Cricut, Inc.

Good day, and thank you for standing by. Welcome to Cricket Third Quarter 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 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Jim Suva, please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on Cricut's third quarter 2024 earnings column. 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 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, November 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, and welcome, everyone. Total sales in Q3 decreased 4% year-on-year. We are pleased with the increase in paid subscribers in Q3 of 5% year-on-year, which exceeded our expectations. International sales grew 2% year-on-year with some benefit from foreign exchange rates. In Q3, platform revenue increased slightly on paid subscriber growth. Products revenue declined 7% as connected machines revenue declined 11% on higher promotions planned for the Q4 holiday season. Accessories and materials declined 3% on more favorable comps. While paid subscriber growth is indeed a win, we would benefit from a stronger acquisition and engagement. We ended the quarter with just under 5.9 million active users who cut in the past year, down less than 1% from a year ago, and our 90-day engaged users declined 3%. We continue to experience engagement erosion from our large 2020 and 2021 pandemic cohorts and from prior years, who age on their engagement curve and are not offset with as many new users in recent quarters. While we want to improve engagement for all our users, our focus remains to maximize engagement of our most impactful users from a modernization perspective, which are new users onboarding onto the platform, or onboarders, and access subscribers. During Q3, we continued to make solid progress on our initiatives to drive engagement with our new members. we introduced several improvements to make it easier for new members to connect their new machines and successfully design and make their first projects. As evidence of this success, we have seen almost a 50% increase compared to a year ago in new users who successfully connect the machine within the first five minutes of the connection process. As a reminder, Onboarders are a particular focus because the more they interact with our platform early, the more likely they are to interact with our platform over time. We have further integrated education and help resources directly within the onboarding flow and redesigned the homepage for new members to further tailor it with inspiration most appropriate for beginners. We've also automated steps that we know are common pitfalls for new members. At the end of Q3, we also introduced in beta an AI-driven help assistant to a portion of our members. We are pleased with the initial response from beta users and plan to roll it out specifically with onboarders during Q4. Evidence that these efforts are having a positive impact is that this is the second consecutive quarter of a year-on-year increase in the share of members who complete a project during the first day, and who complete multiple projects in their first week. To benefit all members, we continue during the quarter to make improvements to our software platform, specifically in helping them search and find inspiring content on our platform and removing friction in designing their projects in design space. Based on our A-B testing, our filtering and machine learning algorithms have rolled out several improvements to our search capabilities. We have also made content flow simpler by placing images on panels directly adjacent to the canvas, making images a single click away. Measured in terms of time to find and place an image onto the canvas, we have seen an over 20% improvement year to date. A major focus in Q3 has also been our text and font editing capabilities. And we now have a much broader support of characters among our most popular fonts. Recently, our marketing team has made great progress bringing members back to Design Space after their last visit via email, push text notifications, and paid social campaigns in a much more personalized, relevant, and automated manner. Our first engagement marketing campaign utilizing this platform went live at the very end of Q3. We plan to scale this effort during Q4 and Q1. While our overall engaged user metrics have not stabilized as of Q3, we are confident in our efforts to deliver a simplified and more personalized experience using our design space platform and our ability to leverage a much more scalable engagement marketing infrastructure. During Q3, we conducted a market mix analysis for machine sales in the US and Canada. The results show that our investment in top and middle of funnel marketing had a positive impact on machine sales in the first half of 2024. In addition, the analysis shows that the overall spend on these channels has an attractive ROI. Given these results, we are continuing the higher level of marketing spend. Our deeper promotional strategy during key selling times of the year that we started in late 2023 is working. For example, we are pleased with the results from the fall Amazon Prime Day. During 2024, we have worked with retailers to get to more healthy inventory levels. We are pleased with this progress and believe the channel inventory is healthier this year compared to prior years as we head into the important holiday season. Notwithstanding, there remain pockets in the channel where we would like to see more on-hand inventory for holiday. Accessories and materials declined 3% year on year on more favorable comps and compares to declines of 27% and 26% in Q2 and Q1 respectively. Our materials are engineered to work seamlessly with our machines to create the best user experience. Recall in late Q1, we launched the Cricut value line of materials, which we designed to compete in online marketplaces. I'm excited to say that the Cricket Value Line has been well received and we launched additional SKUs in Q3 following the initial launch of a limited number of SKUs in late Q1. We are even more optimistic about this product now that we have a bit of history in the market, but it's still early and a small portion of our portfolio. We have additional innovation products and cost reductions coming in the quarters ahead. We are focused on attracting more new users to buy our connected machines. reversing weakening engagement trends, re-injecting enthusiasm among our users, and being more effective competitors in accessories and materials. 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 is our fundamental belief that when we give people more reasons and inspiration to make things that are appealing to them and ensure the customer has access to affordable and quality materials, we will see an improved user experience, which is one of the reasons that we offer bundles with many of our machines in select channels. We are driven to continue to innovate and improve our platform and user experience while exhibiting both longer-term focus and current discipline. I will now turn the call over to Kimball.

