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Duolingo is expected to become one of the companies with the most opportunities to use AI to rapidly develop their business. The co-founder's graduate thesis is about how AI can help humanity. Duolingo may have been born for this opportunity.
It's difficult for people to learn because of games, social media, etc. constantly grab users' attention. It's like "you want people to eat broccoli, but next to it is the most delicious dessert ever." Duolingo decided to "make broccoli taste like dessert."
It took Duolingo 8 years to reach 1 million DAU, but only 21 months from 1 million to 3 million, and AI capabilities played a crucial role in this process. In the technology-driven education field, using AI to achieve Self-Adaptation learning and personalized content is becoming the norm. Duolingo's choice to actively integrate AI functions and make effective progress shows that it can not only keep up with current trends, but also actively participate and shape the future of education.
Duolingo was founded by Carnegie Mellon University students Severin Hacker and Luis von Ah in 2011. As US immigrants from different worlds and cultures, they understood the importance and necessity of learning different languages, which prompted them to found Duolingo. With Gamification's learning experience, strong brand effect, various beneficial marketing strategies, and the help of AI, Duolingo's stock price has risen by more than 210% in 2023.
Duolingo is not only an innovative language learning platform, but also one of the healthiest and most trending education companies in terms of revenue performance. Its revenue mainly comes from four parts: subscriptions, advertising, English testing, and other businesses.
Subscription business charges Super Duolingo members, providing a variety of learning and gamification functions and exempting ads, which is its main performance driver; advertising business charges advertisers who are willing to place ads on the app; English test business charges candidates (this test can be used for study abroad applications and visa applications, etc., and has been recognized by more than 4,500 universities/programs worldwide); other businesses include the sale of virtual goods within the app.
Most of Duolingo's revenue comes from subscription services, and paying users are concentrated in wealthy countries such as the US and Canada. Luis' view is: "This is a form of wealth redistribution. The basic idea of Duolingo is to find wealthy people to pay for everyone's education costs."
As a leading language learning platform, Duolingo has maintained a beautiful growth curve since its listing. With a vast language learning market, unique marketing strategies, and strong AI support, it leads the AI education track (other star companies in the generative AI track). It actively integrates new technologies such as AI to improve the learning experience, and is also trying to gradually expand its business to mathematics and music courses. In 2023, Duolingo was the first to access GPT4 and launched the Duolingo Max subscription service. With the support of AI, Duolingo's subscription revenue is growing rapidly.
The four success factors of Duolingo
1） The huge language learning market provides a fertile ground for development
Duolingo is not the first Listed Company to target the language learning market. As early as 2009, language learning software company Rosetta Stone completed an IPO and raised over 100 million US dollars, with annual revenue exceeding 209 million US dollars. However, in the eyes of the founder of Duolingo, Rosetta Stone only targeted a small part of the language learning market and charged them exorbitant fees. This is not a good business at all.
Duolingo has found a more clever way to enter the market than Rosetta Stone. They want to help those who want to learn a new language but cannot afford to pay for the software. Google Trends and the subsequent development of the two companies prove the vision of the founders of Duolingo.
Duolingo's popularity comes from being both a fun learning tool and a language treasure trove. It is completely free and offers teaching courses in over 40 languages, ranging from major languages such as English, French, and Japanese to minor and endangered languages such as Welsh and Navajo. Duolingo also offers a variety of courses and exercises, allowing users to easily master skills such as vocabulary, grammar, listening, and reading.
The huge language learning market space provides a broad space for the development of Duolingo. According to statistics, by 2023, about 1.20 billion people worldwide are learning a foreign language. In 2023, Duolingo's MAU 83.10 million people, with a penetration rate of nearly 7% for the global language learning population. Among them, 5.80 million paying users have a penetration rate of only 0.48% for the global language learning population. Therefore, Duolingo can further expand outward to attract more new users in the future, continuously improve the in-app purchase conversion rate of users internally, and there is still a huge space to increase market share.
On the other hand, as of 2022, the global online language learning market is as high as $20.34 billion and is expected to reach $89.53 billion by 2031 at a CAGR of 17.9%. As Duolingo's subscription revenue growth rate is much higher than 17.9% every quarter, it is expected to occupy a higher market share in the coming years.
2）Gamification learning experience greatly promotes user growth
Learning products or learning itself, the most important thing is to keep users engaged. Duolingo's idea has always been to make the learning process like playing a game, so that users can always immerse themselves in it. It can be said that Duolingo's success also lies in grasping the essence of learning.
Duolingo's learning method is very interesting. Users can complete various tasks and challenges, which greatly improves language skills. Moreover, it also has personalized learning paths and progress tracking functions, which help to develop learning plans and track progress at all times.
It's difficult for people to learn because games, social media, etc. constantly grab users' attention. It's like "you want people to eat broccoli, but there's the most delicious dessert ever placed next to it." Luis and his team decided to "make broccoli taste like dessert" and used many techniques for this.
