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spk01: Good day, and thank you for standing by. Welcome to the Cricut Q3 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stacey Clements, Investor Relations, the Blue Shirt Group. Please go ahead.
spk00: Thank you, operator, and good afternoon, everyone.
spk02: Thank you for joining us on Cricut's third quarter 2022 earnings call. Please note that today's call is being webcast and recorded on the investor relations section of the company's website. A replay of the webcast will also be available following today's call. For your reference, accompanying slides used on today's call, along with a supplemental data sheet, have been posted to the investor relations section of the company's website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer, and Kimball Schill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host live Q&A. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements, including statements regarding our strategies, business, expenses, and results of operations in response 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 factor section of Cricut's most recently filed Form 10-Q. 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, November 8, 2022. Cricket has 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.
spk06: Thank you, Stacey, and welcome, everyone. As expected, we ended the third quarter with healthier channel inventory. Revenue in the third quarter was $177 million, slightly down from last quarter as retailers continued to work through their inventory. Underpinning our resilience in this more challenging macro environment is our durable business model and focused investments on high-impact initiatives. We generated net income for the 15th consecutive quarter, once again demonstrating a proven track record of sustainable profitability. I'm confident in the fundamentals of the business and encouraged by the positive momentum in some areas while navigating challenges in others. First, We strongly believe that we have millions of new users to acquire domestically and internationally. Our user communities have never been stronger. Our top three cricket-related hashtags have garnered over 6 billion views on TikTok. Brand familiarity continues to expand its strong search interest on what is cricket. And the success that we saw with Amazon Prime Days in July and October indicates that our sales funnel is healthy. These trends give us confidence in our overall market opportunity and point to expanded interest in the category. We will continue to run the business for the long term, ensuring category and brand health. Our funnel is healthy, and we have a large market opportunity ahead of us. Our qualitative research tells us that interest continues to be strong, but customers are taking longer to convert and have a higher threshold before they make a purchase decision, as they prioritize their needs and wants given the current economic environment. Net new users added in the quarter were down 26% compared to last year, while connected machine revenues were down 49%, indicating that inventory moved through the channel. So consumers continue to purchase the product at a healthier pace than our revenue suggests. Highlighting this point is a 30% year-over-year growth in our user base to nearly 7.5 million, up from 5.7 million the same quarter last year. I'm particularly pleased with the growth we're seeing in our subscription services as we continue to create a richer, more valuable experience for our Cricket Access subscribers. New subscriber growth has outpaced user growth on a percentage basis for 11 consecutive quarters. We continue to drive high margin revenue and leverage the strength of our platform with the tax rates now consistently around 33% compared to mid-20s pre-pandemic. Our platform provides an integrated experience that inspires new design ideas, fosters community, and supports both designing and making. Design Space is a software platform through which users create a profile, follow other users, and connect with the broader Cricut community. Once users discover something they want to create, they can easily create a design or modify an existing one using our suite of tools. They can also easily bookmark projects, images, and fonts for later use, providing us with valuable insight into their personal preferences. Because we are a connected platform, all of these interactions, including designs and projects, are stored in Design Space and cannot be transferred to an outside ecosystem, thus making our platform extremely sticky. Our connected platform creates a competitive mode. All users must use Design Space to cut their machines. This gives us valuable touch points with our entire user base each time they create, as well as giving us insight into their behavior and preferences. Our goal is to create a habit-forming experience where users come back often. More recently, we launched a set of robust image manipulation tools, typically only available in high-end software. These tools give users greater flexibility to easily create designs, reducing hours of design time in the process. The more users interact in Design Space, the more value they create and derive from our platform. For example, shared projects can be leveraged within the Cricut community, saving users valuable design and editing time. Cricut Access, our subscription service, fuels their efforts in these areas and offers proven content to help users achieve their creative potential. We've talked about our Contributing Artist Program, that provides a marketplace for artists to publish images and share in revenue streams as subscribers use their images. While the program is still young, subscriber reaction has been very enthusiastic. Contributing artists are an important source of localized content in many international markets. Also, we recently launched a beta version of Editable Images, a key benefit for Quick Access subscribers that we highlighted in our last call. This represents one of the most significant advancements in our image architecture and offers our Cricut Access members a tremendous amount of creative flexibility with editable images. We continue to invest in the platform to improve discoverability and provide more inspiration, community features, diverse content, and design tools, some of which will be available only to Cricut Access subscribers. We're creating more