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spk03: to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors section of Cricut's most recently filed Form 10-K. Actual events or results could differ materially. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, May 10, 2022. Cricut assumes no obligation to update any forward-looking projection that may be made in today's release or call. I will now turn the call over to Ashish.
spk09: Thank you, Stacey, and welcome, everyone. Revenue in the first quarter was $244.8 million, a significant year-over-year decline, reflecting a tough comp from an exceptionally strong Q1 last year, which benefited from the pandemic. As anticipated, January and February followed a reversion to a more typical pre-pandemic seasonal trend. Starting in March, we began to see additional impacts of slowing consumer demand. Our sound business model and our ability to execute operationally continued, delivering our 13th consecutive quarter of profitability. As we enter Q2 and look ahead to the remainder of the year, we anticipate these pressures persisting in the near term and are highly focused on executing with a balanced and disciplined approach. We continue to view our business through a long-term lens, optimizing the many levers within our control. We are focused on the business fundamentals that position us well for medium to long-term growth and profitability. We added more than 495,000 new users to the platform in the first quarter. Our subscriptions business was strong, with over 33% of our total users being paid subscribers at the end of Q1. We improved gross margins on a sequential basis, reflecting our diverse revenue streams and the work we have done to stabilize our pricing and promotions. Our balance sheet and inventory levels remain healthy, and we continue to operate with agility and discipline, all while delivering attractive profitability. Coming off a two-year hyper-growth period, The Cricket branch is more mainstream and retailers have given significantly more shelf space to our growing ecosystem of connected products and materials. We have a strong and passionate user base, which will fuel our flywheel of engagement and increase user monetization for many years to come. We've invested in driving significant customer acquisition, adding more retail partners and influencers across the globe. At the end of Q1 2022, We had nearly 7 million users on our platform, a growth of more than 4 million users from two years ago, with 54% of total users engaged over the last 90 days. We continue to focus on building a robust engagement engine, which ultimately leads to greater monetization. This engine also fuels our flywheel, creating low-cost customer acquisition through strong word-of-mouth influence. I personally energize and focus on everything we need to do to operate in the short term, optimizing the tradeoff between current profitability and investment in our long-term growth opportunities. We will continue to invest in international markets against a proven playbook of seeding the market long before revenue contribution. Looking at our user base as a whole, we have a significant opportunity to drive growth in our subscriptions and accessories and materials businesses as we further strengthen user engagement and the onboarding experience. Our product roadmap is robust. We are focused on enhancing the value proposition of our subscription product. We are excited about the new things that we are launching over the next three to six months that will enable more content and functionality for our Cricket Access subscribers. We're also making significant investment in our accessories and materials products where we have an opportunity to expand the Cricket ecosystem. Ultimately, these are the drivers that will result in robust growth in the long term as we continue to grow our user base. For consumers looking for a seamless, connected ecosystem for their projects, there is no alternative. It's never been a better time to be a Cricket user. Underscoring our confidence are four key trends that demonstrate resilience in the market and have driven our business forward since 2014. First, the desire for personalization. Second, the digitization of tools that makes personalization easy and seamless. Third, technology has opened the door to a new generation of entrepreneurs. And fourth, the proliferation of social media that drives community a significant barrier for entry for others looking to enter the market. These key trends also work true internationally where we have significant growth opportunity across new and existing markets. Similar environmental challenges exist in our more mature international markets like the UK and Australia. Our newer markets like Germany and France continue to expand and thrive as we add new stores at a high rate with existing retailers and add new retail and e-commerce partnerships. We look at things like user engagement levels, Google search terms, and brand familiarity, all of which have contributed to our success in these markets. As we enter new markets, we utilize the same cricket playbook. with a focus on the same strong fundamental drivers of the business. We have just recently launched in Turkey, and I'm very excited about our upcoming launches in Japan and South Korea over the next few months. At the local market level, we drive continued growth by identifying influential voices, fostering community, and partnering with key retailers. We're also investing heavily in user engagement. starting with how we onboard first-time users. We believe that a great onboarding process plays a strong role in driving long-term engagement and modernization. When a user first receives their machine, it is our goal to delight them at every turn, like the setup and the registration process should be seamless. We are also developing product bundles and learning experiences, which we believe will help smooth the path for users who are just starting out. In addition to our focus on onboarding, we are investing significantly in our platform to help drive user engagement. This starts with Design Space, where we have a unique opportunity to foster more user engagement. This year, we are focused on bringing more versatile and editable content, along with expanding the amount of diverse content. We recently launched a new homepage for Cricket Design Space, creating a more dynamic experience and improving content discovery, both