Good evening everyone, and welcome to Duolingo's second quarter 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 Gillian Munson, our CFO. They'll begin with prepared remarks before we open the call for questions.

Analysts may ask a question by using the raise hand feature. Please note, this call is being recorded, and all participants are currently in listen-only mode.

Before we begin, please note that we'll make 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, and we undertake no obligation to update them.

We'll also discuss both GAAP and non-GAAP financial measures. Reconciliations of the two can be found in our earnings materials, and we encourage you to review them when evaluating our performance.

Now, I will turn it over to Luis.

Thanks, Debbie, and thank you all for joining. Q2 was a strong quarter.

DAUs grew 23% year-over-year, accelerating from Q1 and coming in slightly ahead of our expectations. We're encouraged by what we're seeing so far in Q3.

The vast majority of that growth came from the work we do every day through what we call the green machine. We test hundreds of product changes, measure their impact, and double down on what works.

Most changes are small, but they compound over time. As I discussed in our shareholder letter, that's also what's driving CUR, a measure of user retention, to an all-time high.

Another highlight of the quarter was streak revival, a one-time campaign we ran in June. The idea was simple: give learners who lost their longest streak a chance to earn it back by completing three lessons.

More than 15 million learners revived their streaks, and what's particularly encouraging is that these users are also showing better retention than a typical reengaged cohort. We brought learners back to a product that keeps getting better at teaching languages, chess, math, and music, and they're staying.

We're still early in executing our strategy of prioritizing user growth and teaching better, but Q2 gave us more confidence that we're on the right track. With that, I'll turn it over to Gillian.

Thanks, Luis. Welcome, everyone.

As Luis said, Q2 was a strong quarter. In addition to the DAU acceleration Luis just mentioned, top line results were in line with our expectations, and profitability was slightly ahead of our plan.

As we look at the remainder of 2026, I want to reiterate how we're managing the business. We are investing deliberately in the opportunities that we believe can make Duolingo a significantly larger business over the long term.

At the same time, our team continues to operate with discipline. We continue to execute to our full-year bookings and revenue target ranges of 10% to 12% bookings growth and 15% to 18% revenue growth.

We have increased our target adjusted EBITDA outlook to 26.5% from the 25% we outlined at the start of the year. As for point estimates to help you build your models, please keep in mind the following: for the full year, we expect bookings growth of approximately 11% and revenue growth of roughly 16%.

At constant foreign exchange rates from our last call, the bookings growth rate would be about half a point higher. For gross margin, we now expect to end the year closer to 70%, as compared to the 69% we initially expected, as we drive more AI content into our products, offset by AI cost savings.

We expect adjusted EBITDA to be approximately $320 million at the margin of roughly 25.5% I just mentioned, and we expect to generate over $375 million of free cash flow this year. While it is not included in our 2026 guidance, we do want you to know that the company has a bonus plan that will trigger if Q4 DAU growth is 25% or higher, and would be paid out during Q1.

Since it's currently uncertain whether that threshold will be met, we have not included it in our 2026 guidance. If it were achieved, we would expect the payout to be roughly $10 million in cash, potentially higher if DAU growth is higher.

For Q3 itself, we expect bookings of approximately $307 million, or growth of 9%; revenue of $302 million, representing growth of 11%. We expect gross margin to be 71% and adjusted EBITDA of roughly $76 million, representing a margin of 25.2%.

Our balance sheet and cash flow potential remain strong. We ended the quarter with $1.3 billion in cash and investments, and generated $79 million in free cash flow.

We repurchased about $44 million of stock during the quarter, bringing cumulative repurchases under our authorization to $72 million, or approximately 700,000 shares. Putting it all together, our user momentum is strong, our business model continues to generate significant cash flow, and our team is executing well in an important investment year.

We remain focused on reaching 100 million DAUs in 2028, and we believe the path there can create a significantly more valuable business for our shareholders. Now, I'll turn it back to the operator, and we're happy to take your questions.

Hey, thanks for the question. Appreciate it.

Hi, Wyatt.

Hi. Given DAUs are now expected to be above that 20% year-over-year growth in the second half of the year, could you maybe give some color as to why the full-year bookings guide wasn't raised more?

I realize you're in experimentation mode, but shouldn't a larger amount of users on the platform technically translate to increased bookings, even if you're not pushing for monetization?

