Ladies and gentlemen, thank you for standing by, and welcome to the Cricut Q3 2021 Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Stacie Clements, Investor Relations at the Blue Shirt Group. Thank you. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Third Quarter 2021 Earnings Call. Please note that today's call is being webcast 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, prepared remarks and the accompanying slides used on today's call will also be posted to the Investor Relations section of the company's website, investor.cree.com. Joining me on the call today are Ashish Arora, Chief Executive Officer; and Marty Petersen, Chief Financial Officer. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make 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-Q. Actual events or results could differ materially. All non-GAAP numbers referenced in today's call are reconciled in the press release or the slide presentation on our Investor Relations website. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, November 10, 2021. Cricut assumes no obligation to update any forward-looking projections that may include – that may be made in today's release or call. I will now turn the call over to Ashish.

Thank you, Stacie, and welcome, everyone. We are pleased with the results in the third quarter. Total revenue grew 24.4% year-over-year driven by growth across all three categories: connected machines, subscriptions and accessories and materials. We delivered an EBITDA margin of just over 16.4% while at the same time increased investments in connected software, subscriptions, new product developments and international expansion. We remain focused on our mission to help people lead creative lives. Our user base grew to over 5.7 million users at the end of the third quarter, up 56% year-over-year. Over 2 million of these users were acquired over the last 12 months. One thing I love is that our corporate cohort of users is engaging very similarly to our pre-COVID cohort of users. This means that we have an opportunity to fuel our viral marketing engine as these 2 million new users make and share projects. Our job is to continue to provide a superior experience and drive engagement from existing and new users. Of the 5.7 million users, 3.2 million used their connected machines within the last 90 days, an increase of 37% from the same quarter last year. One of the many ways we monetize this engagement is through our subscription service, Cricut Access. The number of subscribers and subscription ARPU over time are important indicators of our success. We ended the third quarter with over 1.8 million paid subscribers or an attach rate of 32%, consistent with the accelerated attach rate seen last year due to the pandemic. Since 2018, attach rates have grown nearly 10 percentage points, a testament to the success of our investments and in driving increased user monetization over time. As we expand the use cases of our connected platform, we expand our potential user base or serviceable addressable market.…

Thank you, Ashish, and good afternoon, everyone. Our third quarter's performance was driven by strong fundamentals in the business, a diversified revenue stream and our powerful community of users. To understand the health and trajectory of the business, we focus on annual trends, which normalize for seasonality. Normalizing for the effects of the pandemic, we believe looking at financial performance on a two-year stacked basis is helpful. Revenue in the quarter was $260.1 million, an increase of 24.4% over Q3 last year, and 131% since Q3 2019, a solid performance off a tough comp last year and a continuation of our long history of consistent revenue growth. Revenue from Connected Machines grew 35.7% over Q3 last year. As a reminder, the gross profit from Connected Machine purchases mostly covers our customer acquisition cost. The purchase then triggers a flywheel of engagement which in turn drives ongoing revenue from our higher margin categories of Subscriptions and Accessories and Materials. Strong machine sales and healthy attach rates from our growing base of users helped drive 70.8% revenue growth in Subscriptions in the quarter. Accessories and Materials revenue grew 2% over a tough comp last year when engagement on the platform was quickly rising due to the pandemic and stay-at-home orders at the time. In terms of geographic breakdown, international revenue growth continued to outpace growth in North America, increasing 109.7% in the third quarter over the same quarter in 2020. We’ve made significant investments to grow our opportunity and foster a global community of users. As a percentage of total revenue, International represented 12% in the third quarter, up from 7.1% in Q3 2020. As Ashish mentioned, we continued to rapidly grow our user base. As of the end of the third quarter, we have added 1.4 million users in 2021, bringing…

[Operator Instructions] Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Hi, thanks for taking my question. This is Bala on for Rod. Ashish, I want to start with the engagement rate metric? So, it’s down again materially this quarter, and it sounds like it is somewhat worse than what you had expected. But then it is good to hear that from September, it sounds like engagement metric – our engagement rate is improving. So, I just want to understand how you’re thinking about the December quarter. I know holiday season is really late November and into the month of December, so you’re not probably seeing the full extent of trends. But any initial thoughts on how you’re thinking about the December quarter and I got a follow-up.

