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

All right. We're going to get going. The penultimate presentation, at least for me of the day, and I think for most of you too, before drinks at 6. So I've got the great pleasure of having Cricut with us today. Ashish Arora, the CEO; and Kimball Shill, the CFO. So welcome to both of you. Thanks for coming to the conference.

Thanks, Roderick.

Great to have you.

I wanted to kind of kick this off with a little bit of an overview of the company. I think that we were saying outside more people need to know what Cricut is, what is it doing. And so Ashish, I thought maybe I'd get you to start this off with a little bit of an overview, talk us through the company, maybe a little bit of background and what Cricut is all about.

Yes, thanks. So Cricut is a creativity platform and we basically help people make personalized items, everyday items, or make handmade goods. So anything from t-shirts to mugs, to hats to home decor and greeting cards and the list goes on and on. The platform, basically, what we do is we sell a connected machine and those range from anywhere from $149 to about $400, and people use those machines to cut physical things, right, from paper to leather to balsa woods, basswoods, et cetera. Think about like a giant industrial machine that is used in factories. And what we've done is we miniaturize these machines, connected them to the cloud. The platform itself basically is a set of design apps and these exist on mobile devices or desktops, and users use those apps to design things and send it to the connected machine, and they make those things. And these things will be polished, and handmade and people do it as a hobby or they also do it to sell items in marketplaces. We have 3 businesses. One is the connected machines business itself. The second is a subscription business that we are super excited about. And the third is accessories and materials. And we kind of caught it like a 2-stage razor blade model, but on day 1, people buy the machine, we attach accessories and materials and digital content to it. But that journey continues with the platform. And a month 1, month 2 later, basically, the platform becomes a razor, right? And we'll talk a little bit more about the platform later, but we think that that's a secret sauce. And just again, the company has launched in about 40 -- over 40 different markets. So we're in the early days of our company's story.

Great. Okay. That's great. One of the things I like about the company too is it's always been profitable, profitable growth, which you don't see in -- a lot of things we see people start off losing money, burning cash. A lot of companies here are still doing that. So I commend you for that.

Yes. No. We launched the platform in 2014. I should have mentioned that we were EBITDA profitable since 2014. The company grew at about 40%. And unlike most companies, we didn't have a big access to balance sheet. So we really kind of are very resourceful in how we leverage our balance sheet and capital.

Right. Yes, I thought that was very impressive. A matter of fact, we do infrastructure technology and consumer system stuff, but more electronics, less crafting things. So when this landed on my desk, I thought, why in the world would they give a hardware analyst that automated crafting thing like this. And I looked at the numbers and I thought, oh, this is very interesting. It's a very profitable company.

Yes. And again, I worked at Logitech prior to this, and we did many categories from gaming to et cetera. These are incredibly difficult super intelligent devices. It takes us years and years to design. In fact, most printer companies actually would not even give us components because they'll say our tolerance is our precision item. So this is like more high-end electronics that you can imagine.

I also think it's interesting because there's a -- just to get into the product a little bit. There is an online community element to it that I think is very interesting. And we almost never see that in hardware really. We see it with Apple a little bit, maybe a little bit more than a little bit, but not often do we see that connectivity between those 2 things. A platform that can do something than a bunch of users in a community, and it's a pretty vibrant kind of community as well. I mean I don't know if you could say a little bit about interaction, like how much people interact with the online platform and so on.

Yes. So Rod, I've been in consumer electronics in many different categories from gaming to home entertainment, to smart television, computer peripherals and have never, never seen anything like this. And just to give you a sense, we have over 7.2 million users on our platform. We have hundreds and hundreds of groups on Facebook, Pinterest, Instagram. Just on TikTok alone, just the top 2 #cricut over 5.3 billion views. That is actually comparable, like a #nike will probably be a few multiples higher than that, but not too far, right? The level of passion that people have, and it really comes from this idea of self-accomplishment. People make something they're incredibly proud and they actually go tell the world about it, right? So over 40% of our first-time awareness, which comes from users, right? It's word of mouth, et cetera. So people love to talk about it. We call it the fly -- engagement flywheel. And if you think about it, like everything that a user makes, it's an opportunity to create a conversation, right? So whether that's in the digital space, whether it's in the physical space. And our events, if you just go on YouTube and just look at it and just type in a Cricut launch event, it actually look like as if Apple is launching a product today. Like we -- I remember a couple of years ago, we were launching a product in Michaels, and I walk into the store to get ready at 7:00, 7:30 in the morning and there will be like 300 people lined up outside waiting since 5:30 in the morning. And I was like, we're going to be here even at 9:00. So yes, the passion is incredible. And I think it's the virality and we leverage it in our platform. We've built in -- the platform is not just a design software. It is building in a lot of community elements, right? So think about like Pinterest meets Adobe, all together in one.

