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

Good morning, everyone, and thanks for joining us today. My name is [ Lane Sarah ], and I'm part of the U.S. Internet team here at Goldman Sachs. And so I'm very pleased to be joined here today with the Cricut team. We have the CEO, Ashish Arora; the CFO, Kimball Shill; and the SVP of Finance, Jim Suva. And so before we get started, I think you will go ahead and read the safe harbor act.

Yes. Thank you so much, Lane, and welcome, everyone, to the Cricut fireside chat. A few housekeeping items. First, this fireside chat is being live broadcast and a replay will also be available on the Investor Relations portion of our website. We encourage you to read our safe harbor commentary, which includes risks and our recent 10-Q and 10-K and other SEC filings. As Lane mentioned, joining us on the stage, first of all, on the far right is Lane. Next to her is Ashish Arora, our Chief Executive Officer; and Kimball Shill, our Chief Financial Officer, and I'm Jim Suva, SVP of Finance. If you do have any questions, please raise your hand, we'll get a microphone to you as this is being webcast, that way it is captured. And if you have additional questions, please e-mail me at the conclusion of this at [email protected]. Lane. I'll turn it back over to you.

Okay. Great. So I guess first for those in the audience that may be a lot familiar with the Cricut story. Can you just talk about what you're trying to build and what you're unlocking in terms of an opportunity and just how you guys are positioned against that over the long term?

Sure, sure. So first of all, Lane, we are a critical creativity platform and users use our platform to make handmade goods or personalize everyday items. And they make lots of amazing things like personalized T-shirts, custom [ bags ], vinyl decals, school projects, cards, paper projects and things that people always continue to make. We have 8 million users on our platform, we have about 2.7 million subscribers. And the user journey starts with the purchase of a connected machine, but the relationship with the user over time stays on the platform. And so let me talk a little bit about the platform. The platform -- first of all, our users design projects, files and on our platform, using our apps, on iOS and other OSs and they send it to the machine to cut. Our platform also helps people discover all kinds of inspiration and project that they can actually make. So we help them discover content that they would want to make or they think they'd want to make, we help them design and make those projects. And ultimately, we want them to share back on our platform. From a modernization strategy, we have a few different ways to monetize. Clearly, the connected machine is where the relationship starts. We have accessories and materials, which is a very, very important part of our business. So we basically help users figure out the materials that they need to make a project. So that's a big part of our monetization. And then finally, all the content and the subscriptions that come with it. Like I said, we have 2.7 million subscribers. Last comment I'll make is just about the opportunity size. We estimate our SAM to be massive because we believe that everybody wants to create. We have actually shared these numbers before. We have about 85 million people in the U.S. and Canada, 129 million people in the top 6 markets, and we believe that these trends that drove Cricut's growth from the 2014 until now, those are still intact and people will continue to make those projects.

Okay. Great. And then, I mean, looking at your revenue segments, you've got a fairly split balance between the connected machines, the accessories and materials in the subscription. So can you just talk about how those are all interlinked and how they build upon one another. And then just with AI being such a key topic for investors this year, can you just talk about how you guys incorporate and leverage AI into your ecosystem?