advertising touch points and design space to drive increased monitors and subscribers. For example, we have multiple touch points related to user onboarding, content searches, and design tools that deliver context-sensitive ads depending on what the user is doing. Early success in these initiatives is driving an increase in trials and subscribers. The chart shows our top ten touch points, but there are many others, and we continue to optimize and learn. Aside from general advertising and key touchpoints in the user's journey, significant upsell touchpoints to Cricut Access include content and subscriber-only premium design tools. As a result of these efforts, we added approximately 89,000 net new subscribers in Q3, which is better than expected in the face of slower machine demand and user growth. We have a solid roadmap of features and data-driven marketing capabilities to further enrich the platform. Just as importantly, we continue to invest in our onboarding initiatives. We know that the faster a user gets up and running, the more they create, engage, and share over their entire lifecycle. Last year, we rolled out an online learning center, which is primarily focused around how-to guides for specific projects. More recently, we integrated a virtual learning platform into Design Space that walks users step-by-step through a series of simple and fun lessons. These lessons teach users the basics of design space and how to use a connected machine, Cricut materials, and more. In addition, users can take advantage of our learning kits on Cricut, which provide materials and tools to complete specific projects that enable our users to build their confidence in their designs and crafting efforts. We have almost half of our total user base cutting on our platform in the past 90 days. with nearly 3.6 million engaged users up 11% year over year. Now keep in mind that these engaged users are defined by how many users have actually cut a project. Our current definition of engaged users doesn't take into account the hundreds of thousands of daily users coming into design space that aren't cutting but are taking a variety of actions. For example, users have bookmarked over 120 million images and projects And we see this accelerating with nearly 2 million bookmarks being added each week since the middle of Q3. The majority of these users who come in on any given day end up cutting over the next week. When we ask users who have not cut with their machines in over 90 days, 80% of them are motivated to use their Cricut machine more often and express a strong desire and interest in doing so. We believe that if we can give them compelling reasons to come into design space more often, to browse and to be inspired, and make it easier and faster to find the right idea and make projects, we can get these users to engage. Our mobile apps play a key role in making it easier for users to take some action on our platform and have a frictionless experience. For even the briefest moments of engagement, whether it's a spare five minutes for project discovery, checking community notifications, or creative design work, Our data shows that users who use Design Space on more than one device are significantly more likely to cut and are much more likely to subscribe to Cricket Access than those using only one device. The more time users spend in Design Space and use the platform, the more opportunities we have to monetize and ultimately cut. Additional monetization opportunities exist within our accessories and materials business where we continue to innovate in ways that uniquely leverage our platform. Last quarter, we noted that we have seen competition, especially online, as well as more placement of competitive materials in our retail channels. While our members realized that cricket materials were seamlessly with our machines and our software, users are more price sensitive than they have ever been. During Q3, we began running additional promotions to help improve affordability and help right-side channel inventory. We plan to continue to focus on making our products more affordable through cost and promotions. We will also continue to expand into new use cases. In Q3, we launched a wide range of items from card making, labeling, and personalization. These included watercolor cards, markers and brush sets, smart labels, glow-in-the-dark vinyl and iron-on, and several other consumables. The early results show that these items are driving additional sales of accessories and materials and helping people do projects quicker and easier. Finally, we will lean into those retailers that help tell the entire cricket ecosystem story, showcasing compatibility between machines and cricket materials. International remains an important priority. The trends that have driven our business since 2014 also hold true internationally, and our research shows an almost universal propensity for crafting. In Q3, we executed a new go-to-market model in Australia, deploying a local warehouse facility which will allow us to improve customer experience. We continue to make strides in continental Europe, especially France and Germany, with expanded distribution and awareness. Our platform investments, such as the Contributing Artists Program and Editable Images, will play a key role in our international expansion in existing markets. We recently launched in South Korea Japan, Saudi Arabia, with imminent launches in India and Taiwan. Additionally, we localized versions of Design Space in nine new languages, Swedish, Polish, Danish, Hungarian, Czech, Norwegian, Romanian, Finnish, and Thai. In summary, operating in this macro environment has been challenging, but I believe we are stronger for it, with greater focus and discipline than ever before. As we enter 2023, we believe channel inventory imbalance will be mostly behind us, and we anticipate sell-in and sell-out to be more closely aligned. We have a large serviceable addressable market with less than 10% penetration, and we will continue to drive new machine sales and use it for the long term. We benefit from our design space platform, giving us significant opportunity to drive user engagement and monetization. Some of our investments are already showing signs of success, building confidence that what we are doing today could have lasting impacts for long-term growth. I will now turn the call over to Kimball for more details on the financials.
