Q3 2021 Cricut Inc Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome to get quicker accused the 2021 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. They will be a question and answer session to ask a question during the.
Session, you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero I would now like to hand to conference over here a speaker today Stacey climb in Sweden, better relations at the Blue shirt cause. Thank you. Please go ahead.
Thank you upgrade or you. Good afternoon, everyone. Thank you for joining us on cricket third quarter of 821. Her name's call. Please note that today's call is being webcast on the Investor Relations section of the company's website.
Replay of the webcast will also be available following today's call for your reference prepared remarks any accompanying slides you've done today's call will also be posted today Investor Relations section of the company's website investor Dot cricket Dot com.
To me on the call today, a seizure, Laura Chief Executive Officer, and Marty Peterson Chief Financial Officer.
Before we begin we would like to remind everyone that are prepared remarks contains forward looking statements and management may make forward looking statements, including statements regarding our strategies business expenses and the results of operations in response to your question is.
Statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the rest of the sector section of cricket must reset my style one 10-Q.
Actual events, a result could differ materially all non-GAAP numbers reference to today's call are reconciled in a press release for the slide presentation on our Investor Relations website. This call also contains time sensitive information that is accurate only as of the date of this broadcast November 10th 2021 cricket assumes no.
Nation to update any forward looking protections that may include that may be made in today's release or call I will now turn the call over to a fish.
Thank you say you're welcome everyone.
We appreciate the results in the third quarter.
Total revenue grew 24.4% Udall are ya.
Driven by ghouls across all three categories connected machine subscriptions and accessories and materials.
We delivered and EBITDA margin or just or 60 blood, 4%. One of the same time increase investments in connected SASSA subscription you product development and international expansion.
We remain focused on a mission to help people lead creative lives.
Our user base do two or 5.7 billion users at the end of the third quarter.
56% year over to you.
Well, we're too little abuse uses were acquired over the last 12 months.
One thing I love is that a corporate cohort of use it as is with engaging very similarly to a prequel that cohort of users.
This means that we have an opportunity to be with a viral marketing engine.
2 million, new users make a chair projects.
Our job is to continue to provide the superior experience and drive engagement from existing or new users.
After 5.7 million users 3.2 million user connected machines within the last 90 days, an increase of 37% from the same quarter last year.
One of the many ways, we monetize its engagement subscription service cricket axis.
The number of subscribers in subscription asked what time are important indicators of success.
We ended the third quarter with over 1.8 million paid subscribers or then attach rate of 32%.
Assisted with the accelerated attach we had seen last year due to the pandemic.
Since 2018 attach rates of grow nearly 10 percentage points, a testament to the successful investments.
And then driving increase user monetization of what time.
As we expand the use cases about connected platform, we expand our potential user base or serviceable addressable market.
For example, the launch of cricket Joy lost Ya enabled us to reach a more mainstream user base.
Small business owners and teachers.
The cricket Joy gave us an opportunity to expand our retail partnerships with mass butchered retailers like target Walmart and specialty retailers such as the container store.
We also expanded into new vertical such as office supply and consumer electronics retailers around the world.
These users may start off using a platform for one or two use cases, such as Labour Beg your organization, but we have a significant opportunity to expand their level of engagement over time.
We continue to aggressively add content to cricket axis now with over 200000 images of prop 175000 images of the end of Q2.
We added new genres projects, when you use cases relevant content to international markets and more.
We also continue to improve the user experience, adding new features and functionality exclusive to cricket members cricket access members.
For example in October we lost a feature called automatic background remover, eliminating the need to manually clean and uploaded image.
Are passionate community of users provides a flywheel the mortgage create more cricket benefits from the network effects that drive new user acquisitions and engagement.
These communities around the world organic by nature and serve as a competitive both for us.
Items is at the centre of everything we do and we take great pride in fostering these communities.
By aligning value that those with by users great things can happen.
Through a making forward progress we partner with organizations to help inspire and spread joy to others.
Most recently, we partner with the birthday Party project.
<unk> users within our community to make 5000 projects in five weeks for donation to help underprivileged kids celebrate their birthdays.
Projects included cards, Waterbottles banners T shirts puzzles stickers and coloring pages for kids to receive on their birthday.
I am proud to say that we exceeded expectations with over 11000 projects made and donated.
There is no doubt that our community continues to deliver above and beyond.
I use those inspire every day to do our best for them. So they can do their very best.
This summer we also saw amazing projects, but outdoor events, such as weddings vacations grabbed reviewed reunions BB events.
Of course back to school.
As we head into the fourth quarter, a seasonally strongest quarter, we're already see inspirational projects for personal focus on holiday decor and gifts from our growing user base.
