Good day, and thank you for standing by. Welcome to the Cricut Q3 2022 Earnings 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stacie Clements, Investor Relations of The Blueshirt Group. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's third quarter 2022 earnings call. Please note that today's call is being webcast and recorded on the Investor Relations section of the company's website. A replay of the webcast will also be available following today's call. For your reference, accompanying slides used on today's call, along with a supplemental data sheet, have been posted to the investor relations section of the company's website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer, and Kimball Shill, 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-Q. 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 8, 2022. 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, Stacie, and welcome everyone. As expected, we ended the third quarter with healthier channel inventory. Revenue in the third quarter was $177 million, slightly down from last quarter, as retailers continued to work through their inventory. Underpinning our resilience in this more challenging macro environment is our durable business model and focused investments on high impact initiatives. We generated net income for the 15th consecutive quarter, once again demonstrating our proven track record of sustainable profitability. I am confident in the fundamentals of the business and encouraged by the positive momentum in some areas while navigating challenges in others. First, we strongly believe that we have millions of new users to acquire domestically and internationally. Our user communities have never been stronger. Our top three Cricut-related hash tags have garnered over 6 billion views on TikTok. Brand familiarity continues to expand with strong Search interest on What is Cricut. And the success we saw with Amazon Prime Days in July and October indicates that our sales funnel is healthy. These trends give us confidence in our overall market opportunity and point to expanded interest in the category. We will continue to run the business for the long-term, ensuring category and brand health. Our funnel is healthy, and we have a large market opportunity ahead of us. Our qualitative research tells us that interest continues to be strong but customers are taking longer to convert and have a higher threshold before they make a purchase decision, as they prioritize their needs over wants given the current economic environment. Net new users added in the quarter were down 26% compared to last year, while connected machine revenue was down 49%, indicating that inventory moved through the channel. So, consumers continue to purchase our products at a healthier pace than our…

Thank you, Ashish and good afternoon, everyone. We continue to see the effects on consumer demand of a softer macro environment. Retailers' orders in September were a little softer than historical trends would have indicated as retailers worked through channel inventory positions. In October, we started to see orders for holiday season, although at lower levels than previous years, as retailers are taking a cautious approach to inventory levels. Given this dynamic, we continue tightly managing what is within our control. In the third quarter, we generated revenue of $177 million, a 32% decline compared to prior year Q3, and we generated $12.4 million in net income. Breaking revenue down further, revenue from connected machines was $52.4 million, down 49% year-over-year, against difficult comps for Q3 2021, related to sell-in of next generation cutting machines and continued replenishment orders. New user adds, as a proxy for machine sell out to end consumers, were down only 26% for the same period, indicating that consumers continue spending, albeit at a lower level, as retailers work through inventory. As you'll recall, we entered Q3 with some retailers holding higher-than-normal channel inventory positions, while at the same time, managing to lower inventory targets. Exiting the third quarter, we believe retailer inventory positions are much healthier, with most retailers needing to place new orders to fully capture expected holiday demand. We believe holiday demand remains seasonally strong. We are working closely with our retail partners, as well as leveraging our more flexible direct to consumer sales channels, to place inventory where needed to meet demand. We are proud of our subscription performance. Revenue from subscriptions was $68.9 million, up 29% over last year and 2% sequentially. Our continued success highlights the durability of our business model and validates the focus we've placed on Cricut Access…

Certainly. [Operator Instructions] And our first question will come from Mark Altschwager of Baird. Your line is open.

Hi. Thanks for taking my question. First related to inventory, are you able to quantify how much the stock you believe has taken place across machines and materials and accessories this year?

Yes. I'm taking a question in terms of channel inventory. And what, if you recall our comments back to one, right we called out that we the end of the year with what we thought was $35 million heavy. But what changed as we went throughout the year is that was relative to what had been the historical trend through COVID. And we think retailers have changed their targets over time. And so it was a moving target throughout the year. What we are confident with is the number of weeks we have on hand, in channel by channel. And so the targets are a little different, but we are at a point where most retailers need to be reordering related to holiday. And, we have seen those reorders in most cases coming close to expectations, although as a call that my in my prepared remarks. In September, we saw a little bit lighter orders than we would have expected but those have picked up in October.

Mark, I'll just add to Kimball's point, I think there's a couple of data points that we are sharing with some of this is really hard to exactly quantify. One is, if you look at our machines, our revenues are down 49%. And, -- our net new use of ads, which is a little bit of a proxy for sell through was down only 26%. We saw the same thing in materials and accessories, which is selling revenues, which is -- what is in the article calculation was, not as positive at least not better sell through materials and accessories than that ARPU number suggests, it was still lower than last year. But it was much better than sell and revenues. So both of those, basically indicate to the fact that we were able to move pretty significant channel inventory and feel like we're -- after several quarters are in line with, where we're selling and sell to will correlate.

