Q1 2021 Cricut Inc Earnings Call
Good day and thank you for standing by welcome to the cricket Q1, 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any prettier.
Since please press star Zero I would now like to hand, the conference over to your Speaker today, Jessica Barker Investor Relations at Blue shirt Group Ms. Jessica. Please go ahead.
Thank you operator, and good afternoon, everyone.
Thank you for joining us from crickets first quarter 2021 earnings call.
Note that today's call is being webcast on the Investor Relations section of the company's websites.
The webcast will also be available following today's call.
For your reference prepared remarks, and accompanying slides used on today's call.
Also posted to the Investor Relations section of the company's web site Investor Doc Cricket Dotcom.
Joining me today on the call are Ashish Aurora, Chief Executive Officer, and Marty Peterson Chief Financial Officer.
Before we begin we would like to remind everyone that our prepared remarks contain forward looking statements and management may make additional forward looking statements in response to our questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
Statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors section of crickets. Most recently filed form 10-Q, an S. One registration statement.
Actual events or results could differ materially.
All non-GAAP numbers referenced in today's call are reconciled in the press release.
The slide presentation on our Investor Relations website.
I'll also contains time sensitive information that is accurate only as of the date of this broadcast may 13th 2021.
No obligation to update any forward looking statement.
Protection that maybe made in todays release or call I will now turn the call over to Ashish to begin.
Thank you Jesse.
Welcome to our first earnings call as a public company.
I want to start off by thanking all of those that have supported us over the years.
Our passionate community of users around the world.
My special Thanks to the Pearl family and their investment organization Petrus asset management.
For the early investment and continued support.
And most importantly, our entire quicker team for their hard work and continued dedication to our mission and our culture.
In March we completed our IPO and I want to welcome our new shareholders.
We look forward to sharing our journey with you as we continue to grow and fulfill our mission to help people lead creative lights.
While the IPO will help support growth across multiple strategic initiatives.
We will continue to be very disciplined in our investment approach.
Got a long history of delivering solid growth.
In 2020 in addition to COVID-19, we saw growth because of international expansion.
The introduction of the cricket Joy product family.
Took a joy helped us expand our retail footprint acquire more beginner users and.
And broadened our penetration.
I'd like to start by.
By sharing a few highlights from <unk>.
And then I'm going to spend a few minutes talking about the power of our platform and business model.
Our passionate community as well as our growth drivers going forward.
Q1 was a continuation of growth in 2020, as we acquired new users efficiently and drove engagement.
Revenue in the first quarter was 324 billion.
125% growth over Q1 of last year.
Putting us at a trailing 12 month run rate in excess of $1 billion.
EBITDA was $68 6 million in the first quarter.
232 per cent increase over the first quarter of last year.
We experienced a significant increase in user growth in the first quarter.
76% year over year, bringing.
Bringing our total use those to just under $5 billion.
All of this while we faced connected machine shortages.
For the large influx of shoes that that'd be acquired in 2020, we benefited from monetizing those users with accessories materials and subscriptions.
User acquisition or just the thought of budge user journey with cricket.
Keeping them engaged in creating is one of the most important ways the fuel user acquisition and monetization flywheel.
The boys users are engaged the board they are talking about cricket and sharing projects with friends and family.
As of the end of Q1 2021.
62 per cent of our users created with African machines over the trailing 90 day period.
Up from 60 per cent in Q1 2020.
Although users create with their connected machines, we have an opportunity to drive revenues across our accessories are material as well as subscriptions that are recurring in nature.
Ending paid subscribers grew 118% year over year.
Let me talk about the platform.
Your bill to talk from a software and products that accompany a user from inspiration to a finished project.
We define our platform to include a highly versatile connected machines.
Designed to discover and create projects as well as hundreds of different types of accessories of materials that are designed to seamlessly work across that connected machines.
For those new to the cricket story, let me reinforce some of the key trends that shape, our business and a typical user journey.
You are benefiting from major long term secular trends that include personalization digitization of tools technology, enabling a new generation of entrepreneurs and the proliferation of social media.
I'll use the journey typically starts with the purchase of one of our connected machines.
From the time they use it opens a box registered on our platform.
The first project design plays a key role in that journey.
Our goal is to YY users at every touch point.
Every new they get free design ops on P C back iOS and Android.
And because we are cloud based user can start a project on one device.
And pick it up on another.
You can access the selection of images wants and ready to make projects some free software patches.
As well as upload their own images.
We have two subscription offerings cricket access and cricket axis premium.
Through the subscription users get access to our content library of 140000 images as well as discounts and trick of dotcom and priority remember a cat.
As of the end of Q1 2021, nearly 33 per cent by users will subscribe to cricket axis.
Our platform offers several commodity features which allow users to follow each other in the cricket community share projects and create projects that other users of share.
