Duolingo, Inc. [DUOL] Filings

10-Q 1 duol-20240630.htm 10-Q duol-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 001-40653

Duolingo, Inc.

(Exact name of registrant as specified in its charter)

Delaware

45-3055872

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

5900 Penn Avenue

Pittsburgh, Pennsylvania 15206

(412) 567-6602

(Address, Including Zip Code, and Telephone Number, Including

Area Code, of Registrant’s Principal Executive Offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.0001 per share	DUOL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 6, 2024, 37,436,672 shares of the registrant's Class A common stock were outstanding, and 6,102,077 shares of the registrant's Class B common stock were outstanding.

Table of Contents Page


Special Note Regarding Forward-Looking Statements			2
Special Note Regarding Key Operating Metrics			4
Risk Factors Summary			4
Part I Financial Information			6
Item 1. Financial Statements (Unaudited)			6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			39
Part II Other Information			40
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			83
Item 3. Defaults Upon Senior Securities			83
Item 4. Mine Safety Disclosures			83
Item 5. Other Information			83
Item 6. Exhibits			85
Signatures			86

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation, statements regarding our business model and strategic plans, including the introduction of new brands or products, and our implementation thereof; statements regarding our expectations, beliefs, plans, objectives, prospects, assumptions, future events or expected performance, including our ability to compete in our industry; the sufficiency of our cash, cash equivalents and investments; and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.

Without limiting the generality of the foregoing, you can identify forward-looking statements because they contain words such as “may,” “will,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal,” “objective,” “seeks,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are neither promises nor guarantees, but involve a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to:

•our ability to retain and grow our users and sustain their engagement with our products;

•competition in the online language learning industry;

•our limited operating history;

•our ability to maintain profitability;

•our ability to manage our growth and operate at such scale;

•the success of our investments;

•our reliance on third-party platforms to store and distribute our products and collect revenue;

•our reliance on third-party hosting and cloud computing providers;

•our ability to compete for advertisements;

•acceptance by educational organizations of technology-based education;

•changes in our business and macroeconomic conditions; and

•those identified in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, and in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report on Form 10-K”).

We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current

expectations, estimates, forecasts, and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and, although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. We cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. You should not place undue reliance on our forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements.

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “Duolingo,” the “Company”, “we,” “our,” “us,” or similar terms refer to Duolingo, Inc. and its subsidiaries.

Special Note Regarding Key Operating Metrics

We manage our business by tracking several operating metrics, including monthly active users (MAUs), daily active users (DAUs), paid subscribers, subscription bookings, and total bookings. We believe each of these operating metrics provides useful information to investors and others. For information concerning these metrics as measured by us, see Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Operating Metrics and Non-GAAP Financial Measures.”

While these metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our platform is used. These metrics are determined by using internal data gathered on an analytics platform that we developed and operate and have not been validated by an independent third party. This platform tracks user account and session activity. If we fail to maintain an effective analytics platform, our metrics calculations may be inaccurate.

We believe that these metrics are reasonable estimates of our user base for the applicable period of measurement, and that the methodologies we employ and update from time-to-time to create these metrics are reasonable bases to identify trends in user behavior. Because we update the methodologies we employ to create metrics, our operating metrics may not be comparable to those in prior periods. See the section titled “Risk Factors—Our user metrics and other operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may negatively affect our reputation and our business”. Other companies, including companies in our industry, may calculate these metrics differently.

Risk Factors Summary

The following is a summary of the principal risks that could materially adversely affect our business, financial condition, and results of operations, all of which are more fully described in Part II, Item 1A. “Risk Factors.” This summary should be read in conjunction with Part II, Item 1A. “Risk Factors” and should not be relied upon as an exhaustive summary of the material risks facing our business.

•If we fail to keep existing users or add new users, or if our users decrease their level of engagement with our products or do not convert to or remain paying users, our revenue, financial results and business may be significantly harmed.

•The online language learning industry is highly competitive, with low switching costs and a consistent stream of new products and entrants, and innovation by our competitors may disrupt our business.

•Changes to our existing brand and products, or the introduction of a new brand or products, could fail to attract or keep users or generate revenue and profits.

•We have had operating losses in the past and we may not be able to achieve or maintain profitability in the future.

•Our costs are continuing to grow, and some of our investments have the effect of reducing our operating margin and profitability. If our investments are not successful, our business and financial performance could be harmed.

•Our quarterly operating results and other operating metrics may fluctuate from quarter to quarter, which makes these metrics difficult to predict.

•Our user metrics and other operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may negatively affect our reputation and our business.

•We rely on third-party platforms such as the Apple App Store and the Google Play Store to distribute our products and collect payments. If we are unable to maintain a good relationship with such platform providers, if their terms and conditions or pricing changed to our detriment, if we violate, or if a platform provider believes that we have violated, the terms and conditions of its platform, or if any of these platforms loses market share or falls out of favor or is unavailable for a prolonged period of time, our business will suffer.

•We rely on third-party hosting and cloud computing providers, like Amazon Web Services (“AWS”) and Google Cloud, to operate certain aspects of our business. A significant portion of our product traffic is hosted by a limited number of vendors, and any failure, disruption or significant interruption in our network or hosting and cloud services could adversely impact our operations and harm our business.

•If we are not able to maintain the value and reputation of our brand, our ability to expand our base of users may be impaired, and our business and financial results may be harmed.

•Our business is subject to complex and evolving U.S. and international laws and regulations. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

•Our success depends, in part, on our ability to access, protect, collect, and use personal data, and our failure to comply with the varying and rapidly-evolving regulatory framework on privacy and data protection across jurisdictions could result in claims or other forms of liability, increased costs of operations, reputational harm, or decline in user growth or engagement, or otherwise have a material adverse effect on our business.

•Regulatory and legislative developments on the use of artificial intelligence (“AI”) and machine learning could adversely affect our use of such technologies in our products and services.

•From time to time, we may be party to intellectual property-related litigation and proceedings that are expensive and time consuming to defend, and, if resolved adversely, could materially adversely impact our business, financial condition and results of operations.

•We may fail to adequately obtain, protect and maintain our intellectual property rights or prevent third parties from making unauthorized use of such rights.

•The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on the Nasdaq Global Select Market, including our directors, executive officers, and 5% stockholders and their respective affiliates, who held in the aggregate 79.0% of the voting power of our outstanding capital stock as of June 30, 2024. This ownership will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

Part I Financial Information

Item 1. Financial Statements (Unaudited)

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value amounts)



	June 30, 2024		December 31, 2023
ASSETS
Current assets
Cash and cash equivalents	$	888,240	$	747,610
Accounts receivable	77,722		88,975
Deferred cost of revenues	63,285		53,931

Prepaid expenses and other current assets	12,317		7,282
Total current assets	1,041,564		897,798
Operating lease right-of-use assets	49,760		19,103
Intangible assets, net	20,586		15,995
Property and equipment, net	18,343		11,792
Goodwill	4,050		4,050
Restricted cash	2,735		2,735
Deferred tax assets, net	835		766
Other assets	1,570		1,718
Total assets	$	1,139,443	$	953,957

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Deferred revenues	$	291,477	$	249,192
Accounts payable	3,405		2,447
Income tax payable	38		792
Accrued expenses and other current liabilities	22,804		24,931
Total current liabilities	317,724		277,362
Long-term obligation under operating leases	54,775		21,094

Total liabilities	372,499		298,456
Commitments and contingencies (Note 9)
Stockholders’ equity
Class A common stock, $0.0001 par value; 2,000,000 shares authorized as of June 30, 2024 and December 31, 2023; 37,377 and 36,311 issued and outstanding at June 30, 2024 and December 31, 2023, respectively Class B common stock, $0.0001 par value; 30,000 shares authorized as of June 30, 2024 and December 31, 2023; 6,123 and 6,215 issued and outstanding at June 30, 2024 and December 31, 2023, respectively	4		4
Additional paid-in capital	930,054		869,918
Accumulated deficit	(163,114)		(214,421)
Total stockholders’ equity	766,944		655,501
Total liabilities and stockholders' equity	$	1,139,443	$	953,957

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023






Revenues	$	178,327	$	126,839	$	345,880	$	242,500






Cost of revenues	47,349		33,788		92,540		65,280
Gross profit	130,978		93,051		253,340		177,220
Operating expenses:
Research and development	55,147		47,947		106,025		93,791
Sales and marketing	20,174		17,734		40,105		34,335
General and administrative	36,957		32,235		72,071		62,478

Total operating expenses	112,278		97,916		218,201		190,604
Income (loss) from operations	18,700		(4,865)		35,139		(13,384)