Yes. So, thanks, Bala. I know the question was on engagement, so let me just start off by first – start with the acquisition, because I think that’s the pool of people that we use to engage. So, as we said, we’ve added 1.4 million users through the end of Q3 and expect to add up to 2 million users this year, which is up from 1.8 million that we had said previously. So that’s a good starting point for us to drive more engagement. The second thing, one of the things that we focus on inside is we are looking at the total number of engaged users and how that number is increasing year-over-year. And that number, we saw increased 37%, which, again, is a very positive sign. From a standpoint of engagement as we look forward, I want to kind of highlight a few things. One is that we’ve acquired a very high-quality customer during COVID, right? So, the 2020 cohort was very similar to the pre-2020 cohort, which means that we have an opportunity to engage them as activity levels pick up. The second is that the trends that – including personalization that drove people to the cricket platform prior to the pandemic are still intact. Even though we saw an exaggerated summer where people doubled down on things that they hadn’t done for 2020, we see that number increasing and the engagement increasing. Like we said, we’ve already seen engagement rise since the end of September. And when they do come back, right, because people will always still want to create, they want to make things, they want to do the projects, similar to what they wanted to do before the pandemic, and when they come back when they are starting to get engaged, we believe that there are very few, if any, substitute platforms for them to go to. And our job is to continue – is going to be to get them to our platform, get them more engaged and having them make more projects. So, we are really taking a very holistic long-term approach, and we think that there’s lots of the positive things that were in place, leading up to the pandemic are still in place, and we have a good opportunity to attract those users.

That’s helpful. On the picking up in this engagement rate, any color on maybe user behavior in different cohorts or different use cases such as maybe in education or holiday or events-related, et cetera? Any color there, Ashish?

Yes. So, I think there’s a couple of things that we mentioned in our remarks. One is that, as I said, the cohorts are behaving very similarly in terms of engagement, right? Another thing that we mentioned was that engagement was not only were the number of people that we engage is down, but also the total engagement was somewhat lower across the board. But like we had a great run up to Halloween. People are making the same kinds of things. And we believe that with all the efforts that we are putting in place like the typical holiday behaviors of making gifts, making projects that are in the holiday spirit, we don’t see anything unusual. In fact, if anything, we see the number of use cases broadening. We’re very excited about some of the new apps and new functionality we’ve created. So no, I don’t think there’s anything unusual that I want to highlight

Just one clarification. Ashish said that the number of users engaged was down. That’s actually – he’s referring to the percentage of total users that engages them. The actual number of engaged users is up quarter or year-over-year by about 900,000 or 37%. Just wanted to make that clarification.

Thanks for clarifying that, Marty.

Got it, Marty. And one follow-up, if I may. The ARPU here for the access and materials is down significantly even if I adjusted the lower engagement rate. On the other hand, subscription attached rate is still very strong. I guess my question is, how do you juxtapose those two metrics? So, it sounds like more people do want to keep subscribed whereas they’re engaging lower. I guess I just wanted to understand better how you are juxtaposing those metrics. Is there anything to read there are, how you’re thinking?

Yes. So, let’s take the accessories and materials ARPU question first. So, Ashish touched on an important link that we need to identify as we talk about this answer, and that’s the link between Accessories and Materials business measured in this case by ARPU and engagement, is when people are engaging, it means that they’re making things, they’re making projects. And when they make projects, they use accessories and materials, and so they’re buying accessories and materials. And so, the fluctuation in engagement generally correlates with the fluctuation in accessories and materials ARPU. Now Bala, you correctly identified that ARPU is a little bit further down than the percent engaged. And where that comes from is while the percentage of our total users engaged is down to 56%, the – those who were engaged were less active. In other words, they’re making – those who remain engaged were making fewer projects. And so, what we point to here is that as we entered the summer – we talked about this last quarter that we’re a seasonal business, summer is our soft season. As we began entering the summer season this year, we saw exaggerated softness, so to speak. And we saw that as pandemic opening up, people making up for lost vacations or other things that they hadn’t been able to do for a while, and that is reflected in both the engagement number and the Accessories and Materials ARPU number, and we believe that explains both the engagement and Accessories and ARPU. Now you also asked about subscriptions. Now subscriptions is not a seasonal metric like the other two are. And the reason for that, there’s a couple of things going on. So, one, our subscriptions are sticky just by nature. We do have some subscribers who are seasonal.…

And I’ll just make one quick point. The fact that subscriptions are staying flat and the Accessories and Materials are down, one other thing that we think is happening is that as people are preparing to make things, they’re going to come back to craft for the holidays. And so, we think that the subscriptions are more indicative of that future engagement, if you will, because they’re designing projects, they want to cut those projects. And to come in and out of subscriptions, probably that we don’t see that much happening.

