Duolingo says AI features 'profitable' as it beats revenue estimates, raises forecast

By Akash Sriram

Nov 5 (Reuters) - Duolingo Inc DUOL.O beat Wall Street estimates for third-quarter revenue and raised its annual revenue forecast on Wednesday, as the language-learning app attracted more paying subscribers for its AI-powered tier.

The company operates on a "freemium" model and has sought to convert free users to paid subscriptions, such as "Super Duolingo" for an ad-free experience, and "Duolingo Max," which incorporates generative AI features.

"We are one of the few companies that has found a way to make profit off of AI. This is actually profitable for us," CEO Luis von Ahn told Reuters.

While the AI additions resulted in a lower profit margin in the third quarter of 72.5%, it was still higher than estimates of 71.4%, according to data compiled by LSEG.

A growing user base continued to drive conversions from free users to paid subscribers. Paid users jumped 34% to 11.5 million in the third quarter.

Growth was bolstered by outsized performance in China. A partnership with Luckin Coffee in July helped boost visibility in the region.

"That activation was a home run. We did not have to pay any money for it. Twenty-six thousand Luckin stores sold more than 10 million Duolingo-branded drinks, which directly led to user growth — mostly in China," von Ahn said.

The company has historically relied on its viral marketing campaigns and strong social media presence to acquire users at a low cost, a strategy that has helped it gain a dominant position in the mobile learning market.

In the third quarter, revenue of $271.7 million beat estimates of $260.3 million. Duolingo has topped revenue estimates every quarter since the company went public in 2021.

The company raised its annual revenue forecast to between $1.028 billion and $1.032 billion, from $1.01 billion to $1.02 billion. Analysts on average were expecting $1.02 billion, according to LSEG data.