within our app and across our users' social media feeds. We're also focused on delivering greater parity between the desktop and mobile experiences so users can have a consistent experience across all of our apps. We recently launched our Design Space app for Android in April, following a new and improved iOS launch at the end of last year. Our mobile apps are key to our overall engagement strategy and a critical pillar of our community efforts. All of these efforts around onboarding and engagement ultimately drive more monetization opportunities on our platform. We have over 2.3 million paid Cricut Access subscribers at the end of Q1. Nearly 700,000 more paid subscribers compared to prior year Q1. Our strategy with Cricut Access is to further expand our offering beyond simply adding more content to include enhanced software and services to further delight our user base and bring additional value to them. Investments in software and subscriptions are resulting in an expansive roadmap of new functionality for our Cricut Access subscribers. One example is our Monogram Maker tool that we will be releasing soon and exclusively for subscribers. This addresses a popular use case. The tool now allows users to quickly create beautiful, personalized monograms from a wide variety of template designs and fonts. Additionally, Our contributing artist program, which I mentioned in the last earnings call, has received great feedback from our beta users. We have made significant steps to extend the program to a broader audience over the next month, bringing more artists to the platform and a wide range of diverse content to our users. We've been increasingly advertising Cricut Access inside Design Space and now have the ability, capabilities, to feature different messaging and upsell offers for Cricut Access and to measure the effectiveness of each of those placements inside design space. Another opportunity for modernization is through accessories and materials with engagement as a key driver. The more users make, the more materials they need. Our competitive advantage in accessories and materials is that we design materials to be seamlessly compatible within the Cricket ecosystem. This means that the materials are specifically designed with our software and connected machines in mind. an area of significant opportunity for us one where we can differentiate from competitors we will continue and work to work and partner with those retailers who will help bring these seamless experiences to the end consumer we will continue to innovate and leverage our compatibility story to differentiate and drive demand for cricket materials although there's a lot of uncertainty in the current macro environment We are as confident as ever about our medium and long-term opportunity for growth. We continue to see a large opportunity to expand our nearly 7 million users over time as we grow into new markets and retailers. Our focus is on driving deeper engagement, including improving the onboarding process and making it easier for our new users beginning their journey. Driving more engagement in turn leads to more opportunities to monetize the user base with subscriptions and accessories and materials. We continue to invest in our future growth through continued innovation that will extend and expand our connected platform. In turn, this will enable us to continue to deliver profits and delight users around the world. Notwithstanding the currently bumpy road, our foot is still squarely on the accelerator pedal of long-term growth. I will now turn the call over to Kimball for more details on the financials.
spk07: Thank you, Ashish, and good afternoon, everyone. For those of you who haven't met me yet, I've led Cricket's operations and supply chain for the last three years. Our purpose-driven mission to help people lead creative lives is what inspires me and our teams every day. Our products foster mental health and well-being, entrepreneurship, and community to millions of consumers around the globe. The diversity of our revenue streams and our proven track record of profitability allow us to operate Cricut through a long-term lens. I'm excited to be here today and look forward to meeting you all in the coming quarters. In the first quarter, we delivered revenue of $244.8 million, a decline of 24% compared to prior year Q1, which benefited from a strong pandemic-related year-over-year growth rate of 125%. Looking at growth momentum over the long term, Q1 revenue was up 70% over the pre-pandemic comparative quarter of Q1 2020. In our last call, we talked about our expectations for a reversion to historical seasonality as we emerge from the pandemic. In March, we also started to see softening in consumer demand, which we believe relates to current macroeconomic factors. That softness continues quarter to date. First quarter revenue was also impacted by higher channel inventory. As discussed on our last call, some retailers took a more proactive approach in managing their inventory, and we entered Q1 with approximately $35 million in higher-than-normal channel inventory. During the quarter, some retailers worked down these inventory levels, while others continued to build their stocks. On a net basis, we estimate that these higher-than-normal channel inventory levels decreased by approximately 20%. But given current market conditions, this process may continue into Q3. We have no plans for additional promotional activity to move this inventory and believe higher channel fill is primarily a result of retailers' own proactive approaches to managing inventory. We view these factors, tough year-over-year comps, softer consumer demand due to macroeconomic uncertainties, and higher inventory levels at retailers as short-term in nature. We continue to believe in our strong business fundamentals and our long-term growth trajectories. Operating margins were up 70 basis points from Q1 2020, despite a nearly 250% increase in operating expenses over the same two-year period. We delivered $23.5 million of net income in the first quarter, demonstrating a durable business model and our continued focus on profitability. Breaking revenue down further, connected machines revenue was impacted by reduced consumer demand trends that began in March, as well as the higher-than-normal channel inventory positions that some of our retailers held entering the quarter. Revenue from connected machines was $62.4 million, down 56% year-over-year. Compared