Cricut, Inc. (CRCT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the third and final day of Citigroup's Technology Conference where we have approximately 200 technology companies presenting this year. Today, we're pleased to host Cricut during this session, and I'm Mike Cadiz, hosting in place of Jim Suva, Citi's IT hardware analyst. We'd like to continue today, but first, we have about 3 housekeeping items. The first is no media please and no press are allowed. If you are a media or press, please disconnect immediately; number two, if you are an investor subject to MiFID II, please ensure you have the applicable agreements in place; and finally, there are disclosures associated with this presentation from Citigroup and available on our website, and contact us if you need those disclosures. Additionally, on Cricut's side, please see their Investor Relations website for any safe harbor risks and forward-looking statements. [Operator Instructions] We'll try to get to your question as time permits. But more importantly, we'll ask your question anonymously, without identifying you. And on that -- with that out of the way, for this session, again, we're pleased to host Cricut. And on our side are Ashish Arora, President and CEO; as well as CFO, Marty Petersen. So thank you folks for being able to join us today.

Thanks, Michael. Good morning, and thank you for having us.

Awesome, and then I'll kick it off with a light question for now. So for many investors not yet familiar with Cricut, and the name alludes somewhat to what you folks do. Would you mind taking a minute-or-so to describe exactly what Cricut produces? And then from there, you can go into perhaps your lineup, your portfolio of connected machines, accessories, subscriptions and consumables, and we can go from there.

Yes. I would love to. So Michael, we're a platform company. We're a creativity platform company, and our platform enables these connected machines that today, we offer these cutting machines that our users use to create projects that look ultimately very polished as if -- even though they're handmade, they look as if they're store-bought. So we offer a design library to our members so that they can actually design projects on a PC, a Mac, iOS or Android. And using that design library, they create projects that ultimately they can cut on our machines. And we give them everything to make that project come to life, from accessories and materials and designs to all the solutions that they need. Before I get into each of these businesses, let me talk about -- let me give an overview of what our platform is. And at the core of our platform is our cloud-based software, which is where we spend most of our time. Our design apps, again, a user can design on a PC or a Mac or an iOS, an Android and everything just synchronizes seamlessly so that they can start a project on 1 device and they can pick it up on another. Also on our platform, we have our content library and data. So that's kind of the backbone of our creativity platform. We have built 3 businesses on top of this platform or as a part of this platform. One is our connected machines, the other is accessories and materials, and then finally, we have digital subscriptions. Today, we have 3 families of connected machines that appeal to beginner creatives to hobbyists to prosumers who 26% of our users sell projects on various platforms. So we have entry-level, Cricut Joy, which is our entry-level machinery. It targets beginner creatives. We have our Cricut Explore family that appeals to hobbyists and enthusiasts. And then finally, Cricut Maker, which is targeted to hobbyists and prosumers. So really we'd like to cover the entire spectrum of that -- of the user base. And just to give you a sense, at the end of Q2, we had about 5.4 million consumers, and that represents about 4% of our serviceable addressable market, which we only include the top 6 countries globally. And so the market actually is even bigger than that. From a model standpoint, our gross profit on connected machines covers -- mostly it covers our customer acquisition cost. But -- and everything that -- else, like our accessories and materials and our subscriptions, builds on top of that, so that is all -- that's all mostly upside. And so once we -- once the user has taken our machine, is on our platform, they go on a journey with us, and we monetize their journey and relationship with our portfolio of accessories and materials and our digital subscriptions.

That's wonderful. So let me ask, if you step back, what are some macro trends at this point that are benefiting Cricut? I know personalization, for one, is a huge megatrend. And are there any new or changes to the existing trends now that we're coming out of COVID?

