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

Okay. So here we go. So I think in the interest of time, we're going to get going with our next fireside chat. It's my pleasure to welcome the team from Cricut here. We've got Kimball Shill, CFO; and Jim Suva, Treasurer and SVP of Finance. I do have to read a quick disclaimer. Please stick with me. Please see Cricut's Investor Relations website and recently filed SEC forms for associated risks, uncertainties and safe harbor statements. So I've done my legal duty. Before we can kick off, Kimball, I want to start with you. For those who are a little bit less familiar with the story, the company has been on a bit of a journey over the last couple of years, talk about what the company has been scaling into, what you're trying to solve for, set the stage for us today for the conversation.

Yes. So Cricut has its roots in the scrapbooking space, if you go way back to the beginning days. And -- where we're in die-cutting machines where you had cartridges for content and fonts and things to cut. And we transitioned back in 2014 to the connected platform and the connected machine and have grown that tremendously over the years. As we went through COVID, we really -- that also helped us accelerate growth dramatically. And as we've kind of moved through the last several years, we've been digesting some of that pull forward of demand that we saw during COVID. But at this point, we have a robust subscription business related to the platform. And then we continue to sell connected machines and monetize our consumers both with subscriptions and accessories and materials.

Okay. I do want to go deeper into all aspects of where the company is going. But I think I want to start maybe with you, Jim. I think at the end of the day, one of the debates around the companies is elements of Platform versus Product and the evolution you've been on in terms of what's being built for the longer term. Let's talk about the platform business first in terms of like what's going on right now in the business that has more of a platform tilt to it? And how we should think about the competitive dynamics in physical products today?

Sure. Thanks for the question, Eric. You correctly described it about Platform versus Product. Let me first take the Platform. So first on Platform, for those in the room who are less familiar, Platform represents about 47% of sales this last quarter, but 70% of total company gross profits. So it's a highly profitable part of our segment. The majority of the Platform is paid subscribers. These are individuals and users who pay either on a monthly or an annual basis. Eric, it's really been a bright spot for our company. We increased paid subscribers up 7% year-over-year, again, 7% up year-over-year to just over 3 million paid subscribers. So we're very proud about that. Now the important question actually is why such strength in subscriptions. First of all, we've been innovating and adding a lot more features. These features add more value. For example, paid subscribers, they get premium tools like Automatic Background Remover, [ Warped Text ], Monogram Maker, Create Stickers and over 1 million high-quality makeable images. So we're adding more and more value to those subscribers, and you're starting to see the results. We're also doing very good at recapturing people who may have had bank challenges with paying their funds of retrying their credit card if it happened to be at a bad time before they got paid or recapturing those individuals to allow them to pay and retry their credit card. Eric, your second part of the question is on physical products. We have 2 categories of that. First is connected machines. And then also the second category is accessories and materials. Connected machines, by far, we're the market leader. We've got a tremendous amount of intellectual property in this area, and we continue to innovate in that area. However, for accessories and material, it's a lot, lot more competitive. We've seen a lot of cost reductions that have benefited us, but we've seen a lot of copycats or lower-priced materials that have competitively gone after us. Last year, we launched a product line called Cricut Value Vinyl materials or Cricut Value materials. It's sold online. It's got longer lengths and better economics and better value to the purchaser. So we have greatly expanded our offerings into this area given the success we've seen in Cricut Value line, and we look forward to more of it in the future. But to unpack the question, Eric, we're very proud about our performance in Platform. And then in Products, you kind of have a little bit of mix based upon seasonality in what we've seen from pull forwards and such like that.

Okay. Super clear. And I do want to stick on that last point with respect to pull forward, Kimball, I'll throw this back to you. You noted some pull forward in consumer purchase behavior in the most recently recorded quarter. How are you tracking changes in consumer demand? And what are you tracking most closely when you think about the second half of the year?

Thanks, Eric. So as we saw the effects of reaction to tariffs across some of our retail partners, they were worried about having product on shelf because many of their products came directly from China, where we had a more diversified supply chain. And one of our goals this year was to gain share in accessories and materials. And so when we saw that opportunity, we leaned into it in Q2. We're still assessing -- we're looking at sellout to understand how much of that pull-in turned into incremental demand versus just rebalancing first half to second half. So we continue to watch it. I think it's still too early to say exactly how that plays out.

Okay. Into the second half. Got it. One other theme I wanted to touch upon is marketing investments. You did increase the level of marketing investments over the last year. The messaging on the earnings calls have been we're trying to boost awareness. We're trying to grow new users. How are you measuring the return on this spend? And what are the key KPIs you're tracking and will determine to set the pace of marketing investment going forward?

