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

Good morning, so I should say. My name is Erik Woodring. I'm a chief hardware analyst here at Morgan Stanley. I am pleased to be joined by Ashish Arora, the CEO of Cricut. This is the first time at the conference. Ashish joined Cricut nearly a decade ago, I think it was in 2012 after working at Logitech. You were involved in a number of businesses there. You worked in software and analytics businesses before that. And so, Ashish, I just want to thank you for coming to the conference. I'm excited to have you here.

Thanks, Erik. Thanks for having me here.

Perfect. So just quickly before we start, for important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. Perfect. With that said, again, like I mentioned, your first time here at the conference. And so, I think it would be helpful if you started maybe take a step back, explain who Cricut is, what you guys do and maybe the company's journey from where you started to where you are today?

Yes. Thanks, Erik. So Cricut is a technology platform for creativity. And the user journey with Cricut starts with user buying a connected machine that they used to cut and engrave and etch and write on all kinds of materials. Users do a lot of projects from anything from T-shirts to wild decals to reading cards. So the range of creativity is pretty amazing. One of the things that -- we then also basically give users design apps on the cloud and on mobile, which they can then use to design projects that then they cut on their connected machines. We have 3 businesses. One is our connected machines business, which is, again, where the user journey starts. In addition to that, we monetize and engage that user with subscriptions is another part of the business and accessories and materials, which, again, allows us to monetize that relationship over time. The company has been net income profitable since 2017. And one of the things that really kind of unique to Cricut is that, our platform, as we'll talk about later, is very sticky and the community is incredibly passionate, so which kind of what defines our brand.

Great. So in our conversations, we've discussed some of the tailwinds that are driving your business, the desire for personalization, the increased usage of digital tools in the crafting market. Maybe just frame for the audience, what do you think are the most kind of important long-term drivers that can allow you to kind of compound growth over multiple years?

Yes. So I think we have talked about 4 trends that I think those trends are very much intact and they've been at play for the last 10 years, and we think they're here for many decades to come. One is personalization. So people want to define themselves, right? They want to be their own brands, so they want to personalize things. They want to -- they're willing to wait longer and pay more to get those things personalized. The second is, it's easier than ever before for people to create things on their mobile and digital platforms. So their ability to create content. And where we come in as we manifest that content in a physical way. Third is, as you said, the proliferation of social media has been very critical to the growth of the company. We use that to inspire people. We use that to drive organic word of mouth marketing. And then finally, the proliferation of marketplaces like Shopify, Etsy, eBay, et cetera. Facebook marketplace that continue to drive this trend. So we think those trends have been playing in our favor for many years, and I think they will continue to play in our favor for many years to come.

Perfect. So, you reported earnings last night. Maybe just touch on some of the most important points from the report and maybe help the audience understand kind of what your message is entering 2022 and beyond?

Yes. So I think 2021 was a very good year for Cricut. We grew the top line revenues to $1.3 billion, which is about a 36% growth, which is -- which builds on the hyper growth that we had in 2020. We ended the year at 2 million subscribers, which is also a strong growth number that we talked about. And then finally, we have -- at the end of 2021, we had about 6.4 million users on our platform, which, again, we acutely acquired about 2.1 million users for the year. So we're actually really proud on where the year went.

So, customer engagement metrics, like the percentage of users created in the last 90 days, some of your ARPU metrics really expanded nicely through mid-2021. Obviously, they've been a little bit more challenged in recent quarters as the world has somewhat normalized. But how do we think about the path to stabilization and expansion for those markets -- for those metrics? And what actions is Cricut taking to kind of give users the tools to engage more, spend more and ultimately kind of see that dip then go and expand?