to a pre-pandemic Q1 2020, connected machine revenues grew nearly 10% on a two-year basis. Revenue from subscriptions was $64.8 million, up 40% over last year, and nearly 238% on a two-year basis. driven by seasonally high machine sales in Q4 and prior investments made to increase the value in Cricut Access. Revenue from accessories and materials was $117.6 million, down 14% over last year. Compared to the pre-pandemic Q1 2020, accessories and materials revenues grew 74% on a two-year basis, reflecting growth in our engaged user base. In terms of geographic breakdown, international markets grew as a percentage of the total business representing 15% of total revenues, compared to 10% in Q1 of the prior year. Revenues from international on a year-over-year basis increased by about 9%, with softness in our most mature markets like the UK, offset by growth in newer geographies. On a two-year basis, international revenues have grown 285% compared to Q1 2020. We continue to fuel our monetization flywheel for long-term growth, In the first quarter, we added over 495,000 new users and ended the quarter with more than 6.9 million total users. The number of users engaged on our platform for the 90-day period ending March was up 21% year-over-year, climbing to 3.7 million engaged users. As a percentage of total users, user engagement was 54% in the first quarter, down from 62% in the prior year when we benefited from stay-at-home pandemic conditions. This was down on a sequential basis from 60%. Typically, Q4 is our seasonal high. And keep in mind, this calculation will fluctuate over time with seasonality and as we broaden our user base and expand into new verticals and use cases. We are increasingly attracting Gen Zs and beginner crafters, creating an opportunity for us in the medium to long term as we broaden the appeal of our products and our platform. Typically, beginner crafters will be less engaged at the start of their crafting journey, with significant opportunity for us for us to drive higher engagement over time. As Ashish pointed out, onboarding and driving engagement is one of the top priorities for the company, and we continue to invest in this area. We also saw strong momentum with Cricket Access. The number of paid subscribers grew by 696,000 on a year-over-year basis, ending the quarter with just over 2.3 million paid subscribers. Attach rates in the quarter rose to over 33%, up significantly from pre-pandemic periods. when our attach rates were in the mid-20s. Subscriber growth is fueled by connected machine sales and new user ads in the prior quarter, offset by a historically consistent level of churn against our now much larger subscriber base. Paid subscriber growth typically lags new user additions by about a quarter, as free trials end and users choose to transition to paid subscription plans. As we look to the rest of the year, we expect pressure on subscriber growth, particularly in Q2 and Q3, as we navigate through the short-term environment of slower consumer demand and new user ads. We measure user monetization through average revenue per user in both subscriptions and accessories and materials by dividing revenue in those segments by your entire user base within that period. Our proof for subscriptions in the first quarter was $9.73, down slightly from $9.96 in Q1 2021. Accessories and materials ARPU closely relates to user engagement and channel inventory. ARPU from accessories and materials in the first quarter was $17.67. This compares to Q1 2021 ARPU of $29.45, which was higher due to unusually high engagement trends during COVID and also reflects heavier buying from our retailers as they restocked depleted inventory levels at the beginning of last year. We have a strong focus on monetizing our growing user base, through subscriptions and accessories and materials. Keep in mind, we grew our user base by 4.1 million users since Q1 2020. Moving to gross margin. Total gross margin in the first quarter was 40.5%, an improvement of over 13 points compared to Q4 2021, and up from 37% in Q1 last year. This represents the leverage in our business model associated with our diverse revenue streams. as a greater percentage of revenue in the quarter derives from subscriptions and with new promotional strategies. You will recall comments during our last call regarding our efforts to improve our overall promotions policies, including new strategies to give us greater flexibility on a go-forward basis, enabling us to manage the business and support retail partnerships. Breaking gross margin down further, gross margin from connected machines in the quarter was 2.7%. On a year-over-year basis, connected machine margin is down compared to 15.3% in Q1 2021, when we were at the height of the pandemic and saw elevated machine sales. The lower connected machine margin was the result of pricing on end-of-life machines and the impact of fixed costs with significantly lower unit volumes. In addition, on a year-over-year basis, Q1 2022 saw impact of elevated freight, warehousing, and handling costs. As we move through 2022, we also anticipate the impact of increases to commodities and labor costs. On a sequential basis, connected machine margins improved from prior quarter of negative 1.5%, as we took corrective actions to the promotional challenges during Q4. Gross margin from subscriptions in the quarter was 90.3%, which is essentially flat year over year. Gross margin from accessories and materials in the first quarter was 33%, down from 41.7% in the prior year. primarily driven by higher costs, including higher freight and handling, as well as lower average selling prices. Starting in Q2, we began to implement price increases. We are in the process of rolling these out with our retail and distribution partners across connected machines, accessories, and materials to help mitigate the impact of the recent cost escalations. We expect these actions to begin benefiting margins later in Q2, with the material impact in the second half of the year. Moving on to operating expenses, we continued to significantly invest in the business with a disciplined focus while making long-term improvements in operating margin. On a two-year compare, we improved operating margin by 70 basis points while more than doubling operating expenses. Total operating expenses in the first quarter were $67.6 million and included $8.9 million in stock-based compensation. This was an increase over the $55.6 