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

Awesome. Well, let's get started. It's 10:00 on the dot. So welcome to day 3 of the TMT Conference. My name is Erik Woodring. I lead the Hardware Research here at Morgan Stanley. Quickly, before we get into speaker introductions, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures as well as the Cricut IR website. If you have any questions, please reach out to your Morgan Stanley sales representative. So I'm pleased to be joined by Kimball Shill, CFO of Cricut and Jim Suva, Treasurer and SVP of Finance. Kimball joined Cricut in 2019, he's been CFO since 2022. Jim joined Cricut 2 years ago after a long and illustrious career, as a friendly competitor here within IT hardware on the sell side. So both of you, Kimball, Jim, thank you for joining us.

Erik, thank you for hosting us.

So Kimball, I think maybe the best place to start is recapping earnings from last night. I imagine most people in the audience and on the webcast have been in and around the conference. So just maybe touch on some of the most important points from the report. And then what is kind of the high-level messaging as we think about 2025?

Yes, Erik, thank you. So we ended the year at $712.5 million that's down 7% and generally in line with our expectations. We increased net income by 17%. So we're very pleased with that. Overall, we were disappointed that we weren't able to execute and drive the top line growth. And so I think the main message that we talked about last time on the call is we are relentlessly focused on our speed of execution and how we accelerate our product development cycles, and how we drive better affordability for our consumers, even as we are also driving to a mass market experience in our software. And so we are accelerating investment this year when we talked about how we actually will bring operating margins down by 2 or 3 points this year as we accelerate those investments because some of those investments will benefit '25. But many investments across our entire hardware portfolio and our product -- physical products will benefit '26 and future years.

Okay. That is -- that's a perfect way to start. If I maybe transition to you, Jim, just to kind of get the question out of the way. We talk to basically every company about this, but tariffs, big theme of the week. Just simplistically, how much exposure does Cricut have to manufacturing in China and Mexico? How are you working to mediate that tariff impact? And how do we think about how that's factored into 2025, your thought process?

Yes. Thank you, Erik. It's definitely a dynamic situation, but let me potentially set the stage a little bit better by helping the investor in the room know about when Cricut filed its S-1 about 3 or 4 years ago, I remember reading a line that said, we manufacture our connected machines in China. Now roll the clock forward to today, that's been 3, 4 years since then. The Ks get issued each year and there's little adjustments to languages but simply to put it bluntly, Kimball and Ashish and our operators have really done a very diligent job. Maybe they saw the crystal ball or they knew what the fortune is going to be. But all, and I mean all of our connected machines that we manufacture today are manufactured and made in Malaysia. And so there are some things that still come from China, whether it be chips or ceramic mugs or a few things like that. But largely, the majority of it is no longer in China so we're pretty pleased with that. Who knows what happens with the administration and if they do anything against Malaysia or not, but our connected machines, Erik, to directly answer your questions, have been shifted being manufactured and produced from China now to Malaysia.

And we have a broad ecosystem. So it's more than just our hardware products, which -- so all of our -- as Jim mentioned, all our machines, all of our heat press products are made in Malaysia today, but we also do consumables. A lot of that comes from South Korea and Thailand. And so just a small minority of our finished goods spend has any exposure to China.

Okay. All right, helpful. Something that's exciting that kind of gets back to the roots of the company, and I remember, Ashish's excitement during the roadshow process a handful of years ago was about product. This is a product company at the start. And you just launched two new products, the Explore 4 and the Maker 4. Jim, maybe just help us understand some of the new innovative features and characteristics that these products now bring to market that you weren't offering previously or that you've improved upon?