Other expense, net of other income	(707)		(268)		(1,328)		(86)
Income (loss) before interest income and income taxes	17,993		(5,133)		33,811		(13,470)
Interest income	10,721		7,543		20,754		13,182
Income (loss) before income taxes	28,714		2,410		54,565		(288)
Provision (benefit) for income taxes	4,363		(1,315)		3,258		(1,431)
Net income and comprehensive income	$	24,351	$	3,725	$	51,307	$	1,143
Net income per share attributable to Class A and Class B common stockholders, basic	$	0.56	$	0.09	$	1.19	$	0.03
Net income per share attributable to Class A and Class B common stockholders, diluted	$	0.51	$	0.08	$	1.08	$	0.02

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2024 AND 2023
(Amounts in thousands)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Total
BALANCE—April 1, 2023	41,018	$	4	$	798,254	$	(233,070)	$	565,188
Stock-based compensation expense	—	—		23,714		—		23,714
Stock options exercised	374	—		3,778		—		3,778
Release of restricted stock units	139	—		—		—		—
Net income	—	—		—		3,725		3,725
BALANCE—June 30, 2023	41,531	$	4	$	825,746	$	(229,345)	$	596,405
BALANCE—April 1, 2024	43,057	$	4	$	898,513	$	(187,465)	$	711,052
Stock-based compensation expense	—	—		26,746		—		26,746


Stock options exercised	254	—		4,795		—		4,795
Release of restricted stock units	189	—		—		—		—
Net income	—	—		—		24,351		24,351
BALANCE—June 30, 2024	43,500	$	4	$	930,054	$	(163,114)	$	766,944

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(Amounts in thousands)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Total






BALANCE—January 1, 2023	40,361	$	4	$	772,562	$	(230,488)	$	542,078
Stock-based compensation expense	—	—		44,787		—		44,787
Stock options exercised	916	—		8,397		—		8,397
Release of restricted stock units	254	—		—		—		—
Net income	—	—		—		1,143		1,143
BALANCE—June 30, 2023	41,531	$	4	$	825,746	$	(229,345)	$	596,405




BALANCE—January 1, 2024	42,526	$	4	$	869,918	$	(214,421)	$	655,501
Stock-based compensation expense	—	—		51,731		—		51,731


Stock options exercised	580	—		8,405		—		8,405
Release of restricted stock units	394	—		—		—		—
Net income	—	—		—		51,307		51,307
BALANCE—June 30, 2024	43,500	$	4	$	930,054	$	(163,114)	$	766,944

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)


	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	51,307	$	1,143
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,317		3,396

Stock-based compensation expense	51,731		44,787
Gain on sale of capitalized software	—		(100)

Changes in assets and liabilities:
Deferred revenue	42,285		35,203
Accounts receivable	11,253		(6,678)
Deferred cost of revenues	(9,354)		(7,679)
Prepaid expenses and other current assets	(5,035)		(2,916)
Accounts payable	736		1,059
Accrued expenses and other current liabilities	(4,199)		(1,036)
Noncurrent assets and liabilities	2,861		(408)
Net cash provided by operating activities	145,902		66,771
Cash flows from investing activities:


Capitalized software expense and purchases of intangible assets	(6,700)		(3,275)
Purchase of property and equipment	(6,977)		(1,508)
Proceeds from sale of capitalized software	—		100

Net cash used for investing activities	(13,677)		(4,683)
Cash flows from financing activities:


Proceeds from exercise of stock options	8,405		8,397




Net cash provided by financing activities	8,405		8,397
Net increase in cash, cash equivalents and restricted cash	140,630		70,485
Cash, cash equivalents and restricted cash - Beginning of period	750,345		608,180
Cash, cash equivalents and restricted cash - End of period	$	890,975	$	678,665

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Amounts in thousands)


	Six Months Ended June 30,
	2024		2023
Supplemental disclosure of cash flow information:

Cash paid for income taxes	$	4,927	$	1,939


Supplemental disclosure of noncash investing activities:

Property and equipment included in Current liabilities	$	1,782	$	114

Right of use assets obtained in exchange for new operating lease liabilities	$	33,039	$	—
Right of use assets disposed or adjusted modifying operating leases liabilities	$	1,303	$	—

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

DUOLINGO, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Duolingo, Inc. (the “Company” or “Duolingo”) was formed on August 18, 2011, and the Duolingo App was launched to the general public on June 19, 2012. The Company’s headquarters are located in Pittsburgh, Pennsylvania.

Duolingo is a US-based mobile learning platform, as well as a digital language proficiency assessment exam. The Company has a freemium business model: the app and the website are accessible free of charge, although Duolingo also offers premium services for a subscription fee. As of the date of this filing, Duolingo offers courses in over 40 different languages, including Spanish, English, French, German, Italian, Portuguese, Japanese and Chinese. We have locations in the U.S., China and Germany.

Principles of Consolidation—The Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and subsidiaries over which the Company has control. All intercompany transactions and balances have been eliminated.

Basis of Presentation—The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) from the Company’s accounting records and reflect the consolidated financial position and results of operations for the three and six months ended June 30, 2024 and 2023. Unless otherwise specified, all dollar amounts (other than per share amounts) are referred to in thousands.

The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. We consistently applied the accounting policies consistent with the annual Unaudited Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q, in preparing these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes for the fiscal year ended December 31, 2023 included in the Annual Report on Form 10-K and filed with the SEC.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Principles—The Unaudited Condensed Consolidated Financial Statements and accompanying notes are prepared in accordance with GAAP.

Use of Estimates—The preparation of Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Unaudited Condensed Consolidated Financial Statements and accompanying notes. Significant estimates and assumptions reflected in the Unaudited Condensed Consolidated Financial Statements include, but are not limited to, useful lives of property and equipment, valuation of deferred tax assets and liabilities, stock-based compensation, common stock valuation, operating lease right-of-use assets and liabilities, capitalization of internally developed software and associated useful lives and contingent liabilities. Actual results may differ materially from such estimates. Management believes that the estimates, and judgments upon which they rely, are reasonable based upon information available to

them at the time that these estimates and judgments are made. To the extent that there are material differences between these estimates and actual results, the Company’s Unaudited Condensed Consolidated Financial Statements will be affected.

Cash and Cash Equivalents—Cash consists primarily of cash on hand and bank deposits. Cash equivalents consist primarily of money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times. The following table shows the breakout between cash and money market funds.



(In thousands)	June 30, 2024		December 31, 2023
Cash	$	96,294	$	50,373
Money market funds	791,946		697,237
Total	$	888,240	$	747,610

The Money market funds are considered Level 1 financial assets. Level 1 financial assets use inputs that are the unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Advertising Costs— Advertising costs were approximately $13,448 and $27,468 for the three and six months ended June 30, 2024, and $12,206 and $23,299 for the three and six months ended June 30, 2023, respectively, and are included within Sales and marketing in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

Income Taxes—The Company’s provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.

Concentration of Credit Risk—The Company’s concentration of credit risk relates to financial institutions holding the Company’s cash and cash equivalents and platforms with significant accounts receivable balances and revenue transactions.

The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal credit risk exists with respect to those balances.

The majority of our revenue comes through our subscriptions and advertising streams, and payments are made to Duolingo through service providers. Two service providers, Apple and Google accounted for 70.0% and 15.3% of total Accounts receivable as of June 30, 2024, respectively. Three service providers, Apple, Google, and Stripe accounted for 65.2%, 20.7%, and 10.7% of total Accounts receivable as of December 31, 2023, respectively.

Impairment of long-lived assets— The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the estimated undiscounted future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. No assets were impaired during the three and six months ended June 30, 2024 and 2023.

Recently Issued Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect the adoption of the new guidance will have a material impact on the Company’s consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), which includes improvements to income tax disclosures. The standard is effective for public entities in fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect the adoption of the new guidance will have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

There are no recently adopted accounting pronouncements.

3. REVENUE

The Company has four predominant sources of revenues; time-based subscriptions, in-app advertising placement by third parties, the Duolingo English Test, and In-App Purchases. Revenue is recognized upon transfer of control of promised products or services to users in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company does not enter into contracts with a customer that contain multiple promises that result in multiple performance obligations. Revenue is recorded net of taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our users.

Revenue from time-based subscriptions includes a stand-ready obligation to provide hosting services that are consumed by the customer over the subscription period. Users can purchase Duolingo monthly or they can purchase a year-long subscription and pay for the subscription at the time of purchase. Under the year-long subscription, users can also purchase a single plan or a family plan. The family plan includes up to six users on one subscription. Such payments are initially recorded to deferred revenue. The user has the ability to download limited content offline. However, as there is a significant level of integration and interdependency with the online functionality, the Company considers the service to be a single performance obligation for the online and offline content.

The Company enters into arrangements with advertising networks to monetize the in-app advertising inventory. Revenue from in-app advertising placement is recognized at a point in time when the advertisement is placed and is based upon the amount received.