Thank you, Ashish. In the third quarter, we delivered revenue of $167.9 million, a 4% decline compared to the prior year and in line with our expectations. Breaking revenue down further, Q3 2024 revenue from platform was $77.7 million, up slightly year on year. While paid subscribers increased 5%, Platform revenue was up less as the mix shifted more to annual versus monthly subscriptions and geographic mix shifted more international. Both shifts are targeted efforts. Platform ARPU increased 3% to $52.86. Revenue from products was $90.2 million, down 7% over Q3 2023. Connected machines decreased 11%, driven primarily by a more promotional activity plan for Q4. Accessories and materials decreased 3% on favorable comps. In terms of geographic breakdown, international revenue was $38.5 million, or up 2%, compared to $37.6 million in Q3 2023. Foreign exchange benefited international sales by just under 2%. As a percentage of total revenue, international was 23% in Q3 2024, compared with 21% of total revenue in Q3 2023. Turning to active users and engagement, we ended the quarter with just under 5.9 million active users, a decline of less than 1% from a year ago. We ended the quarter with over 3.5 million 90-day engaged users, which was a 3% decline from Q3 last year. As Ashish mentioned, we are encouraged by improvement in leading indicator metrics for onboarders, but have more work to do to improve overall engagement. We ended the quarter with over 2.8 million paid subscribers, up 5% from Q3 2023 and up sequentially. As discussed in earlier calls, there is some natural subscriber attrition, So subscriber growth will be challenging until we increase the pace of machine sales and new user acquisition. Moving to gross margin. Total gross margin in the third quarter was 46.1%, a slight decrease compared to 46.8% in Q3 2023. Breaking gross margin down further, gross margins from platform were 87.1% compared to 89.3% a year ago. The decline in platform gross margins was primarily related to higher software development costs and higher hosting fees compared to a year ago, which we expect to continue. Gross margin from products was 10.7% compared to 13.1% in Q3 a year ago. The decrease in gross margins was primarily due to our decision to be more promotional, offset partially by less inventory reserves. Total operating expenses for the quarter were $66.8 million and included $11.4 million in stock-based compensation. Total operating expenses increased 15% from $58.2 million in Q3 2023, driven primarily by increased sales and marketing efforts that we have talked about for the last couple of quarters. Recall Q3 2023 benefited from $4.5 million of net bad debt reversal. Operating income for the quarter decreased 55% to $10.6 million or 6.3% of revenue from $23.7 million or 13.5% of revenue in Q3 last year. We had some discrete items which lowered the effective tax rate for Q3. We expect full-year tax rate to be around 29.5%. Net income was $11.5 million, or 5 cents per diluted share, compared to $17.2 million, or 8 cents per diluted share, in Q3 2023. This marks our 23rd consecutive quarter of positive net income as we continue to invest in our key priorities while running the company in a profitable manner and for long-term value creation. Turning now to balance sheet and cash flow, we continue to generate healthy cash flow on an annual basis, which funds inventory needs and investments for long-term growth. In Q3, we generated $70 million in cash from operations compared to $36 million a year ago. We ended Q3 with a cash equivalence and marketable securities balance of $247 million. We remained debt-free. Current inventory decreased by $136 million from a year ago to $168 million at the end of Q3 2024. During Q3, we used $10.3 million of cash to repurchase 1.8 million shares of our stock, resulting in $30.8 million remaining on our $50 million authorized stock repurchase program. In July, we paid approximately $108 million in dividends for the special one-time dividend of 40 cents per share, plus our first recurring semi-annual dividend of 10 cents per share. The Board of Directors authorized our second recurring semi-annual dividend of 10 cents per share for shareholders of record on January 7, 2025, and payable on January 21, 2025. These capital allocations are possible due to past profitability and our confidence in the sustainability of our future profitable operations. We want Cricut to always have ample liquidity to sustain and grow our business, but not hold excess cash. We do not anticipate the need for any debt or utilization of our credit line in the near term. Now, on to our outlook. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some updated color on our outlook for the rest of 2024, which remains generally unchanged. Given the first three quarters of the year, we expect sales will decline for the full year. We expect continued sales pressure on our product segment And accordingly, total company revenue likely will be down Q4 year-on-year. We expect paid subscribers to grow compared to Q4 2023, and we expect platform revenue to be up slightly. As we stated above, we plan to continue our increased spend on sales and marketing. Given year-to-date performance, we continue to expect some incremental improvement in operating margins for the full year. Our long-term financial model remains unchanged, with operating margin targets of 15% to 19%. Our proven model has demonstrated that when we operate at scale, which we define as revenue above $1 billion, and drive top-line growth, these margins are achievable. With that, I'll turn the call over to the operator for questions.

Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Woodring from Morgan Stanley.

Super. Thanks so much for taking my questions. Just two, if I may. Ashish, first, I think this was the second consecutive quarter where active users are declining year over year and sequentially, but at the same time, paid subscribers are growing year over year and sequentially. So can you maybe just give us a bit more detail on exactly what's happening under the hood? Because it seems just looking at those metrics, you're having a tough time kind of maintaining your user base, but you are successful at growing. converting a smaller cohort of users to paid subscribers, which is just a bit interesting. So do you mind double-clicking and helping us maybe understand what's going on under the hood? And then I have a follow-up, please. Thanks.

Thanks, Eric, for the question. So let me talk about engagement first, and I'll kind of break it down for you, and then I'll talk a little bit about the second part of your question, which is the subscribers. So, you know, engagement continues. You know, we've talked about this for several quarters now. It continues to be a focus for the company. And what we see is we see some pressure from the cohorts of 2020 and 21, but we also see some very healthy signs. So I'm going to spend some time on that. The cohorts that we acquired in 2020 and 21, and we acquired a lot of users, as these users graduate over time, over the engagement curve, that's putting some pressure on the overall engagement numbers. Now, you know, typically we'd offset that with as we acquire new members, and since we aren't acquiring as many new members as we'd like, that's not helping. So the net result of that is what you see in the overall engagement numbers. Now, from a focus standpoint, you know, we have kind of two populations, right, and maybe another one called the engaged subscribers, but basically we are focusing on onboarders and then the entire group. install base of active users, right? From an onboarding perspective, you know, and these are good leading indicators, you know, we really kind of, we want to make it easy for them to come onto the platform in a way that their lifetime engagement is better than the cohorts that we acquired in 2020 and 21. And some of the metrics we talked about is that we saw nearly a 50% improvement in the number of people being able to connect with their machine in the first five minutes. And why that's important is that those users then create more projects because they spend less time connecting. It was also the second quarter in a row that onboarders created more projects in the first few days. And from our data from prior history, we know that when that happens, that tends to lead to better engagement over the lifetime of that customer. You know, without going into all the details, we also talked a little bit about what we are doing for existing, for the entire install base. So, you know, we've seen some pretty significant improvement in the amount of time it's taking for people to search for content. And we've actually implemented a new platform that would allow us going into Q4 to bring those users back to design space. So, Eric, those are some of the things that, you know, are helping with increasing engagement, specifically from an engaged subscriber standpoint. Because people are able to find content, they're able to get personalized information, we are seeing a better success rate in acquiring those customers back or retaining those customers. So I think the net result of that is you know, we see that improvement in engaged subscribers. And, you know, we're pretty convinced that the things that we are working on, especially given the leading indicators that I talked about, you know, are things that will impact our overall engagement curves over time. So we're going to stay focused on executing on that path.

Subscriptions. So we're working on subscriptions. You know, we're actually very excited about our subscription business. We think it's It's evidence of we continue to focus on adding value, making sure that our customers view that as a compelling value. You may recall last quarter we talked about we thought we might even be marginally down as subscribers of the quarter. So we were quite pleased to grow subscribers by 5%, but I think that also talks to our ability to reach into our user base even as we're not adding as many new users as we would like currently.