Sure. And this is all very new. Late last week, literally, as you were getting ready for this conference, we launched two new products, and they are the Cricut Maker 4 and Cricut Explore 4, it was our most popular -- they follow on our most popular machines, which are the Maker and Explore. A couple of things to note. It was actually in 2021, Erik, 2021 when those machines came out. So when we think about what are some of the enhancements? They cut up to 2x faster now, so if my wife was making T-shirts for the swim team or soccer team, and she's going to bust out 30 of these machines, and that could take a couple of hours, reducing the time by up to 2x is pretty meaningful. The other thing, and this does matter a lot is there's also additional color enhancements. Sage and Seashell. And we know whether it be other consumer electronic products and things like that, color does sell. We also note that there is some benefits to us about costing down and optimizing the hardware also as far as cost out and reliability. But the big thing is these are our most popular machines. These are our follow-on products enhancements. They are just out newly as of late last week, and then they will be rolling out globally in the weeks ahead, and we're quite excited. So far, the reviews, Erik, we're very pleased with the reviews from both the users as well as the retailers that we sell through.

Okay. Perfect. You've also launched a handful of new accessories and materials SKUs. I think something like 100-plus or something, there's a lot out there. And so again, just help us understand, Kimball, maybe what you're doing on that side in terms of details of what those new launches are. And importantly, there is a huge aftermarket business here associated with the connected machines, how does this help to kind of build out that broader ecosystem?

So we see an opportunity to really grow our accessories and materials business online and gain share there. And so let me just clarify because last year, we introduced our Value line of materials, and we started with a few SKUs to test our investment thesis that paid off well. We did a few more in Q3 last year, and we think we've nailed the value proposition. And so what I talked about yesterday is we have over 100 new SKUs coming. Many of those in the first half, we haven't launched them yet, right? But those are coming. And we think that helps us gain share in online marketplaces like Amazon and be much more competitive.

Okay. Perfect. All right. So before I kind of delve into the specifics of 2025, some of the key metrics, you had very specific language in your earnings release last night. About first half declines, though more moderate than 1H '24, but a second half inflection. And that kind of second half inflection kind of took my eye. And so Kimball, maybe what exactly -- what does that mean when we talk about a second half inflection? What gives you the confidence to say that today here early in March, there is a potential for an inflection in the second half?

Erik, thanks for the question. So let me break that down a little bit because our optimism really is driven by all the things we're doing and our relentless focus on execution, and that we think we have an opportunity to move the needle here. And I'll just kind of talk about the revenue segments of our business. Platform, our subscription business is the healthiest part of our business. We grew year-over-year last year, we expect to grow for full year this year. Our machine business, right? We've been spending heavily on marketing to engage consumers and build enthusiasm with our retailers. And our data tells us that we're having an impact. And we're continuing at a higher level of marketing spend that will continue to build on that base. As Jim just mentioned, we launched two updated machines of our most popular machines, and that's being very well received. And so as we move through the year and continue to execute, we believe that we're building momentum in that business. We were down on machines last year 3% for full year. And so we see the opportunity that machines is neutral at best to positive as we move through the year. Our real challenge is on accessories and materials. We were down 20% for full year last year. And I just talked about some of the new SKUs we're launching, but we think we have an opportunity to be more competitive in that space. We are sprinting towards new product development to add enthusiasm as well as options for consumers both from a consumable standpoint, but also on our other hardware accessories, right? One of the things that we changed last year is in Q4, we did some price testing on our hardware accessories, and we lowered them to -- we promoted down to be more in line with competition. We saw an uplift that we were pleased with. We're continuing that strategy this year. And so we believe there's opportunity for additional revenue in hardware accessories, right? And we've talked about the investments. The investments we're making for this year and future years is across our entire lineup from products on cutting machines, on hardware accessories and on materials. And so we are sprinting to the world where we are doing a better job of addressing consumer affordability, right? Why do I bring that up? Because we know that affordability is the #1 concern consumers express when they're considering making a purchase and entering our ecosystem.

Perfect. Okay. So let's maybe transition over to talking about engagement. So let's -- high level, you guys have been very transparent that recent user cohorts behave differently than the COVID cohorts. Maybe let's just start very high level, like what are you seeing in engagement trends from some of these recent cohorts, kind of highlights that you'd point out to us?

