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Duolingo (NASDAQ: DUOL)
Q1 2024 Earnings Call
May 08, 2024, 5:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Debbie Belevan
Good evening, everyone, and welcome to Duolingo’s first-quarter 2024 earnings webcast. Just a fun fact before we get started, that catchy song, Spanish Or Vanish, has already 1 million listens on Spotify, if you can believe it. Today, after market close, we released this quarter’s shareholder letter, a copy of which you can find on our IR website at investors.duolingo.com. On today’s call, we have Luis von Ahn, our co-founder and CEO; and Matt Skaruppa, our CFO.
They’ll begin with some brief remarks before opening the call to questions. [Operator instructions]. Please note that this event is being recorded [Operator instructions]. And just a reminder, we’ll make some forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties.
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Some of these risks have been set forth in the risk factors of our filings with the SEC. These forward-looking statements are based on assumptions 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. Additionally, we’ll 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 it over to Luis.
Luis von Ahn — Co-Founder and Chief Executive Officer
Thank you, Debbie. And welcome, everyone. We’ve started 2024 on a strong note with another stellar quarter. In Q1, we grew revenue and bookings by 45% and 41%, respectively, delivered record profitability, and grew DAUs 54% year over year.
These results show how powerful our product-driven flywheel is. Our excellent product fuels word of mouth growth, which in turn provides data to continuously improve the product, ultimately driving higher engagement and subscriber conversion. Our three-pronged approach of teaching better, growing users, and converting them to subscribers continues to be a winning strategy for us. This year, our monetization efforts are focused on optimizing our subscription offerings, including our family plan and our third tier Duolingo Max.
We feel good about the progress we’ve made on Max based on the results of our experiments to date. Because of that, we rolled out Max more broadly in April. And today, roughly 10 — 5% to 10% of our DAUs have access to it. We will make it available to more countries and courses in the next few months.
We’re also improving our family plan experience by streamlining the invite flow and having more engaging social features. Our progress on these initiatives, alongside other monetization initiatives on our current trends, give us the confidence to raise our full-year guidance. Finally, our English learner initiative will lay the foundation for long-term user and monetization growth. Although the vast majority of global language learners are learning English, English learners represent less than half of our DAUs, which is why we see a substantial opportunity to expand into this part of the market to grow users and bookings over the next couple of years.
This growth area, along with the continued momentum in our core product, highlights the massive opportunity ahead of us. With less than 1% of the language learning market, which is estimated to reach $115 billion by next year, you can see that we are just getting started. Our continued execution against our strategy is why we are confident that we can sustain rapid growth for years to come. And with that, I’ll turn it over to Matt.
Matt Skaruppa — Chief Financial Officer
Thanks, Luis. I’ll provide some additional color on our Q1 results before updating you on our guidance for the remainder of the year. As Luis shared, we saw a very strong Q1 performance with a combination of 41% bookings growth, 45% revenue growth, and a record 26% adjusted EBITDA margin, showing the continued strength of our business. We beat our Q1 guidance, thanks to the compounding impacts of our growth and monetization experiments and our social-first marketing.
This strategy continues to drive organic growth and increasing subscriber conversion. The continued strength in the business is what gives us the confidence to raise our 2024 bookings and revenue guidance. At the midpoint, we are guiding to bookings and revenue growth of 31% and 38%, respectively. I’d note that this growth comes even as we lap an incredibly strong 2023.
For Q2, we are guiding to similar bookings and revenue growth rates as the full year despite comping an unseasonably strong Q2 last year. As we mentioned on the last call, we expect Q3 and Q4 growth rates to step down from Q2. Note that if foreign currency rates were constant year over year, our Q2 bookings growth rate would be about 3 points higher, and our full-year bookings growth rate would be about 1 point higher. We are also raising our adjusted EBITDA margin guidance to 23.5% at the midpoint.
Our updated full-year adjusted EBITDA guidance reflects the operating leverage we expect to achieve across all expense categories this year. Our profitability typically varies a bit from quarter to quarter given our bookings and expense seasonality. Specifically, as we said on the last call, we expect Q2 margin to be lower than Q1 and are guiding to 21.5% to midpoint. And in Q2, we expect to see some deleverage across all the spend categories, driven by increased hiring in R&D and normal course increases in sales and marketing and G&A.
We expect adjusted EBITDA margin for Q3 will be lower than Q2 because it’s typically our largest hiring quarter and because we’ve shifted some sales and marketing spend into that quarter. And Q4 will be similar to Q1. For the full year, we are guiding to an incremental adjusted EBITDA margin of 39%, which is slightly above our long-term adjusted EBITDA margin target of 35%. Finally, we ended the quarter with approximately 49 million fully diluted shares outstanding using the quarter-end close price.
And in 2024, we expect to end the year with about 1% net dilution from equity issued to employees which is similar to the dilution we had in 2023. And with that, I’ll turn it back to Luis.
Luis von Ahn — Co-Founder and Chief Executive Officer
Thanks, Matt. I want to close by saying that this quarter’s results are a testament to the dedication of our team and to the support of our subscribers, both of whom help us expand our mission to more learners. Finally, I’d like to extend a huge thank you to Laela Sturdy, a long-serving board member, who will be stepping back to focus on other priorities. Laela has been a tremendous supporter of Duolingo for the past decade and was instrumental in the progress we’ve made to date.
So thank you, Laela. And now we would be happy to take your questions. I’ll turn it back to Debbie to manage the queue.
Debbie Belevan
All right. Thanks, Luis. [Operator instructions] Your first question comes from Ralph Schackart of William Blair.