spk05: Thank you, Ashish, and good afternoon, everyone. We continue to see the effects on consumer demand of a softer macro environment. Retailers' orders in September were a little softer than historical trends would have indicated, as retailers worked through channel inventory positions. In October, we started to see orders for holiday season, although at lower levels than previous years, as retailers are taking a cautious approach to inventory levels. Given this dynamic, we continue to tightly manage what is within our control. In the third quarter, we generated revenue of $177 million, a 32% decline compared to prior year Q3, and we generated 12.5% in net income. Breaking revenue down further, revenue from connected machines was $52.4 million, down 49% year-over-year against difficult comps from Q3 2021 related to sell-in of next-generation cutting machines and continued replenishment orders. New user ads as a proxy for machine sell-outs and consumers were down only 26% for the same period, indicating that consumers continued spending, albeit at a lower level, as retailers worked through inventory. As you'll recall, we entered Q3 with some retailers holding higher than normal channel inventory positions, while at the same time managing to lower inventory targets. Exiting the third quarter, we believe retailer inventory positions are much healthier, with most retailers needing to place new orders to fully capture expected holiday demand. We believe holiday demand remains seasonally strong. We are working closely with our retail partners, as well as leveraging our more flexible direct-to-consumer sales channels placed inventory where it needed to meet demand. We are proud of our subscription performance. Revenue from subscriptions was $68.9 million, up 29% over the last year and 2% sequentially. Our continued success highlights the durability of our business model and validates the focus we've placed on cricket access and the expansive improvements we've made over the last several quarters, as Ashish mentioned. Revenue from accessories and materials was $55.7 million, down 47% over last year when we benefited from channel fill and smart materials related to the launch of next generation cutting machines, continued replenishment orders, and higher engagement trends. Let me provide some context around accessories and materials. Our revenue mostly derives from selling into retailers and is influenced by multiple factors, including consumer buying behavior, such as pantry loading, promotional activity, competition, and currency. Further, we have been more promotional in this segment and see favorable share gains when our products are close to the price parity with the competition. Accessories and materials continues to be the segment with the most competition. In terms of geographic breakdown, international revenue was $27.6 million, down 11.5% from prior year Q3, and up 13.8% sequentially. International again grew as a percentage of the total business, representing 15.6% of total revenue, compared to 12% in Q3 of the prior year. Turning to users and engagement. We ended the quarter with nearly 7.5 million total users, up 1.7 million users over last year. The number of users engaged in our platform, meaning those who cut at least once in the 90-day period ending September 30, was nearly 3.6 million, up 11% year over year. Engagement as a percent of total users dropped from 51% last quarter to 48% this quarter. Keep in mind that summer is historically the lowest period for engagement, and the scale of this seasonal drop is similar to what we saw from Q2 to Q3 last year. As expected, we are seeing engagement pick up as we head into the holidays. As Ashish talked about, we are increasingly looking at engagement on a more holistic level, starting with the number of users that are interacting in Design Space on a daily and weekly basis. We will continue to invest in content, community, and software features with a specific focus on mobile, to move users through their journey from inspiration to cutting over time. Paid subscribers grew by more than 600,000 on a year-over-year basis and approximately 89,000 sequentially, ending the quarter with nearly 2.5 million. Attach rates remained high at 33%. We measure user monetization through average revenue per user in both subscriptions and accessories materials by dividing revenue for the period in those segments by our entire user base. ARPU for subscriptions in the third quarter was $9.40, down slightly from $9.60 in Q3 2021. For context, three factors generally explain variability in subscriptions ARPU from one quarter to the next when subscribers are growing and attach rates remain high. First, timing of sign-ups during the quarter. Second, mix of