Thank you for standing by. Welcome to Cricut, Inc.’s Fourth Quarter 2023 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. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Jim Suva, Senior Vice President of Finance. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on Cricut fourth quarter 2023 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 factor 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, March 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. We moved through 2023 focused on profitability, even as we navigated a dynamic consumer discretionary environment. 2023 was our seventh consecutive year of positive net income. We generated $53.6 million of net income, even with the $45.9 million of excess and obsolete inventory reserves and fixed asset impairment charges. We are encouraged by our 49% operating income increase in Q4 year-over-year and the positive uplift from our promotions in Q4. However, we were disappointed that sales fell in the quarter and full year by 18% and 14%, respectively. Our promotions uplift was smaller than we expected and is attributable in part to lower retailer inventory, but in hindsight, we could have conducted more aggressive marketing and promotions. We intend to boost our marketing efforts and spending in 2024 to generate more interest and demand throughout the funnel. We will continue our deeper promotional strategy while focusing on maintaining great pricing discipline. We will keep concentrating on acquiring new users and enhancing their engagement and revenue generation. I would like to look back on 2023 on what went well and what we could do better. The areas where we could do better are straight forward. We need to attract more new users to buy our connected machines. We need to reverse weakening engagement trends and re-inject enthusiasm among our users. We need to be more effective competitors in Accessories & Materials. Much of our discussion today will focus on these priorities. In 2023, our total user base increased 13% to over 8.9 million users, paid subscribers increased 6% to 2.77 million and Engaged Users in the last 90 days decreased 3% to 3.9 million. Now looking at Q4. We saw a positive uplift from our deeper promotions in Q4, although it was smaller than expected. In hindsight, we…

Thank you, Ashish, and welcome everyone. In the fourth quarter, we delivered revenue of $231.2 million, an 18% decline compared to the prior year and below our expectations for the fourth quarter. We generated $11.3 million in net income, a 4% year-over-year increase and our 20th consecutive quarter of positive net income, as we continued to invest in our key priorities. Full year 2023 revenue was $765.1 million, a 14% decline over 2022, as retailers took an even more measured approach to inventory commitments and higher average selling prices for machines dampened consumer sales. We experienced higher average selling prices as our newer, more expensive machines became a larger part of the mix. Also, retailers were unable to fully leverage promotions we offered because of lighter inventory positions, so we spent fewer promotional dollars driving sales than we had planned. Breaking revenue down further, Q4 2023 revenue from connected machines was $77.4 million, down 24% over Q4 2022 and full year revenue decreased 21% year-over-year. Retailer commitments were below demand, causing stock outs at some retailers, which negatively impacted our sales. Remember, when retailers miss out selling machines to consumers, they also miss out on selling the initial basket of Accessories & Materials that go along with the machine sale. We are working with retailers to restock to more adequate inventory levels as we continue our strategy of deeper promotions in 2024 and our expanded marketing efforts to generate excitement. Revenue from Accessories & Materials for the quarter was $77.3 million, down 28% over Q4 2022. For the full year, Accessories & Materials revenues decreased 27%. Subscriptions revenue for the quarter was $76.5 million, an 8% increase over Q4 2022, reflecting targeted investments in Cricut Access and the expansive improvements made over the last several quarters. For the full year,…

Certainly. One moment for our first question. And our first question comes from the line of Adrienne Yih from Barclays. Your question, please.

Hi. This is Angus Kelleher on for Adrienne Yih. Thanks for taking my question. Could you provide some color on the hard goods segment regarding the quantity of the impact, if any, that you have factored into your outlook due to the going concern status of one of your specialized craft retail partners? And then I have a follow-up.

Angus, thanks for the question. So, I would just say that, the retail you’re talking about is a very important part to us, has been and continues to be. There’s a dynamic situation that we’re following closely and we have adequate reserves that, in any eventuality, we don’t expect a material impact to our financials.

Actually, do you want to also talk a little bit about, Angus, this is Ashish, what our diversification looks like and all retailers at less than 10%?