The data from I use those contribution of the platform gives us valuable insights into their preferences and behaviors.
Many of our user share a love for our brand products that ambition.
Users are passionate about sharing cricket tips tricks personal stories and more.
All of this helps wassa and wild commodity abusers, we're deeply engaged with cricket.
Our community creates a reinforcing network effect as the number if I use those gross.
So does the number of projects made and share physically or digitally.
This generates even more share projects and word of mouth that in turn helps you grow out a community.
This community network effect has allowed us to efficiently acquire new users and drive sales by word of mouth referrals complemented by our targeted sales and marketing efforts.
We have over 5 million followers across relevant social media platforms.
I encourage you all to visit our social media pages, where we regularly showcased the creativity of our users.
We also have over 2 billion views on hotshot cricket on Tictoc.
And which are almost entirely organic.
We also have a deep focus on creating a diverse community of users and improving the breadth and depth of content we offer.
Possibly offering new styles genre has.
Seasonal content and content that supports causes all with the goal of inspiring creative needs.
For example in February during Black history month, we celebrated creators within that community and share some of our favorite projects.
We also plan to further expand the content and design space to reflect the interests of our diverse community.
Finally, a 29% of high users use that machine to create projects yourselves and many have created their own businesses.
We believe we have a huge opportunity to continue to scale our user base.
We measure our opportunity in terms of our serviceable addressable market or Sam.
Asami towards active creative who have created at least one project in the last 12 months in categories that we already addressed with our existing product portfolio.
We estimate that our salmon in the U S from Canada is roughly 85 million individuals.
Combined with our international opportunity and our four top international markets alone.
Australia, France, Germany and U K.
Total SAP is about 130 million individuals.
With a user base of approximately 5 million per penetrated less than 4% of our SAP.
As we continue to grow and become more mainstream.
With 280 to expand beyond our standard significant fundamentally we believe that everyone is innately creative and anyone can be a part of the cricket community.
As we make new products and expand our reach we believe there is an even greater opportunity for creatives and potential creators anywhere who joined the cricket Black book.
We also believe that as a significant opportunity for cricket to grow internationally.
We began by international expansion by launching in Australia, Canada, France, Germany, and the United Kingdom.
We've also localize our design us in several languages, such as French German Portuguese and Spanish.
We will continue to pursue a disciplined international expansion by targeting countries with large populations of active creative where we believe the cricket value proposition would resonate.
International revenue grew 253% in the first quarter.
We believe that the trends that help drive user acquisition and growth in North America, a truly global in nature.
In addition, we are seeing similar network effects and a passionate community of users in each of the markets we have launched.
In the future, we expect to expand into new emerging market strategically to continue to drive growth.
Our cloud based software that enables us to upgrade the functionality and features of existing physical and digital products.
And to release, new products that seamlessly integrate with our platform.
Our platform is extensible allow.
Our lives for innovation and growth.
From new products tools accessories increased content and greater functionality available through our software and apps.
For example in Q1, we launched the cricket bulk price.
Our machine accessory that allows our users to create.
Usually professional looking personalized box for personal use.
For gifting and for selling.
Users can now get peeled true dishwasher safe results without Infusible materials.
As part of this launch we added new designs in our library for bi and coupled that with new software capabilities Infusible, Inc, transfer sheets, and Infusible and compatible Buck blanks.
These are designed with a special coding.
That makes it possible for the Infusible and fast foods.
They can also use our infusible ink pens to make customized my set of handwritten notes and drawings on these months.
First launch is a great example of the extensibility of our platform.
Our users the big inspire the new board and gift ideas every time, they use our apps and cloud based software.
It has been amazing to see how users creativity not only the money they are making but also the occasion than friends.
Yeah, making gifts for.
We've been pleased with the sales from Fox.
We spent a lot of time listening to our users, adding greater functionality to our sources.
And improving the user experience.
We added some great educational tutorials and step by step how to build right inside design space to increase ease of use and help drive engagement.
We also enhanced our search functionality added project collection to help users organize their creative work and lost the highly requested off the feature.
Which allows us allows users to add decorative outlines and shadowing to shape tax groups of images to make their designs pop.
Software is core to our platform and you will see us continue to invest in this area going forward.
We have a proven ability to drive profitable growth, which we believe positions us well to keep innovating.
And delivering great experiences for our users over the long term.
I am extremely humbled by what our teams have been able to accomplish and how we've been able to enrich the lives of so many community users over the years.
With continued strong demand, we enter the second quarter with positive momentum.
Although we are taking a judicious approach to the medium term.
We are very long term focus on executing well and continuing to build our platform and enriching our community.
I'll now turn over the call over to body for more details on the financials.
Thank you Ashish and good afternoon, everyone.
It's good to be here today on our first public earnings call.
