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

Sure. So in late February, we launched 2 new products. They are called the Maker 4 and the Explorer 4. And the last time those came out, which were the Maker 3 and the Explorer 3 was around the year 2021. So it had been a long time for a refresh there. So what's new about them? So first of all, we don't have a cadence like every year, like in September, like some companies have a new product come out every single year. We don't have that cadence. But the new products that came out, they have some great new features with them. For example, the Maker 4 cuts up to twice as fast. So if my wife or I are making T-shirts for our kids or more importantly, for the kids' swim team or soccer team, and we're going to cut multiple products, cutting twice as fast really saves a lot of time. That's just one example. There are also new colors, and we do know that color does sell, whether it be in fashion, whether it be in phones, whether it be in back-to-school things, colors do sell. So we had some new colors that came out with that also. We did mention that these new machines are selling well, and we've also been selling more bundles. Let me explain to you a little bit about what that means. With that bundle, we're also putting on some very value-attractive kits like essentials or everything kits that allow you to take it out of the box and immediately make some of the kits are 10 projects and some can be a lot more projects depending upon which bundle you do. That way, when you open it up and take it out of the box, you're not wondering, do I need a mat? Do I need a scraper? Do I need vinyl? You're actually able to open it up out of the box. And Asiya, we talked about it on our earnings call, we were very impressed to see an uptake in those bundles, which we hope translates into a more user, easier positive experience out of the box. But so far, Kimball mentioned about the increase in marketing spend. One thing that I would add into that also is we are accelerating our investments in hardware. And so we wouldn't be doing that if there are not more things yet to come. Now we're not here to announce our new products, but suffice it to say, we would not be spending an acceleration on our hardware and platform investments and in addition to marketing, if there weren't things still in the pipeline coming. So that's suffice it to say the cadence from previously was not as fast as we'd like to see, and we're back into investing and invigorating and coming out with new innovations. But so far, the Maker 4 and the Explorer 4, we're very pleased with how they're doing.

Okay. And then accessories and supplies. I know you've talked about third-party competition there, but it looks like you're starting to gain some share or you're working on gaining some share there. Just help us understand what's going on in that landscape, both from a competitive standpoint and what you're doing to kind of gain share in the consumables and accessories.

So let me break it down into 2 pieces. There's what's happening in online marketplaces because it's a different dynamic than on retail. In retail, over the last several years, we've seen all of our main retail partners come up with their own white label brands, right? And so we have competition on shelf. And one of the things where -- one of the effects of tariffs in April was we have a more competitive supply chain than many of our retailers do because we've spent much of the last 5 years disintermediating China from our supply chain. And so that set us up to do well. And that's one of the reasons that we saw some of that accelerated demand in Q2. In our online marketplaces, it's a different value proposition. And a few years ago, we were selling the same products in a Walmart and a Michaels and a Target as we were selling on Amazon. And the economics of those channels are very different. And so beginning last year, we launched our value line of materials that were engineered and configured specifically to compete well in online marketplaces. And so that continues to do well for us. And so just by having the right product at the right price point in a configuration that also works for our retail -- or sorry, for our platform partners is allowing us to gain share in those marketplaces. And then just the competitive nature of our supply chain relative to some of the competition is also helping us this year in our retail channels.

Okay. Just on international, like I think that's still a growth market for you guys on the international side as well. That's where you guys are growing. Just help us understand where you guys are, what are some of the new markets that you want to get into and some of the trends that you're seeing internationally that may be different than what you're observing domestically.

Yes. So we're excited about international, and we grew again this last quarter. We think we have room for improvement there. So we were up 8% this last quarter, but 4 points of that came from foreign exchange help. And then the rest was from our platform growth. Our physical products were actually down about 10%. And that has more to do with some of the specific markets where we're larger in on an international basis, continuing to struggle. We've talked about Australia for a couple of quarters now. And so that kind of brought down some of the physical products. But overall, international was up 8% for the quarter. At this point, we're in 50 countries around the world. We won't be expanding to new geographies this year, but we are looking at getting deeper into the geographies where we already have a presence. And feel free to add anything, Jim.

Yes. I was going to say, when we think about the 50 countries, a lot of them are still in the infancies and not quite the mature as, say, where the U.S. market is. So we're continuing to build content there, fonts, languages, uniqueness to the website for specific regional holidays and festivities and things there. But again, up 8% year-over-year. That was strong, but we believe we can do better. But again, FX did help us this past quarter by about half of that.

Okay. And is there some -- does it change the way you kind of think about the rest of your income statement as you're expanding internationally? Is there a little bit more on margins? Are they different? OpEx? Is it OpEx ratios different as you're going internationally?