Duolingo English Test revenue is generally recognized once the tests have gone through the proctoring process and a certification decision has been made. This process usually takes less than 48 hours after the test has been completed and uploaded. Customers have 21 days from the date of purchase to take the exam or their purchase will expire and revenue will be recognized. Virtually all customers complete their exams prior to expiration. Sometimes organizations may purchase tests in bulk via coupons with a one year expiration date. The Company will defer revenue from all tests that have neither been proctored nor expired.

The Company’s users have the option to purchase consumable in-app virtual goods. The Company recognizes revenue over the period in which the user consumes the virtual good, which is generally within a month.

The Company also recognizes revenue from Duo’s Taquería, a restaurant that opened during 2022, in the space adjacent to our headquarters in Pittsburgh. Revenue from Duo’s Taquería is recognized at a point in time when the sales are made.

Principal Agent Considerations—The Company makes its application available to be downloaded through third-party digital distribution service providers. Users who purchase subscriptions also pay through the respective app stores. The Company evaluates the purchases via third-party payment processors to determine whether its revenues should be reported gross or net of fees retained by the payment processor. The Company is the principal in the transaction with the end user as a result of controlling, hosting, and integrating the delivery of the virtual items to the end user. The Company records revenue gross as a principal and records fees paid to third-party payment processors as Cost of revenues.

Contract Balances—Deferred revenue mostly consists of payments we receive in advance of revenue recognition, and is mostly related to time-based subscriptions, which will be recognized into revenue over the course of the upcoming year (recognized over 12 months or less). Additionally, the Duolingo English Test has deferred revenue related to tests that have been purchased, but will not be recognized until the tests have been proctored.

Disaggregation of Revenue

In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates revenue from contracts with customers into revenue streams, which most closely depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Revenues:
Subscription	$	143,909	$	95,158	$	275,597	$	181,343
Other (1)	34,418		31,681		70,283		61,157
Total revenues	$	178,327	$	126,839	$	345,880	$	242,500

________________

(1) Other revenue is comprised of the below.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Advertising	$	13,258	$	13,061	$	26,210	$	24,696
Duolingo English Test	10,698		9,809		23,453		19,781
In-App Purchases	10,176		8,675		20,100		16,527
Other	286		136		520		153
Total other revenue	$	34,418	$	31,681	$	70,283	$	61,157

Three service providers, Apple, Google and Stripe, processed 60.7%, 23.7%, and 11.2%, and 60.0%, 23.7%, and 12.0% of total Revenues for the three and six months ended June 30, 2024, respectively. Three services providers, Apple, Google, and Stripe processed 58.2%, 26.1%, and 11.9%, and 57.7%, 26.2% and 11.9% of total Revenues for the three and six months ended June 30, 2023, respectively.

Changes in deferred revenues were as follows:


	Six Months Ended June 30,
(In thousands)	2024		2023
Beginning balance—January 1	$	249,192	$	157,550
Amount from beginning balance recognized into revenue	(176,854)		(112,514)
Recognition of deferred revenue	(121,625)		(88,507)
Deferral of revenue	340,764		236,224
Ending balance—June 30	$	291,477	$	192,753

4. PROPERTY and EQUIPMENT, net

Property and equipment consists of the following as of June 30, 2024 and December 31, 2023:



(In thousands)	2024		2023
Leasehold improvements	$	25,933	$	18,191
Furniture, fixtures and equipment	6,886		5,869
Total property and equipment	32,819		24,060
Less: accumulated depreciation	(14,476)		(12,268)
Total property and equipment, net	$	18,343	$	11,792

Depreciation expense is included within the following financial statement line items within the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023

Research and development	$	500	$	409	$	940	$	816
Sales and marketing	59		45		111		93
General and administrative	582		557		1,157		1,111
Total	$	1,141	$	1,011	$	2,208	$	2,020

5. INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of the following as of June 30, 2024 and December 31, 2023:


(In thousands)	2024		2023
Capitalized software	$	33,595	$	26,895
Other intangible assets	117		117
Total intangible assets	33,712		27,012
Less: accumulated amortization	(13,126)		(11,017)
Intangible assets, net	$	20,586	$	15,995

The Company capitalized $6,700 and $3,176 of software development costs, with the majority of the costs being employee wages, during the six months ended June 30, 2024 and 2023, respectively. Amortization expense is included within the following financial statement line items within the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Cost of revenues	$	944	$	402	$	1,792	$	805
Sales and marketing	158		221		317		571
Total	$	1,102	$	623	$	2,109	$	1,376

The estimated future amortization expense of capitalized software with definite lives as of June 30, 2024 was as follows:


(In thousands)	Amortization Expense
Remainder of 2024	$	3,813
2025	7,677
2026	6,182
2027	2,797
2028 (1)	—
Total estimated future amortization expense	$	20,469

________________

(1)All capitalized software is expected to be fully amortized by December 31, 2028, therefore there is no estimated amortization for the year 2029.

Goodwill was $4,050 at June 30, 2024 and December 31, 2023. As of June 30, 2024 and December 31, 2023, $3,578 and $3,713 of goodwill is deductible for tax purposes, respectively.

6. LEASES

The Company has entered into various operating leases for its office space expiring between fiscal 2024 and 2036. Certain lease agreements contain an option for the Company to renew a lease for a term of up to five years. The Company considers these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis.

On December 18, 2023, the Company entered into an Agreement of Sub-Sublease, with Spotify USA Inc., as Sub-Sublandlord for 85,666 square feet of office space in the building located at 4 World Trade Center, 150 Greenwich Street, New York, New York 10007 for use as additional office space.

The term of the Sub-Sublease commenced on January 8, 2024 and will expire on April 29, 2034

The initial base rent is $442 per month on a triple net basis, increasing to $478 per month at the beginning of the sixth year of the lease term. Payment of rent will commence 20 months after commencement of the Sub-Sublease.

In lieu of a security deposit, the Company is has provided an irrevocable stand-by letter of credit to the Sub-Sublandlord. This letter of credit acts as security for the faithful performance by the Company of all terms, covenants and conditions of the lease agreement. The cash collateral and deposits for the letters of credit have been recognized as restricted cash in the unaudited condensed consolidated balance sheets and totaled $2,735 as of June 30, 2024 and December 31, 2023.

In February 2024, the Company signed a lease with Bullitt Center LLC for 7,940 square feet of office space in Seattle, Washington. The term of the lease is 63 months beginning on March 1, 2024 and expiring on May 31, 2029.

In March 2024, the Company entered into the First and Second Amendments (“the Amendments”) to the Office Lease Agreement with 5704 Penn Office, LLC (the "Landlord") for office space located at Liberty East (the “Premise) at 141 South Saint Clair Street, Pittsburgh, Pennsylvania, which, among other things, increased the leased square footage by 110,008 square feet to a total of 148,266 square feet beginning on August 1, 2025, with an expiration date of April 30, 2036. Under the Amendments, the monthly fixed base rent for the initial square footage increases to approximately $188 per month for the period commencing June 16, 2035 and ending April 30, 2036. The initial base rent of the additional square footage is approximately $394 per month and will increase by approximately 2% per annum, with the exception of the third and fifth years, which have increases of approximately 9% related to additional parking access. Under the terms of the Amendments, the Landlord will provide the Company with an improvement allowance of up to approximately $6,800 for costs relating to the design, permitting, and construction of improvements to the Premise.

In May 2024, the Company signed a lease with Beijing Hengshi Huarong Holding Co., Ltd. for 16,314 square feet of office space in Beijing, China. The term of the lease is 39 months beginning on May 20, 2024 and expiring on July 15, 2027.

The following represents the components of lease cost for the three and six months ended June 30, 2024 and 2023 along with supplemental disclosures of cash flow information, lease term and discount rate:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Operating lease cost	$	2,706	$	1,860	$	5,696	$	3,721
Short term lease cost	14		19		22		22
Variable lease cost	105		127		252		160
Total lease cost	$	2,825	$	2,006	$	5,970	$	3,903

Cash paid for amounts included in the measurement of lease liabilities	$	1,606	$	1,698	$	3,645	$	3,447
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,681	$	—	$	33,039	$	—
Right of use assets disposed or adjusted, modifying operating leases liabilities	$	—	$	774	$	1,303	$	1,397
Gain from termination of leases	$	—	$	—	$	8	$	—


	June 30, 2024		June 30, 2023
Weighted-average remaining lease term	10 years		9 years
Weighted-average discount rate	7.14	%	6.53	%

Sublease income was immaterial for the three and six months ended June 30, 2024 and 2023.

