Ladies and gentlemen, thank you for standing by and welcome to the Cricut Q1 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Stacie Clements with Blueshirt Group. Please go ahead, ma’am.

Thank you, operator and good afternoon everyone. Thank you for joining us on Cricut’s first quarter 2022 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, accompanying slides used on today’s call, along with the supplemental data sheet, have been posted to the Investor Relations section of the company’s website at investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer; Kimball Shill, Chief Financial Officer; and Jason Dea, VP of Finance. 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. 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 10, 2022. Cricut assumes no obligation to update any forward-looking projection that maybe made in today’s release or call. I will now turn the call over to Ashish.

Thank you, Stacie and welcome everyone. Revenue in the first quarter was $244.8 million, a significant year-over-year decline, reflecting a tough comp from an exceptionally strong Q1 last year, which benefited from the pandemic. As anticipated, January and February followed a reversion to more typical pre-pandemic seasonal trends. Starting in March, we began to see additional impacts of slowing consumer demand. Our sound business model and our ability to execute operationally continued, delivering our 13th consecutive quarter of profitability. As we enter Q2 and look ahead to the remainder of the year, we anticipate these pressures persisting in the near term and are highly focused on executing with a balanced and disciplined approach. We continue to view our business through a long-term lens, optimizing the many levers within our control. We are focused on the business fundamentals that position us well for medium to long-term growth and profitability. We added more than 495,000 new users to the platform in the first quarter. Our subscription business was strong, with over 33% of our total users being paid subscribers at the end of Q1. We improved gross margins on a sequential basis, reflecting our diverse revenue streams and the work we have done to stabilize our pricing and promotions. Our balance sheet and inventory levels remain healthy and we continue to operate with agility and discipline, all while delivering attractive profitability. Coming off a 2-year hyper growth period the Cricut brand is more mainstream and retailers have given significantly more shelf space to our growing ecosystem of connected products and materials. We have a strong and passionate user base, which will fuel our flywheel of engagement and increased user monetization for many years to come. We have invested in driving significant customer acquisition, adding more retail partners and influencers across the globe.…

Thank you, Ashish and good afternoon everyone. For those of you who haven’t met me yet, I have led Cricut’s operations and supply chain for the last 3 years. Our purpose-driven mission to help people lead creative lives is what inspires me and our teams every day. Our products foster mental health and wellbeing, entrepreneurship and community to millions of consumers around the globe. The diversity of our revenue streams and our proven track record of profitability allow us to operate Cricut through a long-term lens. I’m excited to be here today and look forward to meeting you all in the coming quarters. In the first quarter, we delivered revenue of $244.8 million, a decline of 24% compared to prior year Q1, which benefited from a strong pandemic-related year-over-year growth rate of 125%. Looking at growth momentum over the long term, Q1 revenue was up 70% over the pre-pandemic comparative quarter of Q1 2020. In our last call, we talked about our expectations for a reversion to historical seasonality as we emerge from the pandemic. In March, we also started to see softening in consumer demand, which we believe relates to current macroeconomic factors. That softness continues quarter-to-date. First quarter revenue was also impacted by higher channel inventory. As discussed on our last call, some retailers took a more proactive approach to manage their inventory and we entered Q1 with approximately $35 million in higher-than-normal channel inventory. During the quarter, some retailers worked these inventory levels – worked down these inventory levels, while others continue to build their stocks. On a net basis, we estimate that these higher-than-normal channel inventory levels decreased by approximately 20%, but given current market conditions, this process may continue into Q3. We have no plans for additional promotional activity to move this inventory and believe…

[Operator Instructions] Your first question comes from the line of Mark Altschwager from Baird. Your line is open.

Hello. This is [indiscernible] on for Mark this afternoon. To start off, could you give us a bit more color on what you were seeing with user engagement, what types of projects are consumers engaging in now versus 6 months ago? And we saw some amplified seasonality last summer. Do you expect that to play out similarly this year?