Ralph Schackart — William Blair and Company — Analyst
Good afternoon, Luis and Matt. Two questions if I could. In the letter, you talked about optimizing subscription tiers throughout the year. I think you’ve talked about this previously.
Maybe just give an update on that, if you could, please, what you’re finding there. I’m guessing you’re doing some testing. And then I know you don’t manage the ARPU. But just sort of any impact as it may relate to impacting ARPU as we progress through the year? And then I have a follow-up.
Luis von Ahn — Co-Founder and Chief Executive Officer
Thank you, Ralph. Thank you for the question. So in terms of subscription tiers, historically, we’ve had two tiers, the free tier and Super Duolingo. About a year ago, we started experimenting with a third tier, which we call Duolingo Max, where the idea was that this coincided with the large language models and generative AI coming out.
So we decided to use the AI features as a good kind of excuse to start the third tier, which is something we wanted to do for a while. So we started experimenting with Duolingo Max, which had a couple of AI features, which are mainly conversational features. And as we said, it was going to take us about a year to get to a wider rollout, and this is what just happened. We started a wider rollout because we’re pretty happy with the results.
I mean, generally, we’re seeing that users that — there’s a desire from users to have higher tier. What you’ll see us do over the next few quarters is, first of all, roll out Max to other countries and other languages. Right now, Duolingo Max is accessible only to people who are learning French and Spanish on iOS in six countries. We expect to put it on Android and in many more countries and many more languages to learn, which will get it to a higher fraction of DAUs.
The other thing that you’ll see us do is where you’ll see us start shifting features around to see what is the best packaging, and there’s no real reason for the highest package to be just AI features. So we’re doing experiments, for example, to put unlimited hearts, which heart — you lose a heart every time you make a mistake. We’re running our experiment to put unlimited hearts in Max. So what you’ll see happen is that by — toward the end of the year, we’ll probably have a pretty set of features.
And then at that time, there will be work to be done to try to move as many of our subscribers to Max as possible. That’s kind of what we’re doing for the tiers. I’ll let Matt answer the ARPU question.
Matt Skaruppa — Chief Financial Officer
Yes. On the ARPU side, there’s a general trend that we’ve talked about before with our ARPU trending back toward basically flat year-over-year growth if nothing else happened if you add in a higher mix of either family plan or Max, you could see that have some upside to it. And so that’s how we think about it, Ralph, in the model.
Ralph Schackart — William Blair and Company — Analyst
Right. Just one more, maybe for Luis. Just in terms of advanced English product, obviously, it’s a big strategic focus. Maybe just a quick update how it’s progressing.
But maybe more importantly, if you get this right or if the consumers really adopt this product, sort of maybe give us a sense of like how impactful this could be for the overall business.
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah, great question. Thank you for asking because it’s something we’re very excited about, our English learner opportunity. Just to put things into context, if you look at the global language learning market outside of Duolingo, the overwhelming majority of people who are learning a language are learning English, and the overwhelming majority of the spend is in people who are learning English. With Duolingo, we’re underrepresented in users, and we’re even more underrepresented in terms of revenue when it comes to English learners.
Less than 50% of our DAUs, for example, are learning English. So we see this as a pretty major opportunity, and this is why we’re investing in teaching English better. And in particular, the thing that we’re doing for teaching English, just to remind everyone, we have a different English course for different base languages. So for example, we have an English course for Chinese speakers, and that’s a different course than the English courses for Spanish speakers, etc.
So we have about 20 English courses. And if you look 3 years ago or so, they got due to different levels of proficiency, each one of these courses, and none of them got you to a very high proficiency. What we have done over the last couple of years, and this is one of the major achievements of this company, is we’ve made it so that our English courses, in particular, 18 of our 20 English courses now get you to pretty high proficiency. So that’s the first thing we needed to do is get people to more advanced levels because English in particular, English learners usually are at a more advanced levels than other languages.
So first thing is we needed to get people to higher proficiencies. The content is now there as of the last few weeks. So that’s good. That’s kind of checkmark one.
The next thing that we’re working on is getting — placing people into the right spot in the course. Now that we have way more advanced content. When new users come in that have prior proficiency, we need to put them in the right place in the course. This is more important with English than with other languages because for people who are learning Swedish or whatever other language that is not English, most of them come to Duolingo as complete beginners.
English learners, it just turns out most people in the world who just know some amount of English. So they come in with prior proficiency. But this prior proficiency that they come in with is pretty patchy because they may have learned it by watching some movies or they took English in third to the fifth grade or just listen to some songs. So what they know in English is pretty patchy.
So the problem of putting them in the right place in the course is tricky. But that’s what we’re working on, and we’re making good headway. Once we are able to do that, which will happen throughout this year, we’re going to start marketing so that Duolingo is now known as a good place to learn intermediate to advance English. And when that happens, I think we’re going to start seeing some meaningful contribution of these English courses more than they have now.
In terms of how large this opportunity is, it’s hard to say exactly, but we think that this is going to be pretty meaningful. So this is — and this is one of the main reasons why we think there’s — in the span of the next midterm, kind of 3-ish years, we see that this is going to be a strong contributor.
Ralph Schackart — William Blair and Company — Analyst
Thanks, Luis. Thanks, Matt.
Debbie Belevan
All right. Next question comes from Justin Patterson of KeyBanc.
Justin Patterson — KeyBanc Capital Markets — Analyst
Great. Thank you very much, and good afternoon. Luis, in the letter you tease having family class, more Family Plan optimizations in there. From what we can tell, friend class have been pretty popular in terms of driving daily engagement.