Yes. So we've actually -- over the last many years, we've identified these -- we identified 4 major trends. And we believe that these are long-term secular trends. And we see these pretty relevant -- we saw them pretty relevant prior to COVID. We saw them a little bit amplified during COVID. But we think that these trends are here to stay. So I think we haven't seen any major changes in these trends, and we think that they're here to stay with us for a while. So let me talk to each one of them. The first one, as you mentioned, is personalization. And people want to express themselves, it's a human need. So people want to express themselves in a unique way, and they want to be different from other people. And they're willing to -- one of the things that we observed is that people are willing to wait longer to get something personalized. They're willing to pay more to a retailer to get something personalized. And we think that, that fundamental need for personalization is going to be here with us for a long, long time because it's a fundamental human need. The second one is digitization of tools. And today, they have more and more digital fabrication tool than digital editing tools on a PC, a Mac and even more importantly, mobile devices. So these tools are more accessible to people to design things that they ever have been. And where Cricut comes in is once people have designed something, we bring it to the physical world, right, by allowing our users to design things and make ultimate physical projects for the real world. So digitization of tools is the second big trend. The third one, which really helped us, and again, we think it's here to stay for a long time, is the proliferation of social media. With platforms like Facebook, Instagram, Pinterest, YouTube, TikTok, it's easier than ever before for people to be inspired, for people to learn how-tos, right, for people to educate themselves on how to do things. And that's been a core driver of some of the things that people have been able to do with the Cricut. And then finally, as I said, 26% of our users sell projects once they've converted their hobby into a business. And again, marketplaces like Facebook, Shopify, Etsy and many more have made it easier than ever before to start the business. And one other thing that I love about this is that the beauty of all this is that these trends are global. And as we go on to each of the countries around the world, we see the same trends that drove our growth in the U.S. playing a role in our growth in these countries. So we're very excited about that.

Excellent. You had mentioned a dedicated user base. And I'm thinking, how should investors look at that customer base and customer engagement through the statistics that you gather relative to the continued growth of that subscriber base? Would you mind talking about that? And then also talk about please any seasonalities regarding the engagement as we go through each year.

Yes. So let me first talk about how we define engagement. I think that's important to understand before I put some numbers to it. So we count engagement as the number of users that cut in the last 90 days divided by our total number of users on our platform, right? So if a user comes in to design something, to bookmark a project, to -- as they're thinking about their project, we do not count it as engagement up until they cut something because we kind of believe that when they cut something on our connected machines, that's when we have the ability to monetize. So people could be spending a lot of time designing things, we won't cover it as engagement up until they start cutting. So our engagement actually in reality is even richer than the metrics that we publish. At the end of Q2, as I said before, we had 5.4 million users, which is about a 64% growth in our users year-on-year. We also had 3.2 million of our users engaged in Q2, which is they cut in the last 90 days, which is about a 53% growth year-on-year. And that represented that we had approximately 1.1 million more users in Q2 this year that were active, that were engaged than as compared to the same quarter last year, right? Now on a percentage basis, in Q2, while the total number of users who were engaged went up significantly, we saw a decline in the percentage of users who were engaged compared to 2020. And I think it's just primarily because unlike last summer, where people were stuck at home and they were doing a lot of home improvement projects, we saw the kind of a reverse of that in the summer this year, where people are on vacation, they took to vacations, they traveled. Having said that, we also saw the nature of engagement change, which is that where last year, there's a lot of focus on home improvement projects, this year, as people are traveling, they were making T-shirts. There were -- a lot of weddings had been put on hold, so there was a lot of wedding projects, et cetera. So again, we saw that extended seasonality during summer because of some of the life patterns that changed as we came -- as we started in this post-pandemic journey.

Wonderful. Would you mind if we talk about right now some ARPU numbers? Or your thoughts on ARPU numbers given subscriptions and accessories and materials are 2 primary categories, what have they been like? And what have you seen them being through time? And are there any specific initiatives you're pushing? As well any expectations for the future?