That's Helpful color. Thank you. And with the promotions, on materials and accessories that you've been leaning into in recent months, so what have been some of the key takeaways so far? I'm curious what you're seeing in terms of basket size or order frequency from some of your users and the other metrics you can share. Maybe the market share of users using Cricut materials versus I'll turn it in materials? Thank you.

Okay. Appreciate the question. So we're omnichannel. And so there are limitations of our data. But some of the lessons we've learned as we have been more promotional. The closer we get to price parity with competition, we hold our own or pick up share with specific retailers where we have -- where we have reliable data. And so we also know from our own proprietary consumer research that there's a higher hurdle for consumers department, the dollars right now. And so what you will see from us is being more promotional in that category, both to address affordability to the consumer, but also to continue to capture market share materials.

Great. Thanks for all the detail. I'll jump back in the queue.

[Operator Instructions] Our next question will come from Jim Suva of Citi. Your line is open.

Thank you. My first question is on the accessories and materials $7.61 is lower than last quarter and way lower than a year ago. Is that due mostly to retail destocking? Because I believe you recognize the revenues on the retail sell-through? And does it lead one to believe that we're at the bottom? Or could it go lower? And I just wonder, are people just being more prudent with what they spend or they're doing more outdoor activities? Because in the entire life of your company? I don't know, if we've actually seen it this lower. So any commentary you can give us on the accessories? That would be great.

Yes. Jim, thanks for the question. And as you pointed out, there are a bunch of dynamics impacting the revenue in that segment. It is a selling metric. And our revenue largely derives from sales to retailers that then sell-through to end consumers. And so the channel inventory that we've talked about that -- the challenge of destocking has continued to be a headwind throughout the year. And but we also, as she pointed out, just a minute ago is sell-through is healthier. Now we don't have perfect data on sell-through. So we don't report on it. But the data we do have suggests that that sell-through is much healthier than sell-in. And so we believe that's a better indicator for the health of the category. And then there's really kind of three influences that we look at on sell-through. One is promotional activity. The other is competition, right. And we and we do see increasing competition, that space, but the other is engagement, because it's a proxy for users consuming the materials and, and needing to repurchase and -- at any given quarter, it's hard to quantify the impact the isolate the impact of each one of those factors, but we know each of those come into play. And we do know that that summer is usually our lowest period of the year for engagement. And so we do think that has played a role in sell-through activity.

And then as a follow up on accessories, are you trying to educate the users or maybe it's just my family who had a terrible experience of using knockoff cricket brands were, gummed up our cutters and all this. And we've now gone back to the original equipment Cricut branded for the vinyls and such. But is there a way like, educate investors? Are you doing that? Or are you just doing that more from promotional dollars out there? Because saving $0.50 or $1 may seem attractive to people until they realize it will kind of mess up their machines? Or is there a way like to QR coded and make it authentic, or I'm just trying to think out loud about ways to educate and keep the lower quality supplies from eroding your company's profitability? Thank you.

So Jim, we actually work really hard to communicate the benefits of our materials. And we think in general, our users understand that they get an optimized experience when they use Cricut materials. That says, as I mentioned, in our research that we've been doing, with our consumers, there's just a higher hurdle rate. There's a lot of price sensitivity. And so that has been driving our promotional strategy to make sure that we're addressing affordability. Even as we continue to tell that story, it makes sure that -- that we're getting the right price value trade off in the mind of the consumer. So, that we can be competitive in the material space.

Jim, I'll just add to Kimball's answer. I mean, clearly, the points really well made. And we know you're very discerning consumer as well. So clearly, we are working with retailers, we are doing that we are -- providing messaging, providing data to help, better explain the value proposition, and the ease of use and seamless compatibility. The second is we are also increasingly integrating, settings and, inside our software so that people can have a hassle free experience with our materials, because they've all been tested rigorously across, for that individual specific machine. And last, but not the least, which I think is really important, right, which is that we're going to continue to partner and lead and with retailers that are, going to showcase the compatibility of the materials and really be focused on, giving the customer the best experience, because we ultimately think that that will ultimately be good for engagement and the long-term health of the category and really gives the consumer best experience. So we agree with you that anything less than that is frustrating. And ultimately, while we may sell an alternative materials, the customer doesn't have an experience, that project is not being made afterwards.

And then my last question is, are we in equilibrium now for machines? And accessories or we still working down and if we're still working down, will we hit that point mid calendar Q4, or what's your forecast for that equilibrium? Thank you.

