DUOL - NASDAQ

[Presentation] Welcome, everyone, to Duolingo's Fourth Quarter 2025 Earnings Webcast. Today after market close, we released this quarter's shareholder letter, a copy of which you can find on our IR website at investors.duolingo.com. On today's call, we have Luis von Ahn, our Co-Founder and CEO; and Gilian Munson, who we are pleased to welcome as our new CFO. They will begin with some prepared remarks before we open the call for questions. [Operator Instructions] And please note, this call is being recorded. [Operator Instructions] Before we begin, please note, we'll make some forward-looking statements regarding future events and financial performance. These statements are subject to risks and uncertainties described in our SEC filings and are based on assumptions we believe to be reasonable as of today. We undertake no obligation to update them. We'll also discuss both GAAP and non-GAAP financial measures. Reconciliations between the two can be found in our earnings materials, and we encourage you to review them when evaluating our performance. And now I will turn it over to Luis.

Thank you, everyone, for joining us. I want to start by talking about Matt Skaruppa, who up until today has presided over 100% of our earnings calls as our CFO. It really has been one of the singular honors of my career to work with Matt. Matt, I know you're watching tonight, and thank you really for everything you did for our mission. Now Matt is a hard act to follow, so I can't think of anybody better to take his place and the person who helped us hire him, our long-term Board member and Chair of our Audit Committee, Gilian Munson. She's our new CFO. She's here with us today, and I'm very much looking forward to working closely with her. Now let's get to the business at hand. 2025 was another strong year for Duolingo. For the first time, we surpassed 50 million daily active users, and that's more than 5x as many as we had when we IPO-ed in 2021. We also delivered over 1 billion in bookings and more than $300 million in adjusted EBITDA. I'm proud that we have built a business that is profitable at scale and that is having a huge positive impact in the world. But what excites me most is not what we've already achieved, it's what's ahead. I'm more convinced than ever that the accelerating advances in AI will fundamentally change the way people learn. This creates an enormous opportunity for us. We are the most popular education app in the world by a margin, and we intend to lead this shift. By leaning into this moment, we believe we can redefine the future of learning while generating exceptional value for our shareholders over the long term. So huge opportunity ahead of us. And the most important thing right now is to continue attracting users. We said this in our last earnings call. Now while our DAU growth over the past several years has been nothing short of phenomenal, it decelerated throughout 2025, and as the new year began, we continued seeing this trend. We now expect DAU growth to be about 20% year-over-year throughout 2026. This reinforced my conviction that we needed to take more decisive actions to reaccelerate DAU growth. Another way of saying -- another way of seeing it is that long-term value in this business is driven by 2 things: the size of our active learner base, that's like the size of the pie. And how effectively we monetize that base. You can think of that as the piece of the pie that pays. At this moment, we are prioritizing growing the size of the pie. So as I detailed in our shareholder letter, we have a carefully considered plan for 2026 that focuses on teaching better and user growth. In addition to the thousands of A/B tests we plan to run in 2026 to improve our product, we have larger initiatives that fall into 3 categories: teaching languages better, improving the free user experience and feeding our next growth engines, meaning our subjects of math, music and chess. All of this is in service of growing DAUs faster. Our medium-term goal is to reach 100 million daily active users in 2028. If we succeed in doubling our DAUs, the payoff would be significant. A more resilient brand, a business with meaningfully higher bookings and profit, and most importantly, a company that reaches and teaches far more people around the world. But in the short term, the short-term implication is that this year, we'll see slower bookings growth and lower profitability as captured in our guide. I want you to know that I don't take this decision lightly and that I know it may come as a surprise to some investors, but it's fundamentally aligned with what I said to shareholders in my very first letter, which I will now read: "Dear potential investors, the main thing you need to know is that I plan to dedicate my life to building a future in which, through technology, every person on this planet has access to the best quality of education. And not only that, but a future in which people want to spend their time learning. Duolingo is the platform for building that future, and we are just getting started." And with that, I'll turn it over to Gilian long-term Munson.