Yes. So we haven't really split that out. I mean international is about 21% of the business overall for the last quarter. We don't have the same profitability goals for new markets as we do for established markets. And in many of them are more established markets like U.K., France, Germany, Australia and New Zealand, where we've been for a while. Some of those markets have experienced the same kind of consumer pressure and inflationary pressure. We -- I mean, last year, that was really a story around U.K., and they kind of hit -- turned the corner in Q4. Australia seems to be 2 or 3 quarters behind the U.K. and kind of the same cycle. But we are investing heavily in those markets. We know we have an opportunity. We talked about the marketing spend. We know awareness in some of those European markets is about half of what we have in North America. And so we do have an opportunity as we lean into our marketing spend to build that awareness, and we think that will pay dividends over time. But just as we turned off marketing back in '22 and '23 and didn't see an immediate drop as we've turned spend back on, we don't see an immediate uptick, right? So there's building momentum that we're doing at this point.

And I would add, in some of these developing countries, there's a higher propensity to make and then resell out of somebody's home as opposed to North America. So what I'm getting at is maybe a parent is making T-shirts to resell them for the soccer team or school functions or things like that. And maybe in North America, they may make for their child or give away, but there's a higher percentage of people who we call them kind of prosumers who will then make and resell their product internationally. And that's where when Kimball mentioned about the Cricut value line, a lot of the people who will make and resell want to buy and are very focused on cost value proposition. So you might want to buy a longer role of vinyl where Cricut value vinyl is a better price per foot than going into a retailer where it's a shorter SKU just for making 1 or 2 projects. So internationally, it does have a little bit higher mix of make to then resell for a profit.

Which is good, again, good for margins.

Yes.

Okay. All right. Tariffs, I know you already said you've mitigated a lot of the logistics from where these are manufactured to outside of China. But just given all the tariffs and the reciprocal tariffs that are going on, just help us understand how you think about tariffs? And then -- and just given the holiday season, what does that imply for margins?

Well, so it's still a pretty dynamic environment, right? As we went into Liberation Day in April, we thought we were actually in a pretty good step because as I mentioned, we've spent a lot of energy moving our supply chain largely outside of China. There are some things that it's very hard to disintermediate. So ceramics, right, is an example of a mug that Jim's 11-year-old daughter at the time made for me from our products. But it's hard to get economic ceramics outside of China. But most of our other spend, we have been able to move to other countries, but we still had exposure to Southeast Asiya. And so when we saw tariffs come in basically across the globe, it is -- it has created a dynamic environment. So as we watch tariff levels bounce around, we're also moving production around to make sure that we are saving as much money as we can. When it comes to pricing and the impacts of that, we know -- and I mentioned this before, we have a discretionary consumer spend product. And so -- and we know that affordability is a main concern of our consumers, especially when you look at cutting machines. And it's not just the cost of a machine that can be anywhere from $100 to $400. It's what is the cost of taking on this hobby because I'm going to have to buy iron-on or vinyl or specialized paper to make these projects. And so how much is that going to cost me? And so we're very focused on as we navigate this, what can we do to make sure that we're keeping it as affordable for our consumers as possible. If I look at our -- the speed of inventory turns, right, we've got 2,500 SKUs. And so not everything has the same velocity. And so even though we've seen tariffs come up starting in April and then reset again in August, most of the impact for us starts to -- some shows up in Q4. But really, the margin impact for us is going to be a 2026 story, not a '25 story.

And Asiya, there's been some companies in the news who have talked about slowing down their production to try to time the tariffs and impact on their income statement. We're not slowing down our shipping. We want to go into the holidays with strength to make sure our retailers have the product on shelf to have a successful holiday season. So we're not gaming it or trying to slow down tariffs based upon certain cutoffs. I know other companies are. We're continuing to produce and ship, and we'll have to absorb the increased costs as they come.

Okay. I'm going to just see if anybody in the audience has any questions here. Jim, I'm going to ask a little bit of -- or Kimball as well. I mean I'm going to ask about shareholder returns. I mean your cash flow generation is very impressive. And you've shown that you always give it back to the shareholders. You've done special dividends. You have a regular dividend, you have share buybacks. How do you balance -- from the free cash flow that you generate, how do you balance that between growth, capital returns? Is acquisition something that you guys think about? Just walk us through that.

Jim, do you want to take that one?