Before we move into the detailed financial results I want to touch on the strength from our business model, which has been the engine of our rapid growth.
Cricket has a proven track record of strong revenue growth and demonstrated profitability stretching back to 2014.
Our sales are diversified across categories and give us revenue streams that are largely predictable.
As Ashish discussed the user journey generally starts with the purchase of a connected machine.
The gross profit from that purchase mostly covers our customer acquisition cost.
The purchase then triggers a flywheel of engagement, which in turn drives ongoing revenue from subscriptions and accessories and materials.
Revenue in the quarter was $324 million, an increase of 125% over Q1 last year.
And was the primary driver in delivering significant growth in net income and EBITDA.
Revenue from connected machines grew 148% over Q1 last year.
Machine sales and new user acquisition throughout 2020, and Q1 this year helped drive 141% revenue growth in subscriptions.
In the quarter and 102% growth in accessories and materials.
In terms of geographic breakdown international revenue growth outpaced growth in North America, increasing 253 per set in the first quarter over the same quarter in 2020.
As a percentage of total revenue.
International represented 10, 3% in the first quarter.
Significantly up from seven 4% and all of 2020 and three 6% in 2019.
We anticipate the investments we made in 2020 and ongoing future investments will continue to expand consumer reach and brand awareness internationally.
The cricket community of users drives healthy engagement on our platform and I was one of the keys to building a long term business with sustainable business with sustainable growth and compelling margins.
The way we measure engagement is to look at what percentage of our entire user base is using their machines to create something in a given 90 day period.
In the first quarter engagement remained strong at 62% of our entire user base up from 60% in Q1 of 2020.
Sequentially. It was lower than Q4, which is to be expected as Q4 is typically our seasonal high quarter.
Given year.
As we emerge from the COVID-19 environment.
We expect that overall engagement will generally be in line with historical levels.
The ways in which our users engage with us may change.
For instance, as users began spending more time outside the home we may see them doing fewer home improvement projects I'm turning back to other types of projects like what like weddings parties back to school and T shirts for family vacations.
We also saw higher year over year growth in both total users and paid subscribers.
We ended the quarter with just under 5 million total users, which represents 76% year over year growth.
Ending paid subscribers also grew in Q1 to $1 6 million.
Up 118% over first quarter 2020.
As engagement remains healthy on our platform, we're able to monetize that engagement through subscriptions and accessories and materials.
We measure that monetization through our true in each of those segments.
We calculate average revenue per user for subscriptions by dividing total subscription revenue fire.
Fire entire user base not just subscribers.
Within that period.
Archie for subscriptions in the first quarter was $9 96.
Compared to $7 20 in Q1 2020.
The.
<unk> was driven by an increase in the attach rate of paid subscribers to total users.
We can't calculate ARPA from accessories and materials by dividing that portion of revenue by our average user base for the period.
Our true from accessories and materials in Q1 was $29 45 compared to $25 40 in.
In Q1 2020.
This increase was driven by our typical monetization flywheel and also by the launch of our mug breast product product line in Q1.
Accessories and materials are two experiences seasonality patterns similar to our overall business, where Q4 is typically our strongest quarter of the year.
All three of our product segments experienced increases in gross margin this quarter.
Our total gross margin was 37 per cent.
Up from 31% in the first quarter of 2020.
We benefited from total from from tariffs associated with moving the bulk of our connected machine production from China to Malaysia.
As a result connected machine margins returned to levels closer to what we saw in early 2018 prior to the increase in tariffs.
Strategically.
Primary production will remain in Malaysia, with the ability to flex manufacturing capacity in China is needed.
In 2020 and in 2021. This strategy proved successful as we were able to increase production in an effort to help me unusually high demands.
Going forward, we expect to continue to incur some tariffs as we leverage production capacity in China to help address continued demand for connected machines.
In addition, depending upon how the post COVID-19 environment plays out we.
We may choose to be more promotional in the second half of the year as demand and supply normalized which could put pressure on margins.
Profitability in the disciplined approach to spending have always been a priority for us.
Our cost structure is characterized by three things.
Efficient sales and marketing spend driven by our strong word of mouth adoption and network effects.
Investing in the R&D for growth and leverage in our fixed costs.
Total operating expenses in the first quarter was $55 6 million and.
An increase over Q1 2020 of $28 2 million.
$8 2 million of this increase was a one time charge related to corporate Oregon reorganization associated with the IPO.
As we move into 2021, we will continue to invest carefully and marketing initiatives.
Those that support our international business new.
New products are platform.
Local community and content.
All to support future revenue growth.
To drive new users.
Increased engagement.
Yeah.
We are always focused on building long term durable business model that allows us to grow the topline invest for the for our future.
And just as importantly continue to deliver solid profitability.