The following table reconciles future minimum undiscounted rental commitments for operating leases to operating lease liabilities recorded on the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2024:


Fiscal year
Remainder of 2024	$	2,026
2025	4,189
2026	9,579
2027	9,507
2028	9,299
Thereafter	48,482
Total undiscounted lease payments	$	83,082
Present value adjustment	(25,851)
Operating lease liabilities	$	57,231

Current lease liabilities of $2,456 and $3,944 are presented within Accrued expenses and other liabilities while non-current lease liabilities of $54,775 and $21,094 are presented within Long-term obligation under operating leases on the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2024 and the Audited Consolidated Balance Sheet as of December 31, 2023, respectively.

7. INCOME TAXES

Year-to-date income tax expense or benefit is the product of the most current projected annual effective tax rate (“PAETR”) and the actual year-to-date pretax income (loss) adjusted for any discrete items. The income tax expense or benefit for a particular quarter, is the difference between the year-to-date calculation of income tax expense or benefit and the year-to-date calculation for the prior year period. Items unrelated to current period ordinary income or loss are recognized entirely in the period identified as a discrete item of tax.

The Company’s PAETR differs from the U.S. federal statutory rate of 21.0% during the three and six months ended June 30, 2024 and 2023 primarily due to the impact of maintaining a U.S. valuation allowance provided on U.S. deferred tax assets.

The Company’s income before taxes, income tax provision or benefit and effective tax rates were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except percentages)	2024			2023			2024			2023
Income (loss) before income taxes	$	28,714		$	2,410		$	54,565		$	(288)
Provision (benefit) for income taxes	4,363			(1,315)			$	3,258		$	(1,431)
Effective tax rate	15.2		%	(54.6)		%	6.0		%	496.9		%

For the three and six months ended June 30, 2024, the Company recorded an income tax provision of $4,363 and $3,258, respectively. For the three and six months ended June 30, 2023, the Company recorded an income tax benefit of $1,315 and $1,431, respectively.

For both of the periods ending June 30, 2024 and June 30, 2023, the Company has recognized a year-to-date discrete tax benefit attributable to the excess tax benefits of stock-based compensation activity. For 2024, however, there was tax expense on pretax operating activities which more than offset the discrete benefit, resulting in an overall year-to-date tax expense position.

The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company’s ability to generate sufficient future taxable income to fully utilize these assets. As of June 30,

2024, the Company continues to maintain a full allowance against its U.S. federal and state net deferred tax assets.

8. STOCK-BASED COMPENSATION

Prior to the IPO, the Company granted options to purchase shares of the Company’s common stock and restricted stock units (“RSU”) in respect of shares of the Company’s common stock to employees, directors and consultants under the Company’s 2011 Equity Incentive Plan. In July 2021, Duolingo adopted the 2021 Incentive Award Plan (“2021 Plan”) and the 2021 Employee Stock Purchase Plan (“ESPP”), each of which became effective on July 26, 2021 in connection with the IPO. An aggregate of 7,946 shares and 1,119 shares of Class A common stock were made available for future issuance under the 2021 Plan and ESPP, respectively. Pursuant to the terms of the plan, on each January 1 through January 1, 2031, the number of shares of the Company’s Class A common stock available for issuance automatically increases by the lesser of (i) 5% of the shares outstanding on the preceding December 31 (calculated on an as-converted basis) and (ii) such smaller number of shares of common stock as determined by the Board or the Committee (as defined in the 2021 Plan). Pursuant to the terms of the ESPP, on each January 1 through January 1, 2031, the number of shares of the Company’s Class A common stock available for issuance automatically increases by the lesser of (i) 1% of the shares outstanding on the preceding December 31 and (ii) such smaller number of shares of common stock as determined by the Board or the Committee (as defined in the ESPP). On January 1, 2024, the number of Class A shares available under the 2021 Plan was increased by 2,126 shares of common stock. The Board waived the 2024 automatic annual increase of shares available for future issuance under the ESPP, and the Company intends to waive such automatic annual increase for all applicable future periods.

The Company’s stock options vest based on terms in the stock option agreements, which generally provide for vesting over four years based on continued service to the Company and its subsidiaries. Each option has a term of ten years. Stock options granted under the 2021 Plan must generally have an exercise price of not less than the estimated fair market value of the underlying Class A common stock at the date of the grant. No options have been granted under the 2021 Plan.

A summary of stock option activity under the Plans was as follows:


(In thousands, except prices and years)	Number of options	Weighted- average exercise price		Weighted- average remaining contractual life (years)	Aggregate intrinsic value





Options outstanding at January 1, 2024	2,985	$	16.04	5.60	$	629,865
Granted (1)	—
Exercised	(580)	14.48

Forfeited and expired (2)	—	19.40
Options outstanding at June 30, 2024	2,405	$	16.42	5.16	$	462,801
Options exercisable at June 30, 2024	2,375	$	16.21	5.15	$	457,011

________________

(1) There were no stock options granted during the three and six months ended June 30, 2024.

(2) There was a nominal amount of forfeitures and expirations during the six months ended June 30, 2024.

The total intrinsic value of options exercised was approximately $110,042 and $106,750 for the periods ended June 30, 2024 and 2023, respectively.

A summary of RSU activity under the Plans was as follows:


(In thousands, except prices)	Restricted stock units	Weighted- average grant date fair value per share




Outstanding at January 1, 2024	2,027	$	106.32
Granted	458	178.83
Released	(394)	97.59
Forfeited	(67)	113.90
Outstanding at June 30, 2024	2,024	$	124.17

As of June 30, 2024, there was approximately $285 of unrecognized stock-based compensation expense related to stock options granted under the plans with a weighted-average period of approximately 5 months. The amount of unrecognized stock-based compensation expense for RSUs as of June 30, 2024 was $235,245 with a weighted-average period of approximately three years. Total unrecognized compensation expense as of June 30, 2024 was $235,530.

There were 9,013 shares available for grant at June 30, 2024.

Performance-based RSUs

In June 2021, the Company granted an aggregate of 1,800 performance-based RSUs (the “Founder Awards”) to the Company’s founders. The Founder Awards vest upon the satisfaction of both a service-based condition and a performance-based condition and generally are settled one year after vesting. The service-based condition is satisfied as to 25% of the Founder Awards on each anniversary of the IPO on July 27, 2021, subject to the continuous service of the founders through the applicable date. The performance-based condition will be satisfied with respect to each of 10 equal tranches only if the trailing 60-calendar day volume-weighted-average closing trading price of the Company’s Class A common stock reaches certain stock-price hurdles for each such tranche, as set forth below, over a period of 10 years from the date of grant.

Any RSUs associated with stock-price hurdles not achieved by the tenth anniversary of the date of grant will terminate and be canceled for no additional consideration to the founders. The stock-price hurdles and number of RSUs eligible to vest will be adjusted to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications, or similar events under the 2021 Plan. The Founder Awards will be settled in shares of the Company’s Class B common stock.


Tranche	Company Stock Price Hurdle		Number of RSUs Eligible to Vest
1 (1)	$	127.50	90
2 (1)	$	153.00	90
3 (2)	$	178.50	90
4 (3)	$	204.00	180
5	$	255.00	180
6	$	306.00	180
7	$	357.00	180
8	$	408.00	180
9	$	612.00	270
10	$	816.00	360

________________

(1) Stock price hurdle for the tranche was achieved in 2021, the service condition satisfied in 2022, and shares were released to CEO and CTO on August 14, 2023

(2) Stock price hurdle and the service condition for the tranche was achieved as of November 22, 2023; the shares will be released after the one-year holding requirement has been satisfied

(3) Stock price hurdle and the service condition for the tranche was achieved as of December 26, 2023; the shares will be released after the one-year holding requirement has been satisfied

The Company estimated the grant date fair value of the Founder Awards using a model based on multiple stock-price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the stock-price hurdles may not be satisfied. The weighted-average grant date fair value of the Founder Awards was estimated to be $61.56 per share and the Company estimates that it will recognize total stock-based compensation expense of approximately $110,817 over the derived service period of each of the ten separate tranches which is between 3.58 – 5.92 years. If the stock-price hurdles are met sooner than the requisite service period, the stock-based compensation expense will be adjusted to prospectively recognize the remaining expense over the remaining derived service period. Provided that the founders continue to provide services to the Company, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock-price hurdles are achieved.

The Company recognized $5,557 and $11,097 of stock-based compensation expense related to performance-based RSUs for the three and six months ended June 30, 2024, and $7,094 and $14,234 for the three and six months ended June 30, 2023, respectively, which is included within General and administrative in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. As of June 30, 2024, there is $25,638 of unrecognized stock-based compensation expense related to these awards.

Total stock-based compensation expense was $26,746 and $51,731 for the three and six months ended June 30, 2024, and $23,714 and $44,787 for the three and six months ended June 30, 2023, respectively.