Yes. So I think it goes back to the engagement question, right, which is -- our engagement percentage, which is a number of engaged users as a percentage of the total users of the platform grew from about 56% in Q3 to 60% in Q4, which is what we are expecting. As we go into the year and into the spring and summer months, we will see that engagement decline a little bit. But the good news is that we are attracting a lot of big -- in addition to focusing on the hobbyist segment, we are attracting a lot of big [ inter-crafters ], right? So that may put some pressure on the engagement in the shorter term, but ultimately allows us to monetize and engage the 6.4 million user base. And I think that's where our focus is, where we continue -- we want to drive accessories and materials and as well as subscriptions. And so, a couple of our key priorities are, let me kind of double-click on subscriptions. Our subscriptions value proposition was focused primarily on content. We are going to continue to expand that. In addition, we are actually providing users very innovative software tools. These are premium software tools and they have to be a subscriber. One thing very unique about our platform, which is what I mentioned early on is, it's very sticky. And I think that kind of has a correlation with subscriptions. In our case, when a user -- users take our ingredients and our artwork to create things, right? So in addition to everything that they've spent money on, they've invested hundreds and hundreds of hours creating projects on our artwork, right? So if they stop subscribing that they are not able to utilize that anymore. So what makes our platform very sticky, unlike many other platforms that exist is that, users are leveraging the content that we give them. But in addition, they're creating more and more content. So the platform becomes more useful and more sticky over time, right? So it's at the most basic level when you start, but as users invest more time in that platform. So I think those are the things that become an automatic gravitational pull to drive subscriptions going forward.

And importantly, because it's cloud-based, you can use it on your phone, put it down, pick it up on your desktop or your notebook, put it down, go somewhere else, pick it up back up.

So everything that a user has designed while they're subscribed is in the cloud. The benefit of that is that, they can access it from any device. What they have to do is make sure they continue to stay, subscribe to leverage the work that they have done, which, as you can see from the attach rates and the subscription ARPU, they seem to be really benefiting and enjoying from that.

So I was just going to ask you about subscription ARPU because, obviously, it's been growing quite strong, 27% in 2020, up double digits again in 2021. What is driving this ARPU growth? Maybe just contextualize it in, one, the options that you provide to your subscribers? But then 2, kind of the value-add that you increasingly try to give your subscribers to get them to stay on, perhaps tell their friends, get their friends to subscribe and so forth?

Yes. So I think there are 3 things and a couple of those I've already mentioned. The first is, we -- the content. The content was the starting point of subscriptions. We talked briefly about the Contributing Artist Program, and that will really help accumulate, diversify the vastness of the library and the amount of content people have had access to. So that's number one. The second is, we are in the very early days of adding software and services and premium tools, which really make it easy for people to do things that they haven't been able to do before. So I think the value proposition of content -- the value proposition of subscriptions will continue to enrich over time. And then lastly, something that we have been doing recently is merchandising. Because we are a connected platform, I think it's a very important point for people to know is that, unlike a printer where you can use any generic or any software. We control the last user -- the each of the user experience. So if users have to use our apps on desktop, PC, or Mac or mobile to come into our content. So what that allows us to do is that, every single time when they use our machines, we can intermediate that. So we've been merchandising the value of subscriptions and measuring them. And I think that we will continue to do that. But I think overall, it's one of the top priorities for the company. And it starts with engagement, right? As we continue to drive engagement and tell users the value of subscription and enhance the value, we will continue to see health in that business.

And then maybe just a question on behavior by cohort. Has there been any change for your pre-2020 cohorts versus your COVID cohorts versus, again, it's relatively early, but your "post-COVID cohorts"? Are they all behaving fairly similarly as you see them go through their journey?

I talk a lot about expanding our demographics, and I think it ties to your question. So let me talk about that first versus a shift, right? So what we've seen is a flattening and broadening of the bell curve, right? So we're very, very focused on the enthusiasts, and we still think that we're in the very early days of that market penetration. In addition to that, we have seen, over the last couple of years, more and more big inter-crafters, intermediate crafters as we've expanded our distribution in mass channels and office and home organization store. We're seeing that influx big and intermediate crafter. We're seeing more Gen-Zs and millennials, which is -- while they are not as engaged initially, it's really good news for us because what that means is that, we are becoming more to be crossing the chasm and becoming more of a mass market product. And I think our goal is to get them to continue to come down the funnel. So, I think from a cohort standpoint, I think we'll -- some of these dynamics will change over time. But we've kind of shared in the past that our -- the users that we acquired in 2020 behaved very similarly to pre-pandemic. Users that we acquired in 2021 with the addition of big inter-crafters and Gen-Zs are behaving at a slightly less level. But again, that provides an opportunity for us to engage them over time because, again, we are -- every time a user uses our product, we can communicate with them, right? So it [ needs ] a lot of focus on that.

And then maybe just speak to -- you guys have a TAM and a SAM in terms of your addressable markets. Maybe just speak to the runway that you have there? Because, obviously, penetration is quite low today. And so, maybe help us frame what that opportunity is to reach more users, again, whether it's your SAM or your TAM, but maybe contextualize both of them?