Sure. So let me first talk about the ecosystem and how everything is designed to work with each other. So we just launched a product called Joy Xtra, maybe about a couple of weeks ago, right? It's a 9-inch machine. And one of the core value propositions of the machine is to actually allow people to make stickers and print things on their -- on their home printer and cut it on the machine, right? So the entire machine, the Cricut Joy Xtra, the software, the apps, the content for people to make stickers, plus we also launched 4 or 5 new types of materials. They were all developed together in unison to ultimately create a -- make it very easy for people to make full color prints and full color stickers, right? So that's a good example of where the machine specs, the software specs, the content, we've got lots and lots of content, people things that people want to make, plus all the materials in the ecosystem, but all designed to give that user the best chance of success and to make it really easy for them to make all these types of projects, right? So a really good example of how the ecosystem is designed because what happens when people use our materials, they basically just have to select an option saying, "Oh, I'm using Cricut sticker paper, right? I'm using Cricut waterproof stickers and the machine just does the rest." Whereas if they try to buy other materials, they have to try out different settings, try out the cut settings because every machine has to be calibrated to cut that material perfectly, right? So it's a good example of how everything works just seamlessly together. From an AI perspective, we've been investing in AI for quite some time. We've actually been investing in machine language learning. We've invested in predictive AI as well as generative AI. So today, we have a number of features that are actually using predictive AI. For example, we have -- when people come search for something, they can often describe it in words, but sometimes they just want to visually say, "I want something that looks similar to that," right? So we have this feature called Similar Images. We have built other features like Automatic Background Removal, let's say I want to take a picture of a water bottle, I [ don't want ] remove the background, so they're able to use some of our AI engines to clean up the backgrounds, et cetera. We are investing very deeply in search. Again, search is -- we have so much content on our platform. For sometimes for -- let's say, I want to search for women playing soccer. But it's really -- we leverage AI to find visually similar images based on that. When it comes to generative AI, which people have been talking a lot about, we want people to find content even if it doesn't exist in our library. So we have -- even though we haven't launched anything, we want somebody might come in and say, "Dolphin jumping over the boat in an ocean." And let's say that particular is not in our database, we will be able to automatically generate an image. Today, we haven't launched it. We've been investing in it pretty heavily. The difference between us and what we see in the market is today most of generative AI is actually based on graphical images. And we are basically focused on vector images, which are very, very precise and very hard to design. So our generative AI is available for that. So we think of it as a very, very complementary part of our business and not much competitive. As we execute on it, we do have to be careful in terms of making sure we respect copyright laws and we are respectful to both the audience, but we believe it's a massive opportunity for us to not only for our monetization strategy called subscription, but also to really enhance the value proposition of the platform to help it easy -- to help make it easy for people to actually create projects.

That makes a lot of sense. And then I mean just zooming in a bit, you guys recently launched the Cricut Venture in July, adding to your portfolio of connected machines. So can you just talk about what the target audience is that you're after? And just how consumer adoption has been trending so far?

Yes, yes. So Cricut Venture, we just launched Cricut Venture about a couple of months ago. It is our 24-inch cutting machine. It's the flagship product for us. And it was designed for the creative enthusiasts right? So it allows people to take a large machine and place it in their home on even a dinner table because the machine has a 45-degree angle that basically makes it much more space optimized for people to use in their home. The machine is -- it allows people to cut 75 feet of repeated images, large images, lots of projects in batches. It is designed for the creative enthusiasts who today makes a lot of projects or makes large projects for schools, for organizations, for weddings, for churches, the religious organizations, events, parties, all of the above. It also is being adopted by some users who want to sell. But first and foremost, it's actually designed for people who use multiple machines. They're heavily into the category, they're deep hobbyists, et cetera. This is our first in-person launch event that we did a couple of months ago. I was really, really excited about the launch. And so far, we're very pleased. It's still early days, but we're very pleased with the results.

So I guess looking at the broader macro environment, some consumer softness, can you just provide investors with an update as to how [ New Year's ] acquisition is tracking as well as engagement?

Let me kind of rewind a little bit and just give people a little bit of history. So the company is growing about 40% plus from 2014 to '19. We believe that the trends on the SAM are intact and healthy. Now in 2020, when COVID happened, to us, it was a massive conversion event. We had a very healthy funnel and all of a sudden, the funnel is converted. We see the reverse happening today. Right, because we have -- we believe we have data that shows that our awareness is healthy. Our funnel is very healthy. People come to the funnel. They go through the research process and then they are waiting for things to become more affordable. The consumer is worried about inflation, worried about spending, and so we see -- because we are a discretionary product and our average prices today, we've been less promotional this year than the last couple of years because we believe it's a long term -- it's the right thing for the category. We have data that led us to believe that the funnel is healthy. People are coming, they're ready to buy something, but affordability is top of mind. So as we go into Q4, we will generally tend to be more promotional so that we can actually convert that funnel. But again, when we look at the business, the fundamental trends, we think of the business is very healthy. We think of the funnel being healthy, and we just don't want to commoditize the brand while the consumer is in this mindset. But we're very excited about the business.

Okay. And then looking longer term, how do you guys think about the potential to partner with e-commerce or social media platforms as a potential for creators and brands?

Yes. Yes. I think I can take the question in a few different ways, but let me first just talk about from a channel perspective. Cricut [indiscernible] research purchase, and people go on social media platforms, like a lot of the awareness originally comes from word of mouth. So friends and family play a huge role when any time when somebody publishes a project, either on the Cricut platform or on Facebook, Pinterest, Instagram, it plays a massive role in the -- in creating awareness and the word of mouth, how did you make this project [indiscernible] Cricut. So from an awareness perspective, platforms like the ones that I mentioned, social media platform play a massive role in the awareness. From a distribution perspective, back a couple of years ago, we shared this data that half of our business comes online and half comes from bricks and mortar. So there's, again, that we see more and more of that happening where people are going to e-commerce platforms. People are going to websites of our retailers, people are coming to cricut.com.