Right. Yes. The thing that kind of -- a funny story on this front, when the IPO was happening, of course, it was COVID, so I'm working from home, and I'm doing these investor education calls. So I'm having -- I don't know if I've ever told you the story, I probably did. I'm doing calls on Cricut, and I'm explaining it to all these investors. And as I'm doing it, my daughter who at the time, 16 years old comes in and says, "Dad, you don't know anything about Cricut. You have no idea what you're talking about. Let me explain this Cricut thing to you."

I love it.

So she clearly heard about it from her friends and things and you don't just -- so I thought that was a very funny experience.

Yes. Just to that point, Rod, I was literally, this afternoon, opening up our Cricut Design Space app on our platform, and it's where you see a lot of community activity. So people, when they make something, they post a photo in our platform. So I just randomly clicked on the first photo. And there was like this eighth grader and she made this project that she had shared on our platform. I clicked the next photo, it's an 80-year old, right? And I turned around, I said, that's a serviceable addressable market. Like your daughter from there, I don't know how old she is, but it goes from that age. I have 2 nephews who actually -- one went to Columbia, other went to Berkeley, they have friends who actually use a Cricut to sell on Etsy, right? So you kind of see the cool gamut of people and I think it's amazing.

Do you know anything about the demo -- I guess you do know the demographics of that base, like is it skew more young? Or is it just all over the place? Or how does the demographic look?

I would say that there's -- like, at least, predominantly over 90% of our users are women, and that's pretty true worldwide. That's changing. But we are starting to see, I ran into a gentleman who works at Pixar and he's a designer that couldn't stop talking about how he uses his Cricut machines along with other colleagues. The demographic is changing and part of it is actually driven by our retail and how we've gone and approach the market. Remember, again, we have a connected machine so we can use software and content and app. So our retail spectrum goes from specialty craft retailers like Michaels and JOANN. We have mass merchants around the world, including the big ones here and other parts of the world. They're in office stores because people, a lot of people use our products for organizing and doing things around the office, for schools. We are in home DIY platforms where, again, people are using our products to create stencils so they can paint walls. So that just kind of gives you the -- beyond container store because, again, our products are used for organizing and labeling, right? So it's a really broad range of use cases. And I think as we continue to create awareness, we are seeing those demographics expand. So we're really excited about it.

Great. All right. On to some more boring short-term topics. And I want to come back to kind of the platform a little bit more later. So one of the things that, I think you would agree with this, Cricut did benefit from the COVID lockdowns. It makes total sense. People are stuck at home. Of course, they would do more of this sort of thing, right? This is something you can do at home. I'm sure they did a lot of other crafting as well. So now we're normalizing out of that. You've had some demand issues short term. I'm just kind of wondering if you could update us now on how things look to you today from a demand point of view. I know back-to-school is important for you. I don't know how much you want to say about that. But just kind of where do we stand here with demand? How do you feel about things as we sit here?

