Duolingo S-1 Filing: Growth, Monetization & English Certification

Duolingo's IPO Filing: A Deeper Dive

Yesterday marked Duolingo’s filing for an initial public offering, providing detailed insights into the company’s business performance and the impact of the pandemic on this prominent edtech company. Initial analysis from TechCrunch indicated positive growth and manageable losses, with Duolingo recently achieving profitability on an adjusted basis.

User Base Growth Analysis

Beyond the headline figures, a more granular examination of Duolingo’s performance is warranted. We will explore the expansion of its user base, revenue generated per active user, and the effectiveness of converting free users into paying subscribers. This analysis will illuminate the challenges Duolingo faces in identifying new revenue streams.

Let's begin by considering Duolingo’s growth in total active users. Consider the rate of increase between 2019 and 2020.

The specific numbers reveal that Duolingo concluded 2019 with 27.3 million monthly active users (MAUs), increasing to 36.7 million MAUs by the end of 2020. This represents a 34% increase. A comparison of Q1 2021 to Q1 2020 shows MAUs rising from 33.5 million to 39.9 million, a growth rate of approximately 19%.

The majority of Duolingo’s user growth occurred in early 2020, coinciding with the onset of the pandemic. Specifically, the company expanded from 27.3 million MAUs at the close of 2019 to 33.5 million MAUs at the end of Q1 2020. Subsequent growth added 3.2 million MAUs throughout 2020 and an additional 6.4 million over the following four quarters.

It's noteworthy that Duolingo’s first-quarter results consistently outperform the rest of the year, potentially linked to New Year’s resolutions focused on language learning or revisiting previously studied languages.

Monetization and Subscriber Conversion

Now, let’s turn to Duolingo’s monetization efforts and its success in converting free users into paying customers.

The growth trajectory here differs significantly. While MAUs increased by 34% from 2019 to 2020, the number of paying users rose from 900,000 to 1.6 million. This constitutes a substantial 84% year-over-year increase.

Therefore, while Duolingo experienced considerable user growth in 2020, the expansion in revenue-generating users was even more pronounced. The pandemic’s primary impact on Duolingo was an improvement in monetization, rather than simply accelerating user acquisition.

Examining more recent data, paid subscribers increased from 1.1 million in Q1 2020 to 1.8 million in Q1 2021, a gain of around 64%. This pace was slower than the overall growth observed in 2020, mirroring Duolingo’s slower revenue growth in Q1 2021 compared to 2020.

Despite this deceleration, the growth remains strong, though less impressive than the over 100% revenue expansion achieved last year.

In percentage terms, 3.3% of Duolingo’s MAUs were paying subscribers in 2019. This figure climbed to 4.4% in 2020, and reached 4.5% in Q1 2021. Duolingo reports this as 5% in its S-1 filing, a figure we consider slightly optimistic given the incremental improvement in this metric.

Even a small increase of 0.1 percentage point per quarter represents growth.

Revenue Per MAU

Finally, let’s analyze revenue per MAU. We will calculate this by dividing quarterly revenues by the corresponding MAU figures. This will allow us to compare Q4 2019, 2020, and Q1 2021.

The results are as follows:

• 2019 revenue per MAU: $0.85.
• 2020 revenue per MAU: $1.32.
• Q1 2021 revenue per MAU: $1.39.

These figures are quite revealing. The company demonstrated significant year-over-year growth in revenue per MAU during 2020. This metric effectively combines the percentage of MAUs who are paying users with the revenue generated from those paying customers.

Importantly, Duolingo continues to increase this metric in its most recent quarter, despite the substantial gains already achieved in 2020. An increase of 7 cents in revenue per MAU may seem modest, but with a user base of approximately 40 million, it translates into meaningful revenue gains.

Duolingo's Business Model: An In-Depth Analysis

This article provides a deeper examination of Duolingo’s financial performance, building upon our initial coverage of its monetization strategies.

Initially, Duolingo publicly stated its intention to avoid advertising, subscriptions, and in-app purchases. However, all three of these revenue streams are now integral to the platform’s operation. The need for financial sustainability ultimately drove the introduction of monetization features. Currently, users can access all learning content for free, or opt for a $6.99 monthly subscription that removes ads, provides unlimited hearts, and offers progress tracking.

Despite demonstrating current growth, the company is actively pursuing alternative revenue sources, with the Duolingo English Test (DET) being a primary focus for bolstering its financial standing.

Data from our earlier analysis (EC-1) revealed a 2,000% surge in DET test-taker numbers between 2019 and 2020. Furthermore, over 2,000 additional educational institutions began accepting the DET during 2020. Company leadership consistently highlighted the DET as a key driver of growth during the pandemic. However, the S-1 filing indicates that the DET currently contributes only 10% to overall revenue, falling short of co-founder and CEO Luis von Ahn’s expectation of 20% following a price increase.

Duolingo’s S-1 filing outlines plans to expand the DET’s reach by increasing its acceptance within higher education, targeting immigration and employment sectors, and integrating it directly into the Duolingo language learning application. The latter integration presents the most significant challenge, stemming from a fundamental paradox: the Duolingo app alone may not provide sufficient English proficiency to successfully pass the Duolingo English Test.

Jennifer Dewar, director of strategic engagement for the test, suggests that the company could leverage the error patterns observed in DET results to refine the English courses offered within the Duolingo app. The ultimate goal is to enable users to progress through the app to an advanced level of English proficiency and then demonstrate their skills through assessment. Achieving this will necessitate substantial investment in speech recognition technology and a comprehensive overhaul of existing coursework.

The S-1 filing demonstrates the company’s capacity for growth despite these inherent tensions, successfully monetizing a portion of its user base rather than relying on the majority. As Duolingo prepares for its public offering, its relationship with these alternative revenue streams, and its ability to effectively educate its users, become increasingly important. Currently, only 8% of the company’s global workforce is dedicated to curriculum development.

While maintaining its identity as a technology company, Duolingo may need to shift its focus towards educational outcomes. This could involve significant investment in areas such as pronunciation, learning efficacy, and the development of new applications – potentially incurring substantial upfront costs. Consider the possibility of strategic mergers and acquisitions, or a focused recruitment drive prioritizing creative content creation.

Company executives have repeatedly emphasized their commitment to keeping the core learning experience free and restricting monetization to features that do not directly contribute to educational value. Maintaining this balance is crucial to the company’s mission, but also places increased pressure on the development of premium, paid features.

Concluding this second assessment of Duolingo, our initial assessment – that the company is entering the public market from a strong position – remains valid. Naturally, questions persist regarding the sustainability of its growth in a post-pandemic environment. However, for a company often recognized for its persistent, and sometimes assertive, notifications, this quiet period appears to coincide with the beginning of crucial internal experimentation.