We are pleased to report our ninth consecutive quarter of positive net income.
Q1, net income was $49 four.
4 million up 279% from the same period last year.
Diluted earnings per share was 24.
Note the cricket did not have a comparable EPS history prior to the reorganization at the time of the IPO.
Turning to EBITDA, which includes stock based compensation expense, we delivered EBITDA of $68 6 million or 21, 2% margin.
In the first quarter compared to $20 7 million or 14, 4% margin in the first quarter of 2020.
Q1, total stock based compensation expense was $11 7 million, including $3 5 billion and recurring stock based compensation and an $8 2 million.
A one time charge related to the IPO corporate reorganization.
Going forward, we expect stock based compensation expense to be approximately $11 million per quarter over the next three quarters.
Turning now to the balance sheet and liquidity.
We ended the quarter with $337 million in cash cash equivalents in marketable securities, which includes $243 million in proceeds from the IPO.
Subsequent to quarter end, the underwriters exercised a portion of the over allotment option, bringing the approximate total proceeds to $261 million.
We also have an untapped credit line of $137 million as of the end of Q1.
Cash used in operations for the first quarter was $22 million, reflecting payments for higher levels of inventory as we continue to work to keep up with demand, especially on connected machines.
As we discussed during our IPO process, we are not providing quantitative guidance at this time.
That said I want to provide some color as we look to the rest of the year.
Yeah.
Typically Q2 is our seasonal low quarter and declined slightly from Q1 in a normal year.
Well, we are only midway through the second quarter current trends suggest that Q2 revenues will be in a range similar to Q1.
As we look to the second half of the year.
We maintain a careful view as we navigate several different dynamics related to the pandemic and possible inventory supply challenges that might occur.
However, we currently expect to add at least as many new users in the full year 2021, as we did in the full year 2020.
Please don't that user growth in Q1 typically benefits from the increased number of machines sold in the last few weeks of the preceding Q4 holiday season.
And due to typical seasonality.
Chile, lower user growth would be expected in Q2.
With new user growth picking back up later in the calendar year.
It's also important to remember that we have aggressively and consistently grown the business for many years prior to the pandemic.
We have built a durable business model and a passionate and viral community of users that drive our user acquisition.
We believe the fundamentals the macro trends and the behaviors that drove our growth then remain intact.
We've made significant progress over the years to reach our long term targets and we're proud of what we have.
<unk> so far.
Longer term, we will continue to invest for growth.
Drive new user acquisition and engagement and bring the cricket ecosystem to millions more around the globe.
Our long term model includes gross margins in the 37% to 38% range and EBITDA margins in the 17 to 20 per cent range.
We are committed and focused on the long term and it is our job to continue to execute the way we always have.
With that I will turn the time back to the operator for questions.
As a reminder to ask a question you will need to press star one on your telephone again that is star then the number one on your telephone.
Please standby, while we compile the Q&A roster.
And your first question comes from the line of Rod Hall with Goldman Sachs. Your line is open.
Yeah, Hi, guys. Thanks for the question.
I guess all right good numbers here, obviously and things are looking good into Q2 as well.
I just wanted to double check your user growth expectation and kind of.
Your commentary there Marty in terms of phasing through the year I assume that youre growing users faster than you normally would here at the beginning of this year, given where we've been in lockdown conditions and so on.
And then but then I'm also assuming you would assume that user growth.
Maybe as good in the back end of the year as you normally would expect but I'm just not quite sure what you're thinking for the back end of your user growth. So that was my first question and then I have a follow up.
Yeah. So so one thing to just re highlight and we talked about in my prepared comments is that.
Theres a seasonal.
Normal seasonal shift and how new users or acquire or acquired.
New users in Q1 are quite a bit higher than new users in Q2, and then as we progress through the year.
New user growth picks up later in the year.
We have always expect to see some normal some normalization as we emerge from the pandemic.
And.
Were pleased to see that that hasn't happened.
So far.
I think that.
I'll direct you back to my prepared comments.
It said that where we feel comfortable that at a minimum.
We will match the number of new users that we that we brought on.
Last year this year.
And and last year 2020 was.
A pretty exceptional year force our expectation is to grow users.
Top of that that strong year.
Okay. Okay. Thanks.
Got it.
Yeah, I just Wanna add thanks for the question really opt.
I just went out a bit more color to what Marty said, because it kind of gives you. The overall flavor of the business. So first I wanted to bind everyone that while Q about 2020.
It was a strong year.
Grown at a CAGR of 45 per cent for several years prior to COVID-19, but.
And Marty mentioned that currently we expect to add at least as many new users in 2020 one as we did in 2020.
And what that means is that as we go into the second half of the year, we have a significantly larger number of users than we did going into the second half of 2020.