Stock-based compensation expense is included in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as shown in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Cost of revenues	$	18	$	14	$	34	$	25
Research and development	14,095		10,978		27,101		20,324
Sales and marketing	1,198		969		2,252		1,748
General and administrative	11,435		11,753		22,344		22,690
Total	$	26,746	$	23,714	$	51,731	$	44,787

Nominal amounts of stock-based compensation expense is capitalized into intangible assets for the three and six months ended June 30, 2024 and 2023.

9. COMMITMENTS AND CONTINGENCIES

Legal Proceedings— From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. The Company is not currently party to any material legal proceedings.

Related Parties— The Company has determined that there were no transactions with related parties as of or during the three and six months ended June 30, 2024 and 2023.

Letters of Credit— The Company has a standby letter of credit obtained in connection with an operating lease. This letter of credit acts as security for the faithful performance by us of all terms, covenants and conditions of the lease agreement. The amount of the letter of credit is equal to six months rent of $442, totaling $2,656. The cash collateral for the letter of credit has been recognized as restricted cash in the Unaudited Condensed Consolidated Balance Sheet and is equivalent to 103% of the letter of credit and totaled $2,735. For more information, refer to Note 6, Leases.

10. EMPLOYEE BENEFIT PLAN

The Company sponsors a profit sharing plan with a 401(k) feature, the Duolingo Retirement Plan (the “Plan”), for eligible employees. The current Plan, effective January 1, 2021, provides for Company safe harbor matching contributions of 100% of the first 4% of the employees’ elective deferrals and 50% of the next 2%, with vesting starting upon the first day of employment. The Company also has the option to make discretionary matching or profit sharing contributions. The Company made safe harbor matching contributions of approximately $1,705 and $1,473 during the three months ended June 30, 2024 and 2023, respectively, and $3,288 and $2,870 during the six months ended June 30, 2024 and 2023, respectively. The Company did not make any discretionary matching or profit sharing contributions during the three and six months ended June 30, 2024 or 2023.

11. EARNINGS PER SHARE

Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.

Basic net income per share attributable to common stockholders is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net income per share attributable to common stockholders is calculated by giving effect to all potential dilutive common stock equivalents outstanding for the period. The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 20 votes per share. Each share of Class B common stock is convertible into a share of Class A common stock voluntarily at any time by the holder, and automatically upon certain events. The Class A common stock has no conversion rights. As the liquidation and dividend rights are identical for Class A and Class B common stock, the undistributed earnings are allocated on a proportional basis and the resulting net income per share attributable to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2024		2023		2024		2023
Numerator:
Net income attributable to Class A and Class B common stockholders	$	24,351	$	3,725	$	51,307	$	1,143


Denominator:
Weighted-average shares in computing net income per share attributable to Class A and Class B common stockholders, basic and diluted	43,260		41,222		43,020		40,921
Effect of dilutive securities
Founder awards where performance has been met	270		180		270		180
Dilutive effect of stock options outstanding (1)	2,216		3,097		2,216		3,097
RSUs outstanding	2,024		2,373		2,024		2,373
Denominator for dilutive net income per common share - weighted-average shares	47,770		46,872		47,530		46,571
Basic income per common share	$	0.56	$	0.09	$	1.19	$	0.03
Diluted income per common share	$	0.51	$	0.08	$	1.08	$	0.02

________________

(1) The Company had 2.4 million options outstanding as of June 30, 2024. The estimated dilutive effect is calculated as the number of shares expected to be issued upon vesting or exercise, adjusted for the strike price proceeds that are received by the Company and assumed to be used to repurchase shares of Duolingo common stock.

12. SUBSEQUENT EVENTS

During July of 2024, the Company completed two acquisitions for a total purchase price of $7,500, which included cash of $6,600 and contingent consideration of $900. At the time of this filing, the Company is currently in the process of completing the preliminary purchase price allocation, which will be included in the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2024.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K and in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. The following discussion contains forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in Part II, Item 1A. “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and included elsewhere in this Quarterly Report on Form 10-Q, and in in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future.

Amounts reported in millions are rounded based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. In

addition, percentages presented are calculated from the underlying numbers in thousands and may not add to their respective totals due to rounding.

Overview

Our flagship app has organically become the world’s most popular way to learn languages and the top-grossing Education app in the App Stores, offering courses in over 40 languages to over 100 million monthly active users for the three months ended June 30, 2024. We believe that we have become the preeminent online destination for language learning due to our beautifully designed products, exceptional user engagement, and demonstrated learning efficacy.

Key Operating Metrics and Non-GAAP Financial Measures

We regularly review a number of key operating metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends, prepare financial projections and make business decisions. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Monthly active users (MAUs) and daily active users (DAUs), along with paid subscribers, subscription bookings and total bookings, are operating metrics that help inform management about the underlying growth in users of our platform, and are a measure of our monetization efforts. To calculate the year-over-year change in MAUs and DAUs for a given period, we subtract the average for the same period in the previous year from the average for the same period in the current year and divide the result by the average for the same period in the previous year. Other companies, including companies in our industry, may calculate these measures differently or not at all, which reduces their usefulness as comparative measures.


	Three Months Ended June 30,
(In millions)	2024	2023
Operating Metrics
Monthly active users (MAUs)	103.6	74.1
Daily active users (DAUs)	34.1	21.4
Paid subscribers (at period end)	8.0	5.2


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Operating Metrics
Subscription bookings	$	156,484	$	106,254	$	317,950	$	216,376
Total bookings	$	190,092	$	137,539	$	387,544	$	277,593

Non-GAAP Financial Measures
Net income (GAAP)	$	24,351	$	3,725	$	51,307	$	1,143
Adjusted EBITDA	$	48,117	$	20,871	$	92,122	$	35,982
Net cash provided by operating activities (GAAP)	$	62,388	$	37,167	$	145,902	$	66,771
Free cash flow	$	54,867	$	34,340	$	134,488	$	63,132

Operating Metrics

Monthly active users (MAUs). MAUs are defined as unique users who engage with our Duolingo App or the learning section of our website each month. MAUs are reported for a measurement period by taking the average of the MAUs for each calendar month in that measurement period. The measurement period

for MAUs is the three months ended June 30, 2024 and the same period in the prior year where applicable, and the analysis of results is based on those periods. MAUs are a measure of the size of our global active user community on Duolingo.

We had approximately 103.6 million and 74.1 million MAUs for the three months ended June 30, 2024 and 2023, respectively, representing an increase of 40% from the prior year period. We grew MAUs through product initiatives designed to make the app more social and engaging, through marketing, and through improving our courses, all of which we believe helped us attract new users, retain existing users, and reengage the millions of former users who return to our Duolingo App.

Daily active users (DAUs). DAUs are defined as unique users who engage with our Duolingo App or the learning section of our website each calendar day. DAUs are reported for a measurement period by taking the average of the DAUs for each day in that measurement period. The measurement period for DAUs is the three months ended June 30, 2024 and the same period in the prior year where applicable, and the analysis of results is based on those periods. DAUs are a measure of the consistent engagement of our global user community on Duolingo.

We had approximately 34.1 million and 21.4 million DAUs for the three months ended June 30, 2024 and 2023, respectively, representing an increase of 59% from the prior year period. The DAU / MAU ratio, which we believe is an indicator of user engagement, increased to 32.9% from 28.9% a year ago. We grew DAUs through many of the same product initiatives as we grew MAUs, such as making the product more fun and engaging.

Paid Subscribers. Paid subscribers are defined as users who pay for access to any Duolingo subscription offering and had an active subscription as of the end of the measurement period. Each unique user account is treated as a single paid subscriber regardless of whether such user purchases multiple subscriptions, and the count of paid subscribers does not include users who are currently on a free trial or who are non-paying members of a family plan.

As of June 30, 2024 and 2023, we had approximately 8.0 million and 5.2 million paid subscribers, respectively, representing an increase of 52% from the prior year period. We grew paid subscribers through product initiatives designed to make Duolingo subscription offerings more appealing, which we believe helped us attract new subscribers and retain existing subscribers.

Subscription Bookings and Total Bookings. Subscription bookings represent the amounts we receive from a purchase of any Duolingo subscription offering. Total bookings include subscription bookings, income from advertising networks for advertisements served to our users, purchases of the Duolingo English Test, and in-app purchases of virtual goods. We believe bookings provide an indication of trends in our operating results, including cash flows, that are not necessarily reflected in our revenues because we recognize subscription revenues ratably over the lifetime of a subscription, which is generally from one to twelve months.