So as you've called out, last year, we increased our marketing spend by about $20 million, and we continue at the same elevated rate as we move through '25. We're looking at a couple of things. First thing we're looking at what is it doing to drive consumer demand. The primary metric we look at is our sellout data where end consumers buy from retailers, our machines, and we're tracking that very closely. We don't have 100% coverage across all channels. So it's directional, but we have seen improvement in sellout on a year-over-year basis since early February as we've moved through the year. And we continue to be up year-to-date on sellout. And so we see that as evidence that our marketing is working. We also have a media mix model and other statistical models that we're looking at to say, for every dollar we spend in a given channel, what is the return that we're getting in revenue and constantly adjusting where that spend is going to be most effective as we move through the year. And one of the changes that we have made this year versus last year, last year was focused almost entirely on building awareness and brand. This year, we've changed that mix a little bit to continue with awareness but also focus on education and middle of the funnel to bring people through so we can do a better job converting as we move into the back half.

Okay. All right. Very clear. Jim, bringing you back in, as you noted, subscriber growth was -- has been positive year-on-year, but you've guided to potential sequential pressure in the coming quarters due to lower new user growth rates. Can you unpack the initiatives focused on reversing weakening engagement trends and discuss how you balance new user acquisition versus increasing the lifetime value of your existing paid subscriber base?

Happy to. First of all, your comment is correct about how we guided to some potential softness in seasonality for paid subscribers. And let me walk you through why. First of all, our business is seasonal in that we have a very strong Q4. But it's important to note that a lot of the purchases of Q4 for connected machines are around the holidays, such as Black Friday, Hanukkah, Christmas. The user will typically unbox their product and start using the product in a free 30-day subscription. So during that 30 days, they're not a paid subscriber yet. But then after that, we hope they have a good engagement and a good experience, and we can convince them that there's value for them to sign up to be a paid subscriber. The result of this, Eric, is actually the sequential improvement and strongest quarters are typically Q4 and Q1. So for example, if you got the product during Black Friday and you unbox it and want to start making ahead of Hanukkah and Christmas, you'll probably be in the free trial subscription for about 30 days. But by the time Black Friday laps 1 month, you're going to become a paid subscriber in the month of December, which is Q4. And then anybody who gets the present for Hanukkah or Christmas, they'll probably be in a free trial subscription through January, and then we hope to convince them in January to become a paid subscriber. So Q4 and Q1 are our strongest paid subscriber quarters. The opposite of this happens in Q2 and Q3. This is when people, actually, children come out of school, families go on vacation, they go visit grandparents and many of our users are monthly paid subscribers. And when they're traveling the world or going on vacation because school is out and the kids are at home, there is a little bit less time to make. And therefore, it's pretty common for people to turn off or not be a monthly subscriber in Q2 and Q3. So seasonally, if you look back of our historical data sheet, you'll see that it's pretty common that in Q2 and Q3, we see softness in paid subscribers and strength in Q4 and Q1. So Eric, when we gave that guidance, we could see some softness in Q3, it's not abnormal. It's pretty seasonal, but we would expect year-over-year growth to continue in paid subscribers. But seasonally, Q2 and 3 are the softest and Q4 and 1 are the strongest. And hopefully, you understand when you get the present for Black Friday, Hanukkah or Christmas, that presents a bit of a lag until you become a paid subscriber. Your second part of the question was on engagement. Eric, it is one of the top priorities of our company is to get engagement to turn positive again. To give some numbers for the investors in the audience as well as webcast, on a trailing 12-month basis, our active users is generally about flat, while the trailing 3 months year-over-year was down 2%. The trailing 3 months or 30-day -- trailing 3 months or 90-day engagement [ of ] down 2%, that's a slight increase from down 3% in the quarter 2 a year ago, but it is something that we really want to focus on is getting that engagement better. We'll talk more about this a little bit, but we're really striving to improve engagement by making the making process a lot simpler, intuitive and to reach better users because right now, our product is very complicated and powerful, which is a good thing, but sometimes it makes it difficult for engagement and people can be a little frustrated.

No, very clear. And Jim, I do want to build on that. You've recently launched the new Explore 4 and Maker 4. How are these new products being received? What can you tell us about their role in driving both new user adoption and upgrades? And what are some of the Product and Platform initiatives you're most excited about when you look out over the next 12 to 18 months?