Very helpful.

Moving on to our next question, we have Mark Altschwager from Baird. Your line is now open.

Great. Good afternoon. Thanks for taking my question. Maybe just sticking with the Accessories and Materials ARPU for a moment. Understanding that there are some exaggerated seasonality this year, I was hoping you could give us a better sense of the level of acceleration you’re seeing quarter-to-date or that you would expect to see in Q4. I guess, I’m trying to get a better sense of what normalization might look like post COVID and perhaps this fall, and these last couple of months is the first kind of clean look we’ve had at that. So just any more color you can share there would be helpful.

Yes. So, in the prepared remarks, we talked about the fact that we expect ARPU – well, ARPU fluctuates with engagement, and so we talked about the fact that both of those on a sequential basis will be up so in Q4 I’m talking about specifically. But the metrics in Q4 last year were just very strong, very tough comp. As people were very active in making a number of projects and engaging. And so, we don’t expect that we will equal that. In fact, that was abnormal and so we think will be significantly down from Q4 last year as we end Q4 this year.

Okay. That’s helpful, Marty. A separate topic, I was hoping you could speak a bit about the, I guess, the pricing strategy and assortment strategy with the machine portfolio. You rolled out the upgraded machines earlier this year, but a lot of the prior models are still quite prevalent on both your site and your retail partners at lower prices. I guess what have been the learnings here thus far as you’ve had the new models and the older models coexisting in the marketplace? And how should we think about maybe the gross margin progression as those older machines sell through in the coming months? Thank you.

Yes. So, I’ll let Marty comment on the gross margin, but let me just talk a little bit about high-level strategy. So, I think one of the things that we wanted to do is, we wanted to make sure that we had enough overlap between our existing models and the new models because supply chain was in such a flux. Part of it was something that we do every time, and some of it was pretty characteristic to this year. Our goal is to still continue to, I would say, carry most of the models. Of the two machines that we have, the three machines that we have, our goal is to phase out one of them and also use the other as to – as we diversify and broaden our channel base as an opportunity to do some channel differentiation. So, we can put the right product in the right channel. But other than the supply chain comment, the phase-in/phase-out strategy this year is not very different from what we’ve typically deployed, and the only thing that makes a difference is that we wanted to make sure we had a healthy overlap between the two models. I think from – I’ll let Marty comment on the gross margin mix and how it will impact.

Yes. So, one just point to note that when we went into COVID, we elected to retain some of our older products a little longer in market just because we – because of supply chain and other challenges, we didn’t know exactly how things were going to play out. So, we chose not to end of life some things that we – some products that we normally would have. So, you have more products coexisting today than we normally would have. So – but each of our products has kind of a life cycle in terms of promotional cadence, and the older machines typically carry deeper discounts from MSRP than the newer machines. And so, we do have more older machines in market today for the reasons I mentioned before. We elected to retain them, then – so we have more – a greater proportion of those today. So, there could be a tiny bit of pressure on margins as a result just of that mix and the election that we made to retain some of those older machines longer.

So, Mark, I just want to recap a couple of points for your benefit. Again, of the five models, more or less, right, there was permutation combination of it, four of them will be ongoing and one will be phased out. The second is, unlike a disconnected or a machine does not connect to a consumer electronics product that’s not connected, in our case, these platforms live for years and years, right? So, even to the extent that we have products that are continuing, our ability to differentiate them by new software feature and continuing to enhance them is very high. So, we are not too worried about having that overlap as well as having some of the older models continue as we continue to diversify our channels.

That’s great, and best of luck over holiday.

Thank you.

Your next question comes from the line of Jim Suva from Citigroup. Your line is open.

Thank you so much. And I think you all know as well as investors that I'm quite a crafty person, and I was actually making some custom mugs for my kids' school teachers and some neighbors and stuff. But then I noticed on your website, a lot of the mugs were sold out and supplies were sold out. So, I wanted to talk to you a little bit about supply chain management. And is there a bit of restocking that's about to come in front of the holidays? Because otherwise, it seems like T-shirt blanks, a lot of them were sold out, mugs are sold out, supplies are sold out and accessories because I know demand is really going to be high here in the next 60 days or so. So, can you talk about supply chain and maybe it's just simply coming in the boat in L.A. or San Francisco and about to be restocked? But I was kind of surprised that I couldn't order more mugs and T-shirts?