Yes. Let me take that, and Kimball could jump in. So I think when we look at engagement, I want to go back and make sure that we define what the – how we calculate the engagement percentage. So the way we calculate engagement percentage is the number of users that have cut in the last 90 days divided by all our user base, right? So to the entire user base, so we don’t graduate any user. In Q1, we – like typical seasons, we see a slowdown from Q4, because Q4 people are in the holidays. When we look at that engagement percentage number, we actually kind of look at two metrics in tandem, right? And we look at the total number of engaged users that are also engaged at that time. So just to give that number and just to kind of repeat that, at the end of Q1, we basically had 3.7 million engaged users, which is about 650,000 compared to the same quarter last year. So I think we expect an engagement to go down from a seasonality perspective. The range of projects that people are doing are – I mean, clearly, we had Valentine’s and more recently, we had Mother’s Day and Easter, we don’t see a big difference in the kind of projects people are doing, right? They are still doing cards and T-shirts and labels. And a lot of this also depends on what stories we tell. As Kimball talked about and I mentioned briefly, one of our core areas of focus is to drive onboarding and engagement. So we are working on a number of initiatives that we believe will help drive those numbers up. But again, it’s a very important metric for the company and we’re hyper focused on it.

Great, thank you for that. And then as a follow-up, how have you seen your customers respond to inflationary pressures in particular? You talked about bringing some more beginner crafters and Gen Z crafters into the network. Are you seeing any significant differences between the heavy users and those newer, younger customers?

Yes. So that’s a really good question. One of our core goals in this company has been to go beyond the super engaged enthusiast, right? And as we have launched retail partnerships, as we have partnered with influencers, our strategy has been to broaden and bring the creativity out in everybody, right? And so the fact that more beginners and intermediates are joining the platform, it’s somewhat by design and by strategy, where we believe that we want to make it easy and less time consuming for people to create things. So whether they want to organize their home, we want to bring creativity not just on special occasions, but in everyday life. The kind of projects that you would guess they are looking to do simpler projects. We have a lot of focus on helping people do things in 5 minutes or less. And then as they get engaged, to kind of bring them up the engagement curve over time. We will see a lot of innovation, as I talked about, in our software where we can bring these users on board. We have launched Cricut Learn as a platform for driving more education, as well as our platform itself basically will feature a significant amount of engagement. I will give one more example. We recently launched our homepage, reduced with kind of one-dimensional right? And now the homepage is multi-dimensional where we have, we are featuring projects from the community. We are featuring projects for beginners and we see people bookmarking projects, saving projects, connecting with community members, etcetera. And we think that we are in the very, very early days of driving that rich engagement on our platform, which is even beyond cutting. And I think that’s something that is particularly helpful to – for new beginners. So as I said, we will stay very focused on expanding and bringing creativity in everyday life, and then complementing that with the infrastructure on our platform to help drive that. So if you talk about crossing the chasm, we’re really focused on that. And we are proud of what our teams have done, and I think we have long ways to go.

Alright. Thank you. I will pass it on.

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

Hey, good afternoon, guys. Thank you for taking my questions. Maybe Ashish, I’ll start one with you. Obviously, without giving too many details beyond what you’d be comfortable sharing. Maybe can you just elaborate a bit on kind of what excites you so much about the 3 to 6-months product road map, meaning would these products be TAM expanders or maybe how can we think about their fit within your ecosystem? And then just adding to that, does the consumer demand environment impact the way that you are thinking about the product launch road map or what products to come out with or the price points to come out with? And then I have a follow-up.

How much time do you have Erik?

As much as you want.

You ask a product CEO, what’s in the road map, and he can go on forever. I think there is a number of exciting things that I’m proud of. Our team just launched a number of products in the heat press category. We launched a Hat Press, which gave people the ability to personalize hats. We launched a consumer focused product at $1,000 that we can talk about the Auto Press and as well as we have upgraded our Easy Press line, and we have tons of innovation coming. I think the thing that excites me the most over the next 3 to 6 months is our platform. And again, what I mean by our platform is Cricut Design Space. It’s the mobile app. As I said, there is a number of things that we are doing that will help drive onboarding. There is a number of things that we are doing to make it easier for the community to connect with each other, to be inspired, to share projects with each other. And I think all of that will really lay the foundation for monetization. The next thing I would say, just building on that track is, we have massive amount of effort going on in helping improve Cricut Access. So we talked about the Contributing Artist Program that will massively expand the library of content and the diversity of content, the genres of content, not just within the U.S. but also globally. We are – in addition to expanding the content library I briefly mentioned this word editable content. Well, what I mean by that is that the people will be able to manipulate content exponentially easier than what they can do today. And we are complementing that content with services such as a software tools such as Monogram Maker. Monogram Maker is a perfect example of matching that to a road map. As we have beginner crafters come in, how do you make it really easy for them to do something that they love doing, which is making a monogram. And they can do that within a couple of clicks. So that’s kind of a few of the examples of the road – of the platform, but I think as we achieve more parity between mobile and desktop, I think that will really enable us to not only enrich the products that are in the market today, but also allow us to introduce new products in new categories that are beyond cutting machines. So that product life cycle is a little bit longer, but we have been working on technologies and innovations that can really expand what Cricut means to people beyond the cutting machine. So those are all the things that I am excited about and I hope I answered most of your questions.