So I’d love to hear more about just how you’re thinking about some of these optimizations around Family Plan going forward, what that could do for the business. And then, Matt, for the financial part of the question, we’ve often found that Family Plan is much better retention characteristics, much higher ARPU for companies, pretty price elastic. So as you see more value, see KPIs really improving around Family Plan, how do you think about that price to value ratio going forward? Thank you.
Luis von Ahn — Co-Founder and Chief Executive Officer
So I’ll start with the feature. So Family Plan is an interesting feature. The Family Plan was built by our monetization teams. There was no team that was called a Family Plan or anything, just we built one of the plans.
We built a Family Plan. And as soon as they built it, they move to doing something else. So they kind of left it there. It was pretty bare bones family plan.
And it just started growing by itself organically. So we found that there’s just a lot of desire from people to get a Family Plan. And what we love about the Family Plan, of course, is that it has much higher retention than our other plans because if you buy a Family Plan, it has multiple users in your family. As long as any of them to keep using it, you’re still on that plan.
So it’s been really great for us. We saw it get to about 18% of our subscribers are on a Family Plan now, and that’s without really spending any real effort improving the plan. So about 2 months ago or a couple of months ago, we started a new team that’s basically to work on improving the Family Plan. They’ve done a number of things.
They started out by just fixing some things that were — really should have just been fixed from the beginning. For example, it was the case. Even though it grew — Family Plan grew that much, it was the case that if you have some kids under 13 in your Family Plan, the adults couldn’t see the kids’ names. This just made no sense, so we have fixed that.
We are making it so that it is easier to find your family. So we’re working on that. We are adding a lot more social features, like basically wait for the whole family to collaborate or compete. So we think that over the next few quarters, we’re going to see an increase in the fraction of our subscriptions at our Family Plan.
I don’t know, Matt, if you have more about that with the pricing.
Matt Skaruppa — Chief Financial Officer
Yeah. On the price to value, Justin, I think it’s a great question. And I’ll just take a second to broaden it out. So we have added a ton of value to our super subscription and to Family Plan, and now we’re working on adding even more value with Max.
And I think that’s why when you hear us talk about experimenting with pricing, that’s part of what we’re trying to do just in general, is find ways to see if we’ve added enough value to consumers that they’re willing to pay us more for their subscriptions. I think on Family Plan, in particular, what Luis just mentioned is adding value to a plan that historically has had one defining value addition feature, which was adding more people. And so as we add more value, I think we will continue to experiment with the price the price of Family Plan. And I know that my two daughters get a lot more value out of it already because they can consistently nudge me to do a lesson.
So it’s not hard for me. I’m biased, of course, to squint and see us experimenting with pricing because we are definitely already improving the value of the plan.
Justin Patterson — KeyBanc Capital Markets — Analyst
Good stuff. Thank you both.
Debbie Belevan
Next question comes from Bryan Smilek of J.P. Morgan.
Bryan Smilek — JPMorgan Chase and Company — Analyst
Great. Thanks for taking the questions. I guess just to start on Max. Could you just talk about the ultimate revenue contribution and target mix as you continue to roll out this tier going forward? And I guess in terms of the sub mix, how much is incremental versus cross graders from Super and Free Game?
Matt Skaruppa — Chief Financial Officer
Yeah. I mean, Luis can talk more about maybe the longer-term vision. In the short term, Bryan, the answer is we don’t know yet. We’re still — we’ve rolled it out now to about 5% to 10% of users who can have the option to see it.
And so we’re excited about it, and we’re seeing a lot of traction. We’re seeing a bunch of evidence that people are willing to pay a substantially higher price for it. But in terms of the ultimate mix, we don’t know just yet. And certainly, in 2024, the impact of Max will be — is in our guide, but it’s commensurate with the fact that it’s only a 5% to 10% rollout now.
So it’s relatively modest in the 2024 guide. So I don’t know, Luis, if you want to talk kind of maybe at a broader level.
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. It’s hard to say what the ultimate mix is going to be because it will depend in part where we settle on what features are going to be in which plan. So it’s very hard to say because we have not settled on that. I mean right now, we’re still experimenting which features are going to be in which plan.
So I think we’re going to have more to say — we probably know the answer to this question in the next few quarters. But at the moment, I — it’s very hard to say.
Bryan Smilek — JPMorgan Chase and Company — Analyst
Great. That’s super helpful. And then I guess just on user growth, can you just talk about in any given quarter, just given we’ve seen some very strong social media and marketing campaigns, how much that contributes to growth? And just how you’re thinking about marketing going forward as you continue to scale the MAU base?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. It’s a great question. So generally, there are two big reasons why we’re growing so fast. The bigger reason is that we’ve just been improving our product over the last several years, and those product improvements compound.
And when the product is better, two things happens. People tell their friends organically. It’s kind of word of mouth because it’s a better product. And also people stick around for longer because it has better user retention in general, not just payer retention but user retention.
So that I would say is the majority, but also marketing and in particular our brand marketing has just done a really good job of getting the brand out there. This is all our stuff with our social media with TikTok and YouTube shorts and Instagram that we’re really being able to replicate all over the world. It’s hard to give an exact mix. But my sense is it’s probably two-thirds product, one-third marketing, but this is a very hand-wavy amount.
And the reason it’s so hard is because a lot of our growth just comes from word of mouth. And we just don’t — it’s hard to measure word-of-mouth growth, how much of that is affected by the fact that the owl did some weird thing on Instagram versus people told their friends. So that’s why. But yes, I mean, these are the two main reasons we’re growing.