Another example is the winning streak mechanism, which represents the number of days you have been continuously learning. This feature is very significant. As a result, users will open Duolingo every day in order not to lose their winning streak. It is reported that currently more than 3 million of Daily Active Users in Duolingo have clocked in for more than 365 days.
Also, Duolingo has always tried to make users willing to come back through clever and humorous "notifications". Currently, Duolingo's interesting and unique message notifications, and many users are willing to spread and re-create on social media based on "recall notifications", have given the product great recognition and praise.
Duolingo has successfully created an interesting language learning experience. They encourage users to be more proactive in learning (rather than seeing it as a chore), which is directly reflected in the increase in the number of users and the improvement of DAU and MAU, which is crucial for the product's advertising revenue. On the other hand, Duolingo's free model allows users to easily use most content and services, which makes learning easy and effectively motivates some users to upgrade to the paid version on demand. The significant growth of paid subscribers indicates that once users recognize the value provided by the platform, they are willing to invest in education.
Based on user recognition of the product, Duolingo experienced strong growth in both users and revenue. In Q3 2023, Duolingo's DAU jumped from 14.90 million in the same period last year to 24.20 million, with a growth rate of up to 63%. In addition, MAU increased by 47% year-on-year to 83.10 million. Equally important, the 60% growth of paying users reached 5.80 million. This demonstrates Duolingo's ability to effectively attract users and implement profit strategies.
3）Continuously Optimize User Experience and Engagement with AI
The rapid growth of Duolingo in recent quarters is mainly attributed to the continuous application of new technologies such as AI. With the help of large-scale model capabilities such as GPT4, it analyzes user performance and preferences in real-time, thereby generating highly customized learning paths. In addition, AI functions such as natural language processing can provide real-time dialogue practice and instant feedback, effectively increasing interactivity and improving customer engagement and retention.
AI has many uses in the Duolingo app. For example, if the user's accuracy rate is lower than 80%, they may find it too difficult and give up using the app. If the accuracy rate is higher than 80%, they may find it too easy and unable to learn knowledge, so they may also give up. Therefore, Duolingo needs to ensure that the difficulty of the questions is appropriate and keep the user's accuracy rate around 80%, so that AI can come in handy.
For example, Duolingo has a very complex AI system that chooses when to send notifications and what content to send. When is the most effective time to send notifications? 24 hours after the user last used the product. Luis' exact words were: "The reason is simple. If you were free at 3 pm yesterday, you should be free at 3 pm today. This is what AI, which costs millions of dollars, has discovered."
In October 2020, Duolingo introduced its self-developed feature - Birdbrain, which improves the adaptability of personalized courses. The Birdbrain model aims to provide a more personalized learning system, providing language materials with difficulty matching according to the learner's language proficiency. As the number of exercises completed by the learner increases, Birdbrain can also better understand the learner's proficiency and generate exercises of appropriate difficulty, helping learners improve their learning outcomes more efficiently.
Since then, the popularity of GPT models has not been missed by Duolingo. In 2021, Duolingo introduced GPT3 for generating language practice content, which is more intelligent than Birdbrain. With just human input of instructions and requirements, GPT3 can generate language practice content that meets the requirements. In March 2023, Duolingo announced the integration of GPT-4 and launched the Duolingo Max subscription service, which includes new AI features. The logic behind Duolingo's launch of these features is to achieve a teaching effect similar to that of a real person 1-on-1 through the product. Roleplay supports learners and AI simulating interactive conversations in certain life scenarios. In addition, users can chat with Duo (Duolingo's owl mascot) to obtain simple explanations of correct or incorrect answers and more examples.
It took Duolingo 8 years to reach 1 million DAU, but only 21 months from 1 million to 3 million. It can be said that AI capabilities played an indispensable role in this process. Currently, in the technology-driven education field, using AI to achieve Self-Adaptation learning and personalized content is becoming the norm. Duolingo's choice to actively integrate AI functions and make effective progress shows that it can not only keep up with current trends, but also hopes to actively participate and shape the future of education.
4）"Social priority "and" tailored to local conditions "marketing strategies
People want to be entertained, not sold. "This is the experience of the Duolingo marketing team. Duolingo tries to remind users that this is a language learning application, but it is also very interesting. Duolingo chooses to let Duo (Duolingo's owl mascot) participate in the online trend and even become an Internet celebrity.
In addition, although Duo is popular worldwide, Duolingo has found that Lily with purple hair is loved by many Chinese teenagers, so fan content about Lily has been widely spread on Chinese social media. Previously, Duolingo had Duo's peripheral products, and in the future, Lily's plush toys and stickers will also appear.
Duolingo adopts a "social-first" marketing strategy. Through popular culture, social media events, etc., fans and users become brand ambassadors, actively sharing experiences and participating in Duolingo's social content. The marketing team also creates Duolingo emojis and content that users like, which also brings considerable exposure to Duolingo.