Yes. No, no, no, that’s perfect. Maybe just as a follow-up, obviously, there is a lot of moving pieces, a lot of dynamics going on in the market. So just to kind of help level set and make sure we’re thinking about it correctly – 2Q correctly from a seasonality perspective. If we look back over the past few years, there is been quarters where June is up fairly strong. Obviously, during the pandemic last year, we were up kind of low single digits. Given the commentary that you provided, should we think about both net new users and total revenue being down sequentially? And just maybe any guidance you can provide on kind of the magnitude of that, again, just so we can kind of all level set where expectations might be for June to the best of your ability?

Obviously, we’re not providing any specific quarterly guidance, but let me kind of talk about the number that we have talked about and hopefully it addresses some of the aspects of your question. As we said in the last earnings call, we’ve basically talked about 8 million users at the end of 2022. And as you can see from Q1, we added 495,000 users, which is even higher than we expected. So it was a strong – and that was driven by a strong sell-through in Q4 last year. January and February looked very typical months from a seasonality perspective, and we are fairly satisfied with how those performed. Starting March, things slowed down and again, a number of factors that you probably are aware of from inflation, to sentiment, to pandemic opening, etcetera. One thing that I didn’t talk about in our prepared remarks as we saw Mother’s Day, Mother’s Day kind of brought a similar level of excitement that we have seen in the previous years, at least week over week, month over month, where whether it was people searching for our brand or excitement about the brand, there is a lot of that. And that gives me confidence that as we go into while we will see a continued slow growth in users for the next couple of quarters, we believe that as we head into Q4, the same kind of thing that drives Cricut every year, which is holidays and Halloween and Christmas and gift giving and home decoration, will be the growth drivers. Now that may not be enough to offset the slower growth in Q2 and Q3. One thing I want to highlight is that unlike other platforms, unlike other categories, where there is a lot of alternatives for people, I don’t believe that there is an expansive platform like us from a creativity perspective. So, when that demand does come back, because people are always going to make T-shirts and do guests and everything else, we don’t think that’s going to go away. We believe they will be the platform of choice, and that’s what gives me confidence. I know you asked me this question specifically in the shorter term, but I do want to address why I am very optimistic and confident about the medium to long-term, because again, as I have said before, the trends on personalization, on social media marketplaces, the fact that people want to sell things haven’t changed. And they are so early on in our brand awareness and familiarity. So, as we improve engagement as we help people make for projects, we think it will drive word of mouth. So, again, we just have to get past the short-term macroeconomic challenges, but we remain fairly confident with our strategy and what we need to do to drive growth going forward in the medium-term.

Alright. Thank you for the color, Ashish. I appreciate that.

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

Thank you very much. I have a first question, probably for Kimball. And that is when you mentioned the subscribers likely to be soft or going down, I think you mean on an absolute basis, not a deceleration basis like the numbers of subscribers actually going down, not deceleration, if I heard that right. And if so, I followed your company since IPO time and I don’t recall a quarter of subscriber growth actually going down. And maybe that’s because we would lived in a world of COVID for the past 2.5 years. But looking back historically more, are there normal periods of normally Q2 should be down, or are they just because of coming back to meeting with people out of society and out of COVID that now it’s kind of an abnormality that we see subscribers going down? Thank you.

Thanks for the question, Jim. So, really, there is three factors that go into overall subscriber growth. And the first and most important factor is machine sell-through that drives new user adds that leads to subscribers. Second is churn, which has been fairly consistent with the natural level of churn over the long-term. And then reactivations during the period, where subscribers will drop out and come back in. And the largest factor is just lower consumer demand and as we go through the next couple of quarters that will put pressure on subscriber growth. And just to be clear, we are talking about total subscribers as opposed to just the rate of subscription. Our attach rate remains very high. We are at our highest point with slightly over 33% attach rate compared to a pre-pandemic mid-20s in our attach rate. Looking forward, we do expect to return to growth in Q4, as we move into our more normal seasonal high and machine sales pick up. In the meantime, I just want to reinforce that we are continuing to invest in the value of our Cricut Access and subscription products and that’s manifested with the attach rates I talked about. But also we are starting to move the needle on reactivations, but it’s not enough to overcome just the drop in consumer demand and the impact of that.