Thank you, Luis, for the really warm welcome. Being a full-time member of this team is going to be a great adventure. I'd be remiss if I didn't say a huge thank you to my friend and colleague, Matt Skaruppa, who we are all going to miss and who I wish all the best. We had a solid finish to the year and ended in a strong financial position, a great platform from which to look forward strategically, as Luis explained. Turning to the go-forward plan and guidance. In our shareholder letter, we have included a lot of specific details to help you with your 2026 modeling, likely more than we will going forward. I'll repeat a bit here and add some color in areas we really want to be sure we emphasize. At the highest level, our 2026 guidance is bookings growth of 10% to 12%, revenue growth of 15% to 18% and adjusted EBITDA margin around 25%. For our Q1 guidance, it is 11% bookings growth, 25% revenue growth and an adjusted EBITDA margin of 25.5%. Here are some details that I hope will help you with your models. Looking at bookings. Quarter-to-date, as of last Friday, Q1 bookings growth was tracking above our Q1 guidance. However, it's important to remember that we are heading into a particularly tough compare in the first half with dead Duo, a price increase, particularly strong advertising bookings and the rollout of Energy. We are modeling some improvement to bookings growth rates at the end of the year, but have only factored in modest early returns on our investments at this point, which we think is prudent as shifts like the ones we are making can take some time to materialize. Turning to revenue. We believe that the rate of year-over-year revenue growth will adjust down following bookings growth rates over the course of the year with some stabilization in the second half. Given our Q1 guidance is 25% growth, the math implies that quarters 3 and 4 will be below the low end of this guidance range. As for cost, as you think about our COGS, the key thing to keep in mind is that we plan to share AI features with a far greater portion of our user base. This is anticipated in the lower gross margins that we outlined in our letter. Additionally, we are investing in 2026. As a result, we expect that R&D and sales and marketing spend growth will outpace revenue growth. Putting it all together, the trajectory of adjusted EBITDA margins will likely be slightly different in 2026 than in previous years. In Q1, we've guided to 25.5% adjusted EBITDA margin, and we expect adjusted EBITDA margin to decline roughly 3 points sequentially in Q2. Then it will improve through the back half of the year with Q4 being our highest margin quarter in 2026. I'd note, however, that we do manage to annual targets and the timing of our spending could shift, but we will update you on as we continue the year. That's a lot of detail we know. We hope that in combination with the shareholder letter, this does help you manage your estimates as we execute our strategy. You may ask about our guidance philosophy. And so I thought I'd note that. This year, our view is that like in Q4, our hope is to narrow the gap between our guidance and actuals versus what you have generally seen from Duolingo in the past. Finally, I would like to highlight our buyback authorization that was announced today. Our Board has authorized a buyback of up to $400 million in our shares. We believe this represents good capital allocation discipline and expect to execute upon this authorization in the coming year. I couldn't be more excited to join this company at this time. The size and scale of the market opportunity ahead is massive. And I very much view 2026 as a foundational year to achieve that opportunity. Thank you, Luis. I'm excited to step into this role during this important moment at the company. And now I'll turn it back to the operator, and we can take your questions.

[Operator Instructions] We'll take our first question from Bryan Smilek with JPMorgan.

Luis to start, can you just elaborate a bit more on what you're seeing in the market across AI and just overall innovation across the technology space that makes this the right time for the strategic shift to reaccelerate user growth? And I guess, more fundamentally, to achieve your 2028 target to double users, what are the, call it, 1 to 2 top priorities across the product that will really enhance that DAU growth and drive the implied acceleration to get there?

Bryan, thank you for the question. Okay. In terms of AI, look, we really are in a unique time in history. AI is going to allow us to teach significantly better. And I also believe that the way people learn is just going to change. And the reason for that is, I think that in the next few years, we are going to see quality of teaching that is as good as a one-on-one tutor. We're going to see that. But not only that, not only is it as good as a one-on-one tutor, but it will be as fun as a mobile game. So it's this incredible thing that's going to happen. And the things that we're seeing is we're just -- we're able to find where users or learners are having trouble and really specialize in that and answer all their questions and whenever they have any kind of confusion, we can get in there and really fix it. We also -- in the case of teaching languages, we can finally practice conversation better. We have this feature video call with Lily. It keeps getting better and better at being able to practice your conversation. And so we can see improvements in how well people are learning. And the same is true for our other subjects, certainly with math. Like I said in our shareholder letter, I believe that this year, we're going to have the best tutor app for math. This is going to be Duolingo math. And it will just -- I think this is a huge market potential. There's about 1 billion people learning math in the world. So we'll be able to teach them as many as we can really well. So I'm very excited about AI in general. And this is why I think now is the time to try to attract as many users as possible. Now in terms of what are the top priorities that will allow us to get to 100 million daily active users by 2028. It's a number of things. In general, the 3 buckets that we're going to be investing in are teaching languages better. Languages is our largest subject, and it will continue being our largest subject for a while. We're going to teach languages significantly better. And there's a lot of work there. Another one is in making the free user experience better. The less friction that there is in the user -- in the free user experience, the more users we have. We have seen this over the last 15 years. Whenever we'd remove friction from the free user experience, DAUs grow, right? So that is another one. And then the third thing that we're going to be doing is just investing a lot in our new growth engines. That's our new subjects. So in particular, chess has grown quite a bit. As I said in our shareholder letter, we have about 7 million daily active users in chess and this is less than a year after we launched. At this point, we believe we're the second largest chess thing in the world, which is, by the way, incredible because if you search for chess on the App Store, we don't appear in the results. We just haven't even gotten there to doing App Store optimization, but we already got to 7 million daily active users. So those are the things that I think are going to help us get there.

Great. And then I guess, elaborating a bit more, you mentioned video call as well, too. Can you talk about the philosophy and the product roadmap really across Max versus Super? You've been very transparent in the past in terms of oscillating the features and the relative pricing set. So how should we think about just overall the Max road map as you start to ship those video calls to Super users as well?