new versus renewal subscriptions. And third, the increasing mix of international subscriptions. Accessories and materials ARPU was $7.61 compared to Q3 2021 ARPU of $18.79, due to lower sell-in revenue in the quarter. Moving to gross margin. Total gross margin in the third quarter was 46.2%, an improvement of nearly 7% compared to Q3 2021, and effectively slab on a sequential basis, which highlights the benefit of our diverse revenue streams. Breaking gross margin down further. Gross margin from connected machines was 6.1%, up 450 basis points sequentially from Q2, reflecting a benefit in product mix. This compares to 14.5% in Q3 of last year. The year-over-year decline in margin was primarily attributable to an increase in promotions as a percentage of revenue, particularly on older machines moving to end-of-life. Subscriptions were effectively flat last year at 90.6%. Gross margin from accessories and materials was 29.2%, down from 38.2% in the prior year, reflecting increased promotions as well as fixed operating costs over lower volumes. Going forward, you will see us offer more promotions in our materials business, with a focus on remaining competitive on price and on market share. Total operating expenses were $64.4 million and included $11.1 million in stock-based compensation. This was essentially flat compared to the $64.3 million in Q3 2021 as we continue investing for the long term. Operating income for the third quarter was $17.4 million, or 9.8% of revenue, compared to $37.7 million, or 14.5% of revenue, in Q3 2021. Operating income was impacted by lower revenues in the quarter while maintaining targeted investments for long term growth. We delivered our 15th consecutive quarter of positives net income. Net income in the third quarter was $12.4 million, down from $30 million in Q3 of the prior year. Diluted earnings per share was $0.06, compared to $0.06 sequentially and $0.13 in Q3 2021. We continue to manage the business for the long term while navigating short-term headwinds. Our profitable business model gives us the flexibility to continue to invest and deliver healthy operating margins as we work toward our long-term target range of 15 to 19%. Turning now to the balance sheet and cash flow. We benefit from a strong balance sheet. We ended the quarter with $198 million in cash, cash equivalents and marketable securities, and our $300 billion credit line remains untapped. During the quarter, we repurchased 1.38 million shares of our stock at a cost of $10 million. As a reminder, we generate cash on an annual basis. Cash generated is the primary source of funding toward our annual inventory needs and additional investments for long-term growth. This fosters a balanced and disciplined approach to capital allocation. It is common for us to be cash flow negative in Q2 and Q3 as we build inventories and generate cash in Q4 with higher seasonal sales. We were positive cash flow from operations year-to-date in Q3. As we look to the fourth quarter, we expect to see sequential growth as demand picks up. We have seen some retailers ordering appropriately to meet holiday demand, while others have taken a conservative inventory approach. Our goal is to have product on shelves throughout holiday and enter 2023 with healthy channel inventory levels. Downside risks include the timing of the remaining retail orders, and also retailer reluctance to spend dollars on new inventory of any type. We anticipate operating margins in Q4 to be lower versus Q3, as revenue mix is more weighted to physical products, along with the impact of higher inventory procurement costs flowing through the P&L and some inventory reserves tied primarily to accessories and materials. As we look ahead to 2023, we are taking a conservative approach in our planning. We anticipate entering 2023 with healthy channel inventory levels and plan to maintain a more linear relationship between sell-in and sell-out going forward. Given our success of our most recent investments and subscriptions and our profitable business model, we are able to invest at consistent levels to drive long-term growth. While we remain committed to our annual operating margin targets of 15% to 19% over the long term, we expect small incremental improvements toward that goal toward the end of next year. Looking at the long term, we believe the trends that have driven our business over the last eight years remain intact. We are 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 opportunity to further drive engagement and monetization. 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 our platform to drive growth in cricket access and our accessories and materials business. With that, I'll now turn the call over to the operator for questions.