I think that's a great question. The first thing to note is that our users don't monetize immediately.

Some of them monetize, takes a while for them to monetize because we have this freemium model. We do expect that higher DAUs will imply higher revenue, but it's going to take some time.

The second reason is exactly what you said. We said at the beginning of this year that we were going to operate in this box in terms of revenue, and we're going to continue with this box, basically roughly 11% year-over-year bookings growth.

Then the rest of the efforts are in increasing DAUs and in teaching better.

Got it. That's helpful.

Then you noted with the extension of free trials, it helps improve both engagement and monetization. Could you just talk to some of the underlying mechanics as to how exactly that works going from one month to two months?

Thanks. Oh,

yeah. Just to put it into context, our monetization team, their goal this year is to find things that monetize that are not at odds with user growth.

Historically, some of the ways that we have monetized have been by adding friction to the free user product, and that is at odds with user growth. One of the things that has worked the best is longer free trials.

In particular, the main one that we're trying is, historically, the free trial on Duolingo, when we say, "Hey, you can try it for free," it's been seven days. We give you seven days for free.

That's what historically has happened. We're now shifting most of our free trials, not quite all of them yet, to a one-month free trial.

The way that works is basically significantly more people decide to take that trial because it's just a better deal. Because of that, we got a larger number of people actually converting to payers.

The other nice thing is that as soon as they agree to go on the free trial, the experience just gets better because we turn off energy, we turn off the ads, this actually increases daily active users as well. We like it very much, and it's having a lot of good traction.

Cool. Thanks, guys.

Thank you.

Hey, Andrew.

Hi, guys. Thanks so much for taking the questions.

I wanted to ask about just your roll in terms of influencers. How do we think about international marketing and kind of the changes you guys highlighted in the letter?

Then, secondly, as we think about the U.S., Luis, understood the strength in the quarter and kind of resurrected users. Can you talk about top of funnel, though?

How do you feel about trends there and kind of the broader opportunity of attracting new users that maybe new to Duolingo? Thank you.

Yeah. I should say our marketing team, just to put it in historicals, most of our growth has been organic through word of mouth.

In fact, for the first several years, it was 100% organic through word of mouth. Then we added mainly one form of marketing, which was social, our own social media accounts.

That's still going really well. We're getting more than 1 billion impressions per quarter on our own social media accounts, which is incredible.

Our marketing team is really starting to expand to having other important tools. One of them is creators, like groups of creators.

That's working quite well, actually, specifically in certain countries, countries like China, Indonesia, and India. Something like two-thirds of our total social media impressions come from influencers.

What we're finding is that we are able to not spend a ton of money on this, and what's nice is that these people have different audiences than us. This really just brings in a lot of new users, and this is something that we're very happy with.

We use influencers differently in different countries, some countries more than others, but that's working really well. I should also mention that our marketing team has just become significantly more sophisticated on performance marketing.

While still the majority of our growth is organic, we're getting good, good traction on both usage of influencers and performance marketing. We are seeing that in top of funnel, it is increasing.

We actually feel pretty good about our top of funnel. It is increasing.

You asked about the U.S. in particular.

The U.S. growth has increased quite a bit in the last quarter, and that's something that we're happy with.

By the way, if you look at our growth, our DAU growth, it's really broad-based. Basically all regions are growing, and all regions are growing faster than they were before.

Asia is still the fastest growing, but U.S. has increased.

One thing I might add to that, Andrew, is the top of the funnel is part of the story of the quarter. It got better.

As that's been a focus area of ours. We've talked about how we want to get better there, and in almost every region, the rate of growth there improved in top of the funnel in the quarter, which is a great accomplishment for the team.

Thank you.

Hey, everyone. Thanks for taking the question.

Two

on my end, both on the monetization angle. I guess, interested to hear what the learnings you've seen so far from giving video call to new Super subscribers, and how is that influencing your plans for video call and Max generally as we go from here?

Yeah. Video call is an interesting thing.

We love this feature. It's an excellent feature for learning conversation, for practicing conversation.

It really works. We have, in fact, research that shows that if you use video call, you get better at conversation.

It really works. It's really good.