Yes. When we started Max a few years ago, we introduced some AI features. We were super excited about all the AI features because they really can help us teach better. At the time, cost for AI inference was way higher than it is now. And so we decided to put our AI features behind a much higher subscription tier, which is Duolingo Max. That's what we have done. But we said back then that as AI costs came down, we would experiment putting features in the different tiers because ultimately, our goal is to be able to teach as many people as possible. At this point, the cost of a video call has gone down very significantly over the last couple of years since we launched video call. And we feel pretty comfortable being able to put it inside Super Duolingo. Now like everything we do, this is going to be an A/B test. We're going to A/B test what happens if we put some video call in Super Duolingo. I'm not sure what that A/B test will do. It may be that this increases revenue because more people sign up to Super Duolingo or because the retention of Super Duolingo is significantly higher because video call is there, or it may be that it decreases bookings because we're not making as much money from selling Max. I don't know what it will do. But whatever it does, we're going to take the appropriate options. So for example, if the decrease in bookings is too high, we may do something like we meter video cost. So for example, on Super Duolingo, you only get access to 1 video call a day versus on Max, you get unlimited. Now I'm saying all of this very much in advance because I don't actually know what will win in these A/B tests. But what I will tell you is that, for sure, we will put some form of video call in our Super tier because we just think that it will help us teach a lot better to a significantly larger number of people. There's about 10x as many subscribers on Super that they are on Max. So if we put video call on Super, 10x as many people have access to conversational practice. And the other thing that I think is we're going to do this on our own terms. I mean my sense is that over time, it will not make sense to have a feature like video call on their plan that is so expensive as Max. So we're doing it from a position of strength right now where our finances are very strong, and we're going to just do that as opposed to if we had to do it defensively 3 years from now because a competitor popped up. I mean, at the moment, we really are not worried about competition. So we're getting ahead of it.

And Bryan, we designed the guidance to give the company the room to go do all of this and experiment with this and do the right thing for our customers. And that's precisely how the guidance and the way we think about the financials this year are designed.

Our next question comes from Ralph Schackart with William Blair.

Luis, last call, when you talked about the reprioritization for 2026, and I think it was sort of contemplated it was going to have some impact on the financials for 2026. But maybe not to the level guided that was presented today. At least that was my interpretation. I could certainly have that wrong. But I guess, did something change since last quarter in terms of how you thought about 2026? So the user growth, is this larger than perhaps you originally anticipated? And then maybe a question for Gilian on the 20% DAU growth. When these friction points or monetization friction points are removed, should we expect some reacceleration in the DAU metrics? And I guess, you sort of suggested that you're tracking above in bookings. Maybe just some kind of early reads on, as you're removing some of these friction points, how the user growth is responding?

Thank you, Ralph, for your question. So yes, in the last call, as you said, we said that we will be concentrating on user growth. And for similar reasons as now, one, we had seen deceleration of DAU growth throughout 2025, some deceleration of user growth. And in addition to that, we think this is just a unique opportunity where instead of decelerating user growth, we should be accelerating user growth because we should -- just capture this opportunity. So that was what we said in the last earnings call. What happened between then and now are two things. The first is that we kept on seeing this trend of user deceleration. And by now, we expect about 20% year-over-year growth throughout 2026. And that -- and the other thing is that my conviction of AI just increased even more. And that just made it so that I have even more conviction that we need to spend really the vast majority of our efforts on DAU growth. And as we built the plan for 2026, this is what came out. I mean the guidance that we're giving. And in terms of the 20%, I guess, Gilian, you can go ahead and answer.

Yes. So as Luis said, we really do expect that 20% through the year. In terms of the Q1, what we're seeing so far, it is tracking ahead of the guidance. And we think that shows everyone that there is a lot of health in the business. But you do have some really, really tough comps coming. And so the overall guide reflects that. I think it's really important to put in context that Luis is talking about is the confidence we've gotten in going for the bigger price. And so when you think about that 20% and the 100 million target, that would imply an acceleration to much higher growth rates in the next couple of years. And if you kind of play that out in terms of what the financials could look at, that is, as Luis said, a much bigger business. So as we look at the business, we think to ourselves, okay, we could have grown the business, probably we would be at about a mid-teens CAGR over the next couple of years. If we could keep our margins where they are, we're probably looking at a $1.5 billion business, $400-plus million in adjusted EBITDA. But we, at the company, are really motivated to go for the bigger prize, which is much more aligned with what Luis and Severin were thinking about when they founded the company. So then if you sort of play out the DAU, this was all back of the envelope. But if we can get to that DAU and even reasonable monetization assumptions from where we are today, and we believe we can scale our expenses over time, you're looking at a business in a couple of years, it could be $2.5 billion with over $700 million in adjusted EBITDA. And I think around this entire company, we're really motivated to go for the bigger price. And so that's what you're seeing and kind of how we're thinking about it. In terms of when you're going to see it in the model, we've really modeled it late in the year. So it's going to take a little while. What we're working on is going to take a little while to see through it. But we do have a little bit in the end of the year. We think it's prudent to keep that small for now until we kind of get going. You'll start to see more and more as we move into '27 and '28.

The next question comes from Mark Mahaney with Evercore.