million in Q1 of 2021. primarily reflecting continued investments that Ishish outlined. Total operating expenses as a percentage of revenue was 28 percent in Q1, an increase from 17 percent from a year ago, primarily due to lower revenues in the quarter. Operating income for the first quarter was $31.4 million, or 12.8 percent of revenue, compared to $64.7 million, or 20 percent of revenue, in Q1 2021. driven by lower revenues for the quarter and increased investments. As we navigate headwinds in the short term, we remain focused on managing our resources and continuing to deliver healthy operating margins, even though in the short term they will likely be below the long-term target range of 15% to 19%. Our business remains durable with a healthy profitability profile. We delivered our 13th consecutive quarter of positive net income, Net income in the first quarter was $23.5 million, down from $49.4 million in Q1 of the prior year. Diluted earnings per share was 11 cents, compared to 24 cents in Q1 2021. Turning now to the balance sheet and cash flow. Our balance sheet is strong and enables us to navigate through periods of market volatility. We ended the quarter with $245.7 million in cash and cash equivalents, and healthy inventory levels. Our credit line of $150 million remains untapped. Cash generated from operations for the quarter was a positive $15.6 million. We plan to carry higher inventory levels to mitigate supply chain risks, as we continue to see long lead times for components and materials. We are carefully monitoring known risks and plan to manage down inventory levels to match as risks unwind. Let me spend a few minutes talking about what we see as we look ahead to the rest of the year. As a reminder, Q2 is typically a softer quarter for us. Also, as we mentioned, we saw significant consumer softness starting in March, and that continues so far in Q2. Based on this, our target of reaching 8 million total users in this year will likely prove to be more challenging than we previously thought, which will likely impact subscriber growth. As I mentioned earlier, new subscriber growth typically lags user growth. Therefore, we expect the number of paid subscribers in Q2 and Q3 to be flat or possibly decline, primarily related to fewer new user ads added to the platform. We continue to see term rates that are consistent with historical trends. We view this flat to decline in subscribers as short-term in nature. We remain focused on the user's journey, which we believe will increase the value proposition and maximize user monetizations. Looking at the long term, we believe the trends that have driven our business over the last eight years remain intact. We are strongly confident in the unique value proposition that Cricut brings to millions of users and to the millions more around the world that we have an opportunity to bring to the Cricut platform. The significant growth in our user base over the last two years also provides opportunities to further drive engagement and monetization over a larger base of users. We are focused on managing our profitability while investing in areas with the highest impact. including improving onboarding, fostering higher levels of engagement, and innovating on our platform to drive growth in cricket access and our accessories and materials business. We remain focused on driving profitable growth and are committed to our annual operating margin targets at 15% to 19% over the long term. In the short term, as we continue to invest, we will likely be below this range by a few percentage points for the remainder of this year. We have a strong balance sheet, solid cash position, and unique business model that enables us to navigate these uncertain times and remain focused on our long-term opportunities. We have a consistent track record of driving profitability while managing our financial resources. Our disciplined approach has been cultivated since 2014 and is ingrained in how we manage and operate our business model. The tremendous growth we've achieved lays the foundation for us to scale and grow even further, and we are as focused as ever on optimizing the things that will truly drive our business forward. With that, I'll turn the call over to the operator for questions.
spk04: Ladies and gentlemen, if you have a question at this time, please press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, that's star one on your touchtone telephone to ask a question. Your first question comes from the line of Mark Altrager from Baird. Your line is open.
spk02: Hello, this is Amy Tuskey on for Mark this afternoon. To start off, could you give us a bit more color on what you're seeing with user engagement? What types of projects are consumers engaging in now versus six months ago? And we saw some amplified seasonality last summer. Do you expect that to play out similarly this year?
spk09: Yeah, you know, let me take that and jump in. So I think when we look at engagement, I want to go back and make sure that we define how we calculate the engagement percentage. So the way we calculate engagement percentage is the number of users that have cut in the last 90 days divided by all our user base, right? So the entire user base. So we don't graduate any user. You know, in Q1, typical seasons we see a slowdown from Q4 because Q4 people are in the holidays. When we look at that engagement percentage number, we actually kind of look at two metrics in tandem, right? And we look at the total number of engaged users that are also engaged at that time. So just to give that number and just to kind of repeat that, at the end of Q1, we basically had 3.7 million engaged users, which is about 650,000 compared to the same quarter last year. So I think we expected engagement to go down from a seasonality perspective. The range of projects that people are doing are, you know, clearly we had, you know, Valentine's, and more recently we had Mother's Day and Easter. We don't see a big difference in the kind of projects people are doing. They're still doing cars and T-shirts and labels. And, you know, a lot of this also depends on what stories we tell. As Kimball talked about and I mentioned briefly, one of our core areas of focus is to, you know, drive onboarding and engagement. So we are working on a number of initiatives that we believe will help drive those numbers up. But, you know, again, it's a very important metric for the company, and we're hyper-focused on it.