Yes. Asiya, so great question. We are very fortunate to be a very profitable company and generate significant cash, and we have 0 debt. We're not against debt if an opportunity comes along, but let me walk you through the structure, how we think about capital allocation because it's very premeditated and with purpose and intent. And it's something we work with our CFO, CEO and Board of Directors, so there shouldn't be no surprises here. First of all, priority #1 is to fund organic growth. That organic growth is to drive sales. It's the increased marketing that Kimball talked about, the increased R&D that we're doing in hardware and in software and in platform. And we are spending now for the sustainable long term. That's how we look at it. So organic growth is number one. Second would be M&A. We do look at M&A from time to time. We haven't announced any large acquisitions. We look at them, but we would have to find something that accelerates our growth. We're not like a bolt-on company where one should expect it, but M&A is in our list as number two. Third is to return excess cash. And you correctly mentioned special dividends as well as recurring dividends. And let me separate those into 2 buckets. The special dividend, which in July, we paid a $0.75 dividend plus a $0.10 recurring dividend. The $0.75 dividend is the special dividend and that was funded by our work down of inventory. Kimball mentioned during COVID days, we ordered a lot of products, whether it be semiconductor chips, plastics, metals. They have to be assembled in Malaysia, then shipped to the United States, then in our distribution center, they'll be warehoused and then eventually go to our retailers, and then we'll eventually get paid from that. We saw a very significant work down in our own inventory from the COVID days to today. So that work down resulted in extra cash that was in excess of need of organic growth and M&A. I mentioned we haven't done M&A, but we're not opposed to it. But so far, that extra cash, what we've done is we've given it back to our shareholders. We don't want to hold cash just to hold cash or be a bank or hold excess cash, so we will return it to shareholders. One should think about that special dividend is being primarily fueled by the inventory work down post-COVID. That's different than our recurring dividend. Our recurring dividend is paid twice a year in July and in January. And right now, it's been set at $0.10 every 6 months. That recurring dividend is being funded by our organic operations, the profitable operations. Then when we have excess cash, we'll also look at stock buybacks. We have a $50 million stock buyback that we've put in place. This is our third $50 million stock buyback that we put in place. The previous ones took approximately 18 months for us to work through each of those $50 million. And given the trading volumes and price action that we see, sometimes we are a little bit limited from accelerating that because we still want to make sure that there's ample liquidity in the market for investors to be able to enter and exit their stock without creating a disruption. But Asiya, to reaffirm your statement, we're very pleased to be a profitable company and very focused on organic growth. But when we don't have it, we will return it to shareholders. We have no intention in the near term of taking on debt. But if the opportunity from M&A or accelerating investments came along, we're not opposed to debt. But also right now, we believe that we can continue our dividend, and we're in a very strong suit for that for capital deployment.

Okay. I mean one last round to see if investors have any questions here. Okay. Then I'm going to ask Jim and Kimball to maybe wrap it up with a few comments on what do you think is underappreciated by the investment community about Cricut's shares?

So we're really excited about our subscription business, right? That's where 80% of our profit comes from. We have over 3 million subscribers. We invest heavily in the platform and increasing our value proposition over time. And we think even as we've seen the physical products be challenged over the last couple of years and finally returning back to growth in Q2, we have continued to consistently grow subscribers. One of the things that we have talked about publicly this year is we are rearchitecting our platform to be a much more mass market experience. And at the end of Q2, we were on target with 2 simplified use cases that are our most common use cases. We have a few more that we will deliver by the end of the year. And so one of the things that will be transformational for us in 2025 is a much simpler, much mass-oriented user experience, and we think that will help engagement in our platform and in bringing new consumers to our ecosystem.

And I would say, in addition to what Kimball said, investors really don't appreciate the subscription model. They value us as a hardware-only company, and I understand that. But when you peel back and spend the time to understand our business, the subscription profitability and the stickiness of paid subscribers is very encouraging. And when you layer on that we just grew paid subscribers 7% year-over-year, that's pretty compelling when you think about the lifetime value of a paid subscriber who's coming in, whether they pay us monthly or annually, that's good profit margins. Recall our gross margins for platform are high 80%, and we're very pleased with that, but it rarely comes up when people first look at our company. The second thing I'd focus on is the financial positive leverage when we become a recurring sustainable growth company. The leverage of profitability from increasing sales is significant, and I would encourage you to take a look at that. And while we're pleased that we hit growth this past quarter in Q2, we're really looking for sustainable long-term growth and the financial model and profits that puts off in cash flow is tremendous. I think those are the 2 things, Asiya, that investors underappreciate.

All right. I'm going to wrap it up here. So thank you both. Thank you, gentlemen, for coming to and good luck with the rest of your investor meetings.

Asiya, thank you for hosting us.