Sure. So you're right. We did launch 2 new products in earlier this year. In the last month of February, we launched the Explore 4 and the Maker 4. The last time those products came out, Eric, was 2021. So quite a long time. So now we launched those 2 new products. And it's not just newness. They have some really great features. For example, they cut up to 2x as fast. Now that's actually a remarkable improvement. When you think about my wife or I making t-shirts for the swim team, and we're going to make 20, 30, 50 of them, cutting t-shirts twice as fast is a remarkable accomplishment. There's other features with them as well as some new impressive colors, and we do know that colors do sell. We are very pleased with it. We're also pleased about how we've been selling them in that we've been selling them with an option for a bundle, meaning you can bundle it with additional materials that way you don't bring it home and say, "Oh, I needed a mat" or "Oh, I needed additional materials and have to go back to the store." So that way, when people get home, they open the box and with this bundle, have a great experience right out of the gate. These additional bundles bring more economics to Cricut, and we hope that people have a great experience with it where they will then come back to buy the Cricut brand. On new materials, it's important to note that the new materials online, I mentioned Cricut Value Vinyl and Cricut Value line, those are longer length materials. They're not in as fancy as a box that shows up on your doorstep, but a lot of things from Amazon are not in fancy boxes, and it gives better economics. And in today's inflationary environment where people are looking at benefits and the value of things, Eric, we are finding that the Cricut Value line is not only getting great reviews but selling very well. Again, less fancy of a container, really good product that comes out, but longer lengths. You wouldn't necessarily buy it for one project, a one-off thing. But if you're doing multiple cuts for multiple projects, the Cricut Value line has had great success, and we look forward to more of that ahead.

Okay. Kimball, I want to bring you back into the conversation, maybe pivoting towards international. I think in the last quarter, you called out strength in Europe, but some elements of weakness in Australia. How should we be thinking about your global portfolio of businesses and where you might be seeing divergence in terms of the way the business is sort of operating against the current environment?

Thanks, Eric. So we were up 8% in the quarter for international, which is 21% of revenue for the company. And that was -- about half of that was from foreign exchange benefit and the rest was growth in platform. We were -- we did see decline in our physical products in Q2 internationally. But as you called out, that was related to some specific markets that continue to be under pressure. So Australia is one of our larger markets internationally, and that has been under pressure for going on 2 years now. You may recall last year, we talked a lot about U.K. and U.K. seemed to turn the corner in Q4. Australia is still behind. There was also some weakness in France, where last year, France was a bright spot. And our 5 largest markets outside the U.S. and Canada are U.K., France, Germany, Australia and New Zealand. And so when one of those has a headwind, it weighs on the whole business. We are in 50 countries, but many of them are still very nascent in the opportunity. And so not enough -- while we have growth in some of those smaller markets for us, it's not enough to offset the headwinds we saw on physical products in Australia.

Okay. Understood. I want to stick with you on one other topic. We've had this conversation on public earnings calls. We've written about it in our own reports, your exposure to the creator economy. There are secular themes around the creator economy, influencer uptick. How are you positioning the platform to capitalize on that broad secular growth theme when you think about your product and your portfolio and your platform against the theme rising?

So one of the most important things that we are investing in, and we've talked about this before, is dramatically simplifying the user journey and the maker experience within our Design Space platform. So today, it's a very powerful tool, but it can also be intimidating to learn. And we've talked about our goal for '25, and we've been investing in this in '24 and '25 is to dramatically simplify that user journey around core use cases. And coming out of Q2, we delivered on the first 2 of those use cases. There's a few more coming before the end of the year, but it covers the most common thing. So making t-shirts or making greeting cards and the things that we see most consumers wanting to make on our platform. And so first is come up with a more mass experience that will allow us to broaden that market. And then also, we're accelerating investments in hardware that will allow us to continue to leverage both of those elements in our flywheel and Jim has already talked about the investments that are starting to pay off in the accessories and materials space. And so between refresh products on the hardware and on the materials side and then a fundamentally better user experience on our platform.

Okay. Understood. Jim, I want to bring you back in. As a company, you guys have demonstrated a commitment to shareholder returns, buybacks, dividends. When you think about the array of growth initiatives we've talked about today, how do you strike the right balance between funding growth initiatives, balancing margins, potentially returning capital to shareholders? What's the paradigm? How do you guys think about it?