So I'll take that one. So we provide, on a quarterly basis, ARPU for subscriptions and accessories and materials. And the accessories and materials ARPU is very seasonal. It's similar to our overall business where users are more active in the holiday. So that represents our seasonal high and less so in the summer months, which represents our seasonal low. And so that's one impact on -- that drives this variability of ARPU. Another one is that -- is product mix. Within the accessories and materials category, we have MSRPs as low as $0.99 for digital images and as high as $240 for our 12x10 Easy Press. And so mix shifts within the category can lead to some of that variability as well. Subscriptions ARPU, on the other hand, is -- that has less variability. The primary driver of this metric is really the subscriber attach rate, which is about 33% as of the end of Q2. And that's the primary thing that drives that. Prepandemic, that was around 25%. And during the pandemic, that increased to around 30% and further increased to about 33%, partially due to the pandemic, but also partially due to the fact that we've been emphasizing increasing the value proposition of subscriptions pretty heavily since last year through expanding the content library in terms of quantity, quality and relevance as well as providing certain software features that are limited to subscribers. Longer term, we continue to do a number of things to grow both of these areas of the business. First, on accessories and materials, we'll continue to expand our product lines, including with higher margin or higher price, let me call it, items like the Mug Press and the Foil Transfer Tool, both of which we launched in the last 12 months. Those are good examples of that. And as well as differentiated products like our Smart Materials line. We launched that as part of the Cricut Joy machine launch as well as more recently with the Explore 3 and Maker 3 launch. We launched Smart Materials with -- that are compatible with those machines as well, and there's more we're developing for the future. And on subscriptions, we'll continue to create more value for the subscriptions offering, and working to draw users down the engagement funnel as they join. They usually join with 1 or 2 use cases in mind. But as they start doing that, they learn about more things that they can do with it and that expands their usage of it, and that draws them down the funnel.

On the topic of usage, I understand that your user base is quite enthusiastic. Many times, I hear that they spontaneously gather in groups to discuss ideas, exchange projects and that's on an ad hoc basis. Does Cricut have any organized initiatives that you -- that the company is putting forth to also increase engagement with these users?

Michael, that's pretty perceptive of you to kind of detect that. But let me kind of talk about engagement on a variety of fronts. So we have a number of initiatives today that are helping drive engagement. And first and foremost, because we are a connected platform, right? Our machines are constantly submitting data, our apps are constantly submitting data. And while we're clearly very respectful of privacy, we also want to make sure we can draw aggregate trends. So we're using our data better to better -- to drive engagement amongst various cohorts. So that's number one. The second is our overall focus on user experience and improving the onboarding experience. How do we get, as we bring [ beginner creators ], how do we get them onboarded and up and running and so that they can start creating projects, right? We've also focused heavily on educational content by introducing like live and on-demand content. And this is to really help people learn their new machines as well as to learn new skills. So just to give you some metrics, we've had over 16,000 people take these classes in the last few months, and we have had excellent feedback. And as we go into the holidays, we're going to increase the number of live classes that we offer. In addition to that, we are offering, as I said, on-demand content to not only help people learn about their machines but also acquire new skills. And as you pointed out early on, which is we have a very vibrant and engaging community. And we have hundreds of Facebook groups that have organically formed themselves and there are people that -- there are Facebook groups for beginners, there are Facebook groups for our Mug Press. So there's hundreds of these groups. And the beauty about the natural driver of our category is that anytime somebody makes something, it's an opportunity for us to create a conversation around it, right? So if I made a T-shirt, somebody is going to ask me, "Hey, where did you buy it?" I would say, "Oh, I made it." "Well, how did you make it?" "Well, I have a Cricut." "Well, what is a Cricut?" Right? And if you look at our official pages, whether it's on Instagram and Pinterest, even on YouTube, you'll see a lot of people virtually gathering in common interest, but also -- and prior to the pandemic, people would literally go and have meet and greets in different cities and all of these groups that are forming, and we are helping enable them by creating content that drives it. One of the projects I'm actually very excited about that our entire community has come together, we have this birthday project that we are working with an organization in Dallas. And this is about helping little kids who are not as fortunate to celebrate their birthdays. So our entire community is making projects and doing things and they are sending physical cards and water bottles and all kinds of birthday gifts to these kids around the country, right? And that's a wonderful aspect of our platform is as we help people lead these creative lives, it creates a strong emotional connection to the brand. And all of those initiatives ultimately drive engagement and create affinity for the brand.