Yes. So again, I always remind people saying, we launched our platform in 2014. And from 2014 to 2019, we were growing. We roughly grew at a CAGR over 40%, right? So COVID, and I'll talk about trends in a second, so COVID definitely benefited us, right? But it didn't define us, right? And I think we have to really kind of understand the fundamentals of the business. . And when I talk about the fundamentals of the business, the trends that I believe that led us -- led our growth or helped us with our growth from 2014 to '19, they are very much prevalent in 2020 and '21. We had some additional tailwinds, but the trends around personalization, the availability of digital tools, marketplaces, all of those things were true then, they're true now. And then those trends are continuing to stay relevant, right? What I do think when you compare -- when you kind of deconstruct our business, right, I always say there's this big wave of machines that we sold and demand that was created during COVID, right? And I think it's going to -- it's hard to replicate that, but we think things will normalize over time. We have the reverse right now. We have headwinds. There are a few headwinds right now. But if you take that out, the numbers that I talk about is -- there's -- we have 17% more users that are engaged on our platform today than they were last year, right? We have 34% more subscribers than we had last year. We sold 30 -- we added 30% or something, I think 34%. We had 34% less net new user adds this -- last quarter, yet the number of people who are taking our first time trial subscriptions was up, right? So if you kind of isolate that there was an abnormal amount of demand, and now there's some headwinds, we think of the business in a 3- to 5-year time frame, and we think that the fundamentals of the business are pretty solid. The other thing I would encourage is, this is publicly available data, which is if you go to Google Trends and you say, search -- you look at what is the Cricut or a Cricut, right? We think that the awareness and familiarity are very healthy. But that's not reflected in the demand because we do believe that we are a discretionary item and while it's -- we will see the seasonality play out. We think the consumer is still waiting on the sideline. But in the meantime, we have 7.2 million users on our platform, 3.7 million of them engaged during this quarter, right? We have an opportunity to sell them accessories and materials and subscriptions and introduce them to new things, and that's what we are focused on. And by the way, that doesn't take away from that -- we believe we have penetrated only about 6% of our addressable market. So we think, yes, while there is a short-term thing that we have to normalize, we think the opportunity is intact.

I want to come back to this question because you said you think there's -- consumers are on the sidelines. Do you think that, that is macro-related? Do you think it's just a consumer weakness? Or do you think it's more to do with normalization, getting back to some kind of a normalized rate of demand? Or how would you parse it? And I know you can't do it scientifically, but which of those 2 things do you think is a more important variable or more important influencer here?

I start out by looking at brand interest and awareness and familiarity, right? And specifically, the term, what is Cricut, if you look at saying, how many people are searching for what is a Cricut and you have publicly available data on Google Trends. We think it's -- we've been thinking at a healthy share that there are lots of people who are interested in what is the Cricut, right? The other thing that I would say is that when we -- we did a -- we actually tested some price elasticity, and when we promoted one of our machines called Cricut Joy on Prime Day, we saw that demand manifest itself, right? So we think that the consumer is very price sensitive at this point given everything that's going on. We don't want to overuse the price and promotional level because we think we will kind of cheapen the category, and it will ultimately be not the right thing for the category. So we believe that this is very much the consumer's mindset around their spend. And we think that as things normalize, as people get into gifting mode and as the world comes back to normal, that demand will manifest itself.

It can improve a little bit.

Yes. And then finally, I would say that unlike other platforms, especially in the health category, we don't know of any other platforms. I'm not -- and I keep -- I want to go, at some point, talk a little bit more about what I mean by the platform. We don't think that there are very many other creative platforms that allow people to do the things that we're allowed to do. So there is not like a health bike kind of example that you've got a gym alternative to it.

Right, right. So sticking with the kind of some of the shorter-term trends, inventory correction has also been a factor here, lot of companies have experienced this. It's been kind of surprising because a lot of retailers, and I think this has come from the top down and retailers saw some sort of a signal in the summer, also realized they could get things more easily and said, "Hey, we're not buying any more inventory, clear inventory." So where are we with the inventory situation now? How do you feel about that on the other side of that, we still have more inventory to clear.

Yes. So as we've gone through the year, right, we saw -- in Q1, we saw some retailers continue to build their positions, right? Others are starting to work down to kind of more normal levels of channel inventory. What changed in Q2 is everybody is sort of working through channel inventory. And if anything towards the end of the quarter, starting to accelerate that process. So that clearly has affected our sell-in, which affects our machine revenue. But when we -- best available data that we're looking at volume trends, we think the channel gets to kind of their desired target levels kind of late Q3, early Q4, and we'll have to resume buying to be able to meet holiday demand. And so we do expect to see an uplift in Q4 relative to prior quarters.

And Kimball, could I just ask you lead times? Can you remind us what has happened to your lead times or what's going on with supply? Like do you feel like your lead time is pretty normal now? Or how does that side of the equation work?

So on strategic silicon, which is our longest lead time type of components, they're still at 70-plus weeks, right?

Okay.

And so we're planning that out on a very long time horizon. We're also using component inventory to make sure that we have continuity of supply in the volumes that we want.

So people do want to restock ahead of the holidays somewhere later in the fall, then you'll be able to supply that adequately, you think?