spk01: Certainly. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. And our first question will come from Mark Altwager of Baird. Your line is open.
spk07: Hi, thanks for taking my question. First, related to inventory, are you able to quantify how much D-stock you believe has taken place across machines and materials and accessories this year?
spk05: I'm taking your question in terms of channel inventory. And if you recall our comments back in Q1, right, we called out that the end of the year with what we thought was $35 million heavy, But what changed as we went throughout the year is that was relative to what had been the historical trend through COVID. And we think retailers have changed their targets over time. And so it was a moving target throughout the year. What we are confident with is the number of weeks we have on hand in channel sales. by channel, and so the targets are a little bit different, but we're at a point where most retailers need to be reordering related to holiday. And we have seen those reorders in most cases coming close to our expectations. Although, as I called out in my prepared remarks, in September, we saw a little bit lighter orders than we would have expected, but those have picked up in October.
spk06: Mark, I'll just add to Kimball's point. I think there's a couple of data points that we are sharing. Some of this is really hard to exactly quantify. One is, you know, if you look at our machines, our revenues are down 49%, and, you know, our net new user ads, which is, you know, a little bit of a proxy for sell-through, was down only 26%. We saw the same thing in materials and accessories, which is our sell-in revenues, which is what is in the ARPU calculation. was not as positive. We saw better sell-through in materials and accessories than that ARPU number suggests. It was still lower than last year, but it was much better than sell-in revenues. So both of those basically indicate the fact that we were able to move a pretty significant channel inventory and feel like we are up to several quarters are in line with where our sell-in and sell-through correlate.
spk07: Helpful color. Thank you. And with the promotions on materials and accessories that you've been leaning into in recent months, what have been some of the key takeaways so far? Curious what you're seeing in terms of basket size or order frequency from some of your users and any other metrics you can share, maybe the market share of users using Cricut materials versus alternative materials. Thank you.
spk05: Okay. Appreciate the question. We're omnichannel, and so there are limitations of our data. But some of the lessons we've learned as we have been more promotional, the closer we get to price parity with competition, we hold our own or pick up share with specific retailers where we have reliable data. And so we also know from our own proprietary consumer research that there's a higher hurdle for consumers to part with the dollars right now. What you will see from us is being more promotional in that category, both to address affordability to the consumer, but also to continue to capture market share materials.
spk07: Great. Thanks for all the detail. I'll jump back in the queue.
spk01: As a reminder, if you do have a question, please press star 1-1 on your touchtone telephone. Again, please press star 1-1 for additional questions. Our next question will come from Jim Suva of Citi. Your line is open.
spk03: Thank you. My first question is on the accessories and materials. You know, $7.61 is lower than last quarter and way lower than a year ago. Is that due mostly to retail destocking? Because I believe you recognize the revenues on the retail sell-through. And does it lead one to believe that were at the bottom, or could it go lower? And I just wonder, are people just being more prudent with what they spend, or they're doing more outdoor activities? Because in the entire life of your company, I don't know if we've actually seen it this low. So any commentary you can give us on the accessories, that would be great.
spk05: Jim, thanks for the question. And as you pointed out, there are a bunch of dynamics impacting the revenue in that segment. It is a sell-in metric, and our revenue largely derives from sales to retailers that then sell through to end consumers. And so the channel inventory that we've talked about, that the channel has been destocking, has continued to be a headwind throughout the year. But we also, as Ashish pointed out just a minute ago, is Sell-through is healthier. Now, we don't have perfect data on sell-through, so we don't report on it. But the data we do have suggests that sell-through is much healthier than sell-in. And so we believe that's a better indicator for the health of the category. And then there's really kind of three influences that we look at on sell-through. One is promotional activity. The other is competition, right? And we do see increasing competition in that space. But the other is engagement, because it's a proxy for users consuming the materials and needing to repurchase. And in any given quarter, it's hard to quantify the impact, to isolate the impact of each one of those factors. But we know each of those come into play. And we do know that summer is usually our lowest period of the year for engagement. we do think that has played a role in sell-through activity.