Yeah. Good point. And just call it, Angus, that we don’t have any retailers that represent more than 10% of our business in terms of revenue.

Okay. Thank you. And for my follow-up, how do you balance your plans to invest behind marketing against the fact that it appears to be one of the line items with the farthest to go against your long-term goals? What do the leverage opportunities look like there for fiscal 2024 and beyond and how might the influencer forward marketing affect that?

Well, when we look with 2020 hindsight, I think, marketing is an area where we have pulled back a little bit too much, and by that, I mean discretionary marketing. So if you look at our total sales and marketing bucket in the P&L, there’s lots of stuff in there, including bank charges for all our subscriptions, those kind of things. But discretionary marketing is an area where we think we’ve pulled back too much. We think we have an opportunity as a category leader to generate enthusiasm in the category and reinvigorate consumers, and in turn, our retailers. And so it’s an area where we expect to lean in to do precisely that.

So, Angus, let me add to that. So, our conviction and our research continues to show that the opportunity is very large for us globally. So basically, we think there’s a large market. We’ve talked about the funnel being healthy. Now, obviously, in Q4, what we learned from that is that, as we were kind of wrapping up marketing towards the end of the year, plus our Q4 promotions, we had an uplift but didn’t deliver the uplift that we needed. Now, in Q1, as we continued to wrap up marketing, as well as combine that with, for a major sales event and had promotions, especially during Valentine’s Week, we saw a pretty significant uplift. We were very pleased with that data. So, as we go into Easter, Mother’s Day and throughout the rest of the year, including back-to-school and some other moments, I think marketing is the area that we want to lever. So, our strategy, as we kind of shared in our prepared remarks, which is continue to wrap up marketing and we have a lot of -- we’re basically deploying different types of vehicles. I think we’re doing more marketing than we’ve ever done in our history. I think it’s the right investment because we see the funnel being full. We want to pull people through the funnel. That coupled with a more frequent and deeper promotional strategy, we think is going to help drive growth in the near -- in the next six months to nine months. But we’re really excited about marketing. We have doubled -- actually tripled -- we have basically added significantly to the team. Our goal is to continue to ramp that up and just do different kinds of marketing and we’ve kind of included some of those details in color in our prepared remarks. We’re very excited about it.

I just want to clarify, Ashish isn’t calling the inflection point of six months to nine months, right? I mean, it may be a few quarters, but we are focused on investing for the long-term and how do we drive that excitement that Ashish talked about.

Gotcha. Thank you.

Thank you. [Operator Instructions] One moment for our next question. And our next question comes from the line of Erik Woodring from Morgan Stanley. Your question, please.

Hi. Thank you. This is Maya on for Erik. So the percentage of engaged users dropped to a December quarter low, 44%, and remains near all-time lows. Where do you think engagement bottoms out and can you help us understand when your engagement efforts will start to move higher?

Thank you for the question. So, as we’ve kind of pointed out before, engagement is one of the top priorities of the company. We have leadership that has a lot of credibility and we’re going to continue to wrap those efforts. In Q1, sorry, in Q4, our engagement numbers and this is the actual number of users declined by 3%. So let me kind of give you some color on what some of the headwinds and tailwinds were. Now, in 2020 and 2021, we acquired a massive cohort of people. And as those people are going through a typical graduation curve and that curve stabilizes over time, we see those, as those people graduate, as the engagement return -- as the engagement levels come down to more normal levels, we see that as a headwind. Now, on the flip side, as we continue to onboard people, as we acquire people, that creates a tailwind. So those users are much, much more engaged, but not in -- we’re not acquiring enough users to offset the people that are graduating. Now, then the question is, how can we improve engagement overall, which is where our efforts have been more focused? And so the good news there is that, when we ask people, people who have not come onto the platform for the last three months to six months, over 80% of them basically tell us that they really want to use the Cricut platform and the reasons they cite are, hey, I just ran out of time. I couldn’t find the right reason or the right inspiration and those we think are controllable factors, right? So our goal is to make the product easier to use, make it more reliable, give people a lot of inspiration that we can actually send proactively to them. So in our prepared remarks, we talked about expanding the inspirational content, making it easy for people to search that content and actually making it much, much more personalized. So again, even though we will continue to see headwinds because of the 2020, 2021 cohort, I have strong confidence in the team that this will at some point reverse over time. So we just got to stay focused and keep driving it.