spk02: Great. Thank you for that. And then as a follow-up, how have you seen your customers respond to inflationary pressures in particular? You've talked about bringing some more beginner crafters and Gen Z crafters into the network. Are you seeing any significant differences between the heavy users and those newer, younger customers?
spk09: Yeah, so that's a really good question. One of our core goals as a company has been to go beyond the super-engaged enthusiast, right? And as we have launched retail partnerships, as we have partnered with influencers, our strategy has been to broaden, you know, bring the creativity out in everybody, right? And so, you know, the fact that more beginners and intermediates are joining the platform, it's somewhat by design and by strategy, where we believe that, you know, we want to make it easy and, you know, less time consuming for people to create things. So whether they want to you know, organize their home, you know, we want to bring creativity not just on special occasions but in everyday life. You know, the kinds of projects that you would guess, you know, they are looking to do simpler projects. We have a lot of focus on, you know, helping people do things in five minutes or less. And then as they get engaged to, you know, kind of bring them up the engagement curve over time, we'll see a lot of innovation, as I talked about, in our software where, you you know, we can bring these users on board. We have launched Cricket Learn as a platform for driving more education, as well as, you know, our platform itself, you know, basically will feature a significant amount of engagement. I'll give one more example. We recently launched our homepage, which used to be kind of very one-dimensional, right? And now the homepage is multi-dimensional, where we are featuring projects from the community, we are featuring projects for beginners, and we see... People bookmarking projects, saving projects, connecting with community members, et cetera. And we think that we are in the very, very early days of driving that rich engagement on our platform, which is even beyond cutting. And I think that's something that is particularly helpful for new beginners. So as I said, we'll stay very focused on expanding and bringing creativity in everyday life. And then, you know, complementing that with the infrastructure on our platform to help drive that. So, you know, if we talk about crossing the chasm, we're really focused on that. And, you know, we're proud of what our teams have done. And I think we have a long ways to go.
spk02: All right. Thank you.
spk04: I'll pass it on. Your next question comes from the line of Eric Woodring from Morgan Stanley. Your line is open.
spk01: Hey, good afternoon, guys. Thank you for taking my questions. Maybe, Ashish, I'll start one with you. Obviously, without giving too many details beyond what you'd be comfortable sharing, maybe can you just elaborate a bit on what excites you so much about the three- to six-month product roadmap? Meaning, would these products be TAM expanders, or maybe how can we think about their fit within your ecosystem? And then, You know, just adding to that, does a consumer demand environment impact the way that you're thinking about the product launch roadmap or what products to come out with or the price points to come out with? And then I have a follow-up.
spk09: Okay. How much time do you have, Eric?
spk01: As much as you want.
spk09: You know, you ask the product CEO what's in the roadmap and he can go on forever. Okay. You know, I think there's a number of exciting things that I'm proud of. You know, our team just launched a number of products in the heat press category. We launched, you know, we launched a hat press, which gave people the ability to personalize hats. We launched a prosumer-focused product at $1,000 that we can talk about the auto press. And, you know, as well as we have upgraded our easy press line. And we have tons more innovation coming. I think the thing that excites me the most over the next three to six months is our platforms. And again, what I mean by our platform is Cricket Design Space. It's the mobile app. As I said, there's a number of things that we are doing that will help drive onboarding. There's a number of things that we are doing to make it easier for the community to connect with each other, to be inspired, to share projects with each other. And I think all of that will really lay the foundation for monetization. The next thing I would say, just building on that track, is You know, we have a massive amount of effort going on in helping improve cricket access, right? So, you know, we talked about the Contributing Artists Program that will massively expand the library of content and the diversity of content, the genres of content, not just within the U.S., but also globally. We are, you know, in addition to expanding the content library, I briefly mentioned this word, editable content. What I mean by that is that people will be able to manipulate content exponentially easier than what they can do today. We are complementing that content with services and software tools such as Monogram Maker. Monogram Maker is a perfect example of matching that to a roadmap. As beginner crafters come in, how do you make it really easy for them to do something that they love doing, which is making a monogram? They can do that within a couple of clicks. That's a few of the examples of the road of the platform which what I think as we achieve more parity between mobile and desktop I think that would really enable us to not only enrich the products that are in the market today but also allow us to introduce new products in new categories that are beyond cutting machines so you know that product life cycle is a little bit longer but we have been working on technologies and innovations that can really expand what cricket means to people beyond a cutting machine. So those are all the things that I'm excited about. And I hope I answered most of your questions.
