DUOL Q2 2025: 40% YoY DAU Growth Drives Margin Beat on AI Cost Cuts
- Strong User Growth and Engagement: The company delivered 40% YoY DAU growth with an improving DAU-to-MAU ratio (up to 37%), indicating robust user engagement and retention trends despite some seasonal variations.
- Innovative Product Enhancements: Duolingo’s rollout of new features—such as the energy mechanic replacing hearts to drive conversion, as well as rapid expansion into new subjects (e.g., chess, math, and music)—supports improved user experience and broadens its total addressable market.
- Improving Margins and Cost Efficiency: With lower AI compute costs driving improved gross margins and successful pricing experiments (including testing a web-based checkout to reduce third-party fees), the company is well positioned to enhance overall profitability.
- Lower DAU growth and sentiment risks: The Q2 transcript highlighted that DAU growth slipped to the lower end of guidance partly due to negative social media sentiment from previous edgy posts, which could signal potential headwinds for future user engagement and revenue.
- Underperformance of premium Max conversion: Despite overall growth, the transcript notes that Max subscriber conversion is growing more slowly than Super, with factors such as challenging video call features for beginners potentially limiting monetization upside.
- Regulatory and rollout challenges in key markets: In China, regulatory hurdles are delaying the rollout of high-value features like Max, meaning that the fastest growing market may not yet contribute to higher-margin subscriptions, potentially slowing revenue growth.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EBITDA Margin | FY 2025 | no prior guidance | Expected to be around 28.5% to 29% for FY 2025 | no prior guidance |
Gross Margin | FY 2025 | Expects a 150 basis point decline year-over-year in gross margin | Anticipated benefits from AI cost savings with minimal impact from web-based checkout in back half of FY 2025 | raised |
DAU Growth | Q2 2025 | no prior guidance | 40% (year-over-year, as reflected in Q2 2025) | no prior guidance |
ARPU | Q2 2025 | no prior guidance | Increased by 5–6% in Q2 2025; expected to remain in the low single-digit positive range | no prior guidance |
Revenue from New Features and Plans | FY 2025 | no prior guidance | Rollout of the energy feature expected to be completed within a couple of months, potentially driving higher revenue | no prior guidance |
Max Plan Growth | FY 2025 | no prior guidance | Growth is slower than expected; renewal rates are being monitored with more data expected in Q3 and Q4 2025 | no prior guidance |
FX Impact | FY 2025 | no prior guidance | FX provided a tailwind to bookings in Q2 2025 and is expected to contribute meaningfully to the back half of FY 2025 | no prior guidance |
Investments | FY 2025 | no prior guidance | Planned investments in product development (including hiring new graduates and expanding the music roadmap) with a small incremental marketing spend | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
User Growth and Engagement | Previously, earnings calls in Q1 2025, Q4 2024, and Q3 2024 described robust DAU growth with figures around 49%–60% year-over-year, broad-based regional expansion, strong performance among English learners, and experiments with resurrected users | Q2 2025 highlighted a 40% YOY DAU growth with noted regional variations (e.g. slower U.S. growth due to no U.S. marketing spend), impact of social media backlash, and plans to shift strategy in the U.S. | Overall strong growth continues but with a slight moderation and regional adjustments to address U.S. market challenges. |
Subscription Conversion and Monetization | Earlier periods (Q1 2025, Q4 2024, Q3 2024) focused on steady improvements in conversion rates, incremental upgrades from Super to Max, and the growing contribution of new subjects (math, music, chess) to overall bookings | Q2 2025 emphasized bundling new subject offerings (math, music, chess) to expand TAM, with efforts to optimize LTV rather than immediate revenue growth, while still referencing conversion improvements | The focus remains on driving conversions, with a shift toward using new subject bundles to boost the total addressable market. |
Duolingo Max Adoption and Challenges | Q1 2025 reported adoption at about 7% with pricing concerns (e.g. high price in India) and challenges with the Video Call feature for beginners; Q4 2024 mentioned 5% adoption with strong traction among English learners; Q3 2024 covered rapid rollout (targeting 50%-70% DAU exposure) and conversion cycle uncertainties | In Q2 2025, Max adoption reached 8% but growth was slower than expected due to Super subscription growth, with challenges such as the video call being difficult for beginners and regional rollout limitations (e.g. China) | Adoption of Max is steadily increasing, yet product challenges (like accessibility for beginners and regional availability) remain a consistent area of focus. |
Product Innovation and AI Integration | Across Q1, Q4, and Q3 2024, Duolingo discussed AI-driven content creation (e.g. 148 new courses), the introduction of AI-powered Video Call with Lily, enhancements in user engagement through new features, and ongoing experimentation across offerings | Q2 2025 reiterated investments in new subjects (chess, math, music), further enhancements to Video Call (adding bilingual options, backgrounds for Lily), and benefits from lower AI costs that improve operational efficiency and content development | The commitment to AI integration remains strong, with continuous feature improvements and expansion into new educational areas driving long-term innovation. |