And in terms of in the future, we’re very excited about all the marketing stunts that we have planned for the rest of the year. I mean I’m not going to spoil them, but we have really cool stuff coming.
Bryan Smilek — JPMorgan Chase and Company — Analyst
Great. Thank you for taking my questions.
Luis von Ahn — Co-Founder and Chief Executive Officer
Thank you, Bryan.
Debbie Belevan
Next question comes from Jian Li, who’s sitting in for Mark Mahaney at Evercore.
Jian Li — Evercore ISI — Analyst
Yes. Thank you very much. First, just a quick follow-up on the Max. I know it’s probably early stage as well, but anything you can share on the uptake of Max versus Max family and then monthly versus annual? Like is that different from your current super mix? And also for music and math, any update on the learnings and product roadmap for the rest of the year? Because I can imagine you’re leaning into Family Plan.
Math would definitely be relevant, right? So — and then I’ll have a follow-up after.
Luis von Ahn — Co-Founder and Chief Executive Officer
Matt, do you want to take the next question, and then I’ll talk about music and math?
Matt Skaruppa — Chief Financial Officer
Yeah, Jian Li, the mix question is going to be one that we already mentioned, which is, right now, the number of folks who are subscribing to Max is relatively small, and so we can give you the mix numbers, but it’s going to change a lot as we roll it out even this quarter and throughout the rest of the year. So I don’t know exactly how to guide you on that just yet, except to say that like Luis said, we’ll know more over the next couple of quarters. And again, I think it’s going to be — it’s going to vary based on what features go where, what the price is, and how it interacts with things like the Family Plan, math and music over time.
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. And in terms of math and music, again, for context, what we’ve done is a few months ago, we added math and music as courses through the main Duolingo app. Currently, they are available only on iOS. They’re going to come on Android this year.
So that’s part of the roadmap. Also currently, the courses are only available if you’re — the language of your phone is either English, Spanish. German, or French. So another thing that we’re going to do is make them available kind of for more — basically for more markets, for more languages.
So those are kind of standard bread-and-butter things that we’re going to get more users trying these. But the main thing that we’re doing for both of them is just adding a lot more content and making it more fun. In the case of math, we’re adding a lot more real-world content. So as opposed to just seeing kind of the standard math operations, you’ll see them with thermometers and dollar bills and stuff like that, which people like quite a bit.
We’re finding that people like those quite a bit. There’s music. You probably see us do things like, well, this may not be for this year, but over time, instrument integration. That’s a big thing that we’re going to be working on for music.
But in general, we’re very happy with the growth of math and music. Now I just need to remind you one thing because I have to remind people every time. We do not expect that we’re going to get very meaningful revenue contributions from math and music, certainly, this year. There may be some next year, but it won’t be that meaningful.
I mean it will just take some time for these quarters to grow. But so far, they’re growing very well, and we’re super happy with the results.
Jian Li — Evercore ISI — Analyst
Great. And then another question just on the bookings guidance. I hope I’m doing this math right. I think last quarter, you guys talked about bookings potentially 5 points decel from Q1.
I think the guidance is just a little bit short of that. So anything that you would call out?
Matt Skaruppa — Chief Financial Officer
I think the strength that we’re seeing in the subscription business, so subscriptions grew 47%. Subscription bookings grew 47% year over year in Q1, which was faster than we expected. It was very strong. And so subscriptions is continuing to grow.
That’s why the full-year guide is up. In Q2, subscriptions, again is going to be the majority of the story. So that’s just how the growth rates have shaken out as we’ve seen how subscription strength has performed so far this year and what we expect for the rest of the year.
Jian Li — Evercore ISI — Analyst
Good.
Debbie Belevan
Great. Next question comes from Ryan MacDonald of Needham.
Ryan MacDonald — Needham and Company — Analyst
Thanks for taking my questions. As we think about the investments you need to make within — for English content, and then also to market the English learning capabilities of Duolingo moving forward, can you give us a sense of what maybe the incremental magnitude of those investments might be? And what maybe the time frame it’s going to take in terms of to get additional content out and then obviously, then to be able to start marketing that and sort of gaining share among those learners?
Luis von Ahn — Co-Founder and Chief Executive Officer
Great question. For English, the content — the good news of the content is that we’ll continue iterating on and improving it. But at this point, the content is out there. So we are done doing the content.
And what was amazing about it is this is really the first big batch of content that we were able to generate in large part because of generative AI. I mean we use large language models for this. So it was a lot quicker and a lot cheaper to generate than what we have been doing in the past, which was mostly handmade. Now this is not to say that humans are not involved anymore.
They’re still involved, but the involvement is much less because we’ve been using generative AI. The other awesome thing about generative AI with this is that it allowed us to do — it still — it is allowing us to do things a lot faster. And what that does, it just changes the calculus for everything, and you’ll see this with English. There were projects that if they were pitched to me 7 years ago or 5 years ago, and I would just do the back-of-the-mill calculation of how long it was going to take to make the content, and I would — it would be pretty clear that it was going to take us 5 years to make the content. I would say let’s not do that project because that’s — I don’t want to spend 5 years on that.
That same content can now be made in, call it, 3 months. So now I’m just like, yeah, sure, go for the project. And even more, even if we make the content in 3 months and at the end of the 3 months, we realized we screwed something up, it’s OK, we can redo it again in 3 months. So it’s just allowing us to do — to be a lot more aggressive on what projects — content projects we work on.