spk03: And then as a follow-up on the accessories, are you trying to educate the users? Or maybe it's just my family who had a terrible experience of using knock-off Cricut brands where, you know, gummed up our cutters and all this, and we've now gone back to the original equipment. Cricut branded for the vinyls and such, but is there a way like to educate investors? Are you doing that? Or are you just doing that more from promotional dollars out there? Cause you know, saving 50 cents or a dollar may seem attractive to people until they realize it will kind of mess up their machines. Or is there a way like to QR coded and make it authentic? Or I'm just trying to think out loud about ways to educate and keep the lower quality supplies from eroding your company's profitability. Thank you.
spk05: So, Jim, we actually work really hard to communicate the benefits of our materials. And we think in general our users understand that they get an optimized experience when they use Cricut materials. That said, as I mentioned, you know, in our research that we've been doing, you know, with our consumers, there's just a higher hurdle rate. There's a lot of price sensitivity. And so that has been important. driving our promotional strategy to make sure that we're addressing affordability, even as we continue to tell that story and make sure that we're getting the right price-value tradeoff in the mind of the consumer so that we can be competitive in the material space.
spk06: Jim, I'll just add to Kimball's answer. I mean, clearly, you know, the point's really well made, and we know you're a very discerning consumer as well. So clearly we are working with retailers. We are providing messaging, providing data to help better explain the value proposition and the ease of use and seamless compatibility. The second is we are also increasingly integrating settings inside our software so that people can have a hassle-free experience with our materials because they've all been tested rigorously for that individual specific machine. And last but not the least, which I think is really important, right, which is that we're going to continue to partner and lean in with retailers that are, you know, going to showcase the compatibility of our materials and really be focused on, you know, giving the customer the best experience because we ultimately think that that will ultimately be good for engagement and the long-term health of the category and really gives the consumer the best experience. So we agree with you that anything less than that is frustrating and ultimately, you know, while we may sell an alternative material, if the customer doesn't have an experience, the project is not being made afterwards.
spk03: And then my last question is, are we in equilibrium now for machines and accessories or are we still working down? And if we're still working down, Will we hit that point mid-calendar Q4, or what's your forecast for that equilibrium? Thank you.
spk05: So as we called out in our prepared remarks, we exited Q3 with what we consider to be much healthier channel inventory levels, and that most retailers were in a position where they needed to be placing orders in order to capture the holiday demand that we expect to see. And so we're watching retail orders. We have seen them pick up over the course of October, even though they were a little bit lighter than we expected towards the end of September. There are still, I think, some potential headwinds with retailers in terms of being concerned about investing in inventory of any type in the current environment. And so they continue to be cautious. Generally, I think we're in a good channel inventory position, and we're looking to exit the year and keep that at kind of a healthy number of weeks in channel.
spk03: Okay. Thank you so much. I appreciate all the details. One moment.
spk01: And our next question comes from Eric Woodering of Morgan Stanley. Your line is open.
spk08: Hey guys, good afternoon. Thank you for taking my questions. You know, maybe the first one, Ashish or Kimball, you know, I kind of love it to either one of you, and that is, you know, I appreciate there are still a number of kind of macro and micro cross-currents at play today. I realize the holidays are incredibly important, but like, I guess something, we're less than 60 days away from the end of the year, and so I'm just curious what are the kind of most significant factors that kind of limit your visibility into things, you know, like your end users or, you know, revenue by any of the segments or margins or just your ability to provide any more kind of incremental information about 4Q? And then I have a follow-up. Thanks.