Right. But historically, have there been periods like pre-IPO works pretty normal, or is this subscriber going down, kind of just an abnormal bump that we should not consider to be a normal thing of the past and going forward?

This is – I call it, it’s a bump.

Okay.

And part of it is I talked about kind of that natural level of churn. We have a much larger subscriber base than we did 2 years ago, right. And our churn rate hasn’t increased, but we still have a fairly consistent level of churn. And as growth moderates in this near-term – in the near-term, it just works out that way, but we expect to resume growth in Q4.

Okay. And then a question for Ashish on more strategy, in your prepared comments, you mentioned your excitement for the next 3 months to 6 months. Is that more on like enhancements of software and enhancements to your ecosystem, or is that on new physical products as we think about your excitement?

Yes. So, I think for the – we have talked about building new types of technologies and innovations that will leverage our platform. But when I really talk about the next three months to six months, I am mostly talking about the platform. Because I think there is a significant opportunity to onboard users better, to drive higher levels of engagement and a fair amount of focus on driving Cricut Access, which is a subscription product. And so we have been working on a variety of software. We have been working with the contributing artists program. So, that’s what I would say we have definitely accelerated our efforts in driving those three things, because they are kind of all related. The more engage users we have, it will drive higher level of subscribers. So, I would say, for the next three months to six months, what we will be able share – what we will be able to share publicly is all in the software platform arena. I mean clearly, as hardware and new technologies take a lot longer, we are feverishly working on some exciting new things that we will be launching in the next couple of years. But at this point, I am talking primarily about our software platform.

Great. Thanks so much for the details and right now, I’m actually drinking out of my Cricut Mug some hot cocoa. So, I figured out the onboarding and user experience at least. Thank you so much.

Thank you.

Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Hi. Thanks for taking my questions. This is Bala on for Rod. I guess I want to actually start with softness in consumer demand in March. Could you maybe elaborate a bit more on it? It looks like you are seeing that weakness both in terms of new users, given that you lowered the full year user adds guidance. And also, it looks like engagement has come down too. So, is it more or less across the board, both in terms of engagement and also a new user onboarding? And I have a follow-up.

Yes. So I think Bala, as we mentioned, like new user adds are driven by machine sell-through, right. So, stuff that we stored in October, November, December, that has a certain lag that time people come off their trial subscriptions. So, in March, we didn’t necessarily see a slowdown in the number of user adds compared to our expectations. What we saw was a slowdown in machine sell-through, which will then impact Q2 and Q3. I think like I said, from an engagement perspective, we saw January and February similar to the typical seasonality we see coming off Q4. So, we didn’t necessarily see anything remarkably different. And we clearly saw, I think what we attribute to the effects of inflation, consumer spending, maybe even return to office and the stresses that puts on life, etcetera. One insight that we have that we not specifically talked about is, the feedback that we get when we talk about engagement and research our user base, is they have all intentions of engaging, they are just out of time, right. So, it’s something that we are focusing on heavily as to how do we make it easier and less time-consuming for people to do some of the things. But again, as I have said, the user adds stayed fairly healthy and consistent with expectations. That’s why we added 495,000 users in Q1. It’s the sell-through and maybe – and somewhat engagement that we saw slow down in March, that will then manifest itself in the next few months.

That makes sense. And for a follow-up, I guess I am wondering, in an environment like this where consumer demand is weakening. Do you plan to go after chasing new users by doing more promotions or do you just plan to continue to be disciplined and focus on profitability? I guess I better – I wanted to better understand your strategy, especially in an environment like this.

Yes. So Bala, that’s a really good question. And I will answer it slightly differently for our accessories and materials versus our machines. So, I think as we have talked about before, we have been very thoughtful about our promotional strategy. It’s a very challenging consumer spending environment. And we don’t believe that it’s the right thing for the long-term business to be highly promotional and leave money on the table. And it also kind of destroys like, to some degree, dilute the value of our brand. What we would like to do is, enhance the value, both in terms of functionality and the things that people can do with our products and also make it significantly easier, right. So, our goal is – and typically, that’s what you see with all major brands is that pricing and brand value can go hand-in-hand. And we think that our current strategy of being less promotional that we have talked about is the right strategy for us. What we would like to do is, we have 7 million users on our platform, right. And our goal is to help drive engagement and help improve the overall experience, because we know even though it’s not a short gun approach, we know that when those users are more engaged, they will make more projects and they will tell their friends and family, and as some of these short-term macroeconomic factors go away, that will help drive demand for the overall product. And again, we as a company have always taken a very long-term view of the world, and we think we are sound in our strategy, and we need to continue to execute on it in a very disciplined and profitable way. That’s just core to our ethos and how we grew up. On the material side, we are working very hard to improve the value of our materials, both in terms of how users perceive the value of our materials, but also in giving them value. Because everybody is worried about their gas bills and their food expenses, etcetera. So, we are being a little bit more promotional on materials and accessories in that category versus machines. And I think we are going to, at least for now, stay pretty strong – sound on our strategy of being less promotional and really kind of focusing on the basics of the business. It’s really a time for us to just get back to the basics, and we think is the right thing for us to do.