So in terms of spend, I don’t think this is something that you should be too concerned about in terms of the spend of the content. And in terms of the marketing, this is something else that we’re not going to — because as a company, we’ve never been a company that use this, for example, performance marketing that heavily or anything. So you’re not going to see us spend $100 million on a campaign to convince English learners on this. Probably what you’ll see us do is do a lot of in-product marketing inside the Duolingo app, which is free and probably a lot of our very strong social media to convince people that Duolingo is an effective way to learn more advanced English.
Ryan MacDonald — Needham and Company — Analyst
Makes sense. All right. That’s helpful color. And then maybe just speaking of social media channels.
Obviously, we continue to see developments around TikTok and a potential ban and bills being passed. Just can you remind us sort of what percentage now of sort of marketing spends on TikTok in the U.S.? And then if the need arises and you need to continue to diversify, what’s the process like to sort of migrate maybe some of those campaigns off? And what’s relative effectiveness maybe on other channels relative to TikTok? Thanks.
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. Great question, Ryan. So OK. So there are a number of things to say here.
First of all, our TikTok views are organic. So we don’t pay for that. That’s just — it’s organic stuff. The — what we’ve decided — we realized a while ago that it was a good idea for us to diversify away from TikTok.
This was more than a year ago. I mean we got very prominent on TikTok, and that was great, but we realized that it was a good to diversify. So we’ve done a number of things. For one, we’ve invested in Instagram and YouTube shorts.
The good news is that YouTube shorts and Instagram reels are products that are pretty similar to TikTok. So what works on TikTok, pretty similar things, work on YouTube shorts and Instagram reels. That’s one thing to say. Another thing to say is by now, actually, YouTube contributes more users than Instagram for us.
Already, that surpassed it. So that’s good for us. The other thing is that our TikTok views in the U.S. are — the U.S.
accounts for less than — it’s a minority of the TikTok views because we have views from TikTok from all over the world. So our sense is that if TikTok were banned, which may happen, it’s probably going to take about a year for that to happen. And if that were to happen, already, it’s a minority. It’s not a very large fraction of users that are coming from our TikTok views because we’ve diversified a particular type of use in the U.S.
And then the other kind of in-house view is that what probably happened is what happened basically in India. Basically, people moved to — from TikTok to Instagram or YouTube, where we’re already pretty strong. So overall, we’re not particularly concerned about a potential TikTok ban in the U.S.
Ryan MacDonald — Needham and Company — Analyst
Excellent. Thanks for the color.
Debbie Belevan
Next question comes from Andrew Boone of JMP Securities.
Andrew Boone — JMP Securities — Analyst
Hi, guys. Thanks so much for taking my questions. I wanted to ask about the deceleration in MAU and DAU, and this may be more of a theoretical question. But how close do you guys think we are to occur where growth would be more limited to your ability to generate new users and rest of the users?
Luis von Ahn — Co-Founder and Chief Executive Officer
Great question. I mean so yes, DAUs decelerated a little bit — well, DAU growth decelerated a little bit. The way we see it, we had like 10 quarters of accelerating DAU growth, and we kept saying almost every quarter like this can happen forever, this can happen forever. And DAU growth was accelerating, but it was accelerating a tiny bit.
It was like 60%, then it was 60.5%, then it was like 61%, etc. And it kind of went all the way up to 64%. This time, we had 55% — sort of 54% DAU growth. We’re — at the beginning of Q2, which we already have, is looking higher than the 54%.
So we think it’s going to go a little higher than that. Kind of the way we see it is we’re at around 60% DAU growth. I mean some quarters are a little more, some quarters a little less. It was kind of the fluke thing that we were going — creeping up for like 10 quarters in a row.
But the way we see it is we’re around 60% DAU growth. And we think that that’s going to continue for a while. It’s hard to say exactly what a while means, but we feel pretty good about our DAU growth. So yes.
Andrew Boone — JMP Securities — Analyst
And then for my second, I wanted to ask about subscriber conversion. It ticked up this quarter, looks very healthy. Can you talk about just the strength of the ’23 cohort now coming through, and it’s just kind of that yearly lag, and that’s what we’re seeing for conversion? Or is there anything else that you guys want to call out there as we think about that metric? Thank you so much.
Matt Skaruppa — Chief Financial Officer
Yeah. I’ll take a little bit, and then Luis can talk about some of the products out of it. But when we look at the numbers, Andrew, that’s what we saw, and that’s what I mentioned to a question earlier around the subscriber bookings growth. Cohort conversion has improved across every cohort from 2023, and so we feel really good about the subscriber free-to-pay conversion and on the continuing ongoing conversion of those cohorts.
So it’s led to — that’s what led to the 47% bookings growth for sub bookings in Q1 and why we feel pretty good about the rest of the guide on the sub booking side. So Luis, if you wanted to mention anything about the product.
Luis von Ahn — Co-Founder and Chief Executive Officer
Well, I mean, just generally, we keep making the subscription tiers more appealing for people to subscribe, and it’s working. So it’s getting more and more people to subscribe. Yes.
Andrew Boone — JMP Securities — Analyst
Thank you.
Debbie Belevan
Next question comes from Eric Sheridan of Goldman Sachs.
Eric Sheridan — Goldman Sachs — Analyst
Thanks so much on taking the question. I just have one maybe more for Matt. Obviously, you continue to sort of demonstrate continued incremental margin outperformance versus the way you guide one quarter forward. Obviously, you’re talking about a step back in margins lower than the level you just put up in Q1 for both Q2 and the remainder of the year or the full year.
Talk a little bit about the investments you want to make between now and the end of the year that could cause that margin to take a step back from the level set in Q1. And if you were to outperform margins as we go through the end of the year, what would be some of the drivers and more of the upside node? Thanks.