So in that time frame, we already have enough finished goods inventory on hand, right? Our strategy throughout COVID has been to hold more finished goods inventory than we normally would, so that we have product on shelves. And so -- and that's one of the ways we've managed the uncertainties in the supply chain. But as we have -- as we start unwinding some of that stuff, we'll get back to more normal levels of inventory over time. But at this point, it's still been around making sure that we had machines to sell.

And when you say that you think the demand will -- they'll need to restock and so on, what's your -- what kind of an assumption are you making about the health of the consumer around that time? Are you kind of assuming that they are a little bit weak? Or are you -- tell us what your macro thought is.

And I'll let Ashish add on to this. But we're looking at historical trends based on what seasonality normally looks like, what we're tracking against, and we have a pretty good idea relative to history where we think we'll end up for the year, right? I mean there could be another shock that ends up surprising us based on consumer weakness. But based -- we have point of view of where we think it plays out. And we're communicating that with our retail partners of what we think they need to have on hand to meet holidays.

And I think, again, I go back to -- we think there's a great amount of interest in the brand and the product. And our job is to create markets, right? And we lead that with our retailers. Having said that, especially with some of our larger retailers that go across many categories, now there could be other factors that might play in, right, which is that they're, overall, open to buy dollars, may be constrained because they have too much inventory of other things, right? So we think those factors, it's hard to estimate. But I think the things that are in our control, we feel really good. We feel pretty good about it.

And the last question on this topic and then we'll move on. But do you normally -- Kimball, you were saying you think you've got a pretty good idea. Has the back-to-school period been a good predictor then of kind of what happens to the latter part of the year? Is that why you say that? Or what do you use to...

Well, so back-to-school doesn't really -- that's not a big sales event for us. It's when engagement starts to pick up from people off doing summer vacation and so they're coming back -- there's more activity. But no, I mean we're monitoring sales out on a weekly basis and mapping that against trends.

And you can see the activity levels because you have a lot of good data?

Yes.

All right. Let's move off short term a little bit and stick with the good data part. So let's go back to the platform a little bit. You said you wanted to talk more about that and kind of flesh that out a little bit more for investors. Why don't you do that for us now? Talk to me about the platform, how extensible is it? Like what else can you do with it? All those sorts of things.

Let me kind of talk about a few concepts. I think they're important. One is like I grew up, even though I never worked in a printer company, but I grew up around with the whole idea of accessorizing a computer. And one other thing that we wanted to make sure is that we like -- we wanted to make sure that when the user is using our connected machine via the user interface, right? So we don't get disintermediated. So any time a user is using -- and there are very few products in the world that anytime you're using the product, a physical device, you can actually talk to that consumer. That's the #1 thing that we wanted to do, right? The second thing we wanted to -- we basically talked about is our category itself has a lot of people want to come back and absorb content, right? It's like Pinterest, right? I want to get an idea on a birthday. I want to do a school project. I want to make a gift for somebody, right? So there's a natural tendency for people to come to our platform and absorb that content, right? I even talked about saying, if you're -- nobody -- if you're -- these are all incredible platforms, so there's nothing against them. But if you're a rideshare platform, people are not going to go around just checking rides, right? Even if you're a movies platform, people are not going to plan movies forever, but we have a habit-forming experience where people come in and engage with our apps even when they're not sitting next to their machine, right? So we have the ability to get the user, we can talk to them, we can sell them something, we can inspire them to do something. The third is everything is in the cloud, right? So people will say, "Oh, it's like iTunes, right?" So it's like, oh, if a user stops subscribing or if they switch to another machine, they walk away with nothing. So they may have spent $500 or $1,000, you walk with nothing. So it's like, oh, yes, that's like iTunes. I'd say, yes, but it's slightly -- it's actually slightly even better, right, which is. So the switching costs are very high. And the reason I say it's actually better than iTunes in a way, again, iTunes is gigantic, right, so more power to Apple, but I think it's an easy metaphor, is that people have not created a remake. They've not invested their own time on top of iTunes. They've not created a remake or something else, right? Whereas, in our case, and I want to give the subscription example. Like in month 1, when a user comes in, they may derive $10 or $15 worth of value, they pay $10 a month. But let's say they're a school teacher. Over the next 6 months, they will have spent hundreds of hours of their design hours on our platform. They'll have created these incredible projects for school that they -- so now by month 7, it's not only about the 10 or 15 images that they want to use, but it's about the hundreds of hours that they have spent doing their own work. So if they stop subscribing, they can still see it in the cloud. They can still manipulate it. They can still design around it. But if they stop subscribing, they lose access to all that work. So majority of the value of the subscription product actually is created by the end user that they have to then subscribe to. So there's a natural -- the product gets better and the value people gets better over time, right? So those are the attributes of the platform. And so what we are doing in the platform is we are -- basically, we report on this 1 metric called the number of time people spend time to cut, but we had to actually look at engagement in a very holistic way. We are saying when somebody is on a beach, somebody is taking a vacation, somebody is in the office, how many times do they come to an app? How many times do they click? How many kind of high value-add actions do they take? They like somebody's project, they bookmark something. We've actually built community right inside the platform. So if I follow a designer, I can follow 100 designers in our platform right? So every time they do something, I get notified. So all of those things we are building in our platform, and we are trying to get that user come back more often. And now that they're coming back more often, which is one of the reasons why our subscriptions have done well, is we're exposing them to different messages. We are exposing them to different products. So we believe that the Cricut platform, the design platform not only serves as when you come in to design something, but if you have a birthday coming up 7 days from now, we want to start talking to you now 7 days before, right? So that's kind of what I mean by the platform and our investments. So we're in the early days of that, and we are really excited. And that's where -- I'm a product CEO and a majority of my time is like -- it's really kind of -- we think that platforms could create persistent value that anything, any piece of content that goes in creates long-term value. And so the last thing I'll mention, and I know we're now very long, is the connected cutting machine is just one type of robotic machine that sits on top of this pretty massive platform. But the community, the content, the marketplace that we are setting up on it for art, all of those things can be used for another type of machine that will sit on top of the platform, so the platform is expandable. I always tell my team, we made great cutting machines, but we are not a cutting machine company. It's the first type of robotic machine that we built on. And we believe that our leverage is not in the machine itself, it's in the platform. So we call it the expandability. So again, we're in the early days of that, and we're really excited about it.