Currently, the content created by users on TikTok and YouTube far exceeds the content published by Duolingo itself. This "social first" marketing strategy is very effective and inexpensive, and the target audience is also very accurate. Duolingo has become one of the most popular brands in the TikTok. As of Q2 2023, the social media exposure rate has increased by 150% year-on-year, which has promoted the development of Duolingo brand and user growth.
The current status and future potential of Duolingo's business
In recent years, thanks to the continuous expansion of the number of users and efficient payment conversion, Duolingo's revenue has increased from $71 million in 2019 to $369 million in 2022, with a CAGR of 50.99%. The revenue in the first three quarters of 2023 is $381 million, a year-on-year increase of 43%.
Although Duolingo has been in a loss-making state in recent years, the net loss reached $60 million in 2022 due to multiple factors such as stock compensation, increase in employee numbers, and equipment expansion. However, the Net Profit in the first three quarters of 2023 has reached $3.95 million, a significant improvement compared to the same period last year when the net loss was $45.644 million. Duolingo has achieved profitability for two consecutive quarters.
On November 8th, 2023, Duolingo announced its Q3 2023 performance, with MAU increasing by 47% YoY to 83.10 million and DAU increasing by 63% YoY to 24.20 million. Compared to Q2, both MAU and DAU showed significant growth.
In terms of the conversion rate of paying users, Duolingo reached 5.80 million in Q3 2023, a year-on-year increase of 60%. The new product Duolingo Max, which integrates AI functions for members, launched in the first half of 2023, is effectively improving User Experience and teaching quality, and is expected to further improve the conversion rate of paying users and per customer transactions.
In terms of revenue and profit, Duolingo's revenue in Q3 2023 was $137.60 million, a year-on-year increase of 43%. Net Profit totaled $2.80 million, a significant improvement from a net loss of $18.40 million in the same period last year. In the first three quarters of 2023, subscription revenue was $287 million, a year-on-year increase of 47%, accounting for 75% of total revenue, with the proportion increasing year by year. Advertising revenue has been around $30 million in recent years, with the proportion of revenue decreasing. English test revenue was $30 million, a year-on-year increase of 25%. According to the current growth rate, this revenue is expected to surpass advertising in 2024 and become the company's second largest source of revenue
In addition, the development potential of Duolingo is also reflected in the fact that R & D expenses always account for the largest proportion in the company's expense composition. From 2021 to 2022, the company's R & D expense ratio exceeded 40%, but the marketing expense ratio continued to decline. Thanks to Duolingo's social media marketing strategy, it maintains good market exposure and user stickiness while reducing marketing costs.
Co-founder and CEO of Duolingo, Luis, stated that the US is the main source of revenue, while the United Kingdom and Germany also make important contributions to revenue. China has become Duolingo's seventh largest market in the world and one of the fastest growing international markets. In response to the Chinese market, Duolingo launched its first dialect course, Cantonese, in 2022, which has attracted nearly 3 million users by July 2023.
In addition, during the Q3 financial report conference call, Luis announced that it will expand its business in the fields of mathematics and music courses, launch related courses, and improve its educational product matrix. Duolingo hopes to expand its product experience and AI capabilities in language learning to more new areas. This move is expected to consolidate Duolingo's position as an educational resource center, rather than just focusing on language.
2023Q4 Performance Outlook
The market expects that benefiting from the effectiveness of social marketing strategies and the continuous improvement of AI technology on User Experience, Duolingo's user, revenue, and profit growth will continue at the previous growth rate. It is expected that the fourth quarter revenue will reach $148 million, a year-on-year increase of 42.95%; earnings per share will reach $0.15, a year-on-year increase of 142.56%.
In this financial report, investors will focus on the growth rate of its DAU, MAU, and paying users, as well as guidance for revenue growth and profitability continuity in the next quarter and fiscal year. It is expected that Duolingo will likely continue the current trend in the next quarter, with multiple important data (revenue, MAU, and paying users) increasing by 30% -60% year-on-year. Given that the management announced during the third quarter financial report conference call that Duolingo will expand into the math and music fields, the market will also pay attention to the substantial progress of related new businesses.
In addition, according to statistics, in the past 8 quarters of financial reports, Duolingo's revenue and earnings per share in all quarters exceeded expectations. And in 7 of these 8 quarters, the stock price rose the next day, with an increase of 4% -34%.
Conclusion
The RockFlow research team has long been optimistic about the growth prospects of Duolingo. With Gamification's learning experience, solid business model, and commitment to supporting education around the world, Duolingo is expected to benefit from the development of AI in the long term.
Coincidentally, during the Q1 2023 financial report conference call, Luis said, "I feel very lucky to lead Duolingo to become one of the companies with the best opportunity to use AI for rapid development." His previous graduate thesis was on how AI can help humans in multiple dimensions.