When we first started adding video call to the platform, I remember the team that was working on it told me, "Okay, we can give this to users, but it's going to cost like 30 cents per call to give to users." That was expensive, and this is why we decided to put it behind our most expensive plan, which is Max.

We said back then is, if we can decrease the cost of this, we're going to try it in different places because it is our aim to give video call to as many people as possible, because it really helps in learning a language. The good news is that through a lot of really hard work, we've been able to bring down the cost of video call.

It is now under a cent per video call. The reason for that is mainly a move towards open source models.

It's just a lot cheaper to do that, and we don't see a loss in quality in there. We're very happy with that, and because of that, we're able to now give video call to Super subscribers.

The state that we're in right now is most new Super subscribers get video call. If you buy Super right now, we will get video call as well.

We expect that over the next few months, we're going to give video call to existing users' subscribers. We haven't quite done that to all of them.

We expect that we're going to do that as well. That's really good because more people are going to be able to practice conversation.

Now, that calls into question what are we doing with Max? My answer is, I don't know yet.

There's a few possibilities. One possibility could be that, well, Super subscribers get a limited version of video call, like limited number of video calls, and Max subscribers get unlimited.

That's a possibility. Another possibility, truthfully, is that we may actually sunset Max.

What I will tell you is that we're going to have an answer to this in the next couple of quarters, and in addition to that, we're going to try to do this without a loss of revenue. That's partly why we're not going super fast here because we're trying to figure out how to do this without losing much revenue.

Again, our intent is that we give it to as many users as possible.

Great. That's really helpful.

Then one thing we've seen reports is that you're testing an ad-supported tier. I guess, help us think through, do you see an opportunity for maybe a lower-priced tier, something in between Super and the free model?

From a user segmentation perspective, what are you really going after there?

We are testing that. It's called Super Lite.

It is being tested. Now, I really want to emphasize the word tested.

I don't know what's going to happen with Super Lite in the end. It is cheaper than Super.

It's about half the price, depending on the geography. It is ad-supported, you get ads, and in addition to that, basically, you don't get unlimited energy, you get twice as much energy.

That's the idea. At the moment, still a small fraction of our subscribers are on Super Lite, but part of the reason is that we're early in the testing, we're just not advertising it very well.

Of course, the goal with a Lite plan like this would be if we're pretty sure that you're not going to buy Super, then we should try to sell you Super Lite. That's kind of the idea, and you're going to see us experiment with that over the next few months.

I don't know what will end up happening, but it's something that we're trying.

Very helpful. Thank you.

Great. Thanks for taking the questions.

Good to see you, Luis. Good to see CUR at an all-time high.

Just curious, could you share more color on just overall retention by cohort? Are these new free trial users that are engaging on a daily basis exhibiting higher engagement trends?

Just curious anything you can add there from a retention perspective going forward.

Like we mentioned in the letter, our user retention, pretty much all metrics of user retention are at an all-time high. The one we look at the most is this one called CUR, which is current user retention rate.

We're very happy that it is an all-time high and that it has increased by about a percentage point in the last year, because tiny changes to CUR end up implying pretty large changes in daily active users over time, because it really compounds. This is pretty broad-based.

Basically, you see it in every region. You see across all types of users.

The reason for this is just that the product is stickier. Basically, we have added a number of things, and it's hard to pinpoint to a single one because, again, we have a new version of the app every single week, and every version of the app has approximately 350 changes.

It's hard to point to something that actually did it, but it's just generally our product is just stickier, and we're very happy with that because that's kind of the best type of growth you can expect, that is just pure, it's a better product.

Great. Thank you.

That's super helpful. Then also kind of building on Nathan's question around Max overall, more from the speaking angle as well, can you just share more color in terms of overall engagement with more intermediate and advanced learners, which would, in my view, likely start to take on more speaking practice within the app?

There's two things to say about that. The first one is that if you have access to video call, the engagement is very good.

In fact, that feature has just gotten significantly better. One of the main metrics that we have for this feature is number of words spoken by DAU who has access to that.

That graph is a beautiful graph because it is entirely up and to the right over the last couple of years. It's just every month it is a little better than the previous month in terms of us getting you to speak more.

Ultimately, this will just translate in people learning better and being engaged with it. There's video call.

We're also in the free tier making people speak more, just there's more speaking exercises, and there's also more ways to answer exercises that before you had to tap on the phone, now you can answer it with your voice. We're pretty happy with that, and it's exactly what you said.