spk01: Yeah, no, no, no. That's perfect. Maybe just as a follow-up, obviously there's a lot of moving pieces, a lot of dynamics going on in the market. So just to kind of help level set and make sure we're thinking about it correctly, to cue correctly from a seasonality perspective, you know, if we look back over the past few years, there's been quarters where June is up fairly strong. Obviously, during the pandemic last year, you know, we were up kind of low single digits. You know, given the commentary that you provided, should we think about both net new users and total revenue being down sequentially and just maybe any guidance you can provide on kind of the magnitude of that? Again, just so we can kind of all level set where expectations might be for June to the best of your ability.
spk09: you know, obviously we're not providing any specific quarterly guidance, but let me kind of talk about the number that we have talked about, and Eric, hopefully it addresses some of the aspects of your question. You know, as we said in the last earnings call, we basically talked about 8 million users at the end of 2022. And, you know, as you can see from Q1, we added 495,000 users, which is even higher than we expected. So it's a strong And, you know, that was driven by a strong sell-through in Q4 last year. January and February look very typical months from a seasonality perspective, and we are fairly satisfied with how those perform. You know, starting March, things, you know, slowed down. And, again, you know, a number of factors that you probably are aware of, from inflation to sentiment to pandemic opening, et cetera. One thing that I did talk about in a prepared remarks as we saw Mother's Day, You know, Mother's Day kind of brought a similar level of excitement that we have seen in the previous years, at least, you know, week over week, month over month, where, you know, whether it was people searching for our brand or excitement about the brand, there was a lot of that. And that gives me confidence that as we go into, while we'll see a continued slow growth in users for the next couple of quarters, we believe that as we head into Q4, the same kind of things that drive crickets you know, every year, which is holidays and Halloween and Christmas and gift giving and home decoration will be the growth drivers. Now, that may not be enough to offset the slower growth in Q2 and Q3. One thing I want to highlight is that, you know, unlike other platforms, unlike other categories, where there's a lot of alternatives for people, like we don't believe that there is a, you know, expansive platform like ours from a creativity perspective. So when that demand does come back, right, because people are always going to make T-shirts and do gifts and everything else. We don't think that's going to go away. We believe that we will be the platform of choice, and that's what gives me confidence. I know you asked me this question specifically in the shorter term, but I do want to address why I'm very optimistic and confident about the medium to long term because, again, as I said before, the trends on personalization, on social media, marketplaces, the fact that people want to sell things haven't changed. And we are so early on in our brand awareness and familiarity, right? So as we improve engagement, as we help people make full projects, we think it will drive word of mouth. So, again, you know, we just have to get past the short-term macroeconomic challenges, but we remain fairly confident with our strategy and what we need to do to drive growth going forward in the medium term. All right.
spk01: Thank you for the color issues. I appreciate that.
spk04: Your next question comes from the line of James Silva from city group. Your line is open.
spk05: Thank you very much. I have a first question probably for Kimball. And that is when you mentioned the subscribers likely to be soft or going down, I think you mean on an absolute basis, not a deceleration basis, like the numbers of subscribers actually going down, not deceleration. If I heard that right. And if so, you know, I followed your company since IPO time, and I don't recall a quarter of subscriber growth actually going down. And maybe that's because we've lived in a world of COVID for the past two and a half years. But looking back historically more, are there normal periods of normally Q2 should be down? Or are we just because of we're coming back to meeting with people out of society and out of COVID that now it's kind of an abnormality that we see subscribers going down. Thank you.
spk07: Thanks for the question, Jim. So really there's three factors that go into overall subscriber growth. And the first and most important factor is machine sell-through that drives new user ads that leads to subscribers. Second is churn, which has been fairly consistent with a natural level of churn over the long term, and then reactivations during the period where subscribers will drop out and come back in. The largest factor is just lower consumer demand. As we go through the next couple of quarters, that will put pressure on subscriber growth. Just to be clear, we are talking about total subscribers as opposed to just the rate of subscription. Our attach rate remains, you know, very high. We're at our highest point with slightly over 33% attach rate compared to a pre-pandemic mid-20s in our attach rate. You know, looking forward, we do expect to return to growth in Q4 as we move into our more normal seasonal high and machine sales pick up. In the meantime, I just want to reinforce that we're continuing to invest in the value of our cricket access and subscription products, and that's manifested with the attach rates I talked about. But also, we are starting to move the needle on reactivations, but it's not enough to overcome just the drop in consumer demand and the impact of that.