As I mentioned earlier over 40% of new customers first hear about cricket through word of mouth provide.
Providing a powerful and cost effective marketing engine for new user acquisition.
We now have over five 3 million social media followers, and 2.8 billion views on hash that cricket on Tiktok, which are almost entirely organic.
We would continue to flock to these communities amplify the voices and sure they're amazing work.
In addition, we've created an expanded set a suite of tutorial videos, how to guides live online classes and inspirational ideas for projects and use cases to help drive engagement.
For example are back to school classroom organization, how to provide the list of ideas for beginner level users.
We include a list of materials and supplies needed and step by step instructions for each project.
Earlier this year, we launched a live online classes and to date more than 20000 users have already participated with very high satisfaction rates.
More recently in October we lost cricket learn a comprehensive resource featuring shot expert led video education as well as live interactive virtual classes.
We're very excited about this new tool to help onboard users and drive engagement.
Revenue from International markets continues to outpace revenue growth from North America.
Growing approximately 110% year over year in the third quarter.
I am excited to have officially entered the middle East in Hong Kong markets.
We also made significant investments expanding international retailer footprint we.
We ended partnerships newer markets, such as Germany, The Nordics, Benelux, Spain, Mexico, South Africa and Singapore.
In more mature markets, such as the UK, Australia, and France, we continued to diversify retailed relationships, allowing us to reach new audiences and use cases in these markets.
In Q2, we rule out an e-commerce site in the UK.
In Q3, we expanded the strategy, bringing a direct to consumer.
<unk> experience to users in Ireland, France and Germany.
We are really excited about international opportunity.
Our observation is that the motivation and behaviour driving international growth are very similar to those that have driven growth in North America since 2014.
The proven cricket playbook invest in delivery great experiences to users that they will show and tell to others can be executed across the globe.
With this large opportunity in front of us in our momentum to date, we plan to increase investment to accelerate international expansion.
We also continue to invest heavily in our platform, including these new features and functionality within our design apps.
For example are new restore brush feature enables users to selectively to store any part of an image that may have been accidentally removed.
We have also introduced a featured images driven other home screen of design space that highlights the freshest and best content.
Coupled with the new ability to bookmark images, we are focused on providing increased visibility and easy access to our ever growing library of images.
We have made major strides in improving our mobile apps with ongoing where to migrate both iOS an Android apps.
To all new technology staff that would provide the foundation for this show design experiences.
There are currently in public beta with our new App.
And the large broadly in the coming weeks with the new Android version coming soon.
We continue to accelerate investments and our software platform mobile experiences and data to drive the best user experience possible.
Before I conclude my remarks, I want to highlight the incredible work from our operation that product teams, who will go tirelessly to help mitigate supply chain risks.
Their work to secure components that advance and read within 12 were to accommodate real time components substitution where necessary.
These teams have lived a cricket values always finding a way to serve our customers.
Overall, I am very pleased with the quarter and the momentum of the business.
We continue to add users onto the platform.
We are investing in new product, improving the user experience and growing the number of engaged users.
Cricket is getting worldwide visibility in new retailers and markets and I couldn't be more thrilled about the opportunities in front of us.
We continue to invest drive growth deliver profits delight users around the world.
I will now turn the call over to Marty for more details on the financials.
Thank you Ashish and good afternoon, everyone.
Our third quarter's performance was driven by strong fundamentals in the business.
Ah diversified revenue stream and are powerful community of users.
To understand the help and trajectory of the business, we focus on annual trends, which normalized for seasonality.
Normalising for the effects of the pandemic, we believe looking at financial performance on a two year stack basis is helpful.
Revenue in the quarter was $261 million, an increase of 24.4% over Q3 last year.
And 131% since Q3 2019 at.
Solid performance of a tough call up last year and a continuation of our of our long history of consistent revenue growth.
Revenue from connected machines grew 35, 7% over Q3 last year.
As a reminder, the gross profit from connected machine purchases, mostly covers our customer acquisition cost.
The purchase then triggers a flywheel of engagement, which in turn drives ongoing revenue from our higher margin categories of subscriptions and accessories and materials.
Strong machine sales unhealthy attach rates from our growing base of users helped drive 78% revenue growth and subscriptions in the quarter.
Accessories and materials revenue grew 2% over a tough comp last year when when engagement on the platform was quickly rising due to the pandemic and stay at home orders at the time.
In terms of geographic breakdown international revenue.
International revenue growth continued to outpace growth in North America, increasing 109, 7% in the third quarter over the same quarter in 2020.
We've made significant investments to grow opportunity and foster a global community of users.
As a percentage of total revenue international represented 12% in the third quarter up from 7.1% in Q3 2020.