I want to ask a growth question and a product question. The growth question is, you mentioned these factors that caused this deceleration, law of large numbers, increased maybe over focus on monetization. There are 2 other potential reasons, too. So just address those, which is market saturation and competitive intensity. Maybe there's -- so just -- are there new data points that just remind you or open your eyes even more to the long-term growth opportunity here? And then in the products, the video call is a wonderful product. These other things that you're talking about, the speaking adventures, is that on the come? Like how soon should we expect that? And getting to this more advanced content with all of your 9 largest languages up to that 129 score. Is that something that happens now? Or is that something that's a multiyear build? Like how long does it take to get to those 2 products that will -- that we could potentially see the products and then the impact that they would have?

Thank you, Mark. Okay. So your first question is about market saturation and competition. We're worried about neither one of those. In terms of competition, if you look at language learning apps, we have about 85% of the daily active users of language learning apps in the world. And that number has remained pretty flat over a while. Basically, we're just not particularly concerned about that. In terms of market saturation, we're -- for example, we look at things like the percentage of daily active users in a given country compared to the size of the Internet base of that country. So for example, in the United States, 2% of all Internet users on a given day use Duolingo. So 2% penetration in the U.S. for daily users. In the U.K., that's 3%. In Germany, that's 4%. And Germany is not the highest country we have. We actually think we can get much higher than that. But even if we only assume that every country got to 2%, which is the U.S. penetration, we would more than double our daily active users. So I just don't think we're near saturation at all. And in general, we are not seeing anything different. For example, we survey our churn users. And the answers to the surveys of our churn users haven't really changed in years. And the most common answer, by the way, when people stop using Duolingo about where they go is that they stop learning. And that has been true for a while. So that's just not something we're particularly concerned about. In terms of the features, we mentioned in the shareholder letter, we mentioned speaking adventures. We're very excited about that. What that feature is like it's basically -- it's a little game where you have to do something, for example, you may be told, go buy a sandwich and give it to that person and then ask them for money or something, something that you have to do. So in that -- you do a lot of things with just text, but every now and then in there, you have to speak to get the things that what you want. That's going to come out -- that's going to be for all users, free and paid. That's going to be scaled. I mean we're already testing it. That's going to be scaled sometime midyear. So you probably see it in your app sometime between now and the middle of the year. We're very excited about that. In terms of more advanced content, that's happening relatively soon. In a matter of a month or 2, you will see significantly more advanced content. So basically, all of our courses that teach the top 9 languages that we teach, which, by the way, cover more than 90% of our daily active users will have content up to Duolingo score 129, which is a particularly important score because that's the score that you need in order to get a knowledge job in that language. So we're very excited about that. And that's coming now. Importantly to say, that content is going to go out there, and we're very happy about that. But that's just the beginning. As soon as it goes out there, we can start improving this content the same way we improve everything. And so over the remainder of the year, you're just going to see better and better versions of this more advanced content, and we're pretty excited about that.

We'll take our next question from Justin Patterson with KeyBanc.

Luis, I was hoping you can talk a little bit more about just the social strategy. We haven't really seen the same degree of virality through the -- through TikTok that you used to be getting. So would love to hear about how you're refining that and thinking of that as just a vector to grow daily usage. And then with respect to video call, I know you've made a lot of improvements within there designed to increase more words being spoken, to make it easier to use. So would love to hear about just how that's been going versus expectations and how you think moving this into the Super tier can really drive more engagement and eventually help contribute to that bookings reacceleration.

Thank you, Justin. In terms of our social marketing strategy, I mean we have an excellent marketing team, really, I think, best in the business. We -- our videos are going viral and they're getting millions of views. But I have to say the comparison point, particularly a year ago, a year ago, there were many weeks where we had the single most watched video in all of TikTok. That was -- that's incredible. So while we're still seeing virality in our videos, we're not in a position where it's the most watched video in all of TikTok. There's a number of reasons for that. One of them is just algorithms have changed enough that it's harder to do that consistently. So I mean, that's one reason. And in general, we're going to continue with the strategy of really trying to get as much virality as possible. And that will -- I'm pretty happy with the results so far. But you are right that compared to a year ago, it's not quite the same. In terms of video call improvements, I'm very happy with the results for video call improvements. Some -- basically, if you look at the graph of words spoken per user on video call, that is just a monotonically increasing graph over time. It just keeps getting better and better and better. And basically, we're just a lot better at getting Lily that you're talking to, to elicit more conversation. Right now, we're trying a new thing, we're actually starting to tell you, hey, in your next response, ask a question or in your next response, use the word because or something. And that actually really gets people going more and more. So I'm very happy with all these improvements. And I really do think that putting it -- giving it to more users, what that will do is it will basically get more users to be promoters of Duolingo because we see that people that engage with video call post online and say things like, "My god, I was skeptical that I could learn a language on Duolingo, but I've just been using Duolingo and using video call and somehow, out of the blue, I am now able to have a conversation." So we're very happy with that.

Our next question comes from Andrew Boone with Citizens JMP.

