Duolingo Q2 FY26 — Shareholder Letter Analysis

The bottom line

Reported revenue grew 18% while bookings — the cash customers actually committed — grew 8%. That 10-point gap is the whole story: revenue is harvesting deferred balance built last year, and Q3 guidance already concedes the convergence at 11.1% revenue growth.

The 26% drop in net income is a tax artifact, not a business signal — pre-tax income was essentially flat. Users, retention and gross margin all beat plan. Per-user monetization is falling, deliberately.

Daily active users

58.7M

▲ 23% YoY

Accelerated 2 pts sequentially

Revenue

$298.5M

▲ 18% YoY · 17% cc

Ahead of bookings for the first time

Bookings

$289.1M

▲ 8% YoY · 6% cc

The leading indicator, decelerating

Adj. EBITDA margin

25.9%

▼ 530 bps YoY

$77.3M · deliberate investment

Net income

$33.2M

▼ 26% YoY

Pre-tax income only −2%

Free cash flow

$78.6M

▼ 9% YoY

26.3% margin, from 34.2%

Paid subscribers

12.7M

▲ 17% YoY

At period end, from 10.9M

Operating cash flow

$88.3M

▼ 3% YoY

29.6% margin, from 35.9%

Revenue is outrunning bookings — and guidance says that ends

Duolingo recognises subscription revenue ratably over ~12 months, so reported revenue reflects cash committed up to a year ago. In Q2 revenue ($298.5M) exceeded bookings ($289.1M) outright. Bookings is the forward-looking number, and it grew less than half as fast.

Year-over-year growth: bookings vs revenue

Q2 FY26 actual and Q3 FY26 guidance, percent

Bookings Revenue

Management attributes the bookings deceleration to a tough prior-year comparison — the initial Energy rollout, a price increase, and advertising outperformance in Q2 FY25. Constant-currency bookings growth was 6%, two points below reported. The balance sheet corroborates the drawdown: deferred revenue rose just $8.9M across six months ($496.2M → $505.1M), so the quarter recognised roughly as much as it banked.

⚠ Watch

Q3 bookings are guided to +8.9% against a full-year guide of +10.9%. The full-year framework of 10–12% bookings / 15–18% revenue was reaffirmed, not raised — only the margin line went up. The maths requires a Q4 reacceleration.

Subscription is carrying more than 100% of the growth

Subscription added $47.4M against $46.2M of total revenue growth. Every other line is flat or shrinking: the Duolingo English Test has now been flat for a full year, and in-app purchases fell 23% — consistent with Energy cannibalising gem sales.

Contribution to revenue growth by product

Change in quarterly revenue, Q2 FY25 → Q2 FY26, $ millions

Added revenue Lost revenue

Subscription is now 86.5% of total revenue, up from 83.5% a year ago. The concentration is increasing, not diversifying.

Revenue by product type Three months ended June 30, $ thousands
Product	Q2 2025	Q2 2026	Change	%
Subscription	210,678	258,035	+47,357	+22%
Advertising	20,603	21,052	+449	+2%
Duolingo English Test	10,088	10,109	+21	0%
In-App Purchases	10,390	8,002	(2,388)	(23)%
Other	506	1,256	+750	+148%
Total revenues	252,265	298,454	+46,189	+18%

Per-user economics are going backwards — on purpose

DAUs grew 23% while bookings grew 8%. The gap is the stated 2026 strategy — "prioritising user growth" and "finding ways to monetise that are not at odds with user growth," including longer free trials. It is still the number to watch.

Change in per-user monetisation

Derived from reported metrics, Q2 FY25 → Q2 FY26, percent change

Improving Deteriorating

Derived figures, not disclosed by the company. Subscription revenue per paid subscriber rises because revenue reflects last year's pricing; subscription bookings per subscriber — today's cash — falls. Free-to-paid conversion slipped 122 bps to 21.6%.

