Cricut, Inc.

Welcome to the Cricut Q1 2024 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jim Suva, Senior Vice President of Finance, Treasurer, and Investor Relations Services. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on Cricut's first quarter 2024 earnings call. Please note that today's call is being webcast and recorded online. 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 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 factors 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, May 7, 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, and welcome, everyone. Q1 played out largely as expected. Operating margin dollars grew significantly by 139% or 15 million, driven by lower inventory write-offs, more paid subscribers, and higher sales of connected machines, despite an 8% year-on-year drop in overall sales. Given the confidence in the sustainability of our profitable operations, the board of directors approved three capital allocation items, a special dividend of 40 cents per share, a recurring semi-annual dividend of 10 cents per share, and another $50 million stock repurchase program. Kimball will go over these three capital allocation items in detail in a few minutes. In Q1, Platform revenues increased 3% on paid subscriber growth. Products revenues declined 15% as the positive growth in connected machines from higher units was more than offset by a decline in accessories and materials. 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. Remember, 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. As mentioned in our press release, going forward, we will talk about active users who have used their connected machines in the past year. And Kimball will go into more details on metrics and KPIs. We ended the quarter with over 5.95 million active users who cut in the past year, slightly up from 5.94 million a year ago and in line with our expectations. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drive our modernization flywheel. During Q1, we accelerate our investment in marketing spend and double down on our PR via live broadcast, gift guides, product reviews, and lifestyle coverage. As we move people down the funnel, our research shows consumers consider the cost of the machine plus the ongoing cost of using it and how much they will use it. To address these concerns, we wanted to show them that they could save money while experiencing the joy of creating and personalizing things. Recognizing this appeal, we recently launched a campaign called Make vs. Buy, which highlights specific examples of savings of making projects versus buying similar finished products. For example, Personalized door mats cost only $10 to make compared to up to $150 to buy. Another example is fashionable personalized tote bags, which cost only $3.08 to make compared to $30 to buy. You can see these and many more examples on our website. During Q1, we leaned into programs that show our target consumers different making occasions. We executed integrated programs for key seasonal moments, including Valentine's Day, National Craft Month, Women's History Month, and Easter. We saw a trend towards personalizing apparel and party decor for the NFL playoffs, including a broadcast hit on Fox News talk show, Fox and Friends. Each of these programs are supported by an integrated marketing plan, leveraging vehicles including digital marketing, influencer posts, organic social, social brand partnerships, and live broadcast. We were highlighted recently in USA Today, which stated, and I quote, cricket's newest cutting machine is the perfect size for casual crafters. The Cricket Joy Extra is an ideal choice for hobby crafters who want all the cutting power of a full-size cricket without having to sell a bulky machine. As a follow-up to the Cricket Make Their Day Valentine's event, We launched our Make Moms Day sales event on April 28th. The two-week sales event is supported by retailer programs and content marketing strategies, incorporating influencers, social editorial, and deals coverage. We ended the quarter with over 5.95 million active users who cut in the past year. And we had 3.5 million 90-day engaged users who cut during the quarter, down from 3.7 million in Q1 2023. We continue to experience engagement erosion from our large user cohorts from 2020 and 21 and from prior years who age on their engagement curve. and are not offset with as many new users in recent quarters. Our focus remains to maximize engagement of our most impactful cohorts, which are new users onboarding onto the platform, or onboarders, and paid subscribers. Recently, we developed more data instrumentation that increased our understanding of the challenges onboarders can run into during their initial journey within our platform. This has helped us focus our efforts to improve this experience. In Q1, we saw an improvement in the percentage of new users who successfully start and complete their out-of-box experience. Our efforts will continue across the journey for new users from test-cut and first project through first week and first month on our platform. In the first quarter, we adjusted how we present our educational video content which we now show directly in Design Space. In addition to a larger content library, we have also made improvements to our search and personalization algorithm. We now provide personalized recommendations for images and projects on the Inspire page in Design Space mobile apps. We will continue to make progress on search personalization over time. We have also enhanced our machine learning personalization models to consider additional inputs from user behavior on our platform. We are also prioritizing projects and images that have a higher chance of big success. In Q1, our team improved the project recommendation system and created an in-house system that is more flexible, adaptable, and designed to capture different aspects of user preferences. For example, we use AI deep learning to suggest projects that users might like based on user behavior to recommend similar projects and help find popular projects that are time sensitive. We tested this new system and it did better than our old models and increased the number of customized projects made on our platform. We also applied AI to examine and label images to suggest suitable tags for images uploaded to our database and help produce better search results for our users. We also intend to use this algorithm to refine existing tags in our database which should improve search retrieval. We have several more improvements planned for search enhancements in future quarters. Paid subscribers were in line with our expectations and increased 82,000 year-on-year and increased 27,000 sequentially in Q1, ending with just over 2.8 million paid subscribers. Our subscriptions efforts continue to bear fruit in terms of converting purchasers of new machines into subscribers. At the other end, our subscription attrition curves have remained steady despite declines in engagement. Lower new user ads compared to prior years puts pressure on our subscriber growth 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. We've also made significant improvements to the background removal tool, which is one of the most used subscription features by our members, by leveraging and testing multiple variants of machine learning and AI-based models to increase the accuracy of removing backgrounds from images uploaded by our users. 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 26% year on year in Q1. Clearly, we still have a long way to go. to establish our expected competitive position here. We recognize the role affordability plays in our materials business and are working on several solutions. The aim is to stimulate purchasing activity and boost engagement. In addition, we face the stiffest competition in this part of the business with lower barriers to entry than cutting machines on our digital platform. I'm excited to give you a tangible update on some positive progress in this area. Towards the end of Q1, we launched the Cricut value materials online. Designed to deliver maximum performance at a great price, this new offering was aimed to compete effectively with online marketplaces which are more price competitive and require hitting the right price points with shipping economics to compete more effectively. This is accomplished through re-engineered product, re-engineered packaging, and improving supply chain efficiency. It will take us some time to work through current inventory as we roll new products in, but we expect to achieve margin improvements in this business over time, while still creating a differentiated offering that works seamlessly with our machines and platforms. Feedback thus far has been encouraging, and I look forward to sharing more with you in the quarters ahead. 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 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 discipline. I will now turn the call over to Kimball.