Thanks, Erik. So first of all, for those not familiar with Cricut, we define engagement as someone actually cuts a project. They use our machine, they cut a project. And so it's not that they come log-in, they actually have to come and make a project and using our platform. And we have seen a softening of engagement trends, right? And so there's two metrics that we report publicly on this. One is active users. And so who has made a project in the last 365 days. We also look at 90-day engaged users. And so active user was down 1% for the year and 90-day engage was down 3% for the quarter, which suggest there's still some pressure that we would expect to manifest. So we're not -- we're disappointed that we haven't been able to turn the overall engagement trends positive. That said, and actually, let me back up a second and address during COVID, years of 2020 and 2021, we brought in cohorts that were roughly double the size of what we were doing pre-COVID each year, right? And so it was a big influx of users, and those users were very engaged. They spent a lot of time on the platform. They were patient with the experience that we had as they learned our tool set and learned how to make projects. The consumers that we're seeing post-pandemic, they don't have as much time. When we research, it's -- I need to be able to make something quickly that's easy, and that I can come up to speed very quickly. And so the users that we've been attracting post-COVID tend to be less engaged than this large group that we brought in. Now we've brought in millions of users since pandemic, but it's kind of a different dynamic of how they want to engage with the platform. And so we know we need a mass market experience and our platform isn't there today in terms of that ease-of-use mass market experience. And so one of the areas of additional investment that we're focused on this year is delivering specific use cases that drive that ease-of-use. So we have very powerful design tools, but there's so much flexibility when people come in, they get lost in the sauce a little bit and trying to figure out how do I get this. And so we know what the most popular use cases are, and we are focused on delivering by the end of this year a dramatically different experience for those core use cases to our consumers. And so two big -- again, the two big things we're trying to solve are address affordability for consumers, and I've talked about the investments we're making there across all of our physical products. And providing a mass market experience on our platform, and that's the future that we are running towards.

Okay. Let's shift to subscriptions because -- or the platform business because that's been strong. Your subscription metrics have been strong and improving. More users are converting to subscriptions. Jim, maybe I'll ask you this one, which is why do you believe you're seeing such relative success with subscribers and call it, broader platform part of your business?

Thanks, Erik. And to set the stage, it's important to realize the magnitude of paid subscriptions business is really important for profitability. That is super important. I think a lot of people, what they look at us only as a hardware company, don't really look at the profitability of the paid subscribers and that's super important to us. And Erik, there's four things to directly answer your question about the paid subscribers. Number one and most importantly, is we add more value for the paid subscriber. And let me give you a look under the covers of what that means. For example, in 2024, we crossed the threshold of over 1 million makeable high-quality images. These are ready to cut, these are ready to use, these are high quality, you do a search, they're ready to go and make it easy on making. Also some additional tools are like automatic background removal. They were taking some pictures here on stage if they wanted to take out the background, automatic background removal is a tool that a paid subscriber gets that those who are using it for free don't. Other tools include like warp, if you want to say, my soccer mom era, or my swim team era and warp that text. These are tools and additional value that paid subscriber gets. So that's the first thing, Erik, I'd say is, again, adding more value to the paid subscribers. Second, if you go to cricut.com and you go to buy a machine, you will automatically see a pop-up option of getting a paid subscription option that will likely give you a very compelling price. Years ago, that wasn't as easy to do, now we have integrated that very seamlessly and are very pleased with that attach rate. So that helps the person when they're buying directly from cricut.com to see a good attach rate on that. It may seem simple, it may seem pretty basic, but we have actually done very well with that, and we are seeing good uplift on that. The third part is I wanted to mention about what we call our save rates. It used to be when Mrs. Suva, my wife were to consider canceling our paid subscriptions, she just hit cancel and okay, and be done. Today, when a paid subscriber wants to cancel, there'll be a pop-up, are you sure? Would you like to get a special promotion? It could be a discount rate for 3 months, It could be buy a year, and get a couple of months off free or something like that, but it gives people a chance to ponder, do I really want to do this, and it's a pretty attractive rate, and we're seeing that. And that was just rolled out and launched in 2024. So it hasn't even been around a full year yet, but that's what we call helping with our save rates or some of our voluntary cancellations of people who meant to cancel, and we give them opportunity to rethink it in a compelling reason to stay in the ecosystem. And finally, the fourth reason is we've been very successful at gradually shifting people from monthly to annual rates. And so when you think about a user who may not use and cut, and make projects every year because they go on vacation, and they may be out of town or something. We have been able to shift some users from monthly rates to annual rates. And the benefit from that is not only does the user get a cheaper cost, instead of $10 per month times 12, is $120 a year, you can basically get it for closer to about $100 per year. So it's on a cheaper rate or more affordable rate. But importantly, it reduces the chance of churn of somebody just saying, "Oh, I'm tired of it. I don't want to use it anymore." So those are the four reasons, Erik, that I wanted to highlight about the paid subscriptions, but the importance of it a lot of external investors don't really see the importance of the profitability of the paid subscriptions. And this is important to us, and we're very proud that we've seen growth in the platform, which is driven by paid subscribers.