Matt Skaruppa — Chief Financial Officer
Yes. No, it’s a great question. And I understand why you would ask it, given that we printed a 59% incremental margin, which is higher than our long-term margin by a lot. . The reason that happened in Q1 was twofold.
One was we actually just shifted some of the expenses out of Q1. It’s in the normal course. Some of that went into Q3, which is why I mentioned sales and marketing expense goes up in Q3 relative to our previous guidance. That was about half of it.
The other half was we were finalizing some additional projects, so Max and some of the U.S. learning content. So we capitalized about $1 million, $1.5 million more incremental than we expected. That was about 2 points of adjusted EBITDA margin.
So if you take those two things into account, you get about half of that overperformance and incremental margin. But to step back even from that very detailed Q1 answer, the broader point is we have a ton of things we want to invest in throughout the course of this year and then for the next couple. So Luis mentioned English learning. That is a priority.
We’re going to focus on that. We’re going to focus on math and music. We’re going to focus on our core subscription business as well. And so that’s why we think that the prudent thing to do to attack this huge opportunity we have is to continue to invest such that that incremental margin stays closer to 35% than 60%, and that’s what we’re guiding to, and that’s where I think we’ll see the rest of the year.
Debbie Belevan
Next question comes from Chris at UBS.
Chris Kuntarich — UBS — Analyst
Great. Thanks for taking the question. Maybe just going back to the Max tier. Are there any markets that as of right now, as we just kind of think about the cost of Gen AI, where it’s just simply too restricted to be rolling out rolling out the Max tier? And can you maybe kind of give us a sense for what that scale is?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. there are markets where we do not plan to roll it out given the current cost. These are usually very low monetizing markets. It’s markets like India, where we have a lot of users but not a lot of payers.
Generally, we expect that in the markets that monetize pretty well, call it, Western Europe, the English-speaking world, Japan, Korea that will be able to roll out Max because it’s fine. Now that said, we expect that the cost of generative AI, the cost of large language models will go down. So over time, we’ll probably be able to roll out everywhere. That’s my hope.
But for now, our intent is for the rest of the year, you’ll probably see us in kind of higher GDP countries.
Chris Kuntarich — UBS — Analyst
OK. That’s very helpful. And just kind of curious about how you guys are thinking about that LTV to CAC for Max. I think you touched on it a little bit earlier.
But just as we think about it across the various plans, how does that kind of compare the core super subscription family plan versus Max? And then just a quick follow-up on another question. Matt, you had mentioned kind of thinking about 60% DAU growth going forward. Is that also the right framework to kind of be thinking about 2Q? Thanks.
Matt Skaruppa — Chief Financial Officer
Yeah. Yeah. So on the LTV side, we primarily — because most of our acquisition comes from organic word of mouth. We mainly focus on the LTV side of that equation, and so, it’s basically right now that the Family Plan has a higher LTV than the Super Plan because it has a higher price and higher retention.
Max right now could have a higher LTV depending on a bunch of variables that go into it, but mainly what price we end up settling at and what feature set goes in there. So that will remain to be seen. Right now, if I had to put a pen and paper on it, the LTV of Max is higher or expected to be higher over the medium term as we both refine the pricing and then the cost of the Gen AI features come down. So but we’ll have to see.
We have to experiment with that over time. And then the — what was the second part of your question? Can you remind me?
Chris Kuntarich — UBS — Analyst
Yeah. Just on the 2Q DAUs, you hadn’t commented about 60%. Is that kind of the right framework for 2Q?
Matt Skaruppa — Chief Financial Officer
Yeah. I think that was Luis’ comment around the fact that we accelerated up over 10 quarters. from 40-some-odd percent to about mid-50s. And then from the mid-50s up to the mid-60s, it kind of ticked up, not a ton over the course of several quarters.
And so right now, we’re feeling very good about being in the — in that range for a while. As Luis said, and I’ll steal from him, it’s hard to say how long a while is, but we feel good for definitely for Q2 and for most of 2024.
Chris Kuntarich — UBS — Analyst
Understood. Thank you so much.
Debbie Belevan
Next question comes from Alex Sklar of Raymond James. .
Alex Sklar — Raymond James — Analyst
Great. Maybe just sticking on that LTV topic that you just kind of hit on. But on LTVs and retention, broadly, after maybe Family Plans, which seems like that’s been the most successful newer development to date. What are some of the biggest tests you’re still looking at to kind of further move the needle in LTV and retention metrics?
Luis von Ahn — Co-Founder and Chief Executive Officer
Probably in terms of tests continuing improvements of Family Plan. And in a Family Plan, it was very good, but it was just — it’s kind of a bare bones feature. So we expect that, that will have — there will be a higher shift to Family Plan, which should increase LTV. And then the other big group of tests is Max, like Matt said.
Our expectation is that Max will end up having higher LTV, but it’s hard to say, but we are — that’s what we’re working on, and hopefully, that we’ll be able to find a set of kind of where each feature goes so that Max is actually a big win in LTV. But it’s very hard to guarantee that right now.
Matt Skaruppa — Chief Financial Officer
Yeah. And Alex, I would just emphasize that the LTV of our annual subscription product is very good, and we have plenty of free users to go convert to paid. So I think there’s a big amount of LTV to still go get in our free users as well. So I just don’t want to skip over that.
The Family Plan is great. Max is going to be great. But the normal course of more users converting more of those to super even produces a ton of LTV, and that’s core to our strategy this year in the near term.