And then so from that we benefit from those users being engaged from a pool from subscriptions accessories that material. Then you know I know we mentioned in our prepared remarks, we talked about some engagement behaviors changing.
But many of these behaviors will still remain intact right. So people still have back to school in fact there'll be bigger this year people still craft for Halloween Thanksgiving holidays people still want to use our products they emotional wellness side.
So in summary, I just want to reinforce a few things that we tried to highlight in our prepared remarks, we have a durable business model.
From a passionate and mobile community of users.
Fundamentals and trends remain strong and intact.
One thing to just add on there that ashish touched on and that is that we have a large number of new users that came on in 2020 and in Q1 2021 that did generate ARPA and so if you just quantify that there were a million users that came new users that came on.
And then just the second half of 2020, another 600000 came on in Q1 and another pick.
You pick the number you want to put a plug in there for for Q2 and all of those users we know from years of history.
That they will generate are true.
Continuing not just not just through the back half of 2021, the free areas in the future and that that's in addition to our the rest of our user base.
That does the same and so I think that that's creates a tailwind for us not just not just in the near term, but for the long term as well.
Yep Yep.
Good day, I have to follow up or share.
Sure Yes.
Okay.
The subscription <unk> progression has been great here and I know Ashish you had planned.
Planned two or one of the strategic goals, you've got is to continue to increase that a night.
I know that you guys had attempted to make some moves on that around the right about the time of the IPO, but I'm just curious kind of what's the plan now is as you look toward the end of the year for continued to increase the value for that subscription maybe talk us through that.
Yeah. So rod you know as you pointed out subscriptions of the.
A key part of our portfolio and we try to drive both engagement and the value proposition of our subscriptions.
You know today, the subscription value was driven by content and so one of our focus areas has been to significantly add to the diversity and the breadth of the content, but in addition to that we are adding.
Launched a few software services that are part of that are only available to subscribers and I think you'll continue to see us doing that is to you know and trust as we tried to enrich the overall value of subscriptions with enhanced content software.
Software and as well as other services. So I'm really excited about the work that the team is doing and I think you'll see more of that in the future.
Okay. Thanks, a lot guys I appreciate it thanks Rod.
And your next question comes from the line of Katy <unk> with Morgan Stanley.
Thank you good afternoon. It was impressive to see the acceleration in year on year growth, even as we started thinking about lapping COVID-19 are at the tail end of the March quarter, when I think about the acceleration from the 114% growth in December to 125% growth in March that's about 17.
Net of incremental revenue any color just generally speaking and what drove that incremental revenue base was it largely related to the mug press launch are you starting to see retailers build more channel inventory as they prepare for increased traffic in their stores or are there other factors there.
We should think about that that helped drive the growth acceleration and then I have a follow up.
A couple of things Kt.
So.
Thank you.
Correctly identified.
Two items one is.
Hum.
Channel fill of machines where were.
Getting back on top of our inventory or our supply constraints with machines and so part of what Youre seeing is in machines in particular is replenishment of channel.
Inventories as well as just strong demand continues in Q1 carried over from.
From 2020.
As well in accessories and materials are our mud press is doing well as well as our <unk>.
Tire easy press line, whose has.
Done.
Has grown faster than that in that segment as a whole and so I think goes as well as subscriptions.
You can look at subscriptions as well.
Our <unk> has increased and that's that's largely driven by increased attach rate of subscribers to users. So really kind of all three of our segments have have contributed to the growth.
And Marty just a follow up on that how many more quarters do you think it would take you to get to the appropriate channel inventory levels and catch up with some of the backlog in the business I mean, I appreciate that it depends on what happens with supply but.
Is it multiple quarters in a normal supply environment to get to normal channel inventory levels or is it quicker than that.
Yeah, that's that's you're correct.
It's a tricky question to be able to answer because there's multiple facets to it one is is demand.
Where does where does that go in the second half of the year and beyond.
But more importantly, it's on the supply chain and there's a number of factors that are affecting the supply chain. There is there you know there's logistical issues.
Where.
You know, there's there's some constraints on shipping on containers on.
Commodities on other components and so it's a little it's a little tricky to be able to say when we will be back on top.
And in a comfortable.
Our position on our machine inventory, but I think that I think that a lot of these supply.
Supply chain constraints will.
B.
At present at least in some form or plan is through the end of the year now we've done a number of things to try to mitigate those as much as possible.
But that.
But I think that that we should.
Look through at least through the end of the year to see some of that now on the on the materials and accessories side, we're back into a pretty comfortable position on those so so really the the.
The machine areas, where and where we're more supply constrained at the moment.
Okay. That's helpful.
Katy I'll just add loans just to make a comment I think very consistent with what he said.
We are definitely.
Better in the Q2 and the rest of the year timeframe than we were in Q4 and Q1 last year.
But I think the challenges that commodity has highlighted.