On the topic of engagement, I remember you mentioned earlier that the machines -- yes, the machines are connected machines and you're able to track its usage over time. Can you expound upon that? And talk about the connected nature of the machines, what that means for upgrades and improvements and rollouts? And perhaps beyond that even, what are some functionalities that users could eventually see in the future brought over the air to their units?

Yes. So we -- Michael, we're an innovation company, and this was -- I have to say this is -- this has to be my favorite question, and I could probably talk about it for a while, but obviously, I can't tip our hand to the competition. But let me still kind of give you a lot of color on this. So first of all, again, as I said, the software is the backbone of our platform. So we are very -- we are investing in our cloud software, in our design apps. We're going to continue to invest significantly and improve the user experience, add new functionality, features. As Marty said, even offer premium features that will help expand the value proposition of our subscription, and we have similar investments in data. So the number one thing, because our machines are connected, when we invest in the platform, the users who bought these machines can do things that they weren't able to do before, right? So we can actually upgrade the functionality of these machines with software. So let me talk about 2 concepts that I've talked about in the past. The first is what I call the extensibility of our platform. Because we are cloud connected, we'll leverage our data, our software and content and add capabilities to our existing connected machines that are already out there in the market. So if a user had bought their machine like 4 years ago, by introducing new software and new functionality, all of a sudden, they can physically do things that they weren't able to do before, right? And that's amazing because like all of a sudden, this machine is sitting at my house. I can do something that I wasn't able to do 4 years ago when I initially bought the machine. So as a part of that, we can -- for example, we can introduce a new machine tool that allows people to engrave or etch or do something else that they weren't able to do. And coupled with that, we can launch new software features, we can launch new content for subscriptions, we can launch new materials and continue to monetize that user base even though they didn't buy a brand new machine, right? So we're just launching a new tool that they can add on to that machine. So that's what I call as the extensibility of that platform. Related to that, in the cutting machines category, we will continue to innovate and launch new types of cutting technologies, offer new use cases. And it's really an -- that allows us an opportunity to extend our library with new types of designs. And ultimately, all of these initiatives are helping us penetrate our SAM, our serviceable addressable market, right? The second concept, just to quickly wrap up, is what I call expandability, right? So we make great cutting machines today. But I always tell my team, we're not a cutting machines company, we're a platform company. And at the end of the day, so as I said before, the core of our platform is data, cloud software, design apps, community features that are built right inside the platform, right? So as we -- what that allows us is it allows us to build new types of machines that can leverage our platform and allow the users to do things that they weren't able to do before, things that are only available -- or technologies that are only available to large factories. So again, our asset is our -- is the platform and the software, and we can put new types of intelligent connected machines on top of that to really continue to expand our innovation, ultimately go after a much larger TAM that we defined today.

Thanks, Ashish. Let's give your voice a little rest and I have a financial question for Marty. Marty, can you tell us about the financial drivers of the Cricut model? I understand there's sales diversification. And more importantly, there's what you call flywheel effects of the product. Would you mind expounding upon that?