So the -- well, 2 follow-up questions to that. One is just a clarification I think for investors that may not be familiar. The subscriptions, there is this strange subscription behavior where people will subscribe and then they'll stop subscribing. They'll subscribe during the holidays, and then January comes around, they don't want to cut any more, they stop. And I know that we've talked about ways to maybe extend that out and just have them -- can you update us on that? Like where are we with that whole behavior thing? And do you have thoughts on how to extend that length of subscription for people?

Yes. So one thing I would say is that, and we can talk about how we are improving the subscriptions product, prior to COVID, we had a rough attach of mid-20s, right, because users can take free content, they can use it, et cetera. And we are now -- we ended last quarter at about 33%, which is at the higher end of the attach, right? And we think that, that plus the ARPU captures all of the effects, right? One of the reasons why we don't talk about churn is we believe that, as Rod, you pointed out, that if a user comes in and out 5 times a year, we neither want to create that 5x churn nor do we want to give the benefit to ourselves that, oh, we reacquired a customer 5x, right? So we actually -- even though we would like them to be subscribing annually and we push annual subscriptions more than anything else, other platforms will let you pause the subscription, right? We basically let them resubscribe, but all of that is captured in the ARPU number and the attach number. The way we've been kind of improving that product itself, and we are in the very early days of that is we, first and foremost, we are expanding content like never before. We've talked a little bit about the contributing artist marketplace where artists from around the world can put their content as part of the subscription, right? We are going to introduce a new class of images, a new class of content called additive limits. We are actually adding software premium tools that are part of this subscription package, right? So if you are a subscriber, you can use an automatic background removal. You can use a monogram maker. So that's a very captive audience, so we do that. And then finally, again, any time people use our connected machine, they are talking to us. And what we are doing -- not only are we creating a better subscription product, we are actually merchandising that product better, right? So we can kind of basically intermediate like 15 points in the user journey saying, if you put a subscription with this message here, this is what it does. So I think those are all the things that are...

So you're getting smarter and smarter about this. I mean the attach percentage though in a way, I wish there was a better metric because it snapshots that, at any point in time and it changes over time, so it'd be nice to know...

But the ARPU captures all of the trade it does.

Yes.

If you combine the attach rate plus the ARPU, it actually really does give you for the quarter, say, what is the net result of all of that stuff, right?