We continue to continues to exist, but I think we are definitely in a better position today.
And for the next few months and quarters than we were three or six months ago.
And then Ashish if I can just ask you a follow up you know you're not providing quantitative guidance.
Yeah, it's hard to know how the world Normalizes post the pandemic and you know that is a big investor debate across all consumer stocks that that saw a boost in their business as consumer behavior changed last year can you just talk at a high level what metrics are you is.
CEO and the management team tracking to.
Understand how your business might evolve and you know what are some of the leading indicators that we should think about that helps us understand early what the you know what the normal run rate of of this this business overall and day consumer.
Consumer behavior will be within within your user base.
Yeah.
So I think you know I like to start out by just saying you know what other things that we obsess about are very focused on is our overall you know how we estimate the market size right and then Sylvia.
We are possibly focus on you.
You know understanding how we get further penetration in our Sam and Tam.
Some of the macro level drivers, which I believe are leading indicators, we look at the trends like and I know you talked about keep yards, but let me just kind of get to that.
Coffee is looking at all these trends you know what is the seasonality of these trends all day here to see how the mainstream so as we look at trends like personalization right.
As we look at trends like social media and the Digitization more and more towards Zumba is happening those are broad indicators that we look out to make sure that none of our assumptions about a business of change you know as far as specific metrics that we look at I would say you know clearly our net new user growth.
<unk> is a big one but also engagement right.
One of the fundamental drivers are one of the drivers of our growth is that our use of data.
Engage and that engagement not only drives our true but it also drives the word of mouth right and so the more people would make the more projects they make them or they tell people about it in the digital and physical space and for US it's very important to make sure that that engagement stays high and if we can continue to drive.
That.
We think there will be we will stay in a healthy place.
Thank you congrats on the strong quarter.
Thank you Katie.
Yeah.
Your next question comes from the line of Jim Suva with Citigroup.
Thank you and congratulations on your results and the.
Our qualitative outlook that you gave about subscribers.
I'm following up on some of the earlier questions about as the year progresses.
I've been trying to buy some of the product online from my wife and stuff like that and it continues to be sold out which is a good situation of demand exceeding supply. It sounds like you've mentioned equilibrium and supply did you say by the end of this calendar year and does that account for semiconductor shortages not not further your supply.
But for your equipment and does that include also restocking the channel.
So just a point of clarification Jim.
Mike My comment about the end of the year with.
Intended to be at least through the end of the year I'm not I'm not necessarily saying, we'll be back in stock in the end of the year or back at normal levels.
It's just too hard to be able to.
To make that.
Judgment, but I think that a lot of the things that we're facing.
In the supply chain.
We'll be prevalent.
And manifest themselves at least through the end of the year now.
In terms of in terms of components.
There there are shortages in components that we've done.
Much to mitigate those shortages by going out and securing.
Longer term agreements with the manufacturers.
And.
Many of those agreements curious at least through the end of the year.
And so what I would what I would point to is despite some of the shortages that you see in other industries, we've still been able to grow machine.
Machine growth just in Q1 at 148%, so we're still able to manufacture.
A number of machines, we're just not we're still not able to manufacture as many as demand would would want at the moment.
Great and then as my follow up my wife won't let me take a part from machine to see what it's all inside of it but I do note, there's metal and plastic and in the world. There's been some changes of both metal and plastic costs is that going to hurt your margins or is it just in aggregate they don't add up to be meaningful.
But any thoughts about raw materials, not semiconductors, but plastics and metals you know cutting knives tools all of these things that my wife users. Thank you.
Yeah, Jim, Yes, where we are now seeing increase in and these commodity price of the sheet metal resin glue polymers et cetera.
Most of the commodities that you that you would expect.
We're seeing those now.
We do.
That's really a supply demand issue and.
We believe its transitory so.
We think that it will impact some have some margin impact in the short term, but we think that.
That over the medium term.
That that supply demand balance comes back into line.
And Jim just to add to it.
Jim I'll, just add to that comment from body, which is a you know clearly there's a as you rightly pointed out there is increase in commodity costs. One other thing that I'm very proud about.
And behalf of the team is that we as we continue to broaden our supply chain as they bring additional contract manufacturers, we will mitigate some of that would just.
More competition on the supply on.
On a supply side. So we've definitely taken some proactive steps to make sure. We are offsetting some of those cost increases when we see them.
Thank you so much for the details and clarifications, it's greatly appreciated.
Thank you Jim.
Your next question comes from the line of Adrienne <unk> with Barclays.
Good afternoon, I will add my congratulations as very nicely done great start to the year.
Ashish I wanted to stay on.
I want to stay on the on the inventory issue and I guess my question is.
What is the forward order books like in the wholesale channel are you able to meet that demand or do you have to kind of push it off a little bit based on the uncertainty. That's my first question and then my second question for you.