Very helpful, Ashish. And I got a follow-up for Kimball, if I may. Just want to touch base on gross margins. Clearly, they were better in the quarter. Mix helped a lot. Going through the year, how should we think about gross margins and a weakening consumer demand environment? Any color there would be helpful, Kimball?

Yes. So, as we mentioned in our prepared remarks, we remain committed to our long-term operating margins of 15% to 19%. We do think for the rest of the year, we will be a few points below that. And gross margins this quarter benefited, as you called out, from a mix of revenue. So, to the extent that accessories and materials, and subscriptions were a larger part of the mix, that actually helped our gross margins in the quarter. Overall, the machine revenue was about 25%, when usually – it’s usually using in the low-40s. And so – we expect gross margins to continue – I guess continue at current rates until we see the machine sell-through pick up. And so especially as we get to the fourth quarter, which is typically our highest season – our highest quarter for machine sell-through, that’s how we are looking at gross margin.

And our goal as a company is to continue to drive profitable growth. Now clearly, there is just a lot of uncertainty in the world out there. And a lot of it’s going to depend on just inflation and commodity costs and everything else. But our strategy is, as I said, we want to be less promotional on machines. We want to continue to drive subscription access product, and we want to give more value. So, how everything plays out, it’s really hard to predict in the shorter term, but our general strategy is to get back from an operating margin standpoint of 15% to 19%, but when that happens is a question at this point.

Got it. Thanks very much.

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

Hi everybody. Thanks for taking my question. I was wondering if you can comment on quarter-to-date trends of engaged users. Are you on track to grow sequentially in terms of an absolute number of engaged users? And then also, longer term, how should we think about your targets for engaged user growth?

Yes. We haven’t really given specific guidance on the number of engaged users. As I said, we look at the two numbers in tandem with each other. One is the percentage engagement, which is again, where we divided by the total installed base. And the second is the total number of engaged users. So, I think it’s – for the year, given our focus that we are going to – and I think we will see some of these initiatives manifest themselves towards the later part of the year. Our goal is to look at that number as – probably even provide a more richer variation of that, right. So, today, we define engagement in a very narrow specific way, but our goal is to continue to drive engagement. Now from a number of users standpoint, like again, we obviously don’t graduate user base, so we will see the same – you will see user base continue to grow.

Understood. And then you mentioned, I think there is pricing initiatives that are in place starting in 3Q. I was wondering if you can just provide more detail on that. Is it both in connected machines and accessories? And is it in all channels as well? And also, how do you kind of reconcile that with the promotions – the recent promotional activity?

So, we are in the process of rolling out price increases across all of our physical segments. So, machine – both machines, and accessories and materials. And that’s still a work-in-process. And so we will see some benefit of that in Q2, but that’s mostly going to impact the second half of the year.

Understood. And is it like-for-like price increases, or is this through innovation in new products?

Well, so the price increases – so could you repeat your question again? Sorry.

I am just – I am wondering, are the price increases, are they like-for-like, right? Price increases as in same product from last year, or are you introducing price more so through innovation and new products? Thank you.

Yes. So, I think, there is a couple of things going on. For – we are actually – when we are rolling out price increases, therefore, all our products across the board. What is going to change is the mix of the products. We have a couple of products that are end of life. And as we go through the year, some of those products will go away, that will actually have a positive impact on gross margins, but the pricing increase that we implemented are mostly across the board, but we are just trying to work through some of the inventories.

Okay. Thank you.

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

Hey guys. Sorry, I just wanted to ask one follow-up question to Jim’s question earlier, and that was when we are talking about the trajectory of subscribers. Those comments about flat to decline or growth in 4Q, those are on a sequential basis, correct, and not a year-over-year basis?

Yes, that is correct.

Okay. That was just a clarification. Thanks.

There are no further questions at this time. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day. You may all disconnect.