Duolingo: How will AI shape the future of education?

Emphasis

① Duolingo has the greatest opportunity to leverage AI quickly One of the educational companies developing business. The company’s co-founder’s graduate thesis was about how AI can help humans. Duolingo may be born just for this opportunity.

② It’s hard to get people to learn because games, social media, etc. are grabbing users’ attention all the time. It’s like “you want people to eat broccoli, but It’s next to the most delicious dessert ever.” Duolingo decided to “make broccoli taste like dessert.”

③ It took Duolingo 8 years to reach 1 million DAU, but only 21 months to go from 1 million to 3 million. During this process, the AI ​​capabilities It’s a must. In the technology-driven world of education, adaptive learning and personalized content with the help of AI is becoming the norm. Duolingo’s choice to actively integrate AI capabilities and make effective progress demonstrates that it is not only able to keep up with current trends, but also wants to proactively participate in and shape the future of education.

Duolingo was founded in 2011 by Carnegie Mellon University students Severin Hacker and Luis von Ah. As immigrants to the United States from different worlds and cultures, they understood the importance and necessity of learning different languages, which led them to found Duolingo. With a gamified learning experience, a strong brand, a variety of beneficial marketing strategies, and the help of AI, Duolingo’s stock price rose more than 210% in 2023.

Duolingo is not only a highly innovative language learning platform, but also one of the education companies with the healthiest revenue performance and the best trends. Its revenue mainly comes from four parts: subscriptions, advertising, English testing and other businesses.

The subscription business charges Super Duolingo members, provides a variety of learning and gamification functions and eliminates advertising, which is its main performance driver; the advertising business provides Advertisers who are willing to place advertisements on the App charge fees; the English test business charges candidates (the test can be used for study abroad applications and visa applications, etc., and has been recognized by more than 4,500 institutions/projects around the world); other businesses include in-app virtualization Merchandise sales, etc.

The vast majority of Duolingo's revenue comes from subscription business, and paying users are concentrated in wealthy countries such as the United States and Canada. Luis' point of view: "This is a form of wealth redistribution. The basic idea of ​​Duolingo is to find rich people to pay for everyone's education."

As a leading language learning platform, Duolingo has maintained a beautiful growth curve since its listing, and leads the AI ​​education track (such as interest in generative AI) with its vast language learning market, unique marketing strategies and powerful AI support. Other star companies on the track, please click to view). It actively integrates new technologies such as AI to improve the learning experience, and is also trying to gradually expand its business to mathematics and music courses. In 2023, Duolingo took the lead in accessing GPT4 and launched an additional Duolingo Max subscription service. With the support of AI, Duolingo’s subscription revenue is growing rapidly.

 1. Duolingo’s four success factors

1) The huge language learning market provides development ground

Duolingo is not the first listed company to target the language learning market. company. As early as 2009, language learning software company Rosetta Stone completed its IPO and raised more than $100 million. At that time, the company's annual revenue exceeded $209 million. However, in the view of Duolingo’s founders, Rosetta Stone was targeting only a small portion of the language learning market and charging them too much. This is not a good business at all.

Duolingo has found a more subtle way to break into the market than Rosetta Stone. They want to help people who want to learn a new language but can't afford learning software. cost crowd. Google Trends and the subsequent development of the two companies prove the vision of the founder of Duolingo:

Duolingo’s popularity comes from the fact that it is both an interesting learning tool and a language treasure. It is completely free and provides teaching courses in more than 40 languages, ranging from large languages ​​​​such as English, French, and Japanese to small and endangered languages ​​​​such as Welsh and Navajo. Duolingo also offers a variety of courses and exercises that allow users to easily master skills such as vocabulary, grammar, listening and reading.

The huge language learning market space provides Duolingo with broad space for development. According to statistics, by 2023, approximately 1.2 billion people around the world will be learning a foreign language. In 2023, Duolingo had 83.1 million monthly active users, with a penetration rate of nearly 7% among the global language learning population. Among them, there are 5.8 million paying users, with a penetration rate of only 0.48% of the global language learning population. Therefore, Duolingo can further expand outward to attract more new users in the future, and continue to increase user payment rates inward. There is still huge room for increasing market share.

On the other hand, the global online language learning market will reach US$20.34 billion as of 2022, and is expected to reach US$89.53 billion in 2031 at a CAGR of 17.9%. With Duolingo's subscription revenue growing at well above 17.9% each quarter, it's poised to capture higher market share in the coming years.

2) Gamified learning experience greatly promotes user growth

Learning the product or learning itself, the most important thing is to keep users engaged. Duolingo's long-standing idea is to make the learning process like playing a game, so that users can always be immersed in it. It can be said that Duolingo’s success also lies in capturing the essence of learning.

Duolingo’s learning method is very interesting. Users can complete various tasks and challenges to quickly improve their language skills. Moreover, it also has personalized learning paths and progress tracking functions to help formulate learning plans and track progress at all times.