So, as I -- as we call that in our prepared remarks, we exited Q3, with what we consider to be much healthier channel inventory levels, and that most retailers were in a position where they needed to be placing orders in order to capture the holiday demand that we expect to see. And so, we are we're watching retail orders, we have seen them pick up over the course of October even though they were a little bit lighter than we expected towards the end of September. There are still, I think some potential headwinds with retailers in terms of being concerned about investing in inventory of any type in the current environment. And so they continue to be cautious. But generally, I think we're in a good challenger position and we're looking to exit the year. And keep that -- keep that -- healthy number weeks and channel. Okay,

Okay. Thank you so much. I appreciate all the details.

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

Hey, guys, good afternoon. Thank you for taking my questions. Maybe the first one is Ashish or Kimball, elaborate with either one of you. And that is, I appreciate there are still a number of kind of macro and micro cost crosscurrents at play today, I realized the holidays are incredibly important. But like, I guess something we're less than 60 days away from the end of the year. And so I'm just curious, what are the kind of most significant factors that kind of limit your visibility into things, like your end users or revenue by any of the segments or margins or just your ability to provide any more kind of incremental information about 4Q, and then I have a follow-up? Thanks.

Yes. So actually, thanks for the question. Let me provide some color on this. I think one of the things that I know you look at in other categories that we've kind of shed for the first time, this time is when we look at Google Trends and we see the interest in the brand with either what is Cricut or the Cricut search term, we see that, mostly flat year-on-year, right, and we see that significantly higher than 2019. And yet, the data in the sell-through doesn't clearly reflect -- the 2021 results. We've actually also done some proprietary research, we've talked to people who have well down the funnel, and this is pretty exhaustively, so that we did. But it was qualitative. So it wasn't quantitative, but we're happy to share some insights from. And to basically people who've gone from awareness to consideration to research and are very, very interested in the product, there's just a higher threshold for them to make that purchase. Now, we do see that when we promote the product in -- and we did that on both Prime Days that consumer comes in. So we definitely -- we feel that there's a healthy demand, healthy awareness interest in the category there. And as we're focusing on the long-term, we believe that we have a lot of time ahead of us. So our expectation is that as the consumer spending returns, that consumer will come in and shop the category. One other point that I'll just make, specifically around October is, in the last couple of years, we've started up promotional periods early on in the year just given -- everybody was worried about getting the product to their house. So this year, we've kind of haven't really gone into that promotional period that we've typically done in time of October. So I think we are seeing some of that. But as again as I look at the fundamentals of the category, and look at overall brand interest, brand awareness, internal research, external factors, such as Google Trends, we feel that there's -- the marketing funnel is healthy. And it's just how do we get -- just a consumer waiting to make the conversions spent.

And just point of clarification, what Ashish says, we're flat in Google Trends year-over-year. Our interest peaked in 2020, and we're essentially flat. We're matching this year interest from 2020 and 2021.

Yes. So 2021 is the point of reference that I specifically brought up in September, and we basically have flat year-on-year compared to 2021, and significantly higher compared to 2019. The interest in the brand at the peak of COVID, at the pandemic was higher, but we're comping 2021 in terms of brand interest, for the most part in September.

Okay. Thank you. That was really helpful. Thank you for that color. I guess, maybe, one other modeling question then a strategy question. If you look at sequential growth in net new users historically, it would suggest that you could end the year kind of right around your original 8 million kind of total user target you guide into a few quarters ago, I realized that's not the hard and fast guide today. But why would that not be the case? Should we expect that new user growth kind of below normal seasonality or just any comments you can help us -- you can give us to help us think about that? Thanks.

Yes. So I think just for -- just to get the details -- thanks, Eric, again. We definitely -- after the initial guidance, we basically kind of reflected that, given everything that is going on. It's very hard to predict. So we kind of muted that a little bit. We continue to believe that like we're doing all the right things to get from an awareness standpoint, like I said, there's just such a -- the holidays are such a big part of the sales, right, especially, given the fact that there's pent up demand as the funnel is for leads, we think it's really healthy. Now, when the customer jump in, and at this point hard to kind of give any guidance on how the economy and consumer sentiment, I mean, you read that just as well as we do. We feel good about awareness actually and we think that we're doing all the right things to get the customer to make that purchase. I think there is a lot is going to depend on what happens in November and December, and where the customer decides to spend the money, but we feel that we are in a good position going into November, December. The other thing that we feel good about, as we've talked about is that given the fact that we've been able to work through the channel inventory, we feel that, we'd have a higher correlation between sellers and sell-through next year. Yes.

Right. Okay. Okay. Okay. And then my last question Ashish for you is, you made an interesting comment earlier on the call just about the hundreds of thousands of users that aren't necessarily engaging with their machine, but are on the Design Space app. And obviously, you've had really nice performance on the subscriber side, even if there's just a tiny bit of a ARPU pressure there. So I guess my question is just, is there an opportunity that you see on your end to kind of better monetize this kind of non-connected machine engagement? It's just the business that is clearly outperforming. And so obviously, subscriptions are really nice to have. And I'm just wondering if you can monetize some of this engagement that actually isn't on the machine, but instead on the app, even if not in a subscription basis? And that's all for me. Thank you so much.