This is much more important to advanced and intermediate users, and we see that as something that will, over time, really help with, certainly monetization, but also word of mouth, because if people are learning better, they're going to tell their friends, etc. We're very proud of that.

Thank you, Luis.

Thank you, Bryan.

Hi, Ryan. Hey,

Luis. Hi, Gillian.

Thanks for taking the questions. Maybe just to ask on the bonus incentive comments sort of at the end of the prepared remarks, obviously, the team internally is operating towards trying to get to that 25% rate.

How should we think about that translating to what's called the pace of new experimentation between now and the end of the year? If that picks up, are there any sort of features or initiatives that you'd call out that you're most excited about, or is this really about just letting the changes and the experiments you've already made continue to sort of mature within the market and sort of let them sort of produce results?

It's a bit of both. Certainly our rate of experimentation will continue—it's pretty high this year, if you look at actually number of experiments that we're putting out per week, that keeps growing.

Over the last year, that has significantly increased. In fact, it has increased faster than our headcount, so that means that per person, we're actually putting out more experiments every week.

You will see that throughout the rest of the year. There's a lot of experimentation that's going to happen.

Generally, that's across all the things that we experiment. Teaching better and daily active user growth are where we're spending our focus, but you're also going to see experimentation in monetization, etc.

It's related to the bonus in some way, but mainly it's just this year our goal as a company was we decided we are going to focus most of our efforts of our incredible experimentation machine to just make it so that we can continue growing daily active users, because we think that, as we've said many times, if we can get to a company that is 100 million daily active users, that's just a much bigger business, and that's where we want to get to. You will see experimentation.

You'll see a lot, as you usually see from us.

Excellent. Then maybe on Max, you obviously are sort of working on a lot of things with Max right now and one being sort of Super or voice soon being rolled out more to Super.

Is there any sort of, I would call it, new feature product development that's sort of maybe geared or aimed towards the Max tier at this point that could potentially sort of continue to extend the life of that tier, or is really everything more focused sort of at the lower tier experimentation right now?

I won't rule that out. It may happen that we develop something that we end up putting behind Max.

We're developing a lot of features, and there may be some that, because of costs of them or something, we end up putting them behind Max. That is not the goal.

The goal really is to try to give speaking, particularly speaking features, which are the most expensive ones to provide. The goal is to provide it to as many users as possible, because, again, we just believe that the more people have access to this, the more word of mouth, the more users we have, and the larger this business becomes.

That's the goal. I guess what I'll say is that that's not what we're trying to do, but it may be that in two months I come back and say, "Hey, Max actually got a new feature."

That is not because I'm trying to be secretive to you, I just don't know what will end up happening in terms of costs of certain features that we're developing.

Appreciate the color. Thanks, all.

Thanks, Ryan.

Thank you, Ryan.

Shweta. How are you?

Good. Thanks.

Good to see both of you. Thanks for taking my questions.

First one is on attention span for users. As attention span, I guess, decreases, how is the engagement and session time across the app trending?

I guess, how are you addressing that? Then the second is on math and music.

Could you please talk about just the product roadmap as you see math and music develop through the year and how that could drive contribution to DAU growth? Thank you.

Thank you. I think part of your question is something that we've said in the past, which is just the world in general, attention span is going down.

If you look at how people use things like social media apps, they use them in 10-second bursts. Whereas for Duolingo, our lesson on Duolingo is maybe two minutes.

That is something that we need to address, and we are working on that, trying to make the minimum session length longer. We're testing stuff there.

We have not yet released anything. Part of the issue there is that if you make the minimum session length shorter, that's good, but you got to make sure that people actually also come back many other times in the day so that it compounds.

That's kind of what we're experimenting with, but it is something we're actively experimenting with. In terms of math and music, we're pretty excited about both of those.

I should say, certainly when compared to chess, even though they do have single-digit millions of DAUs, they're much smaller than chess. We do expect growth from both of them, but we have 60-some million daily active users, even a 50% growth here doesn't contribute all that much.

We do expect that they're growing. We expect them to grow.

Probably the easiest one to talk about in terms of strategy is math, because we understand that pretty well, or at least better than music, I think. With math, originally when we launched math, I thought, and I was wrong, I thought that we could get the average person on the street to get addicted to learning math.