Does that answer your question?

Yes. Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Asiya Merchant from Citigroup. Your question, please.

Great. Thank you for taking my question. The margins have been masked by significant write-downs and impairments, et cetera. So if you wouldn’t mind, like, walking us through 2024 expectations, are we -- is this an end to all these kind of write-offs and margins? And then I have a follow-up. Thank you.

Asiya, thanks for the question. I mean, write-downs were an important part of our story in 2023 and we ended up having total write-downs of $45.9 million. And but for that -- but for those write-downs, we would have operating income of $116 million. So very profitable business and we’re proud of that. The write-downs really kind of break down into two buckets. The asset impairments that both Ashish referenced and I did in my prepared comments, that represents about 40% of that overall bucket for the year. And that’s really as we’ve become more focused on our hardware platform, on the most impactful opportunities around cutting machines. We’ve had to make some hard decisions and to cut some projects and that resulted in impairment. But ultimately, I think, that’s going to be the right thing for our business as we’re going to be more focused on what can be most impactful. The second piece of that really is around excess inventory on finished goods inventory across most of the Accessories & Material segments of the business. And if you look back in 2021 and early 2022, when we were ordering most of these materials, we had a much higher run rate business, we had higher expectations and GAAP requires that we do the periodic look back to say what is our current velocity versus how much we have on hand and so that required us to take some adjustments this year as we adjusted inventory on the balance sheet. But also, we’re going through the process of rationalizing our consumables portfolio where we’ve had historically as many as 2,500 active SKUs. We’re going to be focused on fewer high volume SKUs than we have in the past with a much smaller tail, which will reduce our risk. So as we launch new products, there’s always going to be some bets we get right and some of them we get wrong. So there we -- there will always be some, but you can expect it to be less impactful as we go forward than it has been this year.

Great. Thank you. And then if I may, one for Ashish. Ashish, you guys are reiterating your long-term model in your prepared remarks on your presentation as well. I know things are a little bit tough in fiscal 2024 because you guys are guiding for some revenue pressures and margin impacts. But can you walk us through kind of the line of sight as you see, maybe the exit rates that you’re expecting for fiscal 2024 that sort of gives you the confidence that, let’s say, over a medium-term model, which my model’s over three years, that you can walk towards your margin guidance that you guys reiterate over the sort of medium to long-term?

Yeah. Thank you. Asiya, let me start and then I’ll allow for Kimball to jump in, right? So, I think, again, I want to reiterate that, we’ve continued to do a lot of diligence around the market size. We continue to see and believe in that there’s a huge market for our product and our category, and we’ve done more segmentation research and believe that the opportunity is global for us. So we’re very excited about the business. Now, there’s a couple of things that internally when I talk about what does it take for us to go after that mass market? So, we talked a little bit about, focusing on the 25-year-old to 44-year-old segment. The product appeal is pretty universal, right, across many demographics, et cetera. So the areas of focus, and then Kimber will talk about the long-term model, is we want to drive for affordability, right? We want to make sure not only is it affordable to buy the initial machine to get started, but also the ongoing usage of the machine is affordable, right? So our materials, our content and all of those things. The second is, which I think is really the thing that we have to drive, most aggressively, is the ease-of-use of the platform. We have to make it incredibly easy-to-use. We’ve made significant progress, but I think there’s a lot more to be done. So that’s where the team is focused on and that’s what leads us to believe that while the path to get there is a bit longer than we had expected, we think that that long-term model is valid. I’ll let Kimball talk from the financial piece.