Derived per-user metrics Calculated from disclosed DAU, subscriber, bookings and revenue figures
Metric	Q2 2025	Q2 2026	Change
Bookings per DAU (quarterly)	$5.62	$4.93	−12.3%
Revenue per DAU (quarterly)	$5.29	$5.08	−3.9%
Paid subscribers ÷ DAU	22.9%	21.6%	−122 bps
Sub. bookings per paid subscriber	$20.85	$19.71	−5.5%
Sub. revenue per paid subscriber	$19.33	$20.32	+5.1%

The 26% net income drop is entirely tax

Anyone reading "net income −26%" as operational deterioration is reading the wrong line. Income before taxes fell just 2.3%. The effective tax rate went from 3.6% to 26.9% as prior-year benefits ran out; guidance assumes 23–25% for the full year.

Where the net income decline came from Three months ended June 30, $ thousands
Line	Q2 2025	Q2 2026	Change
Income from operations	33,363	33,945	+1.7%
Interest income	11,427	11,831	+3.5%
Income before income taxes	46,450	45,366	−2.3%
Provision for income taxes	1,669	12,208	+631%
Effective tax rate	3.6%	26.9%	+2,332 bps
Net income	44,781	33,158	−26.0%
Diluted EPS	$0.91	$0.66	−27.5%

Cost growth is running well ahead of revenue

On a non-GAAP basis operating expense grew 32% against 18% revenue growth. That is the entire 530 bps of Adjusted EBITDA margin compression — and it is an explicit choice, not a miss. Sales & marketing led at +35% as the performance-marketing team scaled.

Year-over-year growth: revenue vs cost lines

Q2 FY26 vs Q2 FY25, GAAP unless noted, percent

Revenue (benchmark) Cost line

Every cost line except G&A grew faster than revenue. Note also that purchases of property and equipment rose from $1.2M to $6.9M — 5.7× — which explains most of the free-cash-flow margin gap beyond EBITDA.

What genuinely went right

✓ Beats and highlights

Gross margin 72.6% vs ~71.0% guided. Driven by AI cost efficiencies and a deliberately measured pace of AI feature rollout. This beat is the sole reason the full-year Adjusted EBITDA margin outlook rose ~1 point to 26.5%.
Current User Retention Rate at an all-time high of 84%, up ~1 point year over year. Management calls it one of their most important leading indicators because small gains compound into DAU.
DAU growth accelerated 2 pts sequentially; MAU 4 pts. Management now expects DAU growth to remain above the 20% previously guided for the rest of the year.
Engagement intensity, not just headcount. DAU as a share of MAU rose from 37.2% to 41.7% — a 457 bps gain. Ratios like this are hard to buy with marketing, which makes it the most credible quality signal in the letter.
Balance sheet: ~$1.31B in cash and short-term investments, no debt, with $505M of deferred revenue on the books.
Brand reach: over 1 billion organic impressions per quarter on owned social accounts; in China, Indonesia and India roughly two-thirds of impressions now come from influencer content. Performance-marketing channels and creative output each tripled year over year.

The Streak Revival caveat

A one-time June event let eligible learners restore their longest-ever streak by completing three lessons. 15.4 million learners revived streaks, including nearly 8 million who had no active streak when it began — roughly 13% of the DAU base touched by a single campaign. Management is upfront that two of the three growth drivers are permanent and this one is not, which is honest, but it means the 2-point sequential DAU acceleration is not cleanly organic.

Guidance and capital structure

Company guidance $ millions; FX rates as of July 31, 2026
Measure	Q3 2026	FY 2026
Bookings	$307	$1,285
YoY growth (reported)	8.9%	10.9%
YoY growth (constant currency)	8.9%	9.4%
Revenue	$302	$1,207
YoY growth (reported)	11.1%	16.3%
YoY growth (constant currency)	11.1%	14.9%
Gross margin	~71.0%	~71.6%
Adjusted EBITDA	$76	$320
Adjusted EBITDA margin	25.2%	26.5%

⚠ The margin guide back-loads

The full-year Adjusted EBITDA guide of $320M on $1,207M implies a 26.5% margin. But Q2 came in at 25.9% and Q3 is guided to 25.2%. Strip both out and the remaining two quarters must average 27.5% ($166.7M of EBITDA on $606.5M of revenue) to hit the number — against a gross margin the company itself expects to fall from 72.6% to ~71.0%.