I was wrong. I don't believe we can do that.

Now our strategy is actually to mainly teach math to the people who actually need to learn math, which are basically K through 12 students. Now, we may not sell to schools, that's not our goal to sell to schools, but it's at least that our user base for math is mainly under 18.

As soon as we started working on that, that clarified a lot of things, and I think we started making a lot more progress rather than trying to get your average 35-year-old person who hates math to suddenly love it. I would love to do that, but I've given up on that one.

In music, it's a bit early. We are working a lot on music.

We'll have more to say about music in maybe a quarter or two.

Okay. Thanks, Luis.

35 may be a bit too late for math. If you don't like it, you don't like it.

All right, thanks.

You don't like it, you don't like it, but I really wanted to get people to love math. That's what I want.

Me too.

Me too. All right.

Thank you. Thank you both.

Thank you, Shweta.

Yeah. I'm trying to come on here.

All right, sorry about that. Let's see.

Hello to both of you. Your comment about video call functionality, I'm sorry, Luis, were you saying that you could make it available to all Duolingo users, or all Super subscribers?

Look, I would love to make it available to all Duolingo users. I don't think we can do that right now.

My goal in the moment is to make it available to all Super subscribers.

Okay. The gating factor for it not to be available to all users, it's just cost.

You bring it down by another 90% next year, and you could do it.

Yes, but there's one other thing that we do have to take into account. This is one of the main things that gets people to buy.

If suddenly all users have it, there's less incentive to buy, and then we would have to find other reasons to get people to buy, there's a little bit of a trade-off here. It's both cost and this is one of the main things that gets people to buy.

Okay. Then I want to switch gears and ask you about advertising, and I think you've maybe changed a little bit the last couple of years in terms of your view on both advertising revenue and on advertising spend.

Where are you on that journey? Is there something that you've seen that's made you maybe a little bit more constructive on marketing spend and the efficiency of it and the desirability perhaps of advertising revenue?

You are right that over the last couple of years, I've come around to ads both in terms of ad revenue and ad spend. A couple of things to say: in terms of ad revenue, for the foreseeable future, we will remain a subscription business.

Our subscription business is much larger than ads,

and

it will continue being like that for a while. However, we see a pretty large opportunity with ads.

We have a lot of users. We have a lot of active users, and pretty much every app our size or larger than us makes a ton more money from ads than we do.

We see a pretty big opportunity there, which is why we have become a lot more sophisticated on that over the last—there was a time at Duolingo a couple of years ago where our entire investment in ad revenue was half a person. There was one person whose half-time job was to deal with ads.

This is how much we were investing then. We now have a team, it's significantly much more professional, they know what they're doing, I would expect that over the next few quarters that you're going to see some improvements in our ads business.

This takes some time to get the hang of it, but what I'm seeing is we're just going to be able to give significantly higher-quality ads in our product that also make us more money. We're working on that.

This is an active workstream that we're doing. There's that.

In terms of ad spend, for marketing for us, we're also significantly more sophisticated. There was a while where I was massively allergic to performance marketing.

The way I see it now is I don't think that we want to get addicted to performance marketing, because that's never good. However, it is a good tool to have to complement your other marketing strategies.

Our marketing team, which I really think is probably the best marketing team in the world, has now started adding, as another strategy, performance marketing, and we're very happy with that. We're seeing the results in our top of funnel for that.

Okay. Thank you, Luis.

Thank you, Gillian.

Thank you.

Thanks, Mark. See ya.

Hi, Ygal.

Hey. Hey, Luis.

Hey, Gillian. Thanks for taking the questions.

I guess, as I listen to the call and what we're talking about here, feels a little bit like we're starting to maybe shift or start to focus a little bit more on monetization, talking about ads and new tiers. Is that fair?

Not to say that you're moving away from the optimization around DAUs, but it does feel like you are maybe shifting a little bit to the monetization side. How do you think about that transition?

When is the right time? What's involved?

Then I have a follow-up.

Yeah. It's perceptive of you.

It's a good question. The reality is, this year and for a while, one of the main thing that we're concentrating on is expanding our active user base.

Because we just think that more users is just better for everything, significantly larger business, etc., and we have this aggressive goal to try to get to 100 million daily active users. We feel good about that goal.