Gross Margin and Cost Efficiency | Q1 2025 and Q4 2024 highlighted a temporary decline in gross margin driven by higher AI costs (especially related to Max), with expectations for margin improvement later in the year; Q3 2024 noted declining LLM costs and strong scale while balancing higher costs for GenAI features | Q2 2025 showed improved gross margins driven by lower AI costs (declining API call and token pricing) and experiments with web-based checkout, although benefits remain modest this year due to accounting amortization | While gross margins are under pressure from AI-related investments, cost efficiencies are gradually improving as AI expenses decline and operational innovations are implemented. |
Content Expansion and New Subject Offerings | Q1 2025 detailed rapid course expansion (148 new language courses) and the launch of math, music, and soon chess, with clear plans to increase the breadth of offerings; Q4 2024 and Q3 2024 emphasized scaling math and music courses and expanding advanced English content | Q2 2025 continued to advance the new subjects agenda by noting strong early signals in chess, further investment in music (through an acquisition), and the bundling of these offerings under one subscription while acknowledging revenue optimization will take time | Content expansion remains a core strategic priority, with new subject areas emerging and receiving added focus to broaden the platform’s learning spectrum. |
International Expansion and Regulatory Challenges | Q4 2024 and Q3 2024 discussed international expansion initiatives with detailed plans in Asia, Europe (France, Korea, Italy, Turkey), and robust growth in mature regions; no discussion of regulatory challenges was provided | Q2 2025 and Q1 2025 did not mention international expansion or regulatory challenges | International expansion is a recurring theme in earlier periods but is less emphasized recently, and regulatory challenges remain unaddressed. |
Pricing Strategies and Conversion Risks | Q1 2025 and Q4 2024 highlighted ongoing pricing experiments across regions (including price adjustments for Super and Max), tiered pricing strategies tailored for markets like India, and conversions risks related to regional economic differences and feature placements; Q3 2024 also touched on strategic tier management and conversion variability by device and geography | Q2 2025 continued with pricing experiments that showed modest ARPU increases driven by FX and plan mix, while exploring web-based checkout and addressing conversion risks related to U.S. market slower growth, and social media’s influence on bookings | The focus on refining pricing and managing conversion risks remains constant, with ongoing tests to balance regional market differences and optimize subscription upgrades. |
Advertising Revenue and Monetization Shift | Q4 2024 provided specific commentary on lighter ad revenue due to strategic emphasis on subscriptions and a shift toward higher-value plans, while Q1 2025 and Q3 2024 had little to no discussion on ads | In Q2 2025, aspects of ad revenue appeared modestly as part of overall bookings, but the primary focus remains on subscription and in-app purchases rather than ads | There has been a gradual monetization shift away from heavy reliance on advertising towards subscription-based revenue, with ad revenue playing a secondary role. |
Reliance on Organic Marketing | Q1, Q4, and Q3 2024 earnings calls consistently emphasized low-cost, organic social media marketing as a key growth driver, relying on viral content and minimal performance marketing spend | Q2 2025 indicated that, while Duolingo has historically relied on organic marketing (especially in the U.S.), they plan to start modest paid efforts in the U.S. to complement organic channels due to changing growth dynamics | The long-standing reliance on organic marketing continues, but recent indications suggest a modest shift to incorporate paid marketing in select markets to sustain growth. |
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Margin Outlook
Q: How did AI costs impact margins?
A: Management noted that AI cost reductions (e.g., lower API calls and token pricing) helped beat margin expectations, while FX tailwinds further supported profitability. -
User Growth
Q: What drove daily user growth?
A: Daily active users grew 40% YoY, reflecting strong usage and improved retention despite moderating growth in the U.S. market. -
Conversion Trends
Q: How did Max conversion evolve?
A: The share of Max subscribers rose from 5% to 8%, though Super’s performance outpaced Max, indicating evolving consumer preferences. -
Pricing Impact
Q: What did pricing experiments show?
A: Super pricing experiments modestly boosted bookings and ARPU by about 5–6%, driven by favorable FX and a shift toward higher-priced plans. -
China Market
Q: How is the China market performing?
A: China remains the fastest-growing region, with strong demand boosted by a successful Luckin partnership, even as regulatory issues delay a Max rollout there. -
Payment Flow
Q: What progress on web-based payments?
A: A test on iOS using a web purchase flow reduces reliance on Apple’s 30% fee; its impact is expected to be modest this year due to timing. -
Energy System
Q: How has the energy system affected engagement?
A: Switching from hearts to an energy mechanic has incentivized heavy usage, increasing bookings and engagement, with over half of iOS users already transitioned.
Research analysts covering Duolingo.