Duolingo's Q3 2025 Earnings Call: Contradictions Emerge in DAU Growth, AI Strategy, and Profitability Priorities

Business Commentary:

* User Growth and Engagement: - Duolingo reported a daily active user (DAU) growth of 36% year-over-year in Q3, with September and October showing 30% year-over-year growth. - The growth was driven by improvements in product features, such as locking partnerships in Asia, and a recovery in unhinged social media posts, which positively affected engagement.

• Shift in Strategic Focus:
• The company is prioritizing long-term investments in teaching efficacy over immediate monetization, focusing on user growth and enhancing AI capabilities.

• This shift is due to the potential of AI to revolutionize education and is expected to result in faster user growth over a longer period.

• Chess Course and New Offerings:

• Duolingo's chess course has shown rapid growth, surpassing other core language courses, with player-versus-player (PVP) functionality set to be fully rolled out within weeks.

• The success of the chess course and new offerings like guided video calls are aimed at enhancing user retention and engagement.

• Financial Performance and Guidance:

• Duolingo guided to nearly $1.2 billion in bookings for 2025, with an adjusted EBITDA margin of 29%.
• Growth was driven by strong performance in user metrics and a focus on greater returns from user acquisition via improved teaching efficacy and enhanced product features.
  

Contradiction Point 1

DAU Growth and Strategy

It involves changes in the expected growth trajectory of Daily Active Users (DAU), which is a key metric for the company's growth and user engagement, and reflects strategic shifts in focus.

Is the long-term focus a durable strategic shift? Will booking pressure persist into next year? - Nathaniel Feather (Morgan Stanley)

2025Q3: For years, Duolingo will invest in AI to create an exceptional product that teaches better. Expected initiatives in 2026 will have long-term impacts, but it's too early to guide specific financial results. The opportunity is large, and Duolingo aims for sustained growth. - Luis von Ahn Arellano(Co-Founder, Chairman of the Board)

Okay, let me try to work through this. The user wants me to simplify the given question from a conference call. The original question is about DAU growth slowing in Q2, asking for the main drivers, the user growth trajectory for the year and beyond, and also about the Chinese market and Video Call's impact.First, I need to make sure I understand the key points. The user is asking three things: breakdown of why DAU growth slowed, how user growth is expected to shape up for the rest of the year and into the back half, and info on the Chinese market and Video Call's effect.Now, I have to condense this without losing the original meaning. The original question is a bit wordy. Let me start by shortening the first part. "DAU growth was slightly moderated in 2Q" can be "DAU growth slowed in Q2." Then, "Can you breakdown the primary drivers behind that..." becomes "What are the primary drivers?" Next, the second part is about the shape of user growth through the year and into the back half. The user wants to know the expected trajectory. So "how should we think about..." can be rephrased as "how should we expect user growth to progress..." Then, the third part is about the Chinese market and Video Call's impact. The original says "provide some color on what you're seeing..." which is a bit informal. "Provide some color" can be simplified to "what trends are you seeing..." or "what are the trends." Also, "the impact of Video Call" can be "the impact of the Video Call feature."Putting it all together, the simplified question should be concise, in proper American English, and end with a question mark. Let me check for any unnecessary words. "Slightly moderated" becomes "slowed." "Breakdown the primary drivers" becomes "What are the primary drivers?" I need to ensure that the structure is clear. Maybe combine the first two parts into one question and the third as another. Wait, the original question uses "Also" to add another part. So maybe separate the two main questions: one about DAU growth and user growth trajectory, and another about the Chinese market and Video Call. But the user wants the output to be the simplified version of the original question, which combines both parts. So perhaps keep it as one question but split into two parts with "and" or "as well as."Wait, the original question is one question with two parts: first about DAU growth and user growth, then about the Chinese market and Video Call. So in the simplified version, I can structure it as two separate questions or keep it as one. The user's example output has two separate questions. Let me check the example given in the problem statement. The original example input had a question that was split into two parts with "Also," and the output was two separate questions. So maybe follow that structure.So the simplified version would be:What are the primary drivers behind the slowed DAU growth in Q2, and how should we expect user growth to progress through the year and into the back half?Additionally, what trends are you observing in the Chinese market, and what is the impact of the Video Call feature?But the user's note says to output and only output the generated simplified questions. Also, the original question uses "Also," so maybe combine them into one question with two parts. Let me check the original instruction again. The user says "output and only output the generated simplified questions." So perhaps two questions.Wait, the original question is one question with two parts. The user wants the output to be the simplified version of the original question. The original question is one question but has two parts. So the simplified version should be one question with two parts. Let me check the example. The example input was a single question with two parts (using "Also"), and the output was two separate questions. Wait, no. Let me check the example provided in the problem statement. The user's example input was:"DAU growth was slightly moderated in 2Q. Can you breakdown the primary drivers behind that and how should we think about the shape of user growth through the year and into the back half? Also, can you provide some color on what you're seeing in the Chinese market and the impact of Video Call?"And the output was:"What are the primary drivers behind the slowed DAU growth in Q2, and how should we expect user growth to progress through the year and into the back half?Additionally, what trends are you observing in the Chinese market, and what is the impact of the Video Call feature?"So two separate questions. So in the case of the user's example, the original question had two parts (with "Also"), and the output is two separate questions. Therefore, in this case, the original question has two parts (with "Also"), so the output should be two separate questions. Therefore, the assistant should split - Nathaniel Jay Feather (Morgan Stanley)