spk06: Yeah. So, actually, thanks for the question, Eric. Let me provide some color on this. I think one of the things that I know you look at in other categories that we've kind of shared for the first time this time is when we look at Google Trends and we see the interest in the brand with either what is cricket or the cricket search term, we see that mostly flat year on year, right? And we see that significantly higher than 2019. and yet the data in the sell-through doesn't clearly reflect the 2021 results. We've actually also done some proprietary research where we've talked to people who are well down the funnel, and this is pretty exhaustive research that we did, but it was qualitative, so it wasn't quantitative that we're happy to share some insights from. And so basically people who've gone from awareness to consideration to research and are very, very interested in the product, there's just a higher threshold for them to make that purchase. Now, we do see that when we promote the product, and we did that on both prime days, that consumer comes in. So we definitely feel that there's a healthy demand, healthy awareness, interest in the category there. And as we focus in the long term, we believe that we have a large stamp ahead of us. So our expectation is that as the consumer spending returns, that consumer will come in and shop the category. One other point that I'll just make specifically around October is, You know, in the last couple of years, we've started our promotional periods, you know, early on in the year, just given, you know, everybody was worried about getting the product to their house. So, you know, and this year we've kind of haven't really gotten into that, you know, promotional period that we have typically done in time of October. So I think we are seeing some of that. But, you know, again, as I look at the fundamentals of the category and look at overall brand interest, brand awareness, internal research, external factors such as Google Trends, We feel that the marketing funnel is healthy, and it's just the consumer waiting to make their conversions spend.
spk05: And just a point of clarification, when she says we're flat in Google Trends year over year, our interest peaked in 2020, and we're essentially flat. We're matching this year interest from 2020 and 2021. Yeah, so 2021 is the point of reference that I
spk06: uh, specifically brought up in September and be basically a flat year on year compared to 2021 and significantly higher compared to 2019. The, the interest in the brand at the peak of COVID at the pandemic was, you know, was higher, but, uh, we are comping 2021 in terms of brand interest for the most part in September.
spk08: Okay. Thank you. That, that was really helpful. Thank you for that color. Um, I guess maybe, uh, One other modeling question, then a strategy question. If you look at sequential growth in net new users historically, it would suggest that you could end the year right around your original 8 million total user target you guided to a few quarters ago. I realize that's not the hard and fast guide today, but You know, why would that not be the case? Should we expect net new user growth kind of below normal seasonality? Or just any comments you can help us, you can give us to help us think about that. Thanks.
spk06: Yeah, so I think just for, you know, just to get the details. Thanks, Eric, again. You know, we definitely, you know, after the initial guidance, we basically, you know, kind of reflected that, you know, given everything that was going on, it was very hard to predict. So we kind of, you know, muted that a little bit. you know, we continue to believe that, like, you know, we're doing all the right things to get from an awareness standpoint. Like I said, there's just such a, the holidays are such a big part of the sales, right, especially given the fact that there's pent-up demand, there's the fatherless fall, at least we think it's really healthy, now when the customers jump in and You know, at this point, hard to kind of give any guidance on how the economy and consumer sentiment, I mean, you read that just as well as we do. We feel good about awareness, actually, and we think that we're doing all the right things to get that customer to make that purchase. I think a lot is going to depend on what happens in November and December, you know, and where the customer decides to spend the money, but we feel that we're in a good position going into November and December. The other thing that we feel good about is, as we've talked about, is that given the fact that we've been able to work through the channel inventory, we feel that we'll have a higher correlation between selling and sell-through next year.
spk08: Okay. And then my last question for you is, you made an interesting comment earlier on the call, just about the hundreds of thousands of users that aren't necessarily engaging with their machine but are on the design space app and obviously you've you've had really nice performance on the subscriber side even if there's just a tiny bit of that arpu pressure there so i guess my question is just is there an opportunity that you see on your end to kind of better monetize this kind of non-connected machine engagement it's just the the business that is clearly outperforming and so obviously subscriptions are really nice to have and i'm just wondering if if you can monetize some of this engagement that actually isn't on the machine, but instead on the app, even if not in a subscription basis. And that's all for me. Thank you so much.