Okay, that's really helpful. Thank you for all that color, guys. Maybe my second question or my follow-up is for you, Kimball. You included in your prepared remarks comments around incremental operating and margin improvements year over year this year. I think through the first three quarters of the year, you're at roughly just over 12% operating margins. And I believe it was last quarter you referenced maybe a point of operating margin improvement this year relative to 2023. Is that still how we should be thinking about the operating margin improvement that you're referencing, or has anything changed in the background? Thanks so much.

Thanks, Eric. No, nothing's changed. As I highlighted in the prepared remarks, our general outlook remains unchanged. We're still expecting about a point improvement in year-over-year operating margin for full year. Remember, as we go into the holiday, we tend to have lower gross margins on our physical products, given the promotionality and the higher volumes of physical products we sell during the holiday. So that will pressure margins for the quarter. So we still expect about a point improvement on year over year. For the year. For the year. Yeah, for full year.

For the year. Super. Thank you so much, guys. I'll get back in the queue.

Thank you. One moment for our next question. Our next question comes from the line of Adrian Yee from Barclays.

Hi, this is Angus on for Adrian. Thanks for taking my question. How do you think about long-term margin levels in the platform segment? Is there a path back to 90% in the near term? And then on that, what are the fundamental drivers of platform gross margin performance and how did those behave this quarter? Because it sounds like the software issue kind of clouded the fundamental performance. And then I have a follow-up. Thanks.

So, you know, we continue to invest in the platform, and those are costs we capitalize, and those get amortized over three years, Angus. Also, we've seen our hosting fees for our platform go up, both of which put pressure on platform margins for the quarter. We do expect that trend to continue. I mean, we wrote it about a point in margins as we continue to lean into those investments. And I think that trend you can expect to continue going forward.

You know, you also talked about a little bit of the mix of annual versus monthly, with annual being, you know, at a lower revenue. That puts some pressure as well. But ultimately, that's an intended result.

Yes, well, so Ashish is highlighting, you know, we were up 5% on number of subscribers, but only up marginally on revenue. And that really is two factors that are intentional on our part. One, we are trying to increase the mix of annual subscribers over monthly. That comes as a discount. And then also as the mix continues to shift more international, that also puts pressure on subscription revenue. And then, and obviously, Slightly lower revenue with increased cost puts pressure on overall margin for that.

Got it. Thanks. Very helpful. And then my second question is, I think in your remarks you spoke about retailer inventory levels, but anything you could share on whether you see a potential restocking environment in the future or if it seems like retailers are making more permanent shifts in the levels of crafting products that they carry?

Yeah, so this is the second quarter where we talked about we've seen partial restocking in the channel, and as we go into holiday, you know, I think channel is in generally a healthy position. There are pockets where we would like to see more inventory, but overall, I think it's better than it was a year ago as we go into this holiday season. We have our, you know, deeper Q4 promotions lined up, and we're just at the doorway of holiday season. So, At this point, we're anxious to see how consumers show up for holiday.

And let me, Angus, I'll add on to that. So our traffic to our site is based on all the marketing we've been doing. And our expectation going into Q4, given all the promotional activity, is that that conversion will start to manifest itself. So while the retailer inventory is better, and we're happy and excited about that. There's still some pockets, as Kimball said. Hopefully nobody leaves money on the table in terms of when that consumer comes in to shop, but definitely an improvement year on year.

Got it. Thank you, guys, and see you next month.

Thanks, Angus. Thank you. One moment for our next question. Our next question comes from the line of Asiya Merchant from Citigroup. Great.

Thanks for taking my question today. If you can double-click a little bit, it looks like accessory revenues down 3% in improvement from what we've seen in the first half of this year. Are we at some kind of an inflection point here, you think, on your accessories? And on the flip side, connected machines being down 11% on a year-on-year basis, which was a little bit, you know, different than what we've seen in the first half of the year. So if you can just double-click on, you know, the trends that you're seeing on both those, that would be great. Thanks.

Asya, thanks for the question. First on the sensor materials, that's really more a story of easier comps if you look at prior year comparisons. And I think it's more instructive if you look at sequentially, where we're about flat from Q2 to Q3, and then let that inform your assumptions on Q4. But we do expect to see continued pressure in accessories and materials, and they're not calling an inflection point at this point. On machines, that's really a story about promotionality as we prepare for deeper Q4 promotions. Gross sales on machines was actually up marginally for the quarter, but by the time we take into account provisions for Q4 promotions, that's what's really driving the 11% down in machine revenue for the quarter.