spk05: Right, but historically, have there been periods like pre-IPO where it's pretty normal, or is this subscriber going down kind of just an abnormal bump that we should not, you know, consider to be a normal thing of the past and going forward?
spk07: This is an – I call it – it's a bump. Okay. And part of it is, you know, we talked about kind of that natural level of churn. We have a much larger subscriber base than we did two years ago, right? And our churn rate hasn't increased, but we still have a fairly consistent level of churn. And as growth moderates in the near term, it just works out that way. But we expect to resume growth in Q4. Okay.
spk05: And then a question for Ashish on more strategy. Okay. In your prepared comments, you mentioned your excitement for the next three to six months. Is that more on enhancements of software and enhancements to your ecosystem, or is that on new physical products as we think about your excitement?
spk09: We've talked about building new types of technologies and innovations that will leverage our platform, but when I really talk about the next three to six months, I'm mostly talking about the platform, right, because I think there's a significant opportunity to onboard users better, to drive higher levels of engagement and, you know, a fair amount of focus on driving Cricket Access, which is a subscription product. And so we've been working on, you know, a variety of software. We've been working with the Contributing Artists Program. So that's where I would say we've definitely accelerated our efforts in driving those three things because they're kind of all related. the more engaged users we have, it'll drive higher level of subscribers. So I would say for the next three to six months, what we'll be able to share publicly is all in the software platform arena. I mean, clearly, as hardware and new technologies take a lot longer, we are feverishly working on some exciting new things that we'll be launching in the next couple of years. But at this point, I'm talking primarily about our software platform.
spk05: Great. Thanks so much for the details. And right now I'm actually drinking out of my cricket mug some hot cocoa. So I figured out the onboarding and user experience at least. Thank you so much. Thank you.
spk04: Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
spk08: Hi. Thanks for taking my questions. This is Bala on for Rod. I guess I want to start with softness in consumer demand in March. Could you maybe elaborate a bit more on it? It looks like you are seeing that weakness both in terms of new users, given that you lowered the full year user ads guidance, and also it looks like engagement has come down too. So is it more or less across the board, both in terms of engagement, and also new user onboarding. And I have a follow-up.
spk09: Yeah, so I think, Bala, as we mentioned, like, you know, new user ads are driven by machine sell-through, right? So stuff that is stored in October, November, December that has a certain lag by the time people come off their trial subscriptions. So in March, we didn't necessarily see a slowdown in the number of user ads compared to our expectations. What we saw was a slowdown in machine sell-through which will then impact Q2 and Q3. I think, like I said, from an engagement perspective, we saw January and February similar to the typical seasonality we see coming off Q4. So we didn't necessarily see anything remarkably different. And we clearly saw, I think, what we attribute to the effects of inflation, consumer spending, maybe even return to office and the stresses that puts on life, et cetera. One insight that we have that we, you know, not specifically talked about is, you know, the feedback that we get when we talk about engagement and research, our user base is, you know, they have all intentions of engaging. They're just out of time, right? So it's something that we are focusing on heavily as to how do we make it easier and less time consuming for people to do some of the things. But again, As I said, the user ad stayed fairly healthy and consistent with expectations. That's why we added 495,000 users in Q1. It's the sell-through and somewhat engagement that we saw slow down in March that will then manifest itself in the next few months.
spk08: That makes sense. And for follow-up, I guess I'm wondering, in an environment like this where consumer demand is weakening, Do you plan to go after chasing your users by doing more promotions, or do you just plan to continue to be disciplined and focus on profitability? I guess I want you to better understand your strategy, especially in an environment like this.
spk09: So that's a really good question, and I'll answer it slightly differently for our accessories and materials versus our machines. So I think, as we've talked about before, we're being very thoughtful about our promotional strategy. It's a very challenging consumer spending environment, and we don't believe that it's the right thing for the long-term business to be highly promotional and leave money on the table. And it also kind of destroys, to some degree, dilutes the value of our brand. What we would like to do is enhance the value, both in terms of functionality and the things that people can do with our product, and also make it significantly easier, right? So our goal is, you know, typically that's what you see with all major brands is that pricing and brand value can go hand in hand. And we think that it's, you know, our current strategy of being less promotional that we've talked about is the right strategy for us. What we'd like to do is, you know, we have 7 million users on our platform, right? And our goal is to help drive engagement and help improve the overall experience because we know Even though it's not a shotgun approach, we know that when those users are more engaged, they will make more projects and they will tell their friends and family. And as some of these short-term macroeconomic factors go away, that will help drive demand for the overall product. And again, we as a company have always taken a very long-term view of the world. And we think we are sound in our strategy and we need to continue to execute on it in a very disciplined and profitable way. That's just core to our ethos and how we grew up. On the material side, you know, we are working very hard to improve the value of our materials, both in terms of how users perceive the value of our materials, but also, you know, in giving them value because everybody is, you know, worried about their gas bills and, you know, and their food expenses, et cetera. So we are being a little bit more promotional on materials and accessories in that category versus machines, and I think we're going to at least for now, stay pretty sound on our strategy of being less promotional and really kind of focusing on the basics of the business. It's really a time for us to just get back to the basics, and we think it's the right thing for us to do.