For the three months ended June 30, 2024 and 2023, we generated $156.5 million and $106.3 million of subscription bookings, respectively, representing an increase of 47% from the prior year period. For the six months ended June 30, 2024 and 2023, we generated $318.0 million and $216.4 million of subscription bookings, respectively, representing an increase of 47% from the prior year period. We grew subscription bookings by selling more first-time and renewal subscriptions.

For the three months ended June 30, 2024 and 2023, we generated $190.1 million and $137.5 million total bookings, respectively, representing an increase of 38% from the prior year period. For the six months ended June 30, 2024 and 2023, we generated $387.5 million and $277.6 million total bookings, respectively, representing an increase of 40% from the prior year period. We grew total bookings through

growth in subscription bookings noted above, in addition to growth in the Duolingo English Test, advertising and in-app purchases.

Non-GAAP Financial Measures

We use certain non-GAAP financial measures to supplement our Unaudited Condensed Consolidated Financial Statements, which are presented in accordance with GAAP. These non-GAAP financial measures include Adjusted EBITDA, free cash flow and constant currency. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. By excluding certain items that may not be indicative of our recurring core operating results, we believe that Adjusted EBITDA, free cash flow and constant currency provide meaningful supplemental information regarding our performance. Accordingly, we believe these non-GAAP financial measures are useful to investors and others because they allow for additional information with respect to financial measures used by management in its financial and operational decision-making and they may be used by our institutional investors and the analyst community to help them analyze the health of our business. However, there are a number of limitations related to the use of non-GAAP financial measures, and these non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.

The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons. We use non-GAAP percentage change in constant currency revenues, which exclude the impact of fluctuations in foreign currency exchange rates, for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe this information is useful to investors to facilitate comparisons and better identify trends in our business. The impact of changes in foreign currency may vary significantly from period to period, and such changes generally are outside of the control of our management. We calculate constant currency revenues by using current period foreign currency revenues and translating them to constant currency using prior year comparable period exchange rates for the entire period of related bookings. Constant currency revenue percentage change is calculated by dividing the difference between constant currency revenue and the prior year comparable period revenue by the prior year comparable period revenue.

Adjusted EBITDA. Adjusted EBITDA is defined as net income excluding interest income, income taxes, depreciation and amortization, stock-based compensation expenses related to equity awards, transaction costs related to acquisitions, acquisition earn-out costs, and gain on sale of capitalized software. Adjusted EBITDA is used by management to evaluate the financial performance of our business and we present Adjusted EBITDA because we believe it is helpful in highlighting trends in our operating results and that it is frequently used by analysts, investors and other interested parties to evaluate companies in our

industry. The following table presents a reconciliation of our net income, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Net income	$	24,351	$	3,725	$	51,307	$	1,143
Add (deduct):
Interest income	(10,721)		(7,543)		(20,754)		(13,182)
Provision (benefit) for income taxes	4,363		(1,315)		3,258		(1,431)
Depreciation and amortization	2,243		1,634		4,317		3,396
Stock-based compensation expenses related to equity awards (1)	27,544		24,258		53,657		45,931

Acquisition transaction costs (2)	337		—		337		—
Acquisition earn-out costs (3)	—		112		—		225
Gain on sale of capitalized software (4)	—		—		—		(100)



Adjusted EBITDA	$	48,117	$	20,871	$	92,122	$	35,982

________________

(1)In addition to stock-based compensation expense of $26.7 million and $23.7 million for the three months ended June 30, 2024 and 2023, respectively, and $51.7 million and $44.8 million for the six months ended June 30, 2024 and 2023, respectively, this includes costs incurred related to taxes paid on equity transactions as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Research and development	$	376	$	341	$	912	$	581
Sales and marketing	24		26		53		40
General and administrative	398		177		961		523
Total	$	798	$	544	$	1,926	$	1,144

(2)Represents costs incurred related to acquisitions, including integration costs, which are included in General and administration expense within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

(3)Represents costs incurred related to the earn-out payment on an acquisition, which is included within General and administrative within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

(4)Represents proceeds from a sale of capitalized software, which is included within Other expense, net of other income within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

For the three months ended June 30, 2024 and 2023, we generated net income of $24.4 million and $3.7 million, respectively. For the six months ended June 30, 2024 and 2023, we generated net income of $51.3 million and $1.1 million, respectively. The increase in net income as compared to the comparative period was due to a combination of our growth in revenue and interest income in addition to a reduction in operating expenses as a percentage of revenue as compared to the prior year period.

For the three months ended June 30, 2024 and 2023, we generated Adjusted EBITDA of $48.1 million and $20.9 million, respectively. For the six months ended June 30, 2024 and 2023, we generated Adjusted EBITDA of $92.1 million and $36.0 million, respectively. Adjusted EBITDA increased due to a combination of our growth in revenue and a reduction in operating expenses as a percentage of revenue as compared to the prior year periods.

Free Cash Flow. Free cash flow represents net cash provided by operating activities, reduced by capitalized software development costs and purchases of property and equipment and increased by taxes paid related to stock-based compensation equity awards and transaction costs related to acquisitions as we believe they are not indicative of future liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, investors and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Free cash flow has certain limitations in that it does not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Net cash provided by operating activities	$	62,388	$	37,167	$	145,902	$	66,771
Less: Capitalized software development costs and purchases of intangible assets	(3,093)		(2,544)		(6,700)		(3,275)
Less: Purchases of property and equipment	(5,563)		(827)		(6,977)		(1,508)
Plus: Taxes paid related to stock-based compensation equity awards	798		544		1,926		1,144

Plus: Acquisition transaction costs (1)	337		—		337		—


Free cash flow	$	54,867	$	34,340	$	134,488	$	63,132

________________

(1)Represents costs incurred related to acquisitions, including integration costs.

For the three months ended June 30, 2024 and 2023, we generated $62.4 million and $37.2 million of net cash provided by operating activities, respectively, which was mainly due to our generation of positive net income as discussed under the heading Adjusted EBITDA above. For the six months ended June 30, 2024 and 2023, we generated $145.9 million and $66.8 million of net cash provided by operating activities, respectively. In addition to the generation of positive net income, timing of amounts received from our payment service providers in the current period as compared to the same period in the prior year caused the increase in net cash provided by operating activities for the six months ended June 30, 2024 and 2023.

For the three months ended June 30, 2024 and 2023, we generated $54.9 million and $34.3 million of free cash flow, respectively. For the six months ended June 30, 2024 and 2023, we generated $134.5 million and $63.1 million of free cash flow, respectively. The increase in free cash flow was mainly attributable to the increase in net cash provided by operating activities.

Constant Currency. The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons. We use non-GAAP constant currency revenues and non-GAAP percentage change in constant currency revenues for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

Total revenues were $178.3 million for the three months ended June 30, 2024, which represents an increase of 41% on a reported basis and 42% on a constant currency basis over the three months ended June 30, 2023. Subscription revenues totaled $143.9 million for the three months ended June 30, 2024, which represented an increase of 51% on a reported basis and 52% on a constant currency basis over the three months ended June 30, 2023.

Total revenues were $345.9 million for the six months ended June 30, 2024, which represents an increase of 43% (on both a reported and constant currency basis) over the six months ended June 30, 2023. Subscription revenues totaled $275.6 million for the six months ended June 30, 2024, which represented an increase of 52% on a reported basis and 53% on a constant currency basis over the six months ended June 30, 2023.

Components of Our Results of Operations

Revenue

We generate revenues primarily from the sale of subscriptions. The term-length of our subscription agreements are primarily monthly or annual, with the family plan offered as an annual subscription. We also generate revenue from advertising, the in-app sale of virtual goods, and the Duolingo English Test.

Cost of Revenues

Cost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels in addition to hosting fees. To a much lesser extent, cost of revenues includes customer support costs, such as contractor fees, wages and stock-based compensation for certain employees working in customer support, in addition to amortization of revenue generating capitalized software, and depreciation of certain property and equipment.

We intend to continue to invest additional resources in our infrastructure and our customer support and success organization to expand the capabilities of our platform and ensure that our users are realizing the full benefit of our products. The level, timing, and relative investment in these areas could affect our cost of revenues in the future.

Gross Profit and Gross Margin

Gross profit represents revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of revenues. Our gross profit may fluctuate from period to period as our revenues fluctuate, and also as a result of the timing and amount of investments we make in items related to cost of revenues.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, and stock-based compensation expense. Operating expenses also include overhead costs for facilities, including depreciation expense.