Yeah. And so 15% to 19% is our goal, but I’ll call out, prepared remarks. We mentioned that we think operating income is going to be about flat for the year as a percent of revenue. We expect to be below that this year and really that’s our target when we are operating at scale, but that means we need to be a $1 billion plus in revenue, which we weren’t last year and given where we are on Q1 sales being softer, we’re not calling for that this year. Again, we just want to call out, that’s where we think we get to as we get our business back to growth and scale, but we need to be growing and operating above a $1 billion to hit those kind of operating margins.

And I’ll add just one last comment, right? I think in 2023, we had a strong focus on operating income and we basically, as we looked at the state of mind of the consumer, as we looked at where trends were and hindsight’s 2020, but we were focusing on maximizing and making sure that we run a very profitable model. I think we are definitely leaning into more promotions and more marketing this year, but to Kimball’s point, as the business gets back to growth and as we drive in full scale, that’s when we start to see some of those margins -- we approach closer to those margins that we talked about our long-term model.

Okay. Great. And if I can squeeze in one more, it’s just with your capital allocation, I think you mentioned that you’ve now completed what was authorized. So how should one think about further shares impact and buyback to offset any dilution? Thank you.

So, ultimately, those are Board decisions that obviously management plays an important role in how we think about that. So let me -- but let me talk about kind of our framework and how we do think about it. I mean, first, we want to make sure we have sufficient inventory to operate the business. After that, we’re making sure that we’re making the right investments for the medium- and long-term so that we have the growth opportunities and that includes both our hardware product roadmap, as well as our platform, which we’re in the very early days of continuing to invest in that platform. We also would consider acquisition opportunities as a means of growth, especially as it would accelerate strategic initiatives. But beyond that, we do look for efficient ways to return capital to shareholders and as you’ve seen in the last year, we have -- we’ve used both special dividends, as well as share repurchase programs and so all those tools are in our portfolio. But again, the timing and deployment is up to the Board.

Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Eric Sheridan from Goldman Sachs. Your question, please.

Thank you so much for taking the questions. Maybe two if I could. One more short-term. You called out marketing had an improved output or yield in Q1 relative to what you saw in Q4. I know you’re not guiding to Q1, but is there either a quantification of that or a qualitative color you can give and what that step up might be in terms of return on marketing spend Q1 versus Q4? That’s the shorter term one. And longer term, coming back to some of the topics we’ve talked about already, but if you think about influencer marketing more broadly, how should we think about efforts spent on influencer marketing today that might yield a higher ROI longer term as maybe you’re able to build more LTV on the back of influencer marketing efforts that have some duration around them rather than quarter-to-quarter annualized performance marketing spend? Thanks so much.

Yeah. So thanks for the question. I mean, we had the single promotional event that we talked about around Valentine’s Day where we actually saw a year-over-year comp of machine units and sales. Now that was and we got the uplift that we were expecting in that and we found that encouraging. But it’s kind of one data point against kind of a lower baseline of demand as we entered the year. So if I can just kind of point back to some of our Q3 comments and then how we saw consumers behaving in Q4. Demand was a little bit softer than we expected. We haven’t seen a real change in our consumers thus far in the quarter outside of promotional events. And so we do have a number of those that we planned throughout the year, but we are encouraged by kind of that single data point that we have at this point.