Thanks, Jim. But I'm actually really happy that you're – it seems that you're excited about our mug presents press and you're going to be making a lot of mug as gifts for this holiday. There are actually a lot of people like you that are also doing the same. So, you're absolutely right. The mug present has done well and exceeded our expectations. The attach rate of mugs to the mugs presents are also very high because, again, initially, when we are launching this product, we were not just focusing on personalizing mugs. We were actually focusing on redefining the gift market, right, making it easy for people to make affordable gifts. So, we have been trying to keep up with demand. Again, that is one of the product lines that has been impacted by some of the supply chain, mostly because of demand and less about supply, but it is something that we are pretty aware of, and we will continue to bring more supply, and we have made some good progress. I don't know if you also noticed, but we want to expand the portfolio of mugs, et cetera. Overall, and I'll allow for Marty to chime in. we feel like we – when you look at the Materials and Accessories portfolio, at a portfolio level, I think we feel pretty good about our inventory situation.

Yes. We feel like our inventory situation is good. Obviously, there's pockets of products that for one reason or another were not as strong as we would otherwise want to be. And the mug press is one of those. It's been – the demand has been very, very strong for us, and that's been – and it's a new product, and so it's been hard to keep that one in stock. But I think overall, our teams have just done a phenomenal job in terms of accelerating purchases of long lead time components in terms of rewriting firmware and reconfiguring board so that we have substitution parts, planning for worst-case scenarios and then operating to those worst-case scenarios so that we can have inventory where we need it, when we need it. And that doesn't obviously work when we have nearly 3,000 active SKUs, but we feel pretty good about overall where we are on most everything.

Great. Yes, I've been very pleased with the mug press and the outcome. So, thank you so much and for making our holidays, really an enjoyable situation. Thank you.

Your next question comes from the line of Paul Kearney from Barclays. Your line is now open.

Hey, guys. Thanks for taking my question. First, I think relative to what we were expecting. We were expecting the step-up in expenses, it looks like sales and marketing has increased more than we had previously expected, and there's a little bit of a step-down in R&D. Just first, on the sales and marketing, can you talk about how the results you're seeing that give you confidence to step up that spend and how you're allocating that between adding new users to the platform and driving engagement?

Yes. That's a really good question. As you pointed out, our sales and marketing for this quarter was 11.6%. Last quarter, it was about 6.5%. So, it's significantly up, and part of it was that it was unusually low for all the factors related to the pandemic and supply chain and we didn't have enough inventory, so it was unusually low last year during this quarter. I think fundamentally, our approach to marketing has been changed. We have a very efficient marketing flywheel, and we benefit from strong network effects in our category. Just to recap some numbers, over 40% of our customers first hear about Cricut through word of mouth, and the gross profits on machines more or less cover the customer acquisition cost. And since 2014, we've been leveraging the same playbook, and we will continue to do so, which is creating great experiences for our members. Our category also is very unique because when people make things, they're very proud, they feel very accomplished, they give gifts to people, and that lends itself to a lot of word of mouth. And even to just make it very personal, they actually shared it on their networks when they've made it, right? And to make it very personal, my wife often makes T-shirts for my niece. And invariably, people will ask, well, where did you buy it, and that leads to a Cricut conversation. If you look at our Facebook page, for example, we get tremendous engagement every time we share a user project. And you compare it to other brands, it's pretty amazing. One thing that I do want to point out is that as we continue to scale, we understand each of these social network. We do performance advertising like other folks. We don't do long-form advertising on TV, et cetera, but we feel like we have a very good sophisticated understanding of how to leverage each of the social platforms like YouTube and Facebook and Pinterest and Instagram, and we do that with a variety of organic as well as paid mechanisms. So again, I think our approach to marketing hasn't changed. Our cost of acquisition has not changed significantly. One thing that I do want to point out is that as we accelerate our international expansion and as we add the number of countries, we do have to make some investment with a couple of key sales and marketing professionals and some upfront marketing investments. So, you will see, as we add more countries faster, that those numbers may put some pressure on the sales and marketing number. But overall, our approach hasn't changed, just that is unusually low last year.

Just one thing, a broader comment on all of the operating expense categories. You mentioned that R&D was down – there was a step-down. Actually, from a – both a dollar standpoint and a percentage of revenue standpoint, we increased that category meaningfully as well as sales and marketing and G&A. All categories are up. And much of what you're seeing is catching up from the pause in spend that we took in the COVID year 2020, but also leaning into some of these other activities that we've been talking about in investing for growth. And so – but R&D is one area that we have been investing in quite a bit.