Research and Development. We invest heavily in research and development to create new products and product features that help us grow our user base, engage our users, monetize our users, and teach our users. This, in turn, drives additional growth in, and better lifetime value of, our paid subscribers, as well as increased advertising revenue from impressions from our free users. Expenses are primarily made up of costs incurred for the development of new and improved products and features in our applications during the preliminary product development stage. Such expenses include employee-related compensation, including stock-based compensation, of engineers, designers, and product managers, in addition to materials, travel and direct costs associated with the design and required testing of our platform. We expect engineers, designers, and product managers to represent a significant portion of our employees for the foreseeable future. We typically capitalize a small portion of research and development costs once the product has reached application development phase, mostly consisting of wages, each period into capitalized software when the work is specific to launching a new product, or making major

upgrades to our existing products or platforms. We regularly test product improvements with our users. Many of these tests start by making small changes in the product that affect small numbers of users. As the tests evolve, they can require increasing investment and can impact more users. This process of constant testing is how we implement many of our new products and improvements to our platform and, in total, require large investments and involve substantial time and risks to develop and launch. Some of these products and product improvements may not be well received or may take a long time for users to adopt. As a result, the benefits of our research and development investments may be difficult to forecast. We expect research and development to continue to be our largest operating expense, but expect that it will decline as a percentage of revenues over the long-term.

Sales and Marketing. Sales and marketing expenses are expensed as incurred and consists primarily of brand advertising, marketing, digital and social media spend, field marketing, travel, trade show sponsorships and events, conferences, and employee-related compensation, including stock-based compensation for personnel engaged in sales and marketing functions, and amortization of non-revenue generating capitalized software used to promote Duolingo. We expect our sales and marketing expenses will decline as a percentage of revenues over the near-term.

General and Administrative. General and administrative expenses primarily consist of employee-related compensation, including stock-based compensation, for management and administrative functions, including our finance and accounting, legal, and people teams. General and administrative expenses also include certain professional services fees, general corporate and director and officer insurance, our facilities costs, public company costs to comply with the rules and regulations of the Securities and Exchange Commission (“SEC”) and the Listing Rules of the Nasdaq Global Select Market, and other general overhead costs that support our operations. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenues as our revenues grow faster than these expenses over the long-term.

Interest Income

Interest income consists of income earned on our money market funds included in cash and cash equivalents and on our marketable securities.

Other expense, net of other income

Other expense, net of other income consists primarily of foreign currency exchange gains and losses.

Provision (benefit) for income taxes

The provision (benefit) for income taxes represents the income tax provision (benefit) associated with our operations based on the tax laws of the jurisdictions in which we operate. In addition to the U.S., we also operate in foreign jurisdictions that have different statutory rates. Our effective tax rates will vary depending on the relative proportion of foreign to domestic income, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.

Results of Operations

Comparison of the three and six months ended June 30, 2024 and 2023

The following table sets forth our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income data, including year-over-year change, for the periods indicated:


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2024		2023		% Change	2024		2023		% Change
Revenues	$	178,327	$	126,839	41%	$	345,880	$	242,500	43%
Cost of revenues (1) (2)	47,349		33,788		40	92,540		65,280		42
Gross profit	130,978		93,051		41	253,340		177,220		43
Operating expenses:
Research and development (1) (2)	55,147		47,947		15	106,025		93,791		13
Sales and marketing (1) (2)	20,174		17,734		14	40,105		34,335		17
General and administrative (1) (2)	36,957		32,235		15	72,071		62,478		15
Total operating expenses	112,278		97,916		15	218,201		190,604		14
Income (loss) from operations	18,700		(4,865)		nm	35,139		(13,384)		nm
Other expense, net of other income	(707)		(268)		>100	(1,328)		(86)		>100
Income (loss) before interest income and income taxes	17,993		(5,133)		nm	33,811		(13,470)		nm
Interest income	10,721		7,543		42	20,754		13,182		57
Income (loss) before income taxes	28,714		2,410		>100	54,565		(288)		nm
Provision (benefit) for income taxes	4,363		(1,315)		nm	3,258		(1,431)		nm
Net income and comprehensive income	$	24,351	$	3,725	>100	$	51,307	$	1,143	>100

________________

(1)Includes stock-based compensation expenses as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Cost of revenues	$	18	$	14	$	34	$	25
Research and development	14,095		10,978		27,101		20,324
Sales and marketing	1,198		969		2,252		1,748
General and administrative	11,435		11,753		22,344		22,690
Total	$	26,746	$	23,714	$	51,731	$	44,787

(2)Includes amortization of capitalized software and depreciation of property and equipment as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Cost of revenues (a)	$	944	$	402	$	1,792	$	805
Research and development	500		409		940		816
Sales and marketing (a)	217		266		428		664
General and administrative	582		557		1,157		1,111
Total	$	2,243	$	1,634	$	4,317	$	3,396

________________

(a) Amortization of capitalized software is recorded to Cost of revenue and Sales and marketing for revenue and non-revenue generating capitalized software, respectively.

The following table sets forth the components of our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for each of the periods presented as a percentage of revenue.


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenues	100	%	100	%	100	%	100	%
Cost of revenues	27		27		27		27
Gross profit	73		73		73		73
Operating expenses:
Research and development	31		38		31		39
Sales and marketing	11		14		12		14
General and administrative	21		25		21		26
Total operating expenses	63		77		63		79
Income (loss) from operations	10		(4)		10		(6)
Other expense, net of other income	—		—		—		—
Income (loss) before interest income and income taxes	10		(4)		10		(6)
Interest income	6		6		6		5
Income (loss) before income taxes	16		2		16		—
Provision (benefit) for income taxes	2		(1)		1		(1)
Net income and comprehensive income	14	%	3	%	15	%	—	%

Revenues

Revenues increased $51.5 million, or 41%, to $178.3 million during the three months ended June 30, 2024, from revenues of $126.8 million during the three months ended June 30, 2023. Revenues increased $103.4 million, or 43%, to $345.9 million during the six months ended June 30, 2024, from revenues of $242.5 million during the six months ended June 30, 2023. The main drivers of the increase were:

•Subscription revenue increased $48.8 million, or 51%, to $143.9 million during the three months ended June 30, 2024, and $94.3 million, or 52%, to $275.6 million during the six months ended June 30, 2024, primarily due to an increase in the average number of paid subscribers during the period;

•Other revenue increased by $2.7 million, or 9%, to $34.4 million during the three months ended June 30, 2024, primarily due to increased In-App Purchases of $1.5 million which was driven by the increase in DAU.

•Other revenue increased by $9.1 million, or 15%, to $70.3 million during the six months ended June 30, 2024, due to increased Duolingo English Test revenue of $3.7 million. The increase was mainly driven by increases in the average revenue per test. Additionally, In-App Purchases revenue increased by $3.6 million primarily driven by the increase in DAUs and Advertising revenue increased by $1.5 million driven by the increase in DAUs, which resulted in increased advertisements served, offset by decreases in average revenue per DAU.

The following table provides the changes in revenues by product type:


	Three Months Ended June 30,							Six Months Ended June 30,
(in thousands)	2024		2023		Change		% Change	2024		2023		Change		% Change
Subscription	$	143,909	$	95,158	$	48,751	51%	$	275,597	$	181,343	$	94,254	52%
Other (1)	34,418		31,681		2,737		9	70,283		61,157		9,126		15
Total revenues	$	178,327	$	126,839	$	51,488	41%	$	345,880	$	242,500	$	103,380	43%

________________

(1) Other revenue is comprised mainly of Advertising, Duolingo English Test, and In-App Purchases.

Cost of Revenues and Gross Margin. Total gross margin was 73.4% during both the three months ended June 30, 2024 and 2023. This was primarily due to higher subscription gross margin contribution from an increase in subscriber revenue as a percentage of total revenue, offset by a decline in Advertising margins, which was due to decreases in average revenue per DAU.

Total gross margin increased slightly to 73.2% from 73.1% during the six months ended June 30, 2024 and 2023. This was primarily due to higher subscription gross margin contribution from an increase in subscriber revenue as a percentage of total revenue, partially offset by a decline in Advertising margins, which was due to decreases in average revenue per DAU.

The following table provides the change in cost of revenues, along with related gross margins:


	Three Months Ended June 30,								Six Months Ended June 30,
	2024				2023				2024				2023				Change		% Change
(In thousands, except gross margin)	Costs		Gross Margin		Costs		Gross Margin		Costs		Gross Margin		Costs		Gross Margin		Costs		Gross Margin
Total cost of revenues	$	47,349	73.4	%	$	33,788	73.4	%	$	92,540	73.2	%	$	65,280	73.1	%	$	27,260	0.1	%

Operating Expenses

Research and Development. Research and development expense increased by $7.2 million, or 15%, to $55.1 million during the three months ended June 30, 2024 from $47.9 million during the three months ended June 30, 2023. The increase was mainly due to:

•Increased net personnel costs of $7.9 million, driven primarily by the growth in headcount. Total gross personnel costs increased by $8.2 million, of which $3.2 million of the increase was related to stock-based compensation expense. This increase was reduced by $0.3 million of wages recorded as capitalized software as compared to the same period in the prior year;

•Increased web services and other costs of $1.1 million.