It’s hard to get people to learn because games, social media, etc. are all grabbing users’ attention all the time. It’s like “you want people to eat broccoli, but it’s On the side is the most delicious dessert ever.” Luis and the team decided to “make the broccoli taste like dessert,” and they used a lot of tricks to do so.

Another example is the winning streak mechanism, which represents the number of days you continue to study. This function is very significant. In this way, users will open Duolingo every day in order not to lose their winning streak. According to reports, Duolingo currently has more than 3 million daily active users who have checked in for more than 365 consecutive days.

Also, Duolingo always tries to make users want to come back through clever and humorous "notifications". Currently, in terms of message notifications, Duolingo is unique in its interestingness, and many users are willing to spread and create new products on social media based on "recall notifications", giving the product great recognition and praise.

Duolingo has successfully created a fun language learning experience. They encourage users to be more active in learning (rather than treating it as a chore), which is directly reflected in the increase in the number of users and the increase in daily and monthly activity, which is crucial to the product's advertising revenue; on the other hand, Duolingo The free model allows users to conveniently use most content and services, which makes learning easy and effectively motivates some users to upgrade to the paid version as needed. The significant growth in paid subscribers shows that users are willing to invest in education once they realize the value the platform provides.

Based on user recognition of its products, Duolingo has experienced strong user and revenue growth. In 2023Q3, Duolingo's DAU jumped to 24.2 million from 14.9 million in the same period last year, an increase of 63%. Additionally, MAUs grew 47% year over year to 83.1 million. Equally important, paying subscribers grew 60% to 5.8 million. This demonstrates Duolingo’s ability to effectively attract users and implement monetization strategies.

3) Use AI to continuously optimize user experience and engagement

Duolingo's rapid growth in recent quarters is mainly attributed to the continued application of new technologies such as AI. It uses large model capabilities such as GPT4 to analyze user performance and preferences in real time to generate highly customized learning paths; in addition, AI functions such as natural language processing can provide real-time dialogue exercises and instant feedback, effectively increasing interactivity and thereby improving user engagement and Retain.

AI has many uses in the Duolingo APP. For example, if the correct rate of answering questions is lower than 80%, the user will think it is too difficult and may give up using the APP. If the correct rate is higher than 80%, the user will think it is too easy and cannot learn knowledge, so they may also give up. Therefore, Duolingo needs to ensure that the difficulty of the questions is appropriate so that the user’s accuracy rate remains at about 80%, and AI comes in handy.

For another example, Duolingo has a very complex AI system that chooses when to send notifications and what content to send. When is the most effective time to send notifications? 24 hours after the user last used the product. Luis’s original words were: “The reason is simple, if you were free at three o’clock yesterday afternoon, you should be free at three o’clock today. This is what millions of dollars of AI have discovered.”

In October 2020, Duolingo launched a self-study function - Birdbrain, which improves the adaptability of personalized courses. The Birdbrain model aims to provide a more personalized learning system, providing language materials with matching difficulty according to the learner's language mastery. As learners complete more exercises, Birdbrain can better understand the learner's mastery level, and then generate exercises of appropriate difficulty to help learners improve their learning results more efficiently.

Since then, Duolingo has not missed the popularity of the GPT model. In 2021, Duolingo introduced GPT3 to generate language practice content, which is more intelligent than Birdbrain. As long as humans input instructions and requirements, GPT3 can generate language practice content that meets the requirements. In March 2023, Duolingo announced its access to GPT-4 and launched the Duolingo Max subscription service, which includes new AI features. The logic behind Duolingo's launch of these features is that it hopes to achieve a teaching effect similar to a real person's 1-on-1 through the product. Roleplay supports interactive conversations between learners and AI simulations in certain life scenarios, and users can chat with Duo (Duolingo’s owl mascot) to get simple explanations of why answers are right or wrong and more examples.

It took Duolingo 8 years to reach 1 million DAU, and only 21 months to go from 1 million to 3 million. It can be said that the AI ​​capabilities in this process Indispensable contribution. Now, in the technology-driven education field, using AI to achieve adaptive learning and personalized content is becoming the norm. Duolingo’s choice to actively integrate AI capabilities and make effective progress demonstrates that it is not only able to keep up with current trends, but also wants to proactively participate in and shape the future of education.

4) "Social first" and "local conditions" marketing strategy

"People want to be entertained, not sold." This is the understanding of Duolingo's marketing team, Duolingo manages to remind users that this is a language learning app, but it is also very fun. Duolingo chose to have Duo, Duolingo’s owl mascot, participate in online trends and even become an internet celebrity.

In addition, although Duo is popular around the world, Duolingo found that purple-haired Lily is loved by many Chinese teenagers, so fan content about Lily has been widely circulated on Chinese social media. Previously, Duolingo had Duo peripheral products, but Lily’s plush toys, stickers and other peripherals will also appear in the future.

Duolingo adopts a "social-first" marketing strategy. Through popular culture, social media events, etc., fans and users can become brand ambassadors, allowing them to actively share their experiences and participate in Duolingo's social content. The marketing team also specializes in creating Duolingo emoticons and content that users like, which also brings considerable exposure to Duolingo.