Yes. So when we calculate our SAM, and we looked at just the top 6 markets, which is the numbers that we published, we ask people saying, "Have you made something that our current platform allows you to do in the last 12 months"? And we use that number and the numbers were, I think, 85 million in the U.S. and Canada and 129 million in the top 6 markets. The TAM was calculated, which speaks to our platform is, are you interested in doing something that our platform will allow you to do in the future, right? Are you -- have you made something? So, beyond the capability of our current machines, and that was a TAM, right? Overall, we feel that we're in the very early stages. Unlike most companies, Erik, one of the things that we've done very differently is that, over 40% of our users come to know about Cricut through friends and family. We have a very -- we call these network effects and the marketing flywheel works with -- as more and more of our users engage, they tell other friends and family about it, right? So if you think about it, if I customize my water bottle, a lot of people are going to ask me, "Hey, where did you buy it?" I'm going to say, "Well, I made it, right?" So I think that lends itself to -- the reason I talk about this is that, we believe that we're in the very early stages of that market penetration. And it's our job to tell the world about it through our friends and families, through our members.

So I think you make a really important point there. And for anyone that sees it kind of on the social media networks, something that's a real differentiator for Cricut is you're dedicated and, quite frankly, very socially engaged user -- social media engaged user base, right? So how is that -- how did you create that? Again, was it completely organic? Was it your users taking it on their own? Because it really is some of the stats you listed last night are pretty impressive in terms of the videos on TikTok for example. So maybe just describe how that's been created over time?

Yes, yes. So I think it actually fundamentally starts with the category. I've been in many categories in my previous jobs. And one of the things that makes our category very unique is that, when users use our product, what they ultimately take away from this is a sense of accomplishment and pride. And if -- it's -- there are very few product categories, products serve a lot of functional needs. And there are very few categories that make people feel really good about themselves. And when they feel really good about themselves, they deem it on themselves to tell everybody and their cousin about it, right? They tell their friends and family. We are in the company from the early days because we didn't have access to a tremendous amount of capital, we took a very organic -- and we thought that that was the most sustainable way of doing it, right? So we understand each of these social media platforms really, really well, whether it's Instagram or Pinterest and YouTube and TikTok, we understand what key messages resonate with our user base at what stages of the funnel, right? And what we do as a -- which is, again, different from most companies is that, we put the user and the community at the center of all our marketing. And I would encourage everybody in the audience to look at our official Cricut pages on Facebook or TikTok. We literally -- all we are doing is amplifying through our community user stories and that lends itself to a tremendous amount of word about marketing. I'll kind of tell you how that helps the company. Internationally, somebody asked the question this morning, "Hey, what is your size of investment"? I'd be like we put 2 people on the ground, a salesperson, a marketing person and give them a little pot of money. But we have a team of 2 plus 50. And the 50 are -- where we go -- let's say, we launched in Israel recently or we launched in Singapore, Malaysia, Philippines, we literally have the community discover us, and there will be people who will go into stores and stand all day demoing our products, talking about the passion for the brand. But I think it starts with the self-accomplishment and pride that we generate. And then the brand and the company and the ethos and the culture is built around the user. We don't do -- while we are very proud of our creative teams and our marketing assets. What we do is amplify the little T-shirt that somebody made for a cancer survivor, right? And that's what users appreciate and that's what drives the word about marketing.

Yes. Okay. So you touched on international. So I want to ask you, obviously, it's an important kind of long-term growth vector for you guys. Roughly 90% of revenue comes from the U.S., but you've identified your 6 core markets. You're starting to enter new markets beyond that. And so, maybe just help us understand what inning are you in when it comes to international expansion? What efforts are you taking, again, you kind of just got into this but to increase your presence in some of these markets? And then last one is just how do we think about the payoff period for that?