Yes. I almost want to know what an average user, though, how much time they spent a year ago and how much time they spent now. Like if I'd like to see that number growing, I'm sure it probably is, but -- and the ARPU, like you say, kind of tells you that, but it doesn't 100%.

Yes. No, so one thing that we do want to start talking about -- a little bit about is, like I said, we've looked at a very draconian measure of a user could be designing for 5 days. And they're being exposed to all kinds of products and services, we don't count any of that as engagement, right, even though we can intelligently sell them, engage them, upgrade them to a new machine, all of that, right? So I think the thing that we would be looking at are how many people are coming to our platform? It's amazing that we put 1 million things in people's pockets, right? How many times are people coming and engaging with our platform, how many value-add actions are we taking, et cetera. So I think as we refine our metrics, we'll probably give a little bit more visibility into -- that it's not just about -- like I said, I want people to spend 10 hours designing. And yes, when they can't resell materials, but we also sell -- can sell them a lot of things. We're doing those first time out.

Right, right. The key is the time they spend on that platform, then you can monetize that, all kinds of...

Absolutely. What we call internally the high-value add actions, which is, I can find 10 other people whose aesthetic I like. I can follow some artists from the marketplace. I can save. So one of the other things about our platform is, let's say, your daughter is on a Cricut platform. And let's say, she has done 15 projects that took 100 hours. If she shares them publicly, that 100 hours is now available to anybody, right? So effectively, if I click on a project, it saves me 15, 30, 45 minutes of time. So all of those -- say, we have to capture and saying, how is the platform value increasing over time.

Well, since you brought it up, I'm going to -- I promise I'll open it up to questions if people have them. But one of the things we've talked about as well is could you monetize all that content like so -- like an app store? And I know you've thought about this. I wonder if you could update us on your thoughts related to potentially monetizing all that content that lives on the platform.

Well, there's a -- first of all, we do have this -- we introduced this idea of -- this new feature of contributing artists marketplace where artists from around the world are now publishing content, and that content they are able to monetize, and we are able to monetize through Cricut Access.

So I can go buy their content and you'll get a little slice of what I paid in for their content.

That's right. Or if I'm a subscriber and I use an artist content that, that artist will get, based on usage, some cut of the yard. But now all of a sudden -- so the other day, I was -- we have artists from -- we have like 60, 70 artists from around the world and all of a sudden all this content is coming in and we're in the very early days. Having said that, like our #1 focus is, again, how many users come in and take these high value-add actions, right, and how we monetize them. Today, we monetize them in a couple of ways, and I think there's lots of opportunity to monetize them in the future. And we're looking at a variety of models, but let me give you a couple of examples. Let's say, I see a wedding invitation that had a letter press effect, what I'm going to -- I can see, oh, this person is using a Cricut foil to tear the pieces of content. They'll go buy those things, right? One of our machines cuts fabric and a lot of people do sewing and all kinds of quilting projects. Say I'm on the platform, I see -- I'm sure Rod does sewing and that's his hobby, but all of a sudden, I may want to buy a new machine because I saw on the platform, I started seeing all these fabric projects that are being created. Having said that, our #1 goal is to get users to spend more time, take more actions, create more inertia, good gravity in this platform and we are studying a variety of business models on how to monetize all of those things.

Great. Okay. Let me just see if anybody in the audience has a question. So anybody have -- any of you have a question that you'd like to ask these guys while we have them on stage here? Okay. If you think of something, raise your hand. So I wanted to...

I have a question.

Oh, yes, please. Wait for the mic because we're -- and maybe say who you are and the company.

Chet Kapoor from Tenzing. I just wanted to know, you mentioned the back-to-school data, the engagement trends that you guys are seeing. Does that typically translate to equipment purchases as well?

So engagement is seasonal, right? And holidays tend to be our highest seasonal engagement. So starting with back-to-school, when people have more time because they don't have kids at home, they start to engage more. And engagement drives more accessories and materials purchases because you're making projects, you need things to cut, maybe you're making a T-shirt and you need heat transfer vinyl and it drives that behavior, but it doesn't necessarily lead to new machine sales directly because people are engaging more.