I wanted to go back to the free user experience and improving it. And really, the question is, how does that evolve into a monetization strategy over time, right? So it sounds like one of the lessons was that you guys essentially overmonetized your user base. So Luis, as we think about going through this transition, what happens on the other side in terms of the lesson that you guys now have as you guys come back and then start to monetize users later on?

Andrew, this is an excellent question. Look, we got ourselves into an interesting situation where both Duolingo is undermonetized and overmonetized at the same time. It's undermonetized in that, look, only about 10% of our monthly active users pay us. We wholeheartedly believe we can do much better than that. If you look at comps, if you look at -- if you look at things like Spotify, half of their users are paying them, give or take. And a lot of these freemium businesses, we really think we can get much higher than 10%. However, the way we were increasing monetization was we found that the quickest way to increase monetization was basically by adding friction. The more we added friction, the more we got people to subscribe. And that's okay, but I think that we got it to a point where it really became at odds with DAU growth. There are other ways to get people to subscribe. For example, you can add more features or you can have features that are not exactly friction, but things like selling customizations for avatars and things like that, that have worked really well for games, and we are kind of half a game. So what we're doing now is for the next year, we're using this year to also find ways to monetize that get more people to subscribe. That is true, but that may not be doing so by adding friction. And we're really confident that we can do that. It's just slower because monetizing by adding friction, like if you told me next week, I needed to make, whatever, $50,000 more a day, it was actually quite easy to do. You just double the ad load or whatever it was. But these other ways of monetizing are just going to take a little longer to do, but we're very confident that we're going to have some because only 10% of our active users pay us to subscribe.

And then I wanted to ask about the chess disclosure, and this is really about utilizing multiple apps at the same time. So if I think about the 7 million users, and I think about the core trend of core Duolingo through 2025, how do I think about multiple users using multiple apps, right? Do I just take the 53 million and I subtract 7 million to be able to think about where you are? What's the right way to think about that?

Another great question. Yes. So we said chess has gotten up to about 7 million daily active users in less than a year. We're very proud of that. It's an incredible growth. Now the majority of these users, whenever we put a new subject out on Duolingo, it is a lot easier to get to our own users rather than to get to users outside of Duolingo because we have a direct line of communication to our own users. So the majority of these users, we're not basically saying the exact number, but the majority of those users are users that were Duolingo users and now are using both languages and chess. That's basically what's the common thing that's happening. So we're -- the way to see it is not that languages have not been growing. In fact, languages are growing at about the same pace as Duolingo because it's the largest course. It's just that we are getting some new users for chess, but a lot of them are just doubling up from languages and chess. And what we are seeing is that over time, more and more people are finding out that Duolingo has chess and then chess is starting to attract its own user base. And I think that's what's going to happen over time. And that just takes a little bit of time to do that, but that's what's happening.

Our next question comes from Alexander Sklar with Raymond James.

Luis or Gilian, I don't know who wants to take this one. But on the bookings outlook, just given some of the unknowns you spoke to with Bryan's question earlier on how video call tests are going to play out on Super. What is the bookings outlook factor in terms of conversion rate of Super relative to what you've experienced in the past? And how much time or data, Luis, do you think you need to know if the decision is a successful one based on some of the historical testing?

So if you look at the bookings, the main thing to think about right now is if you take -- start from Q4 bookings growth of about 24% and then look over to the guide, we think about half of that is the user deceleration continuation that Luis talked about. And then the other half of that is us monetizing more carefully and thinking about taking away some friction for our users. So that's how we're thinking about positioning that. In terms of exactly how all the monetization is going to play out, as you know, we A/B test like crazy around here. And so there's a lot to be learned, as Luis explained, over the course of this year. What we're really trying to do with the guidance is give ourselves the room from a position of really good financial strength to go do that work because we think it gives us the opportunity to reach for the higher price.

Yes. And in terms of how long it will take until we know this is working, it's going to take a little while. I mean, we need to make a lot of product changes, et cetera, each of which take a while and then we also need to see user reactions, et cetera. So it's going to take a little while. As Gilian said, we're putting in something modest towards the end of the year to see that some things are working there.

And then maybe just a quick follow-up. Anything factored in terms of pricing changes within the different packages in the outlook?

I mean, what we're going to do this year is we're going to be experimenting, like pretty much every year, although probably more so with prices quite a bit. That means higher prices, lower prices. We're always A/B testing. So we're going to be doing that. But we're not -- this is not something that we're really putting in -- we're putting in the results of all the combined experiments in the outlook. But I don't know if I can tell you for a fact that the price of Super will be higher because we have video call or not. I don't know the results of the A/B test.

Our next question comes from Wyatt Swanson with D.A. Davidson.

Thanks for the question. I've just got one thinking about like the medium-term goal of reaching the 100 million DAUs. Does that assume like marketing stays elevated and monetization stays on the back burner for the entire duration? I think you've kind of answered it, but just sort of thinking through as you sort of ramped monetization over the past year, and you've started seeing DAUs start to decel. So like how do you think about that balance over the medium term? Should we see monetization slowly start to ramp up in these alternate forms that you're kind of exploring?