Yes. The international was, Erik, 11% of the revenues for the company. We grew at about 110% for the year. And it's -- as we've gone -- and I've traveled in many of these countries prior to the pandemic and the running comment between me and my colleague was that up until people started talking, you wouldn't know which country you're sitting in, right? It's only when you got to hear their accent. And the reason I say that is that, the intrinsic motivations and behaviors of what drives people to come into the category irrespective of the 15 markets or 20 markets that we are in is inherently the same, right? So what we've seen in the U.S. and then we -- after the U.S., we launched in U.K. and Australia, the things that drove people to come into the category, irrespective whether they have craft retailers or not, are very much the same, right? And what we have done is, we've leveraged those as we've gone in every country. The last part of your question was, what does it take, right? What is the runway? What is the payoff, right? So I think based on our -- we don't have a shotgun marketing approach, we don't go into a country and spend $50 million. We start with a very small investment, and then we engage the community. We work with influencers. And we think it's the best form of marketing that works for our brand. And it takes like, I would say, 2-plus years to really get the flywheel going, right? And I think as we get better and better at it, I think that time frame will condense. But the reason we've been very strategic and methodical about which countries we add, we have to get that flywheel going. So, we've been investing in countries, again, at a very systematic basis, and we have to start those trend lines today so they can kind of all add up in the next 2 or 3 years. But again, our hope is that, as we get better and better at it, that time frame will condense. And hopefully, we'll be able to do it sooner. But we -- I don't think we're going to fundamentally change our marketing approach where we go in and 3 months later, we have a market, we think it will be the wrong way to develop the brand in those markets. But I feel like across the board, and I would even say it for the U.S. as well, we're in the very, very early stages of the brand.

Right. Okay. So, obviously, to engage with the brand, you want to have a machine, right? So historically, you've launched, call it, 3 to 4 new connected machines or accessories and materials products each year. You launched new products this week. So maybe if you could just touch on those new products? And why -- what they do to the platform -- what they do to Cricut's platform in terms of enhancing it? And then going forward, is that how we should be thinking about the product launch cadence kind of 3 to 4? Or how should we think about it maybe?

Yes. So I'm a product CEO. And we are in a -- this is going to take the next 30 minutes. But we are an innovation company, and it runs in our DNA. We file tons of patents, but let me kind of break out the investments for you. The #1 place that we invest is our platform, right? We think that it has a cumulative residual impact, and it helps launch new businesses, new paradigm, new ecosystems, et cetera. So we have a significant amount of investment in data, content, services, mobile app, design apps, and one of the unique things that we are doing is, we are building community features right inside our design software. That's the major area of investment. It flows through our CapEx line in addition to OpEx. The second area is clearly connected machines. And because we are -- so one is that we believe that, again, we have -- we are in the very early days of what our current connected machines offer, which is the ability to cut, engrave, etch and more things. And we think that there's new form factors, new value propositions in the category that we are in today. In addition to that, we briefly alluded to that because our leverage is on our platform, the connected machine happens to be just the first type of XYZ machine that just does one type of thing today. But our goal is to build and we are building other types of machines that are built on an XYZ paradigm to do things that users are doing today, which is what defined our TAM, right? So I think we will continue to do so. Our cadence, every time we launch a product, yesterday, we launched the Cricut Hat -- a couple of days ago we launched the Cricut Hat Press. And the Cricut Hat Press feeds into the ecosystem for our connected machines, right? So we will be selling hats. We will sell the Hat Press, we will sell films and a vinyl sheet that can be cut on our connected machine. We will sell content that actually people are going to customize their hats. And now all of a sudden, what used to happen in lids could happen in the benefit of the [indiscernible]. And what we've seen is, not just that -- it's not just redefine the hat -- I think the potential based on our experience in the mugs or the Mug Press, it has the potential to really expand and disrupt the gift industry. So when we launched the Mug Press, a lot of people say, "Well, how many mugs will people make"? And that product has been tremendously successful for us. And we sold the Mug Press, we sold mugs, we sold sheets that go with the mugs. We sold content that goes with the mugs and all of that. So it really fed the ecosystem. But ultimately, what we realized was that we redefined the ability for people to make a gift last minute for $5 to $7 to $8, right? So I think we're going to continue that. And Erik, last point I'll say to that is that, and I think it's not well understood. When we build a connected machine, we are leveraging it that for almost close to 6 to 10 years, right? So we can -- when we create a platform architecture, we can continue to create derivatives from that architecture. We can continue to add tools that allow that machine to do things that it didn't do the day 1, right? So I always give the example of saying, if you bought a blender, your blender is not going to do anything different on day 2, right? In our case, if we have 6.4 million users that have our machines, we can add a new tool, couple that with content and give the user a brand-new capability that they didn't have before. I promised you that it will be a long answer.

That's good. I like it. Another important topic that we haven't touched on is just kind of the IP that you have and the way that you differentiate. And I think it's very unique when it comes to the accessories and materials market because people might compare it to the printing market. But in fact, you have IP that makes your product act very differently than third-party products. And then even in some of our conversations early on, there were people that said, we're going to do this and then they realized they needed to get out of the business because they couldn't compete with yourself. And so, maybe just talk about how you've been able to successfully defend the accessories and materials business and some of that IP that you think is really kind of interesting and important?