2025Q2: DAUs showed 40% year-over-year growth in Q2, lapping growth from the previous year. The slight moderation in growth was due to social media backlash from edgy AI posts, affecting primarily young audiences in the United States. DAU growth is expected to stabilize and not show significant changes. - Luis Alfonso von Ahn Arellano (Co-Founder, Chairman of the Board, President & CEO)

Contradiction Point 2

AI and Product Innovation

It highlights differing perspectives on the role of AI in driving product innovation and its impact on financial results, which are critical for investor expectations.

Is the long-term focus a durable strategic shift? Will booking pressure persist into next year? - Nathaniel Feather (Morgan Stanley)

2025Q3: For years, Duolingo will invest in AI to create an exceptional product that teaches better. Expected initiatives in 2026 will have long-term impacts, but it's too early to guide specific financial results. The opportunity is large, and Duolingo aims for sustained growth. - Luis von Ahn Arellano(Co-Founder, Chairman of the Board)

How are AI advancements impacting your service evolution, and how is the Video Call feature being enhanced to drive Max adoption? - Ross Adam Sandler (Barclays Bank PLC)

2025Q2: AI improvements in models and latency are beneficial, but not significantly impacting language learning content. Video Call is enhanced through model refinement for better conversations and engagement. Focus is on average words spoken per Max subscriber. - Luis Alfonso von Ahn Arellano (Co-Founder, Chairman of the Board, President & CEO)

Contradiction Point 3

Focus on User Growth vs. Profitability

It involves a shift in strategic focus, from emphasizing near-term profitability to prioritizing user growth and long-term investments, which could have significant implications for financial performance and investor expectations.

Is the focus on long-term prioritization a durable strategic shift? Will booking pressure persist into next year? - Nathaniel Feather (Morgan Stanley)

2025Q3: For years, Duolingo will invest in AI to create an exceptional product that teaches better. Expected initiatives in 2026 will have long-term impacts, but it's too early to guide specific financial results. The opportunity is large, and Duolingo aims for sustained growth. - Luis von Ahn(Co-Founder, Chairman of the Board)

Are there signs of macroeconomic softness and how is Duolingo positioned globally? How does AI assist with product testing and development? - Ralph Schackart (William Blair)

2025Q1: We are definitely looking at the long term. And we're definitely looking at – Matt, I think you probably mentioned this, but we're definitely looking at long-term profitability as well. - Luis von Ahn(Co-Founder and CEO)

Contradiction Point 4

AI Impact on Product Development and Efficiency

It pertains to the role of AI in product development and workforce efficiency, which could influence Duolingo's ability to scale and optimize its offerings, impacting growth and profitability.

Why prioritize growth over short-term profits with AI advancements? - Ralph Schackart (William Blair & Co.)

2025Q3: AI has allowed cost efficiencies, and Duolingo is willing to invest heavily in innovation without compromising profitability. - Luis von Ahn(Co-Founder, Chairman of the Board) and Matthew Skaruppa(CFO)

How do AI cost optimizations affect Duolingo's long-term profitability and AI's impact on Max and Lily? - Justin Patterson (KeyBanc)

2025Q1: AI cost savings are offset by investing in new features. - Matt Skaruppa(CFO)