Yes, so thanks. I think that is a really good question, something that I'm incredibly excited about. So let me talk about that. So just as a reminder, which is, the way we calculate our engagement metric is the number of users cutting, right, as a percentage of users cutting in the past 90 days, as a percentage of the total users required since 2014, right. And if you think about it, like almost half our entire user base, like 48% of them cut on the machine, right. And we saw that number increase year-on-year. Now we've been -- we've got to be sharing this a little bit. And we probably went into a lot more detail, like we've been obsessed, and we've been focusing on really getting the user to interact in very rich ways on the platform, right. So they're creating bookmarks, which is effectively an intent to come back and make that thing. Liking projects, they're following other users, they're connecting with people, they're sharing stuff. And we know from our data that when they come in in Design Space, there's a higher likelihood to cut. And we made a comment to that in our prepared remarks. So our goal is, how do we get more people coming into Design Space, so even when they're not -- when they are away from their machine, I think mobile is going to play a huge strategy. We think that that ultimately convert to either them cutting and monetizing. So, one data point specifically to your question, which is a proof point is that today, we have not -- we've seen the benefit of that with selling Cricut access, right. So not only are we -- do we have a significantly better, more enhanced Cricut access product, we are actually also able to merchandise that and, create ad impressions and many, many, many different places in the app, right. So we think that our continued focus on engagement -- sorry, continued focus on bringing users to Design Space, getting them to interact. And in lots and lots and lots of time, we will have the opportunity to monetize that, as in ways we've defined traditionally, which is cutting, but also in many other ways. And I think we're in the very early stages. But we have a lot of exciting initiative and I’m very proud of the team to really kind of -- we are building a platform where that activity is adding every users is creating value, adding value and deriving value on the platform.

Awesome. Thank you so much Ashish for the detail.

One moment and our next question comes from Paul Kearney of Barclays. Your line is open.

Hi, everyone. Thanks for taking my question. If we kind of hit the goal of exiting Q4, unhealthy inventory levels of retail, can you maybe help us parse through the puts and takes for the top line growth into FY 2023 for the first half of the backup? Just some -- what are some of the maybe some of the channel dynamics that we have to think of within our model? Thanks.

Yes, so, Paul, thanks for the question. Given all the macro dynamics going on, we're taking a conservative view in our own planning, have had to look at next year, right. Where we had significant headwinds from channel inventory that will be largely behind us, right. There are still some pockets that we'll face next year related to that, especially in our -- in A&M segment. What we are confident about is, Ashish talked about our awareness funnel and what we understand about our consumers, and we're confident that when consumer spending returns that we're well positioned to capture growth. But right now, we're planning that the first half of next year probably looks a lot like the current environment.

Okay, Helpful. And just maybe a longer-term strategic question. Can you just maybe update us on what do you think the long-term user growth trajectory is for this business? And maybe you can start with where your awareness levels are today with the increased promotional activity? Do you think that the consumer is going to continue to need promotions? Or maybe just some metrics on where the user is today and their perception of the brand? Thanks.

Yes. Thanks for the question, Paul. So I think one of the things that again, I want to kind of point out that our revenues were down 49%, and net new user growth was down 26%. Paul, we’ve talked a little bit about the brand interest in the category, which is when people type in the term Cricut, or what is Cricut, we continue to use the same levers that we have in the past, which is network effects, social media, word of mouth, et cetera. We have not provided this -- we have not shared this detail. But we do a lot of awareness, we do a broad base awareness and index study, we stress test our service with addressable market by saying, well, what if we define it one way? Well, what if we get a lot more rigorous about it, and everything that we know both in the domestic markets and in international markets leads us to believe that, we have a large sample ahead of us. We have a large market opportunity. And, again, the things that we control today are build passion for the brand, create awareness. We have -- even though our sales and marketing numbers as a percentage of sales look higher, we believe that that sales -- it's really because of the sales being low. But the effectiveness of that sales and marketing dollar to get that awareness and driving people down that funnel is pretty effective. Now, there are a number of things that our team is working on, based on a tremendous amount of research is to how do we bring people into the funnel? What are the things that we control in terms of helping the user get through to get the research that they are looking for, et cetera? So we feel that they're putting in place a lot of fundamentals in place, and we've continued to build on things that we knew about the customer and continue to build on that. And we believe that all of that will ultimately help us get more conversion when the consumer spending returns, we feel really good about our initiatives.

Thank you.

Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.