spk08: Very helpful, Ashish. And I've got a follow-up for Kimball, if I may. Just want to touch base on gross margins. Clearly, they were better in the quarter. Mix helped a lot. Going through the year, how should we think about gross margins in a weakening consumer demand environment? Any cut there would be helpful, Kimball.
spk07: Yes, so as we mentioned in our prepared remarks, we remain committed to our long-term operating margins of 15% to 19%. We do think for the rest of the year we'll be a few points below that. And gross margins this quarter benefited, as you called out, from a mix of revenue. So to the extent that accessories, materials, and subscriptions were a larger part of the mix, that actually helped our gross margins in the quarter. Overall, the machine revenue is about 25% when usually it's using in the low 40s. And so we expect gross margins to continue growing. I guess, continue at the current rates until we see, you know, the machine sell-through pick up. And so, like, especially as we get to the fourth quarter, which is typically our highest season or our highest quarter for machine sell-through, that's how we're looking at gross margins.
spk09: You know, and our goal as a company is to continue to, you know, drive profitable growth. Now, clearly, there's just a lot of uncertainty in the world out there. And a lot of it's going to depend on just inflation and commodity costs and everything else. But our strategy is, as I said, we want to be less promotional machines. We want to continue to drive the subscription access product, and we want to give more value. So how everything plays out, it's really hard to predict in the shorter term. But our general strategy is to get back from an operating margin standpoint to the 15% to 19%. But when that happens is a question at this point.
spk08: Got it. Thank you very much.
spk04: Your next question comes from the line of Paul Kearney from Workplace. Your line is open.
spk06: Hi, everybody. Thanks for taking my question. I was wondering if you can comment on quarter-day trends of engaged users. Are you on track to grow sequentially in terms of an absolute number of engaged users? And then also, longer term, how should we think about your targets for engaged user growths?
spk09: Yeah, you know, we haven't really given specific guidance on the number of engaged users. As I said, we look at the two numbers in tandem with each other. One is the percentage engagement, which is, again, where we divide it by the total install base. And the second is the total number of engaged users. So I think, you know, for the year, given our focus, that we're going to – and I think we'll see some of these initiatives manifest themselves towards the later part of the year, our goal is to look at that number, you know, and probably even provide a more richer, you know, variation of that, right? So today we define engagement in a very narrow, specific way, but our goal is to continue to drive engagement. Now, from a number of user standpoints, like, again, you know, we obviously don't graduate user base, so we'll see the same, we'll see user base continue to grow up.
spk06: Understood. And then you mentioned, I think there's pricing initiatives that are in place starting in 3Q. I was wondering if you can just provide more detail on that. Is it both in connected machines and accessories, and is it in all channels as well? And also, how do you reconcile that with the promotions, the recent promotional activity?
spk07: So we're in the process of rolling out price increases across all of our physical segments, so both machines and accessories and materials. And that's still a work in process, and so we'll see some benefit of that in Q2, but that's mostly going to impact the second half of the year.
spk06: Male Speaker 1 I understand. And is this like-for-like price increases, or is this through innovation and new products?
spk07: Well, so the price increases – not – so – Could you repeat your question again?
spk09: Sorry.
spk06: I'm just – I'm wondering, are the price increases, are they like-for-like price increases, as in same product from last year, or are you introducing price more so through innovation and new products?
spk09: Yeah, so I think there's a couple of things going on. When we're rolling our price increases, therefore all our products across the board. What is going to change is the mix of the products. We have a couple of products that are end of life, and as we go through the year, some of those products will go away. They'll actually have a positive impact on gross margins. But the pricing increases we implemented are mostly across the board. You know, but we're just trying to work through some of the inventories.
spk06: Okay. Thank you.
spk04: Your last question comes from the line of Eric Woodring from Morgan Stanley. Your line is open.
spk01: Hey, guys. So I just wanted to ask one follow-up question to Jim's question earlier, and that was when we're talking about, you know, the – the trajectory of subscribers, those comments about flat to decline or growth in 4Q, those are on a sequential basis, correct, not a year-over-year basis?
spk07: Yes, that is correct.
spk01: Okay, cool. That was it. Just a clarification. Thanks.
spk04: There are no further questions at this time, ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.
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