Is what is your go to market strategy in a new geography customized software and how much do you put the market.
With advertising in a new market and then I have one for Marty. Thank you.
Okay, well you know I think on the.
On the.
Inventory side, we were constrained in Q1, so we adopted our promotional strategy to accommodate the fact that it didn't make sense for us to be hot.
To follow our regular cadence of promotions when we are having some inventory shortages.
As you've gone through the quarter, we can the situation we are in a bus.
Better position.
And I think we are you know we have.
As we go into Q3, and Q4 will definitely not be in an oversupply situation, but I think we will be.
We will do fairly well when it comes to a healthy mix between supply and demand. That's that's what I would say to that.
On the international from let me, let me I'm actually really excited about that because one of the things that really helps us is that you know people.
People do creative everywhere right, so the behaviors and the intrinsic motivation of what drove our growth in the U S and some of the markets. We're in today.
Global <unk> not yet found a country that they've gone in and you've seen that that behavior is different than some nuances though.
One is you know in some of the countries the channel may not be as developed.
That has allowed us or they may not be specialty retail.
But the the the user need at the day matters that so we've actually been base, we've been successful in working with.
Mass retailers electronics retailers office doors to bring some of those solutions to our user base.
You know our internet spend in.
In marketing and sales will be somewhat higher but not dramatically higher in some of these countries, but the go to market formalized not changing right and what that go to formula entailed as you know.
Basically driving user engagement seeding our products using digital and social very actively and really kind of creep.
Creating raving fans right. So it's a very ground up ground up model.
We definitely create awareness from that but we also make sure that we are providing a great experience and we are building off that engagement, which ultimately then drives network effects and what about marketing.
So I think both from a channel perspective, and from a consumer marketing perspective.
Quarter for Formula remains the same.
Very helpful.
And from Marty This is little bit of a loaded question because it's got so many components to it so.
So from what I'm hearing.
On the cost side is that raw materials are going up but you have you know new unit breakpoints in the car shortage.
The scale Youre shifting countries of manufacturing.
And so I guess my question is let's just take the 600 basis points of gross margin expansion in the quarter.
If you take out the country mix right. So how how would we think about the I M U or the initial margins on the manufacturing of the product versus perhaps mix shift of higher margin subscription and accessories and materials and that's why I say, it's a loaded question because there's so much going on in there. So any help there would be.
Super helpful and maybe one of the easiest ways to start that is when did you shift to Malaysia from China.
As a full quarter and maybe that would help me get give myself a day fine.
Okay.
So.
I'll talk to the your last question first and that is our.
Our machines production shift.
So we began shifting that and in in.
2019.
And the the tariffs on machines increased in mid 2019 so.
So early 2019 you didn't.
There was a 10% tariff you didn't see as much.
The second half you saw a lot more.
And we for the most part head had gotten all of our manufacturing to Malaysia.
Early 2020, but then the pandemic hit.
Malaysia.
And other countries began closing their manufacturing doors, and so we shifted some manufacturing back to China and so so we really haven't had a full quarter.
Our non tariffs because.
In order to meet demand we've been.
Ben manufacturing some of our machines back in China as well.
Because demand has been so strong soy flex we have flex back and so so even today, we haven't we haven't had a full quarter out of China.
And in terms of and I'm sorry, what was your what was your other question.
Yeah.
Of the 600 basis points I guess, just like let's use that as an example on gross.
Gross margin year on year.
Improvement how much of that would be manufacturing cost, maybe and maybe that's easier weighted manufacturing heart itself versus non.
A mix shift to other categories subscriptions and accessories material.
Most most of that was was tariff related.
You can see that you can see that in Q1 'twenty 'twenty. Our machines are carried at a gross margin of 9% and they were 15% this quarter and that's that's really tariff related and so most of it was that but at the same time you do see.
That subscriptions for example was was.
A full percentage point higher when subscriptions carry.
Essentially a 90% gross margin.
And so so but that the majority of it is really tariff related as well as some manufacturing cost reductions because we.
We have.
We have been able to negotiate and with some of our our new manufacturers.
As we expand our supplier base to others.
Alright, I'll just add to that I'll, just add to that and just say that you know the promotions is another area that.
Rob you contributed some we were more promotional in Q4 in general people are you know.
Just more promotional activity than in Q1, we are constrained. So we also did less promotions.
Yeah. It makes sense well best of luck and I'm glad to hear in Q2 is off to a solid start as well.
Thank you Adrian.
And your last question comes from the line of Mark All Schrager with Baird.
Great. Good afternoon, Thanks for taking my question.
From my congrats on the quarter and your first call here as a public company.
So to start out I wanted to ask about engagement really nice to see that up year over year.