Okay. I'm going to stick with you, Jim, talk about kind of things unique to you as being Treasurer and then maybe we can go back to some point. So in addition, again, to running finance, you're the Treasurer, this is a profitable business. You generate cash flow, very solid cash flow. I think free cash conversion, if I remember correctly, in '24, it was more than 400%. You benefited from working down some inventory, which we can talk about. But how does Cricut and you think about prioritizing those uses of cash?

Thanks, Erik. I can tell you we have a very structured, disciplined nature of how we do our capital allocation. And I want to make the blanket statement, we have no debt. And so it's important to note, we're not a levered company, but we have no debt. That being said, I want to note that #1 use and key focus is to fund organic growth. That is, we believe we're a growth company, we're doing a lot of things such as the new machine launches to drive growth, a lot of things with accessories and materials that Kimball talked about Cricut Value. We talked about also paid subscriptions. We really want to have sufficient capital to drive growth. And that could entail building up some inventory at some point. It could be entail components ordering them, getting the suppliers and contract manufacturers, all stocked and ready to run those lines in a fast manner. But number one is organic growth. The second would be M&A. Since Ashish has been CEO of our company for about 12 years, he has not made any acquisitions. We look at M&A from time to time, but it really has to augment and fit in with our ecosystem and spur our growth, but there really hasn't been anything that crossed the threshold. So with that, there's nothing like big that we're looking at, so don't lead into, oh, our cash is built. Therefore, we're going to make an acquisition. Now cash has actually benefited, Kimball has been very successful at working down inventory to a turns rate in an inventory dollar level that's more aligned to what one should expect going forward. But that's the way to kind of think about it. And then after that, hey, what's left? At that point, we look at returning cash to you as shareholders. And we do that in two ways. We have an active stock buyback program where we're under our second authorized $50 million stock buyback program. It is note that the NASDAQ does have certain trading limitations as far as how fast you can buy back stock. And so it is worth noting that. But then we also dividend. We've done several special dividends from time to time. And last May of 2024, we launched a semiannual recurring dividend, twice a year that is paid to shareholders of record in July as well as January. And that equates to $0.10 per share each 6 months, which is ballpark around $20 million of cash that we give back to our shareholders. And Erik, that's the way we look at our capital framework, but we're very fortunate not to be a levered company, with a lot of debt. And Kimball and Ashish are very eagle eye on running a profitable company and not making near-term sacrifices that long term would hurt us. So you'll never see us pushing just to make a $0.25 or doing something simply to make EPS. We don't guide revenues and EPS, but we run it in a very deplaned profitable manner. And it's the DNA of the company to run it in a profitable manner.

I'll just add one thing there because we have had an active buyback program for the last couple of years, but we're also cognizant of the investability of our stock and the float. And so going forward, that may be more conservative at times just because we want to make sure that there is sufficient float in the market.