And today is closer to 60-40, not 50-50.

Yes. And then the last but not the least, within our platform itself, there's a massive amount of people coming every day, every week. We haven't disclosed those numbers. We've created a marketplace of artists that can actually publish on our platform from across many parts of the world. And so that's an opportunity for them. They can publish art and content and they get paid for and monetize. So I think we look at the platforms in many dimensions, and we think we have opportunities in all of them.

Okay. And now turning to Kimball. In your most recent earnings report, you guys saw a recovery in machine sales of about 5%, year-over-year growth. But at the same time, accessories and materials still saw 20% year-over-year decline. So can you just unpack what the key factors are that are driving that dynamic?

Thank you, Lane. We're actually very pleased to finally see an uptick in machine sales as the last few quarters have been challenging for us. A year ago, we actually had on the access of materials and product launches, that we didn't have comparable launches this year. And so much of that more difficult comp was actually channel filled for product launches. If you adjust for that, our A&M was still down, but it was only down about 4%.

Okay. And then I recognize that you guys don't provide like detailed quarterly or annual financial guidance. But I think on the last earnings call, you provided some qualitative color around the back half of the year. And so I was just hoping you could provide investors with an update as to what you're expecting for the remainder of the year?

Yes. And this will be consistent with our comments from our last earnings call is we're a seasonal business. And that means that for us, we typically do 40% of our revenue in the first half and about 60% in the second half. And as we've seen consumers still being under pressure with discretionary spend and as we kind of watching the year unfold, we think that we will still be seasonal, so it will be better in the second half than the first half, but slightly less than normal seasonality.

Okay. And then, I mean, looking longer term, you guys have continued to reiterate the long-term operating margin range of 15% to 19%. So can you just frame what the key building blocks are in order to get there?

So yes, we are focused on achieving operating margins of 15% to 19%. We're not there currently. But in order to get there, we need to be operating at scale and resume growth. We're a growth company, even though we didn't grow last year and we haven't grown this year-to-date, other than kind of the bright spot of machines in this last quarter. And so I think for us, once we're north of $1 billion and growing again, we think that's when we can achieve those operating margins.

Okay. And I guess just within some of the OpEx point items, where do you see the areas of most leverage for the long term?

So most of our operating margin segments are kind of out of our -- outside of our ranges because we're lower volumes than we typically do. But I mean, if we've talked about as we went through last year and kind of adjusting to the environment, we cut $50 million out of planned OpEx spend. We went through a restructuring in January of this year to kind of further be careful on how we invest. We've managed the business through a medium- to long-term lens. And so we're always making sure that we are trying to make the right trade-offs between protecting the future while also protecting our profitability in the short term. And so you'll see us making -- continue to lean into investments that drive ecosystems, and we've talked about this over the last several quarters and also investing in our platform. And so we continue to make those investments even as we are careful where we -- I guess, careful with our OpEx to make sure they manage our profitability.

Let me just add to that. If you look at our sales and marketing as a percentage of sales, right, our approach to sales and marketing hasn't changed. We see a lot of efficiencies, but just because we have lower sales, like you'll see that ratio gravitate up, but that's -- we continue to be very vigilant in how we go to market. We are very unique in terms of how we go to market in many of the countries that we're in. On the R&D front, again, we talked about early on in the year that our focus is on building connected machines and things that we can differentiate with our platform being the moat of those investments. So I think we're taking a lot more focused approach in how we invest in that category. Our G&A is up but that's mostly to do with warehousing and things that we had the fixed expense. But we as a company have been profitable since EBITDA profitable since 2014, and our general ethos is to be incredibly watchful of how we invest. But at the same time, majority of our investments are in connected machines and really building the platform out. We think there's a massive opportunity in leveraging and building the platform.

Okay. Got it. And then just turning to capital allocation. I know you guys have paid off 2 dividends this year, 1 in February and 1 in July. So I was hoping you could just frame what your capital allocation priorities are and just how should investors be thinking about your philosophy around paying out dividends on a go-forward basis?