Okay. Thanks. Just a second, just my follow-up is, can you talk about the inventory levels and your end channel partners and the help there? Is this – are we at normal levels yet with your partners on both machines and accessories?

Yes. So given the market supply constraints and increased global supply lead times, we have seen what we would characterize as some defensive buying by a few of our retail partners, but not across the board. Just a few, we think, have bought maybe a little heavier just in defense of some of these challenges. So, we believe channel inventory may be a little bit heavy, but it's hard to say at this point. One thing that I can say is that we've been awarded incremental shelf space from some retailers that we believe in some cases is because others couldn't fill the shelves and they knew we could, so they gave us that space. And so, it's hard to know exactly how all of that's going to play out. But we take a – from our inventory perspective, our view is we want to keep shelves full, and we want to be on the side of the coin of doing that rather than being on the side that doesn't have inventory and is losing shelf space because they can't keep shelves fallen.

And Paul, I just want to go back to – I think it's kind of also going back to Jim's question that he asked earlier, where some of the inventory, like the mugs were not available on Cricut.com. One of our goals is, first and foremost, to make sure we prioritize our retail partners to keep them in stock. So again, as we've taken that approach, we wanted to make sure that the products get to the shelves and the products available for consumers to come in and buy them in addition to our site.

Thank you.

Your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is now open.

Hey good evening, guys. Thank you for taking my call. Maybe to follow up on that question, just can you quantify what, if any, channel – excuse me, connected machine channel inventory fill there was in the third quarter? And then just going back to your earlier comment, Marty, is it safe to say or is it fair to say there's a greater mix of legacy products in the channel today than normal just because of the product cadence you've had over the last 12 months? And then I have a follow-up. Thanks.

So, on your first question, channel fill in Q3, I think you were asking about. From a machine standpoint, we were supply-constrained in Q3 on almost all of our products. Whether it be machines or accessories and materials. However, we started to catch up on channel inventory on accessories and material late in Q3. So, there is some channel fill impact in Q3 2020 that we saw on accessories and materials, not so much on machines. And then we continue to catch up on materials in Q4, which – that we were making good headway in catching up on that with accessories and materials. But machines, we were still light. And so, for all of 2020, at least the second half, I wouldn't characterize the machine channel fill is really a factor I'm sorry, Erik, I missed your second question. What was your second question?

Yes. Just in terms of the composition of channel today. Is it safe to say or fair to say that there's a greater mix of legacy products in the channel today, just given the product kidding that you've had in some of the long life that you've had of some of the prior models that you've now refreshed over the last three months?

Yes. Actually, I want to clarify a comment that I made earlier. This probably addresses your question as well. First of all, our general goal is to – even though we have five models with three of them that were existing and two new models, our goal is not to do a broad phaseout of any of them, right? So, they are – we're going to use them to – for continued differentiation, whether in the North American markets or across international geographies. The capabilities of these platforms are somewhat unique, and we think that there's an opportunity for us to differentiate channels. And then secondly, you – whenever we launch a machine, it lasts for four to seven plus years. We virtually have not phased out anything. Again, because they're connected, we can continue to expand the functionality with new features and new capabilities. So, we're not looking at it as a legacy issue that we are dealing with. As I said, how we decide to leverage the five models may vary on the model, but the fact is that those five models are going to stay in some form of fashion. And four of them are going to be broadly available, and the fifth one is also going to be available in certain channels. Is that helpful?

Yes. Definitely. Thank you, Ashish and then maybe you mentioned an uptick in user engagement at the end of September. Just curious how does that compare to normal seasonality? I mean is that similar to past years? Are you seeing an uptick in engagement in September?

Yes. So, when we say normal seasonality, we started tracking engagement in mid-2019. And so, we don't have – and then 2020 was an odd year just because of all the dynamics of the pandemic. So, it's a little bit difficult to say what actual seasonality looks like from an engagement standpoint. But I mean, we know that people are more active – we've always known that people are more active in Q4 than any other quarter. And so, when we go back to 2019 and even 2020, we saw that play out. Now – and we expect that again this year. We think that engagement will be higher in Q4 than it was in Q3. We just think that Q4 of 2020 was just extraordinarily high, and we're not – we'll be significantly below that.

Okay, super. Thank you, Marty.

I am showing no further questions at this time. This concludes today's conference call. Thank you all for your participation. You may now disconnect.