spk06: Yeah. So thanks, Eric. That is a really good question, something that I'm incredibly excited about. So let me talk about that. So just as a reminder, you know, which is. The way we calculate our engagement metric is the number of users cutting, the percentage of users cutting in the past 90 days as a percentage of the total users required since 2014. And if you think about it, almost half our entire user base, like 48% of them, cut on the machine. And we saw that number increase year on year. Now, we've kind of been sharing this a little bit and we probably went into a lot more detail. We've been obsessed and we've been focusing on really getting the user to interact in very rich ways on the platform. So they're creating bookmarks, which is effectively an intent to come back and make that thing, liking projects, they're following other users, they're connecting with people, they're sharing stuff. And we know from our data that when they come in in design space, there's a higher likelihood to cut. And we made a comment to that in our prepared remarks. So our goal is how do we get more people coming into design space? Even when they are away from their machine, I think mobile is going to play a huge strategy. We think that that will ultimately convert to either them cutting or monetizing. So one data point specifically to your question, which is a proof point, is that today we have seen the benefit of that with selling cricket access. So not only do we have a significantly better, more enhanced cricket access product, we're actually also able to merchandise that and create ad impressions at many, many, many different places in the app, right? So we think that our continued focus on engagement, sorry, our continued focus on bringing users to design space, getting them to interact, and in lots and lots and lots of time, we will have the opportunity to monetize that in ways we've defined traditionally, which is cutting, but also in many other ways. And I think we're in the very early stages, but you know, we have a lot of exciting initiatives and I'm very proud of the team to really kind of, we are building a platform where that activity is adding, every user is creating value, adding value, and deriving value on the platform.
spk08: Awesome. Thank you so much, Rasheed, for the detail.
spk01: One moment. And our next question comes from Paul Carney of Barclays. Your line is open.
spk04: Hi, everyone. Thanks for taking my question. If we, If we kind of hit the goal of exiting Q4 at healthy inventory levels at retail, can you maybe help us parse through the puts and takes for the top line growth into FY23 for the first half and the back half? Just what are some of the maybe some of the channel dynamics that we have to think of within our model? Thanks. Yeah.
spk05: So, Paul, thanks for the question. Given all the macro dynamics going on, we're taking a conservative approach. view in our own planning of how to look at next year. Where we had significant headwinds from channel inventory, that will be largely behind us. There are still some pockets that we'll face next year related to that, especially in our A&M segment. What we are confident about is, she's talking about our awareness funnel and what we understand about our consumers, And we're confident that when consumer spending returns, that we're well positioned to capture growth. But right now, we're planning that the first half of next year probably looks a lot like the current environment.
spk04: Okay, helpful. And just maybe a longer-term strategic question. Can you just maybe update us on what you think the long-term user growth trajectory is for this business? And maybe you can start with where your awareness levels are today with the increased promotional activity? Do you think that the consumer is going to continue to need promotions or maybe just some metrics on where the user is today and the perception of the brand? Thanks.
spk06: Yeah. So thanks for the question, Paul. So I think one of the things that, again, I want to kind of point out that our revenues were down 49% and net new user growth was down 26%. We talked a little bit about the brand interest in the category, which is when people type in the term cricket or what is cricket, we continue to use the same levers that we have in the past, which is network effects, social media, word of mouth, etc., We have not shared this detail, but we do a lot of awareness. We do a broad-based awareness and index study. We stress test our serviceable addressable market by saying, well, what if we define it one way? Well, what if we get a lot more rigorous about it? And everything that we know, both in the domestic markets, And in international markets leads us to believe that we have a large SAM ahead of us. We have a large market opportunity. And again, the things that we control today are build passion for the brand, create awareness. Even though our sales and marketing numbers as a percentage of sales look higher, we believe that it's really because of the sales being low. But the effectiveness of that sales and marketing data to get that awareness and driving people down that funnel is pretty effective. Now, there are a number of things that our team is working on based on a tremendous amount of research as to how do we bring people into the funnel? What are the things that we control in terms of helping the user get through to get the research that they're looking for, et cetera? So we feel that they're putting in place a lot of fundamentals in place and we have continued to build on things that we knew about the customer and continue to build on that. And we believe that all of that will ultimately help us get more conversion when the consumer spending returns. We feel really good about our initiatives.
spk01: Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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