Assumptions embedded in the outlook

Stock-based compensation of roughly 15.0% of revenue in 2026, with absolute expense rising through the year.
Equity-grant dilution of 3.5–4.0% before the effect of any share repurchases.
Effective tax rate of 23–25% for the year.
Over half of bookings are non-US; every 1% move in the dollar against the currency basket is worth about $4M to second-half bookings.

Buyback and dilution

The stock closed the quarter at $115.02 with 50.7M fully diluted shares. Under the $400M programme announced in February, Duolingo repurchased ~$44.4M (432k shares) in Q2, bringing the total to ~$71.9M / 708k shares through August 1 — described as "nearly all of 2024 and 2025 dilution." Fair as stated, but it means the buyback is offsetting dilution rather than shrinking the share count. It is working on the margin: additional paid-in capital actually fell from $1,058.8M to $1,046.3M over the half despite $72.9M of stock compensation, and financing cash flow swung from +$7.0M to −$86.1M.

Half of "Adjusted EBITDA" is stock compensation

Of the $77.3M of Adjusted EBITDA, $38.6M — 49.9% — is the add-back of stock-based compensation and related payroll tax. For the first half, SBC of $72.9M is 95% of the $76.6M of net income. At a guided ~15% of revenue, SBC runs to roughly $181M for 2026. It is a real, recurring cost of running the business; the adjusted margin story should be read with that in mind.

What to watch next quarter

Bookings growth vs the 10–12% full-year frame. Q3 guided to 8.9%. A Q4 reacceleration has to show up, or the frame breaks.
Bookings per DAU. Down 12% this quarter. The strategy tolerates decline; it does not tolerate acceleration of the decline.
DAU growth ex-Streak-Revival. Q3 is the first clean read on whether the product and marketing drivers alone hold above 20%.
Duolingo English Test and IAP. Flat and −23% respectively. Two lines that were once diversification are now drag.
Video Call economics. Extending access to existing Super subscribers later this year is the swing factor on the AI-driven gross margin beat.
The 27.5% back-half margin the FY guide requires, against 25.9% delivered and 25.2% guided — while gross margin is expected to fall ~160 bps.
DAU/MAU at 41.7%. If engagement intensity holds after the Streak Revival cohort ages out, the user growth was real.

Appendix — reported figures

Summary of financial and key operating metrics $ millions except users; three months ended June 30
Metric	Q2 2025	Q2 2026	YoY
Daily active users	47.7M	58.7M	+23%
Monthly active users	128.3M	140.6M	+10%
Paid subscribers (period end)	10.9M	12.7M	+17%
Subscription bookings	$227.3	$250.3	+10%
Total bookings	$268.0	$289.1	+8%
Revenues	$252.3	$298.5	+18%
Gross profit	$182.6	$216.7	+19%
Gross margin	72.4%	72.6%	+20 bps
Net income	$44.8	$33.2	(26)%
Adjusted EBITDA	$78.7	$77.3	(2)%
Adjusted EBITDA margin	31.2%	25.9%	(530) bps
Net cash from operations	$90.7	$88.3	(3)%
Free cash flow	$86.3	$78.6	(9)%
Free cash flow margin	34.2%	26.3%	(790) bps

Operating expense — GAAP and non-GAAP Three months ended June 30, $ thousands
Line	Q2 2025	Q2 2026	YoY
Cost of revenues	69,684	81,714	+17%
Research and development	73,670	92,195	+25%
Sales and marketing	29,563	40,007	+35%
General and administrative	45,985	50,593	+10%
Total GAAP operating expense	149,218	182,795	+23%
Non-GAAP R&D	50,715	63,645	+25%
Non-GAAP S&M	27,635	37,821	+37%
Non-GAAP G&A	29,192	40,404	+38%
Total non-GAAP operating expense	107,542	141,870	+32%

Balance sheet highlights $ thousands
Line	Dec 31, 2025	Jun 30, 2026
Cash and cash equivalents	1,036,389	1,180,887
Short-term investments	104,078	132,979
Accounts receivable	162,827	130,979
Total current assets	1,436,606	1,571,114
Total assets	1,992,182	2,073,953
Deferred revenues	496,205	505,102
Total liabilities	645,176	664,211
Total stockholders' equity	1,347,006	1,409,742