Great question, Eric. The paradigm is very with purpose and intent and should not be a surprise to anybody. And so let me explain that paradigm of how we look through the lens. First, we're a very profitable company. And the appetite for the company is very frugal and very driven on profits and not to burn the company just for growth or anything like that. So we're very profitable. And first of all, our cash flow and profitability is used for, number one, to fund organic growth. We believe we are a growth company. This past quarter, we posted 2% growth. Our inventory went up a little bit, and Kimball mentioned the increased marketing and research and development that we're doing also to fund it organically. I'll note we don't have any debt at all. On Bloomberg, it might show up a little bit of debt, but that's simply our dividend payable where the cutoff time of when we declared the dividend to the time of when we actually paid it, it actually showed up as a liability on Bloomberg, but that was fully covered. So we have actually no long-term debt. So to fund organic growth. Second is mergers and acquisitions. We've made no acquisitions in over 15 years. It's not to say we're against acquisitions, but we have a very high hurdle, and it would have to really accelerate our growth. And so I can tell you there's nothing imminent that's out there. But in the past 15 years, we've made no acquisitions, but we do hold that out there as potentially something could come along. But right now, 15 years of no acquisition sets a pretty decent precedent that you should not expect us to be a bolt-on company that is trying to consolidate the market. So that leaves us with the third option, and that is the excess cash if we don't want to hold cash just to hold it. We know you as shareholders or potential shareholders have many different alternatives to invest in. So what we do with excess cash is we either then pay it back to dividends via shareholder returns of dividends or stock buybacks. This is after fueling organic growth. For dividends, we've been deploying 2 dividends in the most recent years, special dividend and recurring dividend. Let me break those down. Special dividend has been driven and fueled by our inventory reductions. The company during COVID had very long lead times for both shipping as well as components. And then also inventory that was selling as soon as it came in, that slowed down post COVID. Accordingly, our inventory was way north of $400 million. And today, it's just slightly above $100 million. As we work down that inventory, it did generate a lot of cash. And the way the accounting works is we paid for the cash, we paid for the components with cash. We paid for the shipping, and it went into our inventory, our warehouse as well as components. And as we sell those, we monetize them, and it built up our cash. That is the reason why we've been doing special dividends. To quantify it, we just paid a $0.75 special dividend in the month of July, and that's in addition to the $0.10 recurring dividend that we also paid in July. So the special dividends were being driven by the special work down of inventory levels over the years. And I would not necessarily expect that to continue because we feel comfortable of where our inventory level is today. Now on the recurring dividend, Eric, that we paid $0.10 in July and $0.10 in January per share. That is being fueled and driven by organic operations and profitable operations. That is what investors should be modeling in their model to project going forward as we do anticipate continuing to be profitable. So that's how we return it. And then we also have an active stock buyback. The Board just approved in May our third $50 million stock buyback. The past 2 stock buybacks of $50 million took approximately 18 months to get through. We want to make sure that we do not impair the daily liquidity of our stock, Eric. We want to make sure that there's ample liquidity for investors to move in and out of the stock as they want to build a position or liquidate as needed, but we don't want to impair it. Therefore, we would anticipate this $50 million to again be spread over the similar behavior of what we did over the past 18 months. But I'm very blessed and pleased to work for a company that's very profitable in operations, not only to fund future growth, but also to be paying a dividend and a stock buyback.

Okay. All very, very clear. Kimball, I want to end on you. I always like to end on a bigger picture question. If we're looking ahead and we sit down 12 months from now, what milestones do you aim to have achieved as a company over the next 12 months? What do you believe might be the biggest surprises or themes within the broader industry that investors might not be fully appreciating? So sort of in your control and sort of an unknown to investors or less focused on to investors.

So I think the most important thing to focus on is the experience we're able to deliver to consumers on the platform, right, where we expect to fundamentally change the way consumers can interact with us and make it much simpler and much more approachable from a mass market experience. And we believe that, that's the investment that will help us turn the corner on engagement. We've seen some flattening of the declining trends that we've talked about now for a couple of years, and Jim highlighted some of the numbers on that. But as we make that experience better and easier, we leverage AI across our platform in multiple ways, both from -- we have generative AI options for actual cutting content that are in beta at this point. We have AI driving search algorithms so that we can feed up our 1.5 million high-quality cuttable images to consumers so they can see what they want, what matches their interest, what matches their project type and their skill level. And then again, we're using AI to help with instructions for once I design something, how do I actually turn it into a physical product at the end of the day. So those are the -- that's the experience that we see will fundamentally help us move that forward for our consumers and reach a broader audience. And then as Jim talked about, we also continue to accelerate investments in our hardware portfolio. And so in the coming quarters, we'll see the benefits of new physical products based on that accelerated R&D.

Okay. Well, Kimball, Jim, thanks so much for coming and being part of the conference this year. Please join me in thanking the team from Cricut for being part of the conference.

Eric, thanks.