Yes. I mean I can answer and I can also let Gilian have at it. But in general, we -- our marketing is still extremely efficient. I mean it's really still a small fraction of our revenue that we spend in marketing. I assume that every year, the total number of marketing dollars that we spend will continue going up. However, I'm hoping that past this year, we are going to get some efficiencies. It's hard to say exactly what will happen past this year. It's not like we're guiding, but I assume that we're going to get some efficiencies past this year. And then in terms of monetization, like Gilian was saying before, just almost any way you look at it, with 100 million daily active users, this is just a much larger business. I do believe -- again, hard to put in numbers exactly to give you a model or anything for past 2026, but I do believe that you're going to see other things really start ramping up. I'm very excited about direct ad sales. We're seeing just good uptake on that. And I'm also very excited about in-app purchases, in particular with our avatar. There's a lot of love for our avatars and for our playful brand, and we think we can do quite a bit there.

Yes. And as you think about the margins of the business, one of the reasons I'm so excited about where we're at is that we've shown that this business can have tremendous scale even at the size we're at today, and we think we can be a lot bigger. And there's nothing that we can see in the business that says we can't scale it going forward. We're making an investment right now and descaling some to make that happen. But really, we don't think we need to hire double the number of people, twice amount of marketing. We think that this business can scale really beautifully. It's one of the nicest things about the business model that we have the opportunity to do what we're doing from a position of strength to profitability. We will continue to generate tremendous EBITDA and free cash flow even as we invest, and we see no reason why we couldn't scale up as we reenter monetization and a bit more of a smarter way from here.

Got it. Got it. That's fair. And could you maybe answer us like what the ads business will look like going forward? You've talked about like doubling the ad load is maybe causing additional friction and users potentially churning off. So like our ads -- it almost made it sound like ads were almost coming off of the platform, and it wasn't going to be as big of a monetization channel.

What we're unlikely to do is increase ad load. At the moment, you see an ad at the end of a lesson. That is unlikely to go up, certainly not this year because that really goes counter to everything that I'm saying. However, we are doing a lot better of a job at displaying better ads. I mean, historically, we just have not spent a lot of effort on ads historically. So for example, we use just these network ads that are kind of the lowest common denominator network ads. We are now doing direct deals. What that does is it does two things for our business. Number one, it significantly increases the quality of the ad. So rather than getting ads for like games that you've never heard of, you're going to get ads from like Disney or something, significantly higher-quality ads. And then the amount of money we make per ad is significantly higher when we do that. So I think that's kind of how it's going to be. We're experimenting with some stuff that is really cool, but I don't know if we'll make it work. I'll tell you, my dream has always been to be able to give you ads in the language that you're learning. And we are trying that. So if you're learning Spanish, part of the ad is going to be in Spanish. What I love about that is that the users want that. And so -- and that's also good in the end for the advertiser because the user is actually paying a lot of attention. So I'm hoping we'll be able to try that. I don't know which of these things will work. But in general, I just think ad load will not be higher, but we'll make a lot more money per ad.

Our next question comes from Nathaniel Feather with Morgan Stanley.

Two on my end. First, there's been a lot of concern in the market about the improvement in AI translation tools and the general rise of all-purpose chat bots. I guess what gives you conviction that the user deceleration we saw in 2025 was not due to those factors? And then second, just of the changes you've made so far to improve the user experience, are you seeing anything in the data that gives you conviction that these changes are going to stabilize user growth through the year? And are you already seeing that? Or when might you expect to reach that stabilization point?

Thank you for the question. So AI translation isn't -- people talk about it, but it is not something that we are worried internally about. AI translation has been essentially perfect among the large languages for like more than 10 years. I mean between Spanish and English, it's essentially been perfect. Our users use Duolingo for 2 main reasons: one, as a hobby, they actually want to learn. And those people, whether there's AI translation, it doesn't matter, it's a hobby for them. And then the other group of people is learning English. They want to learn English, and they actually want to learn English. We know also that we ask users why they leave Duolingo. We have this churn user surveys. This does not come up. I mean, like I said, the main reason that people leave Duolingo is because they got busy. We know what that means. It just means they are doing more social media, that's basically what that means. So we're just not -- that's not something we're particularly concerned about. In terms of data about -- are we seeing any data that is making us believe that user growth is accelerating, et cetera. So far, we have done a few things to make the app -- the free experience better. For example, we gave a feature that was in Duolingo Max called Explain My Answer. It's not free for everybody. So we've done stuff like that. And we are seeing quite a bit of uptick on the features, and we're seeing that users love it. But we are -- we have not yet seen an acceleration in DAUs that we think is like, "Oh my god, we're done." Now to be fair, we did not expect this. I think this is why we're saying that you should expect seeing some modest results towards the end of the year.

Our next question comes from Ryan MacDonald with Needham.