We think we can make it. If we do get there, kind of all things get better.

Just more users, you can make more money, all things get better. It is true that, when we started the year, we had a little bit of a pause in monetization in the sense that we're like, "Whoa, whoa, whoa, whoa, wait.

Any monetization that we're doing that is counter to DAU growth, don't do it." The reality is, we were doing a number of things that were counter to DAU growth, we kind of had a little bit of a reset.

At this point, enough time has passed that we understand levers significantly better, we are a little more back into like, "Okay, this type of monetization is good, this type of monetization is good." For example, we mentioned longer free trials.

We understand that, and we are kind of going hard on those. Ads is another business that we're perfectly happy if we have significantly better quality of ads and make more money from them, we're very happy with that because that's also DAU aligned, we are funding that.

It is true that we're probably taking it more seriously. I don't know if that's the right term.

We're focusing a little more on it than when compared to six months ago, so that is true. I don't think there's a time when a lot of people ask us, "Oh, when are you going to stop worrying about DAUs and when are you going to start making money?"

A lot of people ask us that. I don't think that we're going to have a shift like that.

We're going to continue really trying to get to 100 million DAUs in 2028, but you'll see probably increased monetization focus kind of gradually over time, because as we find ways to monetize that are not at odds with DAU growth.

Okay. That's really helpful.

Then I want to come back to the comments you made about the open source models and how that's driven down AI compute costs. A, how should we think about that opportunity in terms of the margin structure over time?

Feels like there's multiple levers you could pull on that. It's an interesting theme because we've heard this over and over again this earnings cycle from a lot of companies in this lean into open source models.

Then how does that change the product velocity? Because I know AI has been a big component in driving your product velocity, does that become a bigger opportunity with the costs coming down?

Thanks.

Yeah. At the highest level, it just turns out that there's, when compared to a year ago, there's just significantly better open source options now.

While for some stuff they are behind the frontier labs, they're not that behind for most things, maybe three to six months. It just turns out that for a lot of applications, you don't need the absolute smartest model.

The reality is, the quality is indistinguishable for many applications that we use. For example, a conversation practice to somebody who can only speak 100 words of a language, your model doesn't need to be as good as a philosopher.

You're probably going to talk about, I don't know, frying eggs. You're not going to talk about very sophisticated stuff.

We find that in a lot of cases we can switch to the open source model. Internally, of course, we're still using many models from, let's say, OpenAI, Anthropic, and we'll continue doing that.

It'll just always be a decision, a trade-off between, can we do it at roughly the same quality, but with the open source? If that's the case, we'll use the open source.

There are still cases where we're not able to, and in those cases we'll continue paying. I do expect that what will happen is that the cost per usage of AI, whatever it is, the cost per token, if you want to call it, will come down for us because we will continue moving more and more to open source.

I also, just like you said, that'll probably mean that we're able to offer more and more AI features to more users. I'm pretty excited about that in general.

The way to think about it is, we set out the year to be very patient with ourselves about what the business model is going to be. We really have been trying to stick to this idea that we're going to grow bookings 10% to 12%, revenue 15% to 18%, and when we started the year, a 25% adjusted EBITDA margin felt like the right level of investment relative to growth.

What we're basically saying is by going up about a point and a half on that adjusted EBITDA margin, we are seeing AI cost savings that will give us a bit structurally a better margin, even with our goal to put voice call out to all Super users over the course of the year.

Very helpful. Thank you.

Thank you, Ygal.

Justin, hello.

Hi, Justin.

Hi, good afternoon. Two if I can here.

First, could you talk through just what's driving the confidence level behind that acceleration in Q4? Is that simply easy comps, or are you just seeing something with the product side finally starting to click there?

Then, Luis, I just wanted to go back to making education affordable for the masses. Obviously, as you increase advertising in there, you do start to have a tension point in there of people to get frustrated with the user experience in it.

Does that start causing some bad behaviors? Would love to hear more how you're thinking through the guardrails of still monetizing across the business while still having education be widely accessible within here.

Thank you.

You want me to cover the bookings guidance? On the bookings guidance, the reality is how the year is playing out hasn't really changed too much.

Of course, we've held the guidance. Q2 was a little better than we expected, you're basically seeing us adjust for that in the guidance.