Yes. So let me add to that. And again, like I said, both machines sell net new user adds and engagement are seasonal and we see that as we go into Q4. We see a lot of back-to-school -- schools and teachers and libraries use our product, and there's lots of passion. So we saw a huge plethora of content coming out of -- lots of people doing school projects, getting ready for their classroom, redoing a classroom. You just come out on our platform, it's up there. While I don't think that -- so while it doesn't -- it's not a machine's buying event per se, we do monetize through accessories and materials and subscriptions and other things. The other thing that it actually does is, as I said before in the discussion, that every time a user does a project, it's an opportunity to create a conversation. So it does do very well for us in driving that word of mouth because as -- imagine school teachers redoing their classroom, parents walk in and they're like, "Oh my gosh, how did you do this, right?" So it's a wonderful time to create that search and awareness, which then reflects in the Google Trends that I talked about in what is a Cricut. It's a -- our product is a researched purchase, right? So there's a journey that happens over a few months. So we look at back-to-school as opportunity to monetize our current user base, an opportunity to drive more types of school-based content and then an opportunity to create awareness around our product. And those things work very well for us.

[indiscernible]

You might want to repeat that if you didn't have a mic or I can do it, if you like.

Well, the question was, because of the channel inventory overhang, the sell-through number is higher than our selling number, right? And so that's the question I'm going to answer. And if you look at the Q2 numbers, we look at new user adds as kind of a proxy for sell-through because we have good data for many accounts, but we don't have perfect data for all accounts. So we don't actually publish sell-through data. But new user adds were down 34% year-over-year for the quarter. Sell-in on machine revenue was down 76%. So that should give you some sense of the order of magnitude of the difference.

The other thing I would say is that -- we didn't talk about, when we estimate the market, right, and we asked people saying, have you made something that a Cricut platform would allow you to do in the last 12 months? We estimate that market in the top 6 markets to be 129 million people, right, which is U.S., Canada, U.K., Germany, France and Australia, right? And we are at 6% penetration, right? So when we are looking at these trends, we basically take a long view. And like I said, when we started in 2014, we didn't say, "Oh, you wait, then we'll be profitable a decade from now, right?" We're like we want to build a business that's the right business. So we look at that 6% penetration. And yes, we saw some pull through of demand. But again, as I go back to looking at the awareness and familiarity and what the pent-up demand is, I gave the example of Prime Day sales, we think that awareness is healthy. We think familiarity of our product is healthy. We do believe that the customer is very price sensitive for discretionary thing, which can wait. But when we look at the long term, and we look at our market size, and that's just with our current machines, right? That's not factoring in any new machine that we would do in the future, that's 6% penetration, right? So yes, we probably have to go through these bugs. We have to wait for things to normalize. But in the meantime, we know what we can control, and we can control engagement, we can control monetizing our current user base, and we can control creating awareness and demand, right? And so when that demand manifests itself, we are there. What we don't want to do, and we didn't talk too much about our sales and marketing, we take a very unique approach to sales and marketing. So while our sales and marketing as a percentage of sales is very high, our approach to marketing is very organic, right? We leverage word of mouth. We leverage passion as we go internationally across many, many countries. So we think that, that's what we need to do and the demand will come, and we'll be there.

You have one more question, [ Max ], do you want to...

Yes. Could you just briefly touch on competition and some of the pressures that you might be seeing in accessories and materials and the steps you're taking to protect your IP there?

Sure. So we're an innovation company, so we have lots and lots of IP that we file. From a true -- we have a couple of Japanese competitors who are competing with us on the hardware side. But we believe that our differentiator is the platform. And today, we don't see any other platform that is approaching the way we have approached the platform. That's specifically on machines. There are a lot of IP that we file on the integration of hardware and software and firmware, et cetera. We have a lot of design IP. On the accessories and materials side, there are some things that are very unique that are IP protected. So we have an insert card mat that is patented, so nobody can copy that. We work with retailers to make sure they are merchandising our entire ecosystem. Now there are other categories like the heat transfer vinyl or a vinyl or card start and we've -- right from the get-go, we've always seen competition in that. And our job is to make our products more affordable. Our products are seamlessly compatible with our software and our machines. But yes, we do see some parts of the market, we have a pretty good handle, like a lock from a patent standpoint. On the other side in some of the commodity categories, we want to win our fair share, and we'll do that by driving -- making our products more affordable, especially in this environment.

Okay. We're a little over time. I mean a lot of questions. I've got more for you, but I don't want to stand between people and drinks. So great to have you here. Thank you so much both of you for coming.

Thank you for your time, Rod.

Thank you, Rod.

Thanks, everyone.