Alex Sklar — Raymond James — Analyst
Got it. That’s super helpful context, and it’s a very fair point on the big MAU-based, DAU base still got game. Matt, maybe this one is for you. You’ve talked about tracking kind of at-risk paid subscribers in the past.
I’m curious if there’s been anything from a macro standpoint, just in terms of consumer health that you’re picking up in the numbers on the scenes right now.
Matt Skaruppa — Chief Financial Officer
Yeah. We haven’t seen anything. We track that metric and a bunch of others to see how our subscriber base is doing, and it looks pretty consistent with 2023. So not to say that that couldn’t develop, but we haven’t seen anything so far this year.
Alex Sklar — Raymond James — Analyst
Great. Thank you both for your time.
Debbie Belevan
OK. Next up, we’ve got Ross Sandler from Barclays.
Ross Sandler — Barclays — Analyst
Hey, guys. Thanks for taking my question. Awesome. So the DAU was already answered, so I appreciate that 60% comment.
But I guess as we go back to converting DAU or MAU TTM to payers, that conversion rate is moving around a bit. So with — I guess what explains the variation we’re seeing there between geo, language corridor, or like product changes that you guys are doing to kind of have that payer ratio fluctuate as it is?
Matt Skaruppa — Chief Financial Officer
Ross, what metric are you keying in on? Are you looking at subs per MAU? Or what’s the metric you’re saying moving around?
Ross Sandler — Barclays — Analyst
Yeah. So well, the DAU decel, I was going to ask why is that happening in the March quarter, first of all, but I think you kind of answered it. And then it’s going to reaccelerate to 60% in the in the June quarter, but your bookings guide is kind of decoupling a little bit. So these types of variations, that would be kind of the key of the question.
Is that stuff that you guys are doing with the product? Or is it something else with these corridors that we need to understand? That’s all. Thank you.
Matt Skaruppa — Chief Financial Officer
No, no, I appreciate it. And I appreciate you giving us a chance to clarify. So for Q2, I don’t think Luis was saying that Q2 was expecting to be exactly at 60%. I think he was saying April was faster than the 54%, and so we feel good about being in the range there.
I don’t think that was meant to be — it’s going to be 60%. It’s around there, plus or minus. It’s just the normal course variation that comes from a great organic growth story that you don’t have a point operated lever on that. So you can’t dial that into 57.2% if you wanted it, right? So just it’s varying.
It’s 55%, 60%. It’s going to be in the range. On the payer side and the bookings, what I would say is that Q2 is typically a slower quarter for us. You can see that in the seasonality.
There’s nothing all that interesting in that because it doesn’t have any of the onetime things that we do throughout the year. So it doesn’t have New Year’s promo, which is in the Q4, Q1. Doesn’t have back to school, which is Q3. Q2 has got just kind of a normal course quarter, and it’s historically been one that just kind of goes with the flow. So I don’t think you’re seeing anything that we’re doing necessarily with the product driving a bunch of volatility.
It’s just kind of normal course stuff.
Ross Sandler — Barclays — Analyst
Thank you.
Debbie Belevan
OK. And next question comes from Arvind Ramnani at Piper Sandler. Arvind, you’re on mute.
Arvind Ramnani — Piper Sandler — Analyst
Yeah. Can you hear it now?
Debbie Belevan
Yeah.
Luis von Ahn — Co-Founder and Chief Executive Officer
Hi, Arvind.
Matt Skaruppa — Chief Financial Officer
Hey, Arvind.
Debbie Belevan
He just went back on mute.
Arvind Ramnani — Piper Sandler — Analyst
Can you hear me now?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yes.
Arvind Ramnani — Piper Sandler — Analyst
Sorry, I’m on the road. So sorry if any background noise. I want to ask about your India kind of business, right? Like, I mean you indicated like those are kind of markets that don’t really have a kind of high tolerance to pay for. They have a higher tolerance for advertising, and maybe that’s kind of the market.
But is there a different price point that will make them an interesting market from a like a subscription — a paid subscription basis?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yes. I mean it’s India is very interesting. I mean we’ve grown DAUs a lot in India, which is great. We do see significantly lower payer conversion, and that’s expected when we talk to other companies that are subscription-based.
It’s very hard to get payer conversion in India to go up. We have — the price of the subscription in India is lower. And my sense is that this is just — we’re going to continue doing things with India. But my sense is this is just a market that needs to mature a little bit in terms of people being OK with digital subscriptions.
So the way we see it is this is a great opportunity, but more in the midterm rather than in the short term because we’re going to continue trying things like in our purchases with India and stuff like that. But for the subscription, even if you look at companies like Spotify or other subscription businesses, it’s just India, it’s hard to get users to become digital subscribers. But I think that it’s changing over time. And I think if you look at it over kind of the next 5 years, you’ll probably see an increase.
Arvind Ramnani — Piper Sandler — Analyst
Yeah, terrific. That’s helpful. And I guess, Matt, once a year — in terms of like margins, right, like I mean — and maybe I don’t think of it this way. But when you think of your various cohorts, whether it’s Max or like Family Plans, does — and I know you don’t disclose it, but in general, where do margins come in each of these different cohorts? Because one thing is AI is exciting, but it’s also not cheap.
Matt Skaruppa — Chief Financial Officer
Sure. Yeah. And we talked about this on our — actually about a year ago, Arvind. We talked about the fact that for Max, it’s — there’s an incremental cost for every use case for every usage of it, and that does lower the gross margin of the Max product.
But in an absolute dollar margin basis because of the way we priced it, at least to date, on an absolute dollar margin basis, you’re better off, even with the prices that were happening last year. So again, I don’t want you to take away from that that’s where this ends. I think that’s where it starts, and we’re going to experiment with the price and the costs are changing relatively rapidly. So right now, I feel pretty good about our dollar margin on Max.