I think it's important to remember that our bookings guidance also includes about half a point of FX headwind. Net-net, you're probably at a little bit of a better place.

I think the year is playing out the way we thought. We've always thought that acceleration is going to come over time.

That's not the way this place is, but we know that it's going to take a little time for the work we're doing to play through. That's what you see in terms of us holding the guidance which implies Q4 gets better from a year-over-year rate of growth perspective.

Your question about making education affordable, this is a very mission-driven company. Hopefully, we have shown that.

We will continue being a very mission-driven company. Our mission is to develop the best education in the world and make it universally available, and that is our goal.

The way we're going to be operating is similar to how we're operating right now, which is we first and foremost care about our reach. That every extra active user that we reach means there's one other person that we're teaching, means there's one other person that instead of doomscrolling on social media is actually learning something that is valuable to them.

That's what we're emphasizing. I really do believe that even though we're a very mission-driven company, I think that if we succeed in our mission, that's also aligned with just making this a very large business.

The more users we have, in one way or another, the more we'll be able to monetize them.

Thank you.

Thanks, Justin.

Hi, Luis. Hi, Gillian.

Hope you're doing well. Just a couple of questions, just with China just continuing to become a kind of an important geo for y'all, and y'all are running OpenAI and Anthropic to run your models, or I think mostly OpenAI, does it create some sort of data residency risk or regulatory risk, there's just a lot going on in terms of regulation and sort of protectionist measures?

Would you just kind of move to a local model in that market? Just how are you thinking about it?

Because, Luis, I know you're fairly forward-thinking about AI and not reactive, just love to see, not that you make any changes, but how are you thinking about it?

You are right. Thank you for asking about China.

China is a very exciting market for us. It keeps growing.

It is our second-largest market in terms of daily active users, and we expect it to become our largest market in terms of daily active users in a year or two. Also, China monetizes pretty well for us.

It monetizes about as well as France. It's an exciting, good market for us.

When it comes to AI, there's a lot there. The reality is that in China, we simply cannot use the kind of U.S.

AI models. We have to use local models.

That's by law. We do that.

In China, all of our usage of AI uses Chinese models. That is just that you have to do that.

In terms of regulatory risk, it's important to mention that, of course, we understand that China poses some regulatory risk. It's kind of outside of our control how they operate the country, but we feel pretty good about what we're doing there in terms of our government relations.

We feel pretty good, but I don't know what the government will decide at any point.

Perfect. Just on this topic, right, can you just give us a rough estimate, right?

I'm not looking for anything precise, but just rough estimate of what your AI costs are, and is it largely on Anthropic, OpenAI, or are they kind of open-weight models? Then just in terms of your cost of revenue, does AI cost you 1%?

Is it 10%? Just directionally, how significant are your AI expenses?

Our expenses on AI in the cost of goods sold are in the tens of millions of dollars, they're significant to the cost of goods sold. Hosting is another big cost for us as well, but those are the two biggies going through the cost of goods sold.

Inside the business, we also use AI, and that is more closer to the $10 million range internally.

Yeah. Perfect.

No, that sounds great. I think those are the main questions.

Unless, Luis, if you have any broader thoughts on just, there's a lot of debate right now in AI sovereignty or open-weight models or closed-loop models, if you're able to share anything, I'd love to get your high-level view on that.

At the highest level, our view inside the company is that it is in our best interest as a company to use open-weight models as much as possible. If I had a magic wand, I would try to move everything to an open-weight model.

It's not always possible, because sometimes the frontier models are more advanced, but from a company's standpoint, it is just significantly better because it's way cheaper to use open-weight models.

Perfect. How we had a hybrid cloud, do you think that's where we end up, you have some sort of orchestration where you put some traffic towards the highest-quality models versus open-weight?

Is that how you expect that to play out?

My guess is that most companies that use AI heavily have a portfolio of models that they use, where for some uses you kind of have to pick this one model that happens to be a proprietary model, but for other things you try to use the open-weight models. My sense is most companies will have a portfolio model like that.

That's certainly what we have. What I would say is that our expectation is that over the next some amount of time, that portfolio will be weighted a little more towards open-weight models than it is today.

Perfect. Thank you so much.

Thank you.

Thank you, Operator. I'd just like to thank everyone for joining us, and we look forward to seeing you on the next call.