Yes. So when a -- typically, a new entrant to the Cricut brand typically comes in through the purchase of a connected machine. And the gross margin on that purchase mostly covers the customer acquisition cost. So everything beyond that is upside for us. And what I mean by the things beyond that, and I talked about this a little bit before in terms of subscriptions, ARPU and accessories and materials ARPU. And what happens is, as Ashish mentioned, once people begin engaging, they -- this flywheel of engagement is triggered, and they start doing things. They start making projects. And when they make projects, they're buying materials to make those projects with, whether it be iron-on or vinyl. Or they -- if they're making T-shirts, they need a heat press. So they buy something in our Easy Press line as well as they need content. And so they will either buy a subscription or a la carte or they can upload their own images. But the -- that basically covers our 3 product segments. They come in with a machine. And the vast majority of our machine purchasers are new to the Cricut brand. And then once they're in with the machine, they are generating ARPU through these other segments, subscriptions as well as accessories and materials.

While we have you, Marty, would you mind -- and I realize it's still relatively early after your IPO. Would you mind talking about your capital allocation framework a bit?

So the -- we -- if you look at where we spend our money, let me just talk about our -- the long-term guidance we've given for EBITDA. We've talked about 17% to 20%, that's our kind of long-term guidance that we've given. And just 1 point of note, we report EBITDA, which includes stock-based compensation as opposed to adjusted EBITDA, which excludes it. So the numbers you see from us are straight EBITDA. But these margin targets are really a balance between top line growth and investments we're making for future growth. And as you know, Mike, we have a proven track record for growth. Over 6 years, we've grown fairly consistently in excess of 45% compound annual growth rate, even prepandemic, that accelerated in the pandemic. And as well, we've been profitable since at the EBITDA level since 2014, and that has grown as well. Now -- and we expect it to continue to grow. Now in the Q2 earnings call, we discussed a number of things relating to our near-term margins. We had a strong first half, and as a result, benefited from higher EBITDA margins. Now from a top line perspective, as we move through the pandemic reopening, we see the typical summer seasonality that I talked about. Before, summer is typically our low season. But this year, we're seeing amplified seasonality as people make up for lost vacations and other activities that they have been prohibited from doing during the pandemic. And we expect that to extend -- that amplified seasonality to extend into Q4. However, as we also mentioned, as we move through the rest of the year, we expect to add at least as many new users in the full year 2021 as we did in 2020, which was about 1.8 million users. We feel good about our ability to continually add users. We also, in the call, talked about our investments we're making across the business, sales and marketing and R&D to help build out our platform and drive future growth, as well as focus on international markets, which is a strong growth initiative for us and has been growing significantly. Now on both a dollar and a percentage of revenue basis, OpEx will increase in the second half and into next year. And for context, last year with the strong revenue growth, we -- revenue growth outpaced OpEx growth. And so as we entered into -- let's see, entered into 2021, we need to catch up on spending in certain operational areas which we are doing, and you're seeing that. But even with these increased investments, we believe we will operate within that 17% to 20% EBITDA margin on an annual basis as we grow the top line, but quarters can fluctuate.

Thank you. So I have one more question. Well, usually, we end our sessions with asking for an idea about why one is excited for the second half or for 2022. And I'll ask that to Ashish, as well as to yourself. But before I ask that -- before I ask that question, I need to ask Marty, can you talk about, while I have you on screen, the supply chain and inventory levels? So we're headed into the holiday season, can you talk about will there be enough, for example, Explore 3s on shelves and in marketplaces to fill stockings come this holiday season? Granted also, there are component shortages and maybe channel issues. Would you mind talking more about supply chain please?

Sure. The short answer to your question is, yes, we believe so. We will have sufficient inventory for the holiday. And let me just now go into a couple of the components of that. One is components. We are subject to the same supply chain challenges that the rest of the world is. Many of our products are made in Asia and -- but components are a challenge. But over a year ago, our team has done a great job. They began extending much further out into the future, our agreements with our component suppliers to lock in much greater levels of components into the -- further out into the future. And so for the most part, that's serving us well. And you've seen that in that we were severely inventory constraint, particularly on machines throughout the second half of Q2 and the first half of -- I'm sorry, the second half of 2020 and the first half of 2021, where we just weren't able to meet demand. But we were able to ramp up our production. And we pretty much caught up as we talked about in our Q2 earnings call by the end of Q2. So channel inventories, they feel pretty good right now. Our own inventories feel pretty good. And so we feel good about supply in the holiday season.