Okay. We talked last -- earlier this session about the Explore 4 and Maker 4, something Ashish highlighted last night was kind of this renewed focus on product launches and innovation. And again, the messaging kind of takes me back to the Cricut of its kind of original roots. And I don't know whether it's Jim or Kimball. Can you maybe just kind of elaborate on how Cricut is thinking about new product introductions, not necessarily in the immediacy of the future. But just big picture, how we think about getting back to more products, bring more upgrades, new cohorts, getting you into the ecosystem, going you through the funnel, et cetera.

So the single biggest driver when we think about innovation is how do we make our products more affordable for consumers, right? I mean if you look at this last generation and even this derivative that we've launched, we've been able to pull cost out as we've gone to this -- to our latest E4, M4. But coming out of COVID, we inherited a consumer that is very strap for cash, if you will and so we know we have an opportunity to innovate and deliver a great experience at a much lower cost to produce that will let us get good margins for our business, but also give a much greater value proposition to consumers. And so -- and that is true across our entire hybrid lineup, not just cutting machines. And so we are focused on that. And we've been talking for a couple of years about how we're driving cost out of our materials ecosystem. And so that's a continued theme where you hear conviction and even some urgency is we think we can do a much better job in our speed of execution and driving that. And that will help drive consumer enthusiasm as we reinvigorate the category. And so it really is about execute, execute, execute to make all this happen, right? And then in parallel, again, providing that mass market experience with our platform so that both things work together to really drive our business forward.

Okay. Can we talk about maybe international versus domestic market? Obviously, when Cricut went public, it was a very domestic-centric. You guys have kind of leaned into the international markets as a source of new users. Curious from your side, where you're finding these new users internationally, what kind of parts of the world are most popular for Cricut? So what kind of country is most core to the story? And anything that you're learning about them as user cohorts kind of compare to U.S. users?

So I think the most important lesson we've learned internationally is the desire to create and the trends that we -- that started our business in the U.S., we see applicable everywhere we go in the world, right? So Ashish recently did a tour of Asian countries last quarter. And he will tell you that when he walked -- and so when we could do these tours, we'll have influencers and enthusiasts and our consumers that come to these conferences because they're excited about Cricut. They want to be involved. And he said, he'll tell you that when he walks into the room, he doesn't -- it's the same everywhere in the world until he hears which language they're speaking, right? And so people love the creativity that our platform and that our products unlock for them. And we see that value proposition everywhere in the world. We see a huge opportunity in international over time. We're still in very, very early days. We're active in over 50 countries around the world. Some we've been in longer, like U.K., France, Germany. Others are much newer, like our Middle East, Turkey, Africa region or Korea and Japan and some of these other Asian countries where we're just barely getting started. And so we're pleased that we've been able to grow for the last 3 quarters in international. It's not at a rate that we're -- we think we can drive a lot more growth there. But to a certain extent, we have the same headwinds economically in some of the bigger countries for us that we've seen in the U.S. And so while there are green shoots of growth, it doesn't fully offset some of those headwinds. I'd highlight that U.K. has been particularly challenged. We talked about several times last year. We saw that hit an inflection point in Q4, right? And so we're seeing some signs of turn. But some -- by contrast, Australia, we highlighted this quarter, continues to be significantly pressured.

Okay. Let's kind of turn to the cost side and investment side of things. Obviously, gross margins are expanding. You're seeing positive mix shift platform outgrowing product. You are leaning as you've been transparent about into OpEx this year in 2025. So gross margins compressing by about 2 to 3 points in '25. Maybe a two-part question. First one is just where are the areas of spend that you'd want to highlight? Because I think last night, you kind of called out sales and marketing, G&A and R&D. So like where are the areas that you'd highlight within each of those buckets? And second to that is, is this unique to 2025? Or how do we think about the possibility of kind of returning to margin expansion beyond 2025 and the ability to kind of drive leverage in the model like you did in '24?