So let me kind of first start off by the printer paradigm, right? So the one thing that makes us very different from the printer is that, the printer can be used in any piece of software. In our case, when we use our connected machine, we are the last user interface, right, whether it's through our mobile apps or a desktop, so we can intermediate that relationship. The second is, a printer will have paper and inks. Well, we have a thousand [ queues ] and all types of materials and all types of tools that go with it, right? So our IP is, we're the company -- we've always said our business is very complex, right? We, on one hand, we're a content company. On the other hand, we have expertise in electromechanical devices. We have expertise in material sciences, right? We have expertise in computational graphics. And we combine all those things to make that complexity the moat, right? So I think that's something that's very, very unique. And when it comes to differentiating, you had to -- this one part of your question about differentiating materials, right? So we can actually redesign our machines with our content. And with -- I'll give you an example. So we have this a patented insert card mat that makes it easy for people to make cards, but nobody can copy that because patented. We then give people cards and envelopes that are designed to go with that and then we have perfectly positioned content that is precisely matched to the card that they're going to buy. So even if you are off by 1 or 2 millimeters, the card will not cut properly, right? And then we work with retailers to market what we -- the compatibility between our machines, our materials and for all our ecosystem. So whether you're using a Hat Press or a Mug Press, we will give you the ink sheet. We will give you the settings on the Mug Press saying, "You don't even need to worry, just put it in and everything will work perfectly, right?" So I think it's that compatibility that's key part of the story and also establishes our moat for us. It is a competitive market. And we expect, to some degree, competition is healthy, but our job is to continue to innovate and be ahead of the competition. But I would say it's that compatibility story between everything that we do. So the #1 thing that our users tell us when I buy a Cricut material, it just works.

Yes. I didn't forget it. Yes. How about in -- roughly half of your sales come from brick-and-mortar, half of your sales come online. How do you see that evolving? How are you working with your retailers to kind of expand that footprint to reach more users? Maybe just talk about some of the strategic investments you're making there when it comes to go-to-market?

So, again, we enjoy a wonderful relationship with our retail partners and half our sales that we've talked about before, comes from e-commerce websites that include cricut.com, but also half of our sales come from bricks and mortar and bricks and mortar retail stores are a wonderful platform for us to inspire the user and bring them in and introduce them to the category, et cetera. Now, one thing that -- when we talk about cricut.com, all the subscriptions, you can only buy on cricut.com through either our software -- within our software or on our website. We also use our platform to merchandise materials in a very exclusive way to come out with new innovations and products, sometimes even before we go into retail. So I think what we'll continue to do is play that symbiotic relationship between our web properties, our design software and things that work for our retailers. I'll give you an example, we recently got into a retail chain that basically is all about home organization. So through our software, we are able to feature destination pages that show people how to label things and how do mark containers and everything else. So again, the placement in retail by using our software to kind of connect the dots, I think Cricut platform can be used to do better or to make your home organization even more seamless and better. So we definitely appreciate that relationship.

Good, good. So we have a little over a minute here. I want to give you the chance to have the last word here and maybe give the audience an opportunity or maybe explain to them maybe what you think is most underappreciated about the Cricut story today? So...

So I'll say 2 things. One is that, the level of engagement and commitment and passion of our user base is uncharacteristic. I've been in like half a dozen categories that never witnessed anything like that, and that's really, really powerful for the brand. The second is, people -- I'm sure when Amazon was coming out with their e-commerce platform, people said in the finance industry, and we said it's a books company, right? Cricut is building a platform, that's our core asset. And the connected cutting machine happens to be the first type of machine that does one thing for the user or a few things for the user. The power of the company is in this platform that we can enable new -- and we are building those with new types of connected machines that are computerized, pneumatically controlled that are beyond what we do today that would allow people to do things that only large industries and factories were able to do. We refer to this trend as a personal desktop manufacturing. And we fundamentally believe in one of the largest industrial trends or industrial revolutions ever, and we think we're in the very, very early stages, and we are participating in it.

Awesome. Well, with that, we are just out of time. So Ashish, thank you very much for joining us. Hope to see you next year, same time, same place. And thank you, guys, for attending. I appreciate it.

Thanks, Erik, for your time.

Thank you.