Luis, I wanted to ask about sort of Duolingo Max to start. Fourth quarter, I think, was your sort of large cohort or lapping the first large cohort of Max subscribers. And I was curious what you were seeing from a retention and renewal perspective and how much that's guiding sort of the strategy to bring video call back into Super. And then if we're going to -- when this sort of transition happens, Gilian, when should we start to see, I guess, the impact of subscribers moving from Max down to Super with the video call being the future? And what assumptions are you making for that in the guidance?

Yes. For -- in terms of Max, none of the Max numbers are making us do anything with video call. The Max numbers are actually quite good. We're happy with the Max numbers. We are taking, what I call, an offensive move with Max. I just believe that the cost of video call has gone down enough. It just kind of doesn't make sense for us to just have it in Max when we can offer it in much cheaper packages. We're not quite there where we can offer it for free, but at some point, we may be able to. And I want to offer it for free because I actually think that it is in our best interest to have the largest possible user base that we can figure out how to monetize in any way rather than just keeping this for a tiny little bit of the user base. So that's just our philosophy. So the entire decision for trying to put video call in Super comes more from we think that this is the right thing for our users rather than any numbers with Max. We're pretty happy with the numbers with Max actually. And then Gilian, I don't know if you wanted to answer that second part. You're -- we cannot hear you. You're muted, or I cannot hear you. Well, sorry, your question, I kind of forgot what your question was because I was like I'll ask for Gilian. I forget it. What was your question? I'll again try to answer that.

Yes. As you think about the guidance for fiscal '26, I guess what assumptions, if any, are you making sort of building in for when video call rolls out to Super for sort of, I guess, you could call it sort of ARPU trend changes of maybe downsells from Max down to Super from that?

Yes. You know what, I'll tell you probably what -- I know what Gilian would have said in here. Look, we ourselves don't really know exactly what is going to happen with this A/B test, where we start giving video call to Super. We don't know that ourselves. But we're going to A/B test it. Everything -- we put in our guidance some bounds, what we think that will actually -- this is what we think in all, and there are some bounds. We'll stay within those bounds. And we have different ways of staying within those bounds. So for example, if we see that putting video call in Super really destroys our Max business or something, which is like really terrible, then we'll start doing something like metering video call in Super, like you only get access to 1 per day versus in Max unlimited, something like that. Again, I'm talking about things in the future because -- so I just don't know exactly what's going to happen, but we're going to stay within the bounds of what we have in the guide. I don't know, Gilian, if you are -- if we can hear you now or not. No unfortunately.

Not quite. Okay. Maybe Luis, just a more quick one for you. You talked about sort of the math and thinking that, that's an opportunity to build and sort of have one of the math -- best math tutoring apps in the world. As that gets developed, would you look at sort of new channels in terms of how to sort of distribute that? Like I think in the past, Duolingo for schools as a way to sort of open up that population on the language side. Is that a potential viable channel as you think about areas where you could get this DAU growth from something like math?

Yes. Math is an interesting subject. On the one side, they're really -- I don't know of another subject other than languages that has as much of a market. I mean math -- there's 1 billion people learning math. So that's awesome. Now they are different than languages in the sense that these 1 billion people generally don't want to learn math, whereas the language people actually want to do that. And these Duolingo people are mostly in schools. In fact, they're mostly in K-12 schools. That's where they are. So that is definitely where we're going to get to now. There's multiple ways to imagine how to do that. Our first step is to just make this product. We're almost there. I mean if you look at the internal versions of our math course, they are incredibly good. Once that happens, there's a big question about go-to-market. At the moment, our hypothesis is that the easier way to get started. That may not be the ultimate thing we do, but the easier way to get started is to think of it as a supplemental thing for school. So rather than get deals with school districts and stuff like that, think of it more as a competitor to Kumon. That is, we believe, the better way to get started because there's a very large number of people that do -- have some sort of help outside, et cetera. By the way, what we like about this, and this is not -- you're not going to see this, this year, but what we like about this over the long term is that the propensity to pay, not from the kids, but from the parents for math is very high. So we'll probably be able to do something there.

Do you hear me now, Luis?

Yes.

Okay. Good.

Gilian is back. I'm glad. Otherwise, they would have started asking questions about acronyms that I don't know, and we are in trouble.

I know. Some nice people just snuck around my computer. We're better now.

We'll take our next question from Shweta Khajuria with Wolfe Research.

I was going to ask Gilian very specific three questions while she was muted just to test her mic. No, actually, I have two questions. One is on retention and the other is on AI. So on retention rates as we think about you investing in math and music and chess and perhaps there are some cross-platform benefits. How do we think about churn and/or retention rates over time as you invest in the product? My understanding is that it has remained largely stable. But is there a reason to think that it actually improves markedly and what that can do to your platform? And then the second is on AI. So you addressed this in terms of competition where you have a market lead versus anyone else in the market right now. But what AI could potentially do is accelerate the path to creating new competitors that don't even exist today. So could you talk to potential risk of a competitor emerging because AI is making it easier to create certain products?

