Cricut, Inc.

Thank you for standing by and welcome to Cricket Inc.' 's fourth quarter 2023 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'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jim Suva, Senior Vice President of Finance. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on Cricut's fourth quarter 2023 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.cricket.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 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-K or Form 10-Q that we have filed with the Securities and Exchange Commission. 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, March 5, 2024. 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.

Thank you, Jim. We moved through 2023 focused on profitability, even as we navigated a dynamic consumer discretionary environment. 2023 was our seventh consecutive year of positive net income. We generated 53.6 million of net income, even with the 45.9 million of excess and obsolete inventory reserves and fixed asset impairment charges. We are encouraged by our 49% operating income increase in Q4 year over year and the positive uplift from our promotions in Q4. However, we were disappointed that sales fell in the quarter and folia by 18 and 14% respectively. Our promotions uplift was smaller than we expected and is attributable in part to lower retail inventory. But in hindsight, we could have conducted more aggressive marketing and promotions. We intend to boost our marketing efforts and spending in 2024 to generate more interest and demand throughout the funnel. We will continue our deeper promotional strategy while focusing on maintaining great pricing discipline. We will keep concentrating on acquiring new users and enhancing their engagement and revenue generation. I would like to look back on 2023 on what went well and what we could do better. The areas where we could do better are straightforward. We need to attract more new users to buy our connected machines. We need to reverse weakening engagement trends and re-inject enthusiasm among our users. We need to be more effective competitors in accessories and materials. Much of our discussion today will focus on these priorities. In 2023, our total user base increased 13% to over 8.9 million users Paid subscribers increased 6% to 2.77 million, and engaged users in the last 90 days decreased 3% to 3.9 million. Now looking at Q4. We saw a positive uplift from our deeper promotions in Q4, although it was smaller than expected. In hindsight, we could have given more discounts and advertised more aggressively to address consumer affordability concerns. These weaknesses were worsened by lower retailer inventory. We saw several retailers miss out on significant Q4 sales due to insufficient channel inventory for our machines. While we are working with those retailers to restart to more adequate inventory levels, and we are seeing some improvements thus far in Q1, we expect some retailers to continue being conservative on inventory commitments. In addition, addressing consumer affordability and making the overall making experience more accessible are significant opportunities for us. As a category leader, we are significantly increasing our marketing spend, both in media coverage and expanding the size of our marketing talent and team. Our goal is to re-accelerate consumer excitement for the brand and category. Now on to an update on our priorities. Recall that we have four priorities. new user acquisition, user engagement, subscriptions, and accessories and materials. I will briefly review these items and provide some detailed commentary on our new platform innovations. We ended the quarter with over 8.9 million total users, up 13% year-on-year, and approximately in line with their expectations. we continue to focus on new user acquisition and engagement growth on our platform, which ultimately drive our monetization flywheel. We have previously shared that our funnel is healthy, and more recent data supports that conclusion. While our platform and products have universal appeal to creators of all ages and demographics, we are particularly focused on women 25 to 44 years old. After several years of reductions in marketing spend, we accelerated our investment as we prepared for the holiday season. Our plan is to further increase marketing efforts and investment in 2024 to drive food for the excitement. Influencer marketing plays an important role in our strategy. We accelerated the onboarding of new influencers in the back half of the year and increased the number of influencers by more than four-four. from adding 57 new influencers in the front half 2023 to adding 247 in back half. We also expanded our reach through increased work on organic and paid social content on Pinterest, TikTok, Meta, and YouTube. Finally, our investment in media relations paid off with a total potential reach of $555 million through broadcast segments and $651 million through gift guides and product reviews. During the holidays, our partnership with the Kelly Clarkson Show holiday giveaway segment also drove excitement and interest in our brand and category. As planned, we were more promotional in Q4 compared to the rest of the year. The promotions were supported by integrated marketing plans, including retailer programs and content marketing strategies, incorporating influencers, social, editorial, and deals coverage. While we did see an uplift, it did not meet our expectations. As we enter 2024, we continue to focus on driving brand awareness and pulling people through the funnel. Our plans include accelerated investment in digital marketing, influencer marketing, and focus on lifestyle and product coverage. In addition, we are expanding our messaging through marketing campaigns, that focus on the role cricket machines can play in different life stages. One example is our partnership with Pinterest around this year's wedding trend, which will be supported by content on and off the Pinterest platform. Our marketing programs also include integrated plans for key moments throughout the year where there is higher motivation to personalize or make