The above increases were partially offset by a decrease in net contractor costs of $1.8 million.

Research and development expense increased by $12.2 million, or 13%, to $106.0 million during the six months ended June 30, 2024 from $93.8 million during the six months ended June 30, 2023. The increase was mainly due to:

•Increased net personnel costs of $13.5 million, driven primarily by the growth in headcount. Total gross personnel costs increased by $16.5 million, of which $7.1 million of the increase was related to stock-based compensation expense. This increase was reduced by $3.0 million of wages recorded as capitalized software as compared to the same period in the prior year;

•Increased web services and technology costs of $1.4 million; and

•Increased travel and other costs of $0.5 million.

The above increases were partially offset by a decrease in net contractor costs of $3.2 million.

Research and development continues to be our largest operating expense as we test and experiment with new products and product features and improve existing ones to drive engagement and efficacy of our products. Increased engagement and efficacy, we believe, help drive organic growth in MAUs and DAUs, growth in, and better retention of, paid subscribers, as well as increased advertising opportunities with free users.

Sales and Marketing. Sales and marketing expense increased by $2.4 million, or 14%, to $20.2 million during the three months ended June 30, 2024 from $17.7 million during the three months ended June 30, 2023.

This increase was mainly due to:

•Increased direct marketing and other expenses of $1.5 million; and

•Increased personnel costs of $0.9 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.2 million.

Sales and marketing expense increased by $5.8 million, or 17%, to $40.1 million during the six months ended June 30, 2024 from $34.3 million during the six months ended June 30, 2023.

This increase was mainly due to:

•Increased direct marketing and other expenses of $4.4 million; and

•Increased personnel costs of $1.4 million driven primarily by the growth in headcount, including increased stock-based compensation expense of $0.5 million.

Direct marketing spend and other marketing expenses as a percentage of revenue decreased as a result of applying learnings from past years, which enabled us to leverage marketing expenses more efficiently.

General and Administrative. General and administrative expense increased by $4.7 million, or 15%, to $37.0 million during the three months ended June 30, 2024 from $32.2 million during the three months ended June 30, 2023. This increase was mainly due to:

•Increased gross personnel costs of $1.4 million, offset by decreased stock-based compensation expense of $0.1 million;

•Increased travel and meals expenses of $1.1 million;

•Increased web services and technology costs of $1.0 million;

•Increased facility-related costs of $0.8 million; and

•Increased other costs of $0.8 million.

The above increases were partially offset by decreases in insurance costs and other costs of $0.3 million.

General and administrative expense increased by $9.6 million, or 15%, to $72.1 million during the six months ended June 30, 2024 from $62.5 million during the six months ended June 30, 2023. This increase was mainly due to:

•Increased personnel costs of $3.1 million, including increased stock-based compensation expense of $0.1 million;

•Increased facility-related costs of $2.1 million;

•Increased web services and technology costs of $1.6 million;

•Increased travel and meals expenses of $1.5 million;

•Increased professional fees of $1.2 million; and

•Increased other expenses of $0.8 million.

The above increases were partially offset by decreases in insurance costs and other costs of $0.7 million.

Interest Income

Interest income increased by $3.2 million, or 42%, to $10.7 million during the three months ended June 30, 2024, from $7.5 million during the three months ended June 30, 2023. Interest income increased by $7.6 million, or 57%, to $20.8 million during the six months ended June 30, 2024, from $13.2 million during the six months ended June 30, 2023. Both period increases were due to an increase in interest rates earned on our money market funds and higher average balances.

Other expense, net of other income

Other expense, net of other income decreased by $0.4 million, during the three months ended June 30, 2024, and $1.2 million, during the six months ended June 30, 2024, mainly from the impact from changes in foreign currency rates.

Provision (benefit) for income taxes

For the three and six months ended June 30, 2024, the Company recorded an income tax provision of $4.4 million and $3.3 million, respectively. For the three and six months ended June 30, 2023, the Company recorded an income tax benefit of $1.3 million and $1.4 million, respectively. For both of the periods ending June 30, 2024 and June 30, 2023, the Company has recognized a year-to-date discrete tax benefit attributable to the excess tax benefits of stock-based compensation activity. For 2024, however, there was tax expense on pretax operating activities which more than offset the discrete benefit, resulting in the an overall year-to-date tax expense position.

Liquidity and Capital Resources

Since inception, we have financed operations primarily through revenues and the net proceeds we have received from the issuance of equity.

As of June 30, 2024, we had $888.2 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist of U.S. government treasury and agency securities.

We believe that our existing cash and cash equivalents, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate and renewal activity, the timing of cash received from our payment processing platforms, the expansion of our sales and marketing activities, the introduction of new products and the enhancements to existing products, and the current uncertainty in the global markets impacting, for example, consumer spending, inflation and foreign currency exchange rates. If we cannot meet our future capital requirements, we may be required to seek additional liquidity. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business and financial condition and results of operations.

A substantial source of our cash from operations comes from deferred revenue, which is included in the liabilities section of our Unaudited Condensed Consolidated Balance Sheet. Deferred revenues consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2024, we had deferred revenues of $291.5 million, which is recorded as a current liability and expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

The following table summarizes our cash flows for the periods presented:


	Six Months Ended June 30,
(In thousands)	2024		2023
Net cash provided by operating activities	$	145,902	$	66,771
Net cash used for investing activities	(13,677)		(4,683)
Net cash provided by financing activities	8,405		8,397
Net increase in cash, cash equivalents and restricted cash	$	140,630	$	70,485

Operating Activities

Cash flows from operating activities can fluctuate significantly from period to period due to timing of payments and cash collections. Our largest source of operating cash is cash collection from sales of subscriptions to our users. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses, hosting expenses, and overhead expenses.

Cash provided by operating activities increased by $79.1 million, or 119%, to $145.9 million for the six months ended June 30, 2024 from $66.8 million for the six months ended June 30, 2023. This increase was mainly due to generation of net income during the current period and the timing of amounts received from our payment service providers in the current period as compared to the same period in the prior year.

Investing Activities

Cash used for investing activities increased by $9.0 million, or 192%, to $13.7 million for the six months ended June 30, 2024, from $4.7 million for the six months ended June 30, 2023. The increase was due to the increases in costs from capitalization of software development and purchases of property and equipment as compared to the prior period.

Financing Activities

Cash provided by financing activities was $8.4 million for both the six months ended June 30, 2024 and 2023 and was related to proceeds from exercises of stock options.

Critical Accounting Estimates

Our Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of Unaudited Condensed Consolidated Financial Statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 1. Description of the Business and Basis of Presentation and Note 2. Summary of Significant Accounting Policies in the notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion of Recent Accounting Pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

As of June 30, 2024, we had $791.9 million of cash equivalents invested in money market funds. Our cash and cash equivalents are held for working capital purposes in addition to future investments in our product. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. As of June 30, 2024, a hypothetical 10% relative change in interest rates would not have a material impact on our Unaudited Condensed Consolidated Financial Statements.

Foreign Currency Exchange Risk

Our reporting currency and the functional currency of our wholly owned foreign subsidiaries is the U.S. dollar. Certain of our payment providers translate our payments from local currency into USD at time of settlement, which means that during periods of a strengthening U.S. dollar, our international receipts could be reduced. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., China and Germany. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. In addition, as foreign currency exchange rates fluctuate, the translation of our international receipts into U.S. dollars affects the period-over-period comparability of our operating results and can result in foreign currency exchange gains and losses. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so

in the future. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to other currencies would not have a material effect on our operating results.

Inflation Risk

Inflationary factors such as increases in costs may adversely affect our results of operations. We do not believe that inflation has had a material effect on our business, financial condition or results of operations to date. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition or results of operations.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

From time to time we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. We are not currently party to any material legal proceedings.

Item 1A. Risk Factors

Our business, operations and financial results are subject to various risks and uncertainties that could materially adversely affect our business, financial condition, results of operations and the trading price of our Class A common stock. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes. If any of the following risks actually occur, it could harm our business, prospects, financial condition, and results of operations and future prospects. In such an event, the market price of our Class A common stock could decline and you could lose all or part of your investment. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks an

Duolingo, Inc. [DUOL] Filings
10-Q	[2024-08-08]
10-Q	[2024-05-09]
10-K	[2024-02-29]
10-Q	[2023-11-09]
10-Q	[2023-08-09]
10-Q	[2023-05-10]
10-K	[2023-03-01]
10-Q	[2022-11-14]
10-Q	[2022-08-05]
10-Q	[2022-05-13]
10-K	[2022-03-04]
10-Q	[2021-11-12]
10-Q	[2021-08-12]
S-1	[2021-06-28]