Currently, the relevant content created by users on TikTok and YouTube far exceeds the content published by Duolingo itself. This "social first" marketing strategy is very effective and The cost is not high and the target audience is accurately reached. Duolingo has become one of the most watched brands on TikTok. As of 2023Q2, social media exposure has increased by 150% year-on-year, which has promoted Duolingo's brand development and word-of-mouth user growth.

 2. Duolingo’s business status and future potential

In recent years, thanks to the continuous expansion of the number of users and efficient payment conversion, Duolingo's revenue has increased from US$71 million in 2019 to US$369 million in 2022 USD, with a CAGR of 50.99%, and revenue in the first three quarters of 2023 of USD 381 million, a year-on-year increase of 43%.

Although Duolingo has been losing money in recent years, in 2022 due to multiple factors such as stock compensation and an increase in the number of employees, as well as equipment expansion, the net loss will reach 60 million Dollar. However, net profit in the first three quarters of 2023 has reached US$3.95 million, which is a big improvement over the net loss of US$45.644 million in the same period last year. Duolingo has achieved profitability for two consecutive quarters.

On November 8, 2023, Duolingo announced its 2023Q3 results. MAU increased by 47% year-on-year to 83.1 million, and DAU increased by 63% year-on-year to 24.2 million. Compared with the second quarter, both MAU and DAU showed significant growth.

From the perspective of paying user conversion rate, Duolingo’s paying users reached 5.8 million in 2023Q3, a year-on-year increase of 60%. Duolingo Max, a new product that integrates AI functions and will be launched for members in the first half of 2023, is effectively improving user experience and teaching quality, and is expected to further increase paying user conversion rates and customer unit prices.

In terms of revenue and profit, Duolingo's revenue in Q3 2023 was US$137.6 million, a year-on-year increase of 43%. Net income totaled $2.8 million, a significant improvement over the $18.4 million net loss reported in the same period a year earlier. In the first three quarters of 2023, subscription business revenue was US$287 million, a year-on-year increase of 47%, accounting for 75% of total revenue, and the proportion is increasing year by year; advertising business revenue has been around US$30 million in recent years, and the proportion of revenue has been continuously decreasing; English testing revenue is US$30 million, a year-on-year increase of 25%. According to the current growth rate, this revenue is expected to surpass advertising in 2024 and become the company's second largest source of revenue.

In addition, Duolingo’s development potential is also reflected in the fact that R&D expenses always account for the largest proportion of the company’s expense structure. The company’s R&D expense rate in 2021-2022 More than 40%, but the marketing expense rate continues to decline. Thanks to Duolingo's social media marketing strategy, it can reduce marketing costs while still maintaining good market exposure and user stickiness.

Duolingo co-founder and CEO Luis said that the United States is the main source of revenue, and the United Kingdom, Germany, etc. also make important contributions to revenue. China has become Duolingo's seventh largest market in the world and one of the fastest-growing international markets. Targeting the Chinese market, Duolingo launched its first dialect course, Cantonese course, in 2022. By July 2023, it had attracted nearly 3 million users.

In addition, during the third quarter financial report conference call, Luis announced that it will expand its business in the fields of mathematics and music courses, launch related courses and improve the educational product matrix. Duolingo hopes to expand its product experience and AI capabilities for language learning into more new areas, a move that is expected to solidify Duolingo's position as an educational resource center rather than just focusing on languages.

 3.  2023Q4 Performance Outlook

The market expects that, benefiting from the effectiveness of social marketing strategies and the continuous improvement of user experience by AI technology, Duolingo's user, revenue, and profit growth will continue at the previous growth rate, and is expected to reach fourth Quarterly revenue will reach US$148 million, a year-on-year increase of 42.95%; earnings per share will reach US$0.15, a year-on-year increase of 142.56%.

In this financial report, investors will focus on the growth rate of its DAU, MAU, and paid users, as well as the revenue growth in the next quarter and next fiscal year. and guidance on profitability continuity. It is expected that Duolingo will most likely continue its current trend in the next quarter, and a number of important data (revenue, monthly active and paid users) will increase by 30%-60% year-on-year. Given that management announced during the third quarter earnings call that Duolingo will expand into the fields of mathematics and music, the market will also pay attention to the substantial progress of related new businesses.

In addition, according to statistics, in the past eight quarterly financial reports, Duolingo's revenue and earnings per share have exceeded expectations in all quarters. In 7 of these 8 quarters, the stock price rose the day after the financial report, with the increase ranging from 4% to 34%.

 4.  Conclusion

RockFlow's investment research team is optimistic about Duolingo's growth prospects in the long term. With its gamified learning experience, solid business model and commitment to supporting education around the world, Duolingo is poised to benefit from the growth of AI in the long term.

Coincidentally, in the 2023Q1 financial report conference call, Luis said: "I feel very lucky to be able to lead Duolingo to become the company with the best opportunity to use AI to develop rapidly. One of the companies." His previous graduate thesis was exactly about how AI can help humans in multiple dimensions.