Excellent. And for the final question, and I'll pose this to both yourself and Ashish as CEO and CFO. For you both, what are you each most excited about for Cricut come the second half and setting up into 2022? That's number one. And then number two, conversely, what are any topics of conversation or investor misconceptions that you'd like to set straight? You have the rest of the day today for investor meetings, it will be a nice way to set up for those meetings by answering those questions. And I leave it up to either of you to take the first answer.

Sure. So let me start with what I'm most excited about, and then we'll go to Marty and then we'll talk on misconceptions, I'll keep it really short. I think the #1 thing I'm most excited about is our investment in our platform. So again, our software is the core of what we do. And we've really kind of expanded our team, and the team is working on a lot of things that ultimately our users will benefit from in terms of platform investments. The second is we are an innovation company, and we are just always excited to be working on new innovations and looking forward to launching those innovations as they come to life in terms of our physical connected machines and everything else that goes around it. And thirdly, I would say, I'm super excited about international, where I'm just waiting to, again, while we've been expanding our international footprint, I personally haven't had a chance to travel in the last 12, 18 months to all the progress our teams have made. So again, most excited about platform investments and innovation and thirdly, our international footprint. Marty, what are you most excited about?

I agree with you. I think among those things, I personally am most excited about international. We've got lots of great activities happening there. The -- and you've seen that growth that we're generating. We expect to continue to show that strong growth there. One of the things is maybe not as much an immediate second half item, but I'm looking forward to getting beyond the pandemic. We were a great beneficiary of the pandemic in 2020. We're seeing a normalization right now, as we've talked about. And you're going to see that normalization in the second half. But beyond that, we grew, as I mentioned before, at 45% plus compound annual growth rate for the several years prior to the pandemic. And as Ashish talked about and highlighted, those -- the drivers of personalization and social media and engagement of our customers, those are still the things that drove us and drove that growth in the prepandemic era are still in place. And so we're looking forward to putting the pandemic, both the benefits, headwinds and tailwinds behind us and moving ahead.

And Michael, let me just quickly add to the -- I think, even more than misconception, let me reinforce a few things that may have been misconceptions 6 months ago, and hopefully, they're less so today. One is we make -- I'm very proud of the connected machine and all the hardware we build and all the expertise we have. But we always think platform first and the articulation in terms of the connected machine second, right? So our investment in software, data is something that I want to continue to build on to make sure that investors understand that what we're really building is this really intelligent platform of software, content data, et cetera. The second is we have a very unique approach to sales and marketing, right? While we spend digital -- we do digital advertising, et cetera, our community is a great driver of our funnel, right? They tell their friends and family, each project they make with friends and family. So there's a lot of leverage and brand affinity that, that model creates. And the third is, for a while, even many years ago, people were like, oh, yes, people in the U.S. want to do this, but outside U.S., we've been in many countries now. And what we saw, the same intrinsic behaviors that drove our growth and love for our brand in the U.S. are the same everywhere. People have a need to be creative. Everybody is born creative and we really think the world is our canvas, right? So I think those are the 3 things that I want to reinforce, platform company, unique sales and marketing. And we believe that as we go into our international footprint, as we go into the world, the world is our canvas. Marty, any misconception that you want to [ clear ]?

I think that's -- when Mike asked the question, that's what I was thinking about.

Excellent. So with a digital round of applause, we'd like to thank Cricut today. Marty, Ashish, and don't forget the wonderful supporting team behind them, which we at Citigroup very much appreciate. So on behalf of Citigroup and Jim Suva, I'm Mike Cadiz, and everyone today have a great day and a good remainder of the conference. We'll see you soon.

Thanks, Mike. Thanks, everyone.