And I think ultimately, the gross margin will be just fine.
Arvind Ramnani — Piper Sandler — Analyst
Terrific. And just last question for me. Last year, you had a lot of kind of basically a sort of quasi free marketing, whether it’s in a form of the kind of Barbie movie and all of that. And I think when we met last time, we were saying a lot of that just basically came to you.
Is there anything you’re able to do in your business this year, are you able to kind of leverage some of that kind of basically free marketing from kind of popular events?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yes, we expect similar stuff to last year. I mean some of these — we expect similar stuff last year in terms of the volume of these. Some of them are outsized in terms of the impact, and that’s very hard to know which one is going to be outsized. But we have a lot of things that are coming to us basically for free mainly because we are a brand that has just struck a cord, and so we’re seeing that.
It’s hard to know whether the things that we have visibility toward for the rest of the year are going to be as big as the Barbie movie. It is very hard to say. But I can tell you that in terms of number of opportunities, it’s probably even higher than last year. So we’re just — I think there’s just a lot to that.
We were talking right before the call, we finally cracked Dua Lipa. She finally cracked. She finally mentioned us. We’ve been simping her for like years.
You finally mentioned the word Duolingo in some interview. So that’s the stuff that we see it’s just entirely for free, and we see a lot of those things are happening.
Arvind Ramnani — Piper Sandler — Analyst
Terrific. Hopefully, we’ll see Dua Lipa at the next Investor Day.
Luis von Ahn — Co-Founder and Chief Executive Officer
Who knows? We’ll see.
Arvind Ramnani — Piper Sandler — Analyst
Great. Thank you so much. That’s it.
Debbie Belevan
Great. Thanks, everyone. I’m not showing any further questions. I’ll turn it back to Luis for closing remarks.
Luis von Ahn — Co-Founder and Chief Executive Officer
Just.
Debbie Belevan
I’m sorry. Curtis just got his hand up at the very last second. Curtis?
Curtis Nagle — Bank of America Merrill Lynch — Analyst
Sorry about that. I think I hadn’t raised it somehow. But Luis, just a quick one on the music. I think you mentioned that there’s going to be — we’re working on some new features in terms of, I guess, integration with musical instruments.
Just curious a little bit more in terms of what that is and how much of, I guess, an unlock, right? And I don’t know if you’ve mentioned this before, forgive me, but how big is that market in terms of at least TAM?.
Luis von Ahn — Co-Founder and Chief Executive Officer
Yeah. So for music, we’re working on a number of things. What we have is we’ve only had the music course out for, I don’t know what, up 4 months, 5 months, a few months. And so we’re still adding a lot of features.
We know that a lot of people who want to learn music actually want to learn how to play an instrument. Today, with our music course, we have kind of like a phone piano thing, like, I mean, you can the tap on the phone. So over time, we’re going to do musical instrument integration. Another thing that we know people want and that we are going to have is licensed music.
Right now, all the music is stuff that is in the free domain, which usually means very old songs. We’re going to be adding licensed music as well, which is what people want to do. So we think there’s a lot of opportunity there to get people to have a — it’s going to be a really fun music learning experience. In terms of the TAM, we’ve looked into this.
There’s a lot of people learning music. So that’s good. It’s hard to say exactly for the TAM because — and because what we want to do for music is the same thing we did for language learning, which in fact, grew the TAM. I mean, for example, in the United States, 80% of our users for language learning were not learning a language before Duolingo.
So we just grown the market, and that’s kind of what we want to do with music. It’s hard to say exactly what it is. I don’t think it’s going to be as big as language learning, but I’m hoping for a significant fraction of language learning at least.
Curtis Nagle — Bank of America Merrill Lynch — Analyst
Just a quick follow-up on that question on the point of licensed music. Would that require some form of monetization to support that cost?
Luis von Ahn — Co-Founder and Chief Executive Officer
Yes, we would have to do that. I mean, it’s — of course, the details are still up in the air, but it would have to be the case that only the payers or at least the payers get the full experience or something like that. It will have to be basically, yeah, something to support that.
Curtis Nagle — Bank of America Merrill Lynch — Analyst
OK. Very good. Appreciate it.
Debbie Belevan
OK. That’s the last question. So I’ll turn it back to Luis to close up.
Luis von Ahn — Co-Founder and Chief Executive Officer
Well, just thank you, Debbie. I’d just like to thank everyone for joining us, and we look forward to speaking to you next quarter. Do your lessons, learn some music, and have a great evening.
Matt Skaruppa — Chief Financial Officer
Yes.
Duration: 0 minutes
Call participants:
Debbie Belevan
Luis von Ahn — Co-Founder and Chief Executive Officer
Matt Skaruppa — Chief Financial Officer
Ralph Schackart — William Blair and Company — Analyst
Justin Patterson — KeyBanc Capital Markets — Analyst
Bryan Smilek — JPMorgan Chase and Company — Analyst
Jian Li — Evercore ISI — Analyst
Ryan MacDonald — Needham and Company — Analyst
Andrew Boone — JMP Securities — Analyst
Eric Sheridan — Goldman Sachs — Analyst
Chris Kuntarich — UBS — Analyst
Alex Sklar — Raymond James — Analyst
Ross Sandler — Barclays — Analyst
Arvind Ramnani — Piper Sandler — Analyst
Luis Von ahn — Co-Founder and Chief Executive Officer
Curtis Nagle — Bank of America Merrill Lynch — Analyst
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