Thanks for the question, Lane. So we don't -- we see ourselves as a special dividend company. We don't see ourselves as a dividend company. We are in business to generate cash. The dividends we paid this year really are more around rightsizing our balance sheet post COVID, right? And the story with that is as we went into COVID and all the uncertainties around supply chain, we had a very deliberate strategy to have inventory on hand that we could continue to supply our customers. And so we carried higher levels of inventory than we normally would have as part of that strategy. And as we've come out of COVID and for the last several quarters, beginning late last year, we have been and continue to work down those inventory levels, and that is producing a lot more cash than we normally would in a year. And so -- that's where you saw the February dividend. And again, in July, as we kind of come farther in that strategy and have higher confidence about where we think our inventory level should line up that we felt it was time to rightsize that. And we will revisit that from time to time because we produce cash on an annual basis, right? But to our capital allocation strategy, priority 1 is make sure that we can fully fund all the organic growth that we have for the company. Second is looking at R&D to make sure that we're protecting the long-term opportunities for the business. After that, we then look at -- are there acquisition opportunities that we think would be synergistic with the business? And then finally, after we've covered all of those needs, how do we most efficiently return capital to shareholders. We've had a buyback program in place for a year. That's a $50 million buyback, and we still have $27 million outstanding. We are largely limited based on -- we trade with the safe harbor regulations, and so we're limited on float and how much money we can place with that. And when we looked at the capital we needed to return to shareholders, that really wasn't an option for us. And so a special dividend was the most efficient tool for us to use.

Okay. Got it. And then just pulling Jim into the conversation. You were recently hired as the SVP of Finance, and you have a prior background as a sell-side equity [indiscernible]. So just hoping you could share some of the big learnings that were surprises that you've discovered over the past 6 months?

Thank you, Lane. And when I was in your seat, I kind of viewed Cricut more as a connected machine company who had a little bit of a view on a platform, now that I've been on the inside, all the efforts from the platform has been very invigorating. In fact, when Ashish talks about artificial intelligence and machine learning and Kimball talks about uses of cash to grow the company organically, it's all coming together. And you can see this if you launch your design space app, you can see how it has things that are now being pushed to you that are unique to you, making a birthday card that's unique to you or certain flowers or anniversary cards, it's really unique to you. The platform, Lane, I greatly underappreciated when I was on the sell side. The strength of the platform is in the infancy, very early inning stages and is getting stronger and stronger and these enhancements coming out are really, really powerful. So that's something that I appreciate a lot more now on the inside of the entire strength of the platform, and it's very exciting.

Okay. Great. And I think I'll just take a moment to pause and see if the audience has any questions.

Do you want to repeat the question? I just want to make sure that people [indiscernible]

Do you have a split between hobbyists who are just doing it for themselves, friends and family, and I'll call them professionals or those who are monetizing the hobby and just the behavior you've seen between the 2 different groups over the last 18, 24 months?

So the number that we've shared is if you look at kind of our core markets, people enter this as a hobby. And what we have shared is about 26% of them graduates where they sell something. That's not to say they're full-time sellers. There are people who are full-time sellers, but when I share that 26%, it's people who -- they're enthusiasts, they make a lot and they sell some, right? So maybe with a sports team or something like that. And as we go around the world because we're in over 50 countries, if you look more to the developed world, say, Latin America, we'll see that people enter with the primary intent to create a small business or a home business and then the hobby and crafting grow from that.

Just to kind of add to that, when we look at the SAM, and I'll just go into the double click on it, you basically ask people saying, have you made something in the last 12 months that could be made at the Cricut machine. And that market, we estimate to be about 85 million people in U.S. and Canada, 129 million people when it comes to the top 6 markets, which includes U.K., Germany, France and Australia. So we think -- and then we -- for ourselves, even though we haven't published these numbers, we basically stress test and saying, well, what if you did once a quarter, what if you did 1 every month, you're doing something, those numbers are still pretty gigantic, right? So when we look at the opportunity, we definitely believe that segments like small businesses, segments like promotional product, segments like school teachers, education, there are really good opportunities for Cricut. The second thing I'd just kind of double-click on is when we look at international markets, we are now in 50 markets, and we have a very organic way. We don't go and spend tons of money in each market. We just -- we basically go into a market, hundreds of users come on to the platform and they start evangelizing. So every place we've gone to, right, we believe that the same things that drove our growth in U.S. and U.K. and Canada, and Australia are pervasive everywhere, you would need to create and inspired. So while we believe that we definitely want to participate in the user's journey to become a prosumer or be a business, we think the opportunity is far bigger when it comes to just making the platform incredibly easy to use. And given the size that we are less than we were 5% to 6% penetrated today, our core focus is going to be to cross the chasm and really go after tens of millions of users. Many of those users or some of those users will sell and there will be an aspiration. But we believe if we get the first right, we'll get the second, but we believe that the opportunity is really to cross the chasm and go after a much, much broader audience. Now if you look at platforms like SC and Facebook Marketplace or other places of Shopify, we have a lot of our users that use our products to sell, but we believe that still is a smaller segment to compare to the larger opportunity we have.