And Eric, let me talk to the second part of your question, which is around marketing and we think it’s a very astute observation and a question, so let me just take a couple of minutes on it. So we actually agree with you that, there’s a lot of leverage that we have, especially in deploying marketing such as influencer marketing, some of the stuff that we talked about in our partnership with Pinterest, PR, social media. Our category itself and our product lends itself very well to word of mouth and network effects, right? And if you think about it, as people make a project, which is why I think engagement plays such a critical role even in acquisition, that as those 3-plus-million people or close to 4 million people engage with our platform, they make projects and they tend to share that on social media. They tend to feel really good about it, right? And we’ve made a lot of, we’re building a lot of capabilities in our platform itself to drive and to share some of that inspiration, et cetera. Last year, I would say we heavily leaned in on performance advertising. And to some degree, there’s not too much scale in that and where we actually cut down, which we have now revamped in a very significant way, are things like influencer marketing, right? So as we partner with influencers, this demographic, if you think about the 25-year-old to 44-year-old target segment that we have, that particular demographic specifically looks at all the social platforms, the way they shop, the way they share messages, the way they communicate with brands. We think influencer marketing plays a really good role. The second aspect, which we kind of briefly alluded to, which is that our research tells us that as you think about life stages, having a baby, buying your first home, all of those things play a huge role and are kind of a point in time where people make the decision around personalization, right? If you think about the amount of money that is spent on a wedding or getting married, it’s not just about the wedding, it’s all the life -- it’s all the things that lead up to the wedding. There’s four to six, seven events and it’s not just the bride. It’s several people involved from bridesmaids to bachelorette parties to mother-in-laws or moms. So I think us leaning in heavily on the 25 to 44, coming up with the right brand messaging and basically helping drive network effects, I think, those are the things that we’ll see. I’m actually, again, I’ll reinforce, really excited about the creativity in our marketing team, some of the things that we are looking at in PR, social media, and I think I’m, again, very optimistic about what role marketing will play in acquisition going forward.

Great. Really appreciate the colors. Thanks.

Thank you. One moment for our next question. And our next question is a follow-up from the line of Erik Woodring from Morgan Stanley. Your question, please. Eric, you might have your phone on mute.

Sorry about that. International was down around 5% year-over-year. Can you help us understand kind of how international has been trending Q1 to-date? I know you called out a little bit of weaker U.K. and I know that it’s been a big driver of growth for you guys over the past few years. So how are you thinking about the international segment as we look into 2024?

Thanks for the follow-up. As I correctly pointed out, Q4 was down 5% year-over-year. We were up 9% for the full year. And let me kind of break that down a little bit. So in some of our larger markets like U.K., we’ve seen the same consumer pressure and concern around affordability as we’ve been experiencing in the U.S. and so that was clearly a factor. In Australia and our META region, which again is Middle East, Turkey and Africa for us, there was kind of a situation where it was more difficult comps. Where in Q2 of, sorry, Q4 of 2022, there were some large channel fill orders related to new distribution in those markets that didn’t have severable comps and so that kind of put pressure on Q4 this year. That said, we think we have a huge opportunity for us in our international growth vector over time and we’re really excited about it. We’ve seen, again, some softness in the larger markets in Q4 similar to what we’ve already talked about in our U.S. market. So that piece of it hasn’t turned around. But we are excited about the medium- and long-term prospects of international growth.

And I just add to that. I’m actually just about a week, week and a half away from heading to Europe. We have a large event going on in Germany and then we have several meetings lined up in the rest of Europe, including Netherlands. We think the opportunity, as Kimball said, is global. The two factors that, again, are reinforced, right? Affordability was a factor. It affected most of our markets. We are obviously early on in the cycle, but affordability was a challenge for that consumer. It’s actually even, to some degree, more pronounced in some parts of the world, especially in Europe. So I think we have got some work to do to resolve that. The second is awareness and acquisition, right? So the same thing that we talked about, that we are driving in North America, we’re going to ramp up. In fact, we are ramping up our efforts in marketing and again, this event that I’m going to in Germany has tons and tons of Cricut users or other people who want to buy a Cricut. And I’ll be on stage, I’ll be talking to them, and again, I think, we will see some of the benefits of the investment that we’re making. So, again, I think, we’re in the very early stages of that global platform.

All right. Thank you.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Jim Suva for any further remarks.

Thank you everyone for joining us this afternoon. We have a large opportunity over the long-term to drive new user growth and increased engagement. The Cricut 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 future opportunity ahead of us. We will be at the Morgan Stanley Technology Media and Telecom Conference tomorrow, Wednesday, March 6th in San Francisco, California, and the ROTH MKM Conference Monday, March 18th in Laguna Niguel, California. If you have additional questions, please email me at jsuva@cricut.com. This now concludes these earnings call and you may now disconnect. Thank you.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.