Okay. That's helpful. And then on just promotional intensity, I understand you guys have, you know, obviously promotions lined up here for the holiday season. Generally speaking, though, you know, relative to the competitive environment, How are you looking at the promotional environment, given that, you know, assuming consumers, it seems like you think that that's going to be a positive driver. How is the promotional intensity broadly in the crafting category?

I think we're seeing promotions fairly broadly in the category. You know, in accessories material segment, for example, throughout the year, we have seen increased promotions you know, competition on price point, and that's partly what informs our promotional strategy on that front. On connected machines, you know, we continue to see positive uplift as we go through each of these promotional periods, and that gives us confidence to continue executing on that strategy. I will add that, you know, when we're not on promotion, we've seen weaker baseline demand than we expected, and we've talked about that for a couple quarters now, where that's continued throughout the year.

Yeah, and let me just add to that. You know, we've kind of been, we've intensified our marketing over the last few quarters, and we see the traffic to not just cricket.com, but other online properties. And, you know, but at the same time, we still think that despite, you know, when we are promoting, we see that demand manifests itself. But in normal times, we think that the consumer is still waiting and affordability is still you know, just given the consumer discretionary spending, affordability is still one of the key factors. So I think, you know, our Q4 strategy is very much built around the hypothesis that, you know, there's awareness, there's, you know, interest in the category, and basically our goal is to, you know, help drive some of that conversion in this timeframe.

Okay. Thank you. Thank you. One moment for our next question. Our next question comes from the line of Eric Sheridan from Goldman Sachs.

Thanks so much for taking the question. Maybe just a couple of parts in one question, and then I'll go back into the queue. When you go back to earlier this year where you sort of asserted this move towards higher marketing intensity to sort of stimulate growth, if we go backwards before we go forwards, What have been the key learnings from that higher level of marketing intensity that you feel are working and that are building scale around the platform and the product array of the company? And to the extent to which some of those efforts around marketing have fallen short of your original goals, How much of it is down to either intensity or channels you're investing in on the marketing side versus the overall environment you find yourself in with respect to the consumer and possibly down to receptivity of some of those marketing messages? Thank you.

Eric, thanks for the question. So if I look at history, we haven't grown top line in a couple of years. And as we We're managing OpEx. We've pulled back in marketing as part of that and got to the point where we feel like we've over-indexed on that. But as we pulled back on marketing, we didn't initially see dramatic drop-offs in demand or consumer enthusiasm. And likewise, as we came into the year, and we've talked about we're leaning into marketing, we want to regenerate enthusiasm both with our consumers and our retailers. We've been spending more throughout the year and and slowly seeing improvement on key metrics. Now, granted, we haven't seen overall top-line improvement, but one of the key things that we measure is traffic to Cricut.com, as Ashish mentioned a moment ago. We measure that because regardless of what channel a consumer decides to enter our ecosystem by purchasing a connected machine, we know that coming to Cricut.com to research our products is an important part of that journey. And we have seen improvement in that both on a quarter-over-quarter and a year-on-year basis for traffic. We also have a multimedia mix model where we are measuring the impact of spend by channel. And we're looking at returns based on multiples of our spend and optimizing that model on a frequent basis to optimize the mix and move money around. we are confident enough in the data that we see that keeps us leading into that spend. So in Q4, Q4 marketing spend tends to be higher than Q3, so you can expect that to continue in Q4, but also for us to continue spending at an elevated rate going into 25 because it also isn't just start marketing and see immediate results. We're building for the long term and happy with the results we're seeing so far.

Great, thank you. Thank you. At this time, I would now like to turn the call back over to Jim Suva for closing remarks.

Thank you, Gigi, and thank you for everyone joining us this afternoon. We have a large opportunity over the long term to drive new user growth and increased engagement. The Cricket platform continues to not only strengthen, but also provide increased value to our users. We will continue to manage the business for sustainable, profitable growth and generate healthy cash flows. I'm excited about the opportunities ahead of us. We will be meeting with investors at the Barclays Investor Conference in New York City on Thursday, December 5th, and the Roth MKM Investor Conference in Deer Valley, Utah on Thursday, December 12th. We hope to see you there. If you have additional questions, please email me at jsuba at cricket.com. This now concludes this earnings call, and you may disconnect.

This concludes today's conference call. Thank you for participating. You may now disconnect.