things. We introduced the Cricket Make Their Day Valentine's event which was held February 4th through 10th in North America and serves as an example of how we plan to leverage promotions throughout 2024. We saw a meaningful uplift in sales and excitement compared to prior weeks from consumers and retailers. As we move through the year, we expect to instill confidence in our retailers to better partner with us and carry more inventory to leverage these integrated marketing and promotional opportunities. We ended 2023 with 5.93 million users who made a project using their cutting machine in the past 365 days, up 2% from the end of 2022. Engaged users at the end of 2023, defined as users who made at least one project in the last 90 days, declined year on year to 3.93 million, 3% below a year ago. Our focus remains to maximize engagement of our most impactful cohorts, which are new users onboarding onto the platform, or onboarders, and access subscribers. As we look to our engagement priority for 2024, our focus remains on enabling our users to discover, make, and share projects easily, as well as expanding our marketing capabilities to reach members when outside design space to stimulate them to return to our platform. We want to increase the breadth and depth of content. make it easier to find that content, and inspire action through great visualization. Let me first talk about how we increase depth and breadth. We think of content as both projects and images. You can think of them as recipes and ingredients. Over the holidays, we showcase holiday projects that have better photos of the finished projects, how-to instructions, and a design layout. When a user initiated a new project based on one of those holiday projects, we saw a higher likelihood to cut relative to a project that did not have good instructions, photos, and layout help. In addition, continuing to grow our library of images remains a priority. A wide choice of images is one of the main benefits our subscribers seek. In Q4, we surpassed 750,000 images in our Cricut Access library, with the majority of these now coming from our contributing artist programs. As we mentioned before, search personalization is important to us. As our library grows, so has our search and image navigation capabilities. For example, we are testing personalized search ribbons that show images and projects based on user history. We see a higher click rate when showing personalized results. We also measure success in the quality of our library by tracking the share of projects made with images from our library versus uploaded images. and this ratio is increasing favorably year-on-year. Now let me briefly comment on visualization. We also launched a redesigned visualization experience that allows members to mock up any image on a series of blanks, such as T-shirt, cap, or a tote bag to inspire action. Paid subscribers were in line with their expectations and increased 161,000 year-on-year and increased 71,000 sequentially in Q4, ending with 2.77 million paid subscribers. Our subscription efforts continue to bear fruit in terms of converting purchasers of new machines into subscribers. At the other end, our subscription attrition curve had remained steady despite declines in engagement. Alas, lower new user ads compared to prior years puts pressure on our subscriber growth and attach rates and created some quarterly fluctuations in 2023 that will likely repeat in 2024. We have a rich roadmap to continually increase the value proposition for subscribers, including an ever-growing suite of premium design tools along with the content strategies described above. In January, we launched CreateSticker, which dramatically simplifies the process of turning a raw image into a finished sticker in a few easy steps. Our goal is to make it incredibly compelling to sign up as a subscriber to leverage our software and services. As our engagement efforts bear fruit, we expect to see a boost to subscriptions. Accessories and materials sales declined 28% year-on-year in Q4. Affordability plays a key role in materials, and given current consumer sentiment, consumers are buying less materials overall and engaging less as a result. In addition, we face the stiffest competition in this part of our business, with lower barriers to entry than cutting machines and our digital platforms. This puts continued pressure on our business. Even so, we feel our share of the materials market has not changed significantly over the past year. We are relentlessly focused on driving costs out of this business, so Cricut materials are the obvious choice when users want to make. We will ultimately accomplish this through re-engineered product, re-engineered packaging, and improving supply chain efficiencies. We have been incrementally capturing cost reductions in our materials with more to come over the coming quarters. It will take us some time to work through current inventory as we roll new products in, but expect to achieve margin improvements in this business over time, while still creating a differentiated offering that works seamlessly with our machines and platform. We expect to provide more details and progress in this area as we move through 2024. Growth in this segment should emerge as we are successful in driving new customer acquisition at a higher rate and our engagement efforts begin to bear fruit. Consistent with prior comments, we will continue our promotional cadence in this category to remain price competitive for consumers with a focus on winning share. We see that when we are in the price range of our competitors, we get our fair share. We are intensely focused on the overall customer experience. And we are motivated to work with those retailers that help us create a great experience, both on the shelf and for actual use of our ecosystem. It's our fundamental belief that when we give people more reasons and inspiration to make things that are appealing to them, and we make it easier to make things affordably, we will see a lift to materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current disciplines. I will now transition the call to Kimball.