Guidance below expectations, Duolingo plummets nearly 30% intraday! CEO: Focus on teaching well first, profitability can wait | Earnings Report Insights

Duolingo's stock price fell nearly 30% during Thursday's trading session due to the company's earnings guidance released after the market closed on Wednesday, which fell short of expectations. The company stated that it is currently more focused on user growth rather than short-term monetization.

Here are the key points from Duolingo's third-quarter financial report:

Key Financial Data:

Revenue: Duolingo's revenue in the third quarter increased by 41% to $272 million, exceeding the $260 million expected by analysts surveyed by LSEG.

Total Bookings Revenue: Total bookings revenue grew by 33% year-over-year to approximately $282 million, also above expectations.

Net Profit: Duolingo's net profit in the third quarter rose to $292.2 million, compared to $23.4 million in the same period last year.

Earnings Per Share: Duolingo's earnings per share in the third quarter were $5.95, up from 49 cents in the same period last year. The company noted that net profit was boosted by a one-time tax benefit of $222.7 million.

Paid Subscription Users: Duolingo's paid subscription users grew to 11.5 million in the third quarter, higher than the 11.38 million expected by analysts.

Daily Active Users: Duolingo's daily active users in the third quarter were 50.5 million, below the 51.2 million expected by analysts.

Monthly Active Users: Duolingo's monthly active users in the third quarter were 135.3 million, below the 137.4 million expected by analysts.

Earnings Guidance:

Fourth Quarter Total Bookings Revenue: Duolingo expects bookings revenue to be between $329.5 million and $335.5 million, lower than the $344.3 million estimated by analysts.

Fourth Quarter Adjusted EBITDA: Adjusted EBITDA is expected to be between $75.4 million and $78.8 million, also below the market expectation of $80.5 million.

Full Year Revenue: Duolingo raised its full-year revenue guidance to between $1.0275 billion and $1.0315 billion, higher than the previous expectation range of $1.01 billion to $1.02 billion.

Due to the earnings guidance falling short of expectations, Duolingo's stock price fell nearly 30% during Thursday's trading session.

CEO and co-founder Luis von Ahn stated in a media interview that the company has "clearly shifted its focus towards user growth" in recent months.

"In the past quarter, we made some small adjustments in our investment direction, and now we are investing more in long-term projects because we believe there are very large future opportunities there."

"We will still focus on monetization, but this balance is slightly changing. In contrast, we will invest more in teaching quality in the future, rather than focusing on monetization as we did in the past."

In recent months, Duolingo has launched a series of new AI tools, including interactive video calling features, to attract more paid users, and the company has also leveraged AI to launch more language courses at a record pace Duolingo adopts a "freemium" model, striving to convert free users into paying users, such as offering "Super Duolingo" for an ad-free experience and "Duolingo Max" with generative AI features.

von Ahn stated to the media:

"We are one of the few companies that have found a way to monetize AI. This business is actually profitable for us."

"There are some experiments that create a conflict between monetization and user growth, and one of my ongoing tasks has been to make trade-offs between the two."

The financial report shows that paid users surged by 34% in the third quarter, reaching 11.5 million. The strong performance in the Chinese market also provided a boost. The partnership with Luckin Coffee in July increased Duolingo's visibility in the Chinese market.

Management also reiterated that they are not concerned about the real-time translation feature of AirPods launched by Apple. von Ahn stated that if one wants to attend college or live in the U.S.,

"You can't just walk around wearing one AirPod all the time."

KeyBanc analyst Justin Patterson downgraded the stock rating from "overweight" to "sector weight," citing that the company's focus on long-term product layout will impact short-term growth and valuation.

He wrote that these initiatives may take "several quarters" to yield "significant financial benefits."