You mentioned something about the uptick in the machine sales last quarter. Can you maybe talk a little bit more about whether you guys have done any analysis on whether that's just a function of the easier comp last year or any promotional strategy that has been working out in your favor to get more direction more traction [indiscernible]

So you're talking about the 5% increase in machine sales. It's an easier comp, right? And the kind of replay history. Coming out of the pandemic, we weren't quite sure what to expect. We were planning on a normal seasonal year last year. And as we looked at -- as Q1 started to play out and you look at kind of -- we sell a lot in Q4. So if you look at kind of where Q4 was relative to Q1, it was looking like normal seasonality. And then Ukraine happened and all the inflation and the economic shocks, and we saw a significant drop in consumer behavior. And so part of that is we're just lapping where we saw -- and we've seen that pressure on consumers continue. I mean we're all reading the same news, but we also have our own research, where we were to understand the pressure on our consumers. And so we're just to the point where we're lapping some of that. And so Q2, the comps were a little bit easier for us -- was the primary reason.

I think a couple of puts and takes, right, Kimball. One is, clearly, we're in a better inventory position. So there's -- we are feeding into a healthier channel, right? The second is I think that's a positive. On the negative, we basically have retailers that have overcorrected their inventory, and we believe that they'll have to basically fill in stock to leverage the holidays. On average, our prices are significantly higher than they were 12, 24 months ago, which again goes against where we are, but we believe that's the right way to approach the business. We are being less promotional. As I said, when we look at our funnel and our data, we feel that the funnel is healthy. Now you will see us being a little bit more promotional as we go into the holidays because users are telling us that they are waiting for a sale, waiting to save money, and they are waiting for affordability, they're waiting for some of their inflation fears to go away. But we believe that when you look at all of those things, we are managing the business in a much better way and we believe that there's an opportunity that will manifest itself, but we just need to get through this period.

All right. If there's no further questions, I just have 1 more for you Ashish. You've been the CEO for 11 years, and I was just kind of hoping you could speak to what goals or milestones you're looking towards over the next year? And then in 12 months from now, what do you think will be like the biggest surprises that investors might have been?

Yes. So Lane, you're right. I've been at the company for about 11.5 years. And I -- and this is -- I'm not just saying it because it's true. I wake up every morning and it still feels like [ day zero ] on the drop. We have a lot to be -- we've accomplished a lot over the years. We've grown the company pretty significantly since 2014, and I feel that we're just starting out. Things that actually get me excited and going, 1 is, clearly, as we talk about crossing the chasm, of the 2 things that we are focused on is, 1 is affordability. We want products to be affordable. We want it to be in the reach of many users, not only in terms of the initial machine, but also in terms of the overall cost of ownership of the machine and the platform. The second is approachability. We've made massive strides. You can kind of look at other categories of the music like Apple's iPod, right, and what happened and how it's graduated over time, both in terms of approachability and affordability. The second is, as I said, is approachability, which is our platform is massively easier to use, but we just want to continue to invest and really make it easy for people to discover things. We want to use personalization, AI technologies to help them find things that they didn't even know they wanted to make, right? So our continued focus on making the platform easier, make it more inspirational and really helping the users find things that they'd want to make. So I think we are competing with everything else that's going on in life. So how do we make it easy for them to discover things. How do we help them make it easy to help them to make things. And ultimately, how do we help them inspire every other community member on the platform with their creativity. So discover, make and share our critical aspects of our platform. A couple of other things that get me excited are clearly like the world is our canvas, right? And every country, as I said before, that we've been in the same trends that drove growth whether you go into South Korea or Taiwan or Japan or Singapore, Malaysia, South Africa, Turkey, Africa, like all of these places, the same human need exists, and our job is to get our platform in front of them. So I think we have a lot more exciting things to come. A lot of innovation in the works. And I always tell my team, these are early days.

Great. Well, I think that's a great place to end. So please join me in thanking the Cricut team for being here today.

Thank you, Lane.

Thank you.