Okay. Thanks for the question. So first of all, I mean, you highlighted the main areas where we are investing. Last year, we started spending on marketing at a higher level. And we increased our marketing spend by $20 million in 2024. And we are continuing to spend at that same level as we move through '25. And as we've talked about, we see the return on that investment. Our data tells us that it's having an impact and at some point manifest in overall top line growth. But we have the confidence that we're continuing to invest in that. Second is R&D and accelerating the hardware products that we've talked about, right, across all of our physical products. Third is accelerating investment in our platform. So things that we would have taken 18 months or more to get to, we are fitting inside of 2024, and that's part of the accelerated spend. And then we did highlight that we also are prosecuting some IP actions to appropriately protect our intellectual property. We have a long history of protecting our intellectual property, but spends a little bit higher than normal because we have both an ITC action and the district court action. And so that's kind of a short-term blip that goes into our OpEx spend. But really, it's about how do we accelerate our time lines and get to this future of more affordability on our hardware products and a great mass experience on our platform. In terms of margin expansion, we do expect, especially as we return to growth, that we see an increase in our margin -- in our operating margins, right? But I think that comes incrementally. There won't be a step function as we get into '26, expect incremental margin extension. And Jim, I don't know if you have any model questions you want to point...

Erik, I would just mention the 2- to 3-point compression for 2025 is on operating margins. And I can't remember if you said gross or operating, but I just want to be clear, it's on operating we're talking about because gross margins can really swing a lot based upon mix, more subscriptions or more platform versus product. So we're talking 2 to 3 points, but we're very confident of that $1 billion of getting back within our range. But as Kimball mentioned, it's not a light switch or a giant step, it would be a gradual enhancement there.

Okay. So we just have a few minutes here. I'm going to kind of ask each of you the same question. But Jim, I'm going to ask you to take the treasurer hat off and put like my hat back on, right, put your old hat back on because we've known each other for a while, and I've always kind of respected how you think. And that is what do you believe as we think about this company, the stock, the trajectory, everything that we've talked about so far. What do you think is either misunderstood or underappreciated by this business? And how is the team working to kind of change maybe some of those misperceptions, so to speak?

Well, the first thing is that -- and this is an accurate view is external people look at Cricut as a machine company. And it's simply because that's the first time that typically run across or use the product is from a machine. Erik, to directly answer your question, I think what they overlook is they don't give us any credit or valuation on the platform or the paid subscriptions. And I understand that, but it's important to note when you look at that, the profitability of the company and our paid subscribers tend to be very loyal and very strong, profitable. And when we look at these enhancements that Kimball talked about, we actually see this growing even more. The last thing I'd mention is valuation. At the end of the day, investors have to put on what their target prices on this company. And if you look at right now, our market cap and you remove the cash we have and with no debt, we're not trading far away from onetime sales. So we're not getting any benefit from the platform side. So I'd say that's the thing that I think a lot of people don't realize is the paid subscriptions and platform profitability of the company.

Okay. Perfect. And maybe Kimball, I'm going to ask you maybe a similar question but from a different angle, which is kind of last word for all of us. Similar question, but just what -- as a CFO and someone that's been around the company since pre-IPO, kind of what gets you most excited as you sit in your role today and you think about where this company has kind of come from and where it's going to and the initiatives that you guys have in place?

Erik, thanks. So first of all, we have a strong conviction in the opportunity ahead of us, right? We -- all of our research shows us we have millions of people -- tens of millions of people in the U.S. and hundreds of millions of people when we look internationally, they're in our TAM, we're profitable. We just finished our 8th consecutive year of profitability. So we manage our business with a focus on the long term, and we are focused on being a profitable company. We are in the very early days, and we think we have a huge growth opportunity in front of us. And as we succeed in some of these things we've talked about and accelerating our product life cycles in providing consumers with a more compelling value proposition with our next generation of products across our whole lineup in coming years, and we deliver on our promise of a mass market opportunity, we think we have the opportunity to bring tens of millions of people into our ecosystem and monetize them.

That's a perfect way to stop. Kimball, Jim, thank you so much for joining us today.

Erik. Thank you.