting, Duolingo announced that it will integrate music, mathematics, and language into one app, and follow a gamified teaching model to form a multidisciplinary learning platform. Louis von An believes that the merger of the three disciplines is beneficial for improving user engagement and retention rates. For example, users can also learn mathematics or language after taking music classes.
However, he admitted that there will not be much growth in mathematics and music revenue in the short term, and the total number of people working in mathematics and music in Duolin's domestic market is only 50, accounting for a small part of the product team. At present, the company's main business area is still language learning. It is revealed that the company is developing an advanced English course, adopting a model of "learning English in English" to cultivate the thinking mode of native English speakers.
In addition, facing the vast Chinese market, many neighboring countries are also trying more localization strategies. Last August, the company launched its first Chinese dialect course - Cantonese, which was open to all users for free. According to media reports, as of July 2023, the number of users of Cantonese courses has reached nearly 3 million.
In addition to expanding technology, AI is also another important direction for expanding neighboring countries. At present, Duolingo has three levels of apps, namely the free Duolingo App, the subscription version "Super Duolingo" App, and the higher-level subscription version "Duolingo Max" App. Among them, Max has integrated GPT-4 and launched two major AI features: Role Play and Explain my Answer.
The financial report board stated that in addition to its existing features, Max has recently added an Inness coach feature that can provide prompts before users submit their answers. In addition, the new features of DuoRadio are also being tested, and its episode scripts are provided by generative AI. However, due to the fact that multiple neighboring countries must pay for generative AI, Max will still be placed in higher-level subscriptions for a period of time.
Louis von An believes that the cost of using generative AI will decrease, and many neighboring countries may adjust their subscription apps and their features, such as placing Explain My Answer in Super instead of Max, and continuing to integrate the functions of the next three levels of apps.
The rapid growth of performance combined with the positive trend of business has caused the stock prices of many neighboring countries to soar. As of November 27, 2023, the company's stock price briefly touched $226.79, far exceeding the education industry leader TAL Education's $10.9 and New Oriental's $78.35. Since the beginning of this year, the company's stock price has risen by as much as 200%.
Can neighboring countries fulfill market expectations?
The hidden worries behind prosperity
Although various indicators in many neighboring countries have shown great improvement, it should be noted that there are still hidden worries behind prosperity.
One is the decrease in the conversion rate of paid users. As of September 30, 2023, Duolingo has 5.8 million paying users, accounting for only 6.98% of monthly active users, and even showing a significant decline compared to 7.8% at the end of fiscal year 2022. Moreover, the financial report shows that due to the decline in average revenue per DAU, advertising profits have declined. On the other hand, iQiyi, which also follows the "subscription+advertising" model, had nearly 590 million active users in Q3 this year, with a total of 108 million subscribed members. The average monthly revenue per member exceeded the 15 yuan mark, reaching 15.54 yuan. Compared to other countries, there is a significant gap.
The other is high expenses that remain high. With the growth of revenue, the various costs and expenses of Duolingo also increased in the third quarter. The revenue and cost during the period was 36.25 million US dollars, an increase of 38% compared to the same period in the previous fiscal year; The total operating expenses were 106 million US dollars, a year-on-year increase of 18%. Among them, sales and marketing expenses were 22.34 million US dollars, a year-on-year increase of 26%; General and administrative expenses were $33.4 million, a year-on-year increase of 10%; The research and development expenses were 50.31 million US dollars, a year-on-year increase of 20%.
Previously, many neighboring countries continued to suffer losses, largely due to high expenses. As revenue growth exceeds expense growth, the company only reaches the critical point of revenue balance. However, the revenue of many neighboring countries cannot continue to maintain the current high-speed growth. If the revenue growth slows down and expenses are not well controlled, the company is highly likely to fall back into a loss making situation.
In addition, Duolingo's layout in AI is more focused on the application layer rather than the technical layer. Compared to researching the underlying technology of large models, companies tend to directly integrate GPT-4 for product layering to attract users. This model of "making a profit" is highly replicable, and neighboring countries do not have an absolute competitive advantage, and existing business will not undergo a qualitative change as a result.
Therefore, even if the situation is good now, the sustainability of the prosperity of many neighboring countries still needs to be questioned.