Yes, sure. In terms of retention, I'll let Gilian say more stuff. But generally, our retention, especially for payer retention is pretty stable. It's very healthy and very stable. There's some chance it may go up. I don't think we're modeling that. I'll let Gilian know because I don't actually know if we're modeling that or not, but there's some chance it may go up over time. It's because one thing we do know is that multi-subject users have higher retention. And the other thing that is true is that over time, more and more users are learning multiple subjects just because we offer more subjects. So there's some chance that it may go up, but I don't think -- so far, this is -- you shouldn't really believe me on this because it has remained pretty flat. I don't know, Gilian, if you want to add to that, then I can go to the new competitors on AI.

I mean retention, it looks pretty flat over a fairly long period of time. And we look at it in aggregate, and we look at it via cohorts. I think the perspective we have is that it can stay where it is. That said, I think you're pointing out something really, really important. All the work we're doing to make the product great, so that word of mouth and top of the funnel and all that stuff is keeping the size of the pool bigger. That also helps current customers, too, right? They get those features, too. So I think it's a possibility, but we haven't modeled anything significant on that front on.

Yes. And in terms of your question about can a new competitor show up because AI allows the building of something faster. So it is true that with AI, you can build stuff faster. And I assume that, that will be more true over time. That is an assumption that we have. The good news is that, that also applies to us. So we can also build stuff faster. So that is good. The other thing to say is there's a little bit of a misunderstanding, I think, in the market about how easy it is to recreate a very sophisticated app like Duolingo. The reality is that if I were to write down just the spec of Duolingo, just -- and I'm not talking about recreating it in a programming language, like write it down in English, it would take me years because there are 1 million corner cases of things that we do that we're really smart about how -- what we do for the user to get them to be more engaged or teach better, et cetera. So I'm not particularly worried about somebody just magically pressing a button and an app appearing that is just better than Duolingo. On top of that, it's pretty hard. The reason Duolingo so far has not really gotten competition at a large scale, again, we have like 85% of the daily active users of language learning apps in the world is because it's pretty hard to compete with our free product in the sense that we have really huge distribution. And a new entrant, when they come in, they need to figure out how to grow. What they usually do is they try performance marketing to try to grow fast, but because our free product is so good, they usually cannot make their performance marketing work if they are to have a free product. So what then they do is they put a paywall on it. And then that just really caps them. So it's just been really hard for entrants. I mean we see -- look, the reality is that over the span of Duolingo, we have probably seen, I don't know, 400 apps come up and try to compete with us. And I'm making that number up, its hundreds. And we just don't see them grow again because we have a very large distribution.

We'll take our next question from Eric Sheridan with Goldman Sachs.

Maybe building on Shweta's question and asking it a little bit differently. When you think about the AI landscape, what is the scope by which you think you need to sort of be a leader in AI learning in the 4 walls of your application and your experience as opposed to possibly cooperating with LLM agents and being an application layer to their platform if more consumer behavior goes in that direction from an aggregation standpoint? I'd love to get your sort of philosophical view on that. And maybe the second question would be you guys were probably one of the leading examples of a mobile-first company with Web 2.0. How should we think about the duration and the need to invest to reposition the company to be AI native in its tech stack over the next couple of years?

Yes. So good question about does it make sense for us to continue in our own app versus something like an LLM. I'll tell you what we do, just historically, there have been a number of new platforms that have happened since we launched Duolingo. For example, smart watches came out. Also smart speakers came out like Alexa. In all cases, we had a lot of people asking us questions. And certainly, the companies that were building these things telling us, this is the next big thing, everybody is going to be in there watch. You should be in the watch. In the past, we made the mistake of early on making an app for the watch or whatever. And only to realize later that apps for watches are not really a thing other than exercise apps for watches. So the way we see it is if it is the case that consumer behavior changes quite a bit so that nobody has their own app and then everybody is over there, we will definitely do something about it, obviously. What I'll say though is that our app in particular, I mean there are many other apps, but you can think of our app a lot like a game. I mean it really matters that we are not text-based. It just turns out that people really, really like doing things like playing Candy Crush or doing Duolingo in part because of the animations, et cetera. So if you're just asking, are we going to be a thing in a chat bot? I just don't think you can get the engagement that we can get inside like a text-based chat bot. Now again, I just don't know what the future is going to look like. But this is -- at the moment, we feel pretty confident that the right investments are to continue making a beautiful experience that is very visual because that's just what keeps people engaged. And in terms of AI native, I mean we've always -- ultimately, we are a technology company. We have been really trying to adopt AI and technology as fast as possible. In fact, we've probably gotten in trouble for adopting AI fast, for example, by writing stupid memos that I wrote one time. So that's -- and also, I think we're just -- you're going to see us always take the next step with things like AI.

This concludes the Q&A section of the call. I would now like to turn the call back to the host for closing remarks.

Well, thank you, everyone. These were excellent questions. And I just want to say that we're very excited about 2026. It is probably not exactly what investors expected. But if you are thinking about Duolingo as a long-term company, which obviously I am because that's kind of what I want, this is really the right investment to do. The second thing that I'll say is that Gilian started her job 3.5 days ago, so it is incredible the amount of knowledge that she has about our finances, which already surpasses mine. So thank you, Gilian, for that. And thank you, everyone.