Any perspective, you can provide on how engagement has trended kind of maybe the March April may timeframe, I mean, I know that the metric you provided a 90 day metric. So maybe just qualitatively I'm trying to understand user behavior recently here as you know vaccine distributions picked up and we're seeing more demand for the out of home.
Activities in Sydney key learnings as you go into a little snap Lockdowns, that's really informing your outlook for the remainder of the year.
Yeah.
One of the things that we actually really excited about our engagement and how it stayed consistent in fact that better than we were in the same at the same time last year.
And you know, it's particularly meaningful because as you're bringing in new users and the majority of our users who are joining our platform are first time users and it takes them a while to get onboard and get really familiar with the platform. So the fact that it stayed as healthy as it has.
It was really a good thing right. So we really haven't noticed very many changes in the types of engagement even in the last few weeks and months.
We had a strong engagement you know clearly throughout the Q1, but even more recently like as we go.
Gone into mother's day in a.
We've seen healthy engagement.
You know as you go through the second half of the as we go into summer. There's a hypotheses that some of that engagement patterns may change right. So maybe people are doing less of them DIY projects, but one of the beautiful things about our platform and our category is that you know all of a sudden there'll be weddings, right and that would be.
There'll be lots of T shirts, and then people will plan trips and cruises and they'll want to west Batching T shirts.
You know back to school will be much bigger right. So that is part of the engagement that we are keeping very keeping a handle on it and we also kind of matching our content programs, but one thing I want to emphasize that I've said before is that yes, there'll be some engagement patterns that will change.
But there is a lot of engagement that will stay consistent bright people will still have.
You know the same festivals than people would pay for all of the day as people would be doing gift.
B there'll be gifting.
So you know where we are.
We continue to monitor the situation and we will continue to adapt our engagement one final point a lot of that we've actually that we've actually really been investing in a dedicated end engagement team and I'm really excited about that because I think they'll be able to not only understand how user behavior is changing but be very.
Dave and making sure that that engagement stays healthy.
Mark and just just one one quick comment on a general comment on engagement engagement.
Does have some seasonality in it lots of engagement, particularly in the in Q4 when.
People are are making things for the holidays.
Thanks, giving and Christmas and so you do see some seasonality patterns.
In engagement.
And one last final point I'll make is that because there are like we are a platform and because we are connected we can see this engagement in real time right. So we have not only program that are you know forward planning, but we can also react to daily or weekly basis, and you know if you see a downturn.
We can really kind of try to understand what's driving that and also put in place programs that offset some of that but I. Just wanted to say just the benefit of having a cloud based platform that we can actually look at some of this behavior in real time.
That's great color. Thank you and then I wanted to follow up also on international.
Maybe just a bit more I mean, great great growth there.
The 10% of sales level is that something you would expect to sustain for the year.
And then just any more color you can provide on the drivers new retail relationships versus sales with your existing partners or any notable differences on accessory materials, <unk> and subscription penetration versus what youre seeing there.
Your domestic markets. Thank you.
Thanks, Mike.
Five questions.
But all good ones.
So they're not right not commenting on what the business will look like in the future, whether it's United when where we will achieve but needless to say we are really excited.
And we're learning a lot right.
As we go into some of these markets as you saw that you know 10 per cent of the business.
Total revenues in Q1 came from international and you know we are very focused on.
Driving additional country. So while we've locked in the four markets that we've talked about we are now in several countries in Europe.
Including the Nordics, Spain, Italy, we have you know.
Middle East South Africa, we are you know.
Already we are building up a team in Singapore and Malaysia.
Asia Asian countries as well.
And what what as I said before in some of these market specialty retail and we understand that and be clouded. The core fund Concentrix go to market strategy, but in many countries. We have not had the benefit of that.
And so we've been very we've been successful in working with other retailers like consumer electronics retailers.
Office retailers and mass retailers and bringing those solutions to the market our go to market strategy, which I talked about earlier.
Steve.
It remains the same one difference I will highlight that I think we will encounter in some of these international market is what we call it pro Zumiez.
So while you know when we started off in North America. For example, be initially really focus on the hobby market and then we saw.
You noted, 29% if I use those also non upselling things made a lot of our products.
As we are going in some of these countries there will be situations, where we will enter the market more focused on small businesses and presumably and.
And then kind of building on that into the hobbyist market, but overall again as I said, we are in the very early stages and we have a great team in place and.
That's a plus per settings. So.
Great. Thank you and best of luck.
Thank you Mark.
Excuse me speakers I'm showing no further questions at this time you may continue.
So.
I think I think that's it then.
We want to thank everybody for.
For joining us today.
And we look forward to too many more of these calls thank you.
Thanks, everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
Uh huh.
[music].
No.
Hum.
[music].
Uh huh.
[music].
Yeah.
[music].