As Ashish mentioned, we continue to rapidly grow our user base.
As of the end of the third quarter, we have added 1.4 million users in 2021, bringing the total user users on the platform to five 7 million.
In the third quarter the number of users engaged on our platform for the prior 90 days increased by almost 900000 up 37% over the same period last year.
As a percentage of total users. However, user engagement was 56% down from a COVID-19 aided 63% in Q3 2020.
As we said last quarter, we anticipated engagement on the platform would be softer than normal and to last longer than normal as people spend more time out of the home.
Since late September we've seen user engagement levels trending up.
Ending paid subscribers kept pace with user growth growing to more than 1.8 million up 55, 8% over third quarter of 2020.
This equates to an attach rate of 32% up slightly from Q3, 2020 and up significantly from Prepandemic levels.
And as a result of the investments we have made an subscription services for two.
Further monetize our growth.
Growing user base.
We measure our monetization through <unk>, and both subscriptions and accessories and materials by dividing revenue in those segments buyer entire user base within that period.
Argue for subscriptions in the third quarter remained healthy at $9 60.
Up from $8.97 in Q3, 2020 and reflected the relatively high attach right I just mentioned.
Our food from accessories and materials in the third quarter was $18 79.
This compares to Q3 2020 <unk> $29.41.
Which benefited from the higher than normal engagement levels related to the pandemic and some catch up channel inventory in 2020.
Accessories and materials are closely relates to engagement as expected the number of engaged users increased in the quarter, but the general project activity was lower than normal.
Putting some downward pressure on accessories and materials ARPA, we expect engagement and <unk> to improve sequentially, especially around the holidays a year and.
Moving on to gross margin total gross margin in the third quarter was 39.2%.
Down from an unusually high 42.8% in the third quarter of 2020.
The decrease was primarily due to higher freight costs and significantly lower promotional activity in 2020 associated with lower inventory levels from the pandemic surge in demand.
In Q3, 2021, we return to a more normal promotional cadence given that we were able to reestablish healthy inventory positions.
We also benefited this quarter from the highest proportion of subscription revenue in our history, which commands high margins.
We expect gross margin in queue for to come down on a sequential basis, which is typical due to more promotional activities with the holiday season.
I want to take a moment and talk about the tremendous progress we have made to enhance our supply chain.
We are subject to the same dynamics that are affecting companies all over the world is Ashish Ashish mentioned in the face of these global challenges. Our teams have worked worked hard to strengthen our inventory positions and two and help mitigate future risks.
Over a year ago, we began making key investments to accelerate the purchase of lonely long lead time components, including chips. We also increased inventory levels and connect machines and accessories and materials and positioned onshore inventory to mitigate shipping delays.
We are in a strong position we are in a strong inventory position today.
Particularly as we head into the holiday season.
And as discussed previously will continue to carry higher inventory levels end of 2022 until we are comfortable that supply chain risks have improved.
On the cost side, we're experiencing inflationary pressure just like other importers.
To offset these costs, we will continue to take a proactive approach and managing margins, including possible price increases.
Moving on to operating expenses total operating expenses in the third quarter was $64.3 million and included $8 $1 million in stock based compensation.
This was an increase over Q3, 2020 or $32.5 million when spending was unusually low or paused as we navigated the uncertainties of the pandemic.
Total operating expenses as a percentage of revenue or 24, 7%. This is higher than the prior year figure of 15.2%, reflecting increased investments in sales and marketing and R&D to help build out the platform and drive future growth, including international growth.
About a third of the overall increase was attributed to personnel.
A little more than half of which was in the form of stock based compensation, which increased as a result of our IPO in March with the balance coming from adding to our talent pool, especially in R&D.
Roughly a fourth of our our total up operating expense increase came from advertising and marketing.
Where we leaned into international expansion and continued to foster influencer relationships most of the balance.
Was catching up to unusually low spending across all categories during the pandemic.
We delivered our 11th consecutive quarter of positive net income.
Net income in the third quarter was $30 million down 33.6% from the same period last year.
In part due to the increased investments I just mentioned Duluth.
Diluted earnings per share was 13.
Note that cricket did not have comparable EPS history prior to the reorganization at the time of the IPO.
Turning to EBITDA, which includes $8 $1 million of stock based compensation expense, we delivered EBITDA of 42.7 million or $16, 4% margin in the third quarter, just shy of our long term annual EBIT target of 17% to 20%.
Q3, 2020, EBITDA margin of 29, 2% was unusually high benefiting from strong pandemic dynamics.
On a two year stack basis, EBITDA has grown 256% over 2019.
Turning now to the balance sheet and cash flow, we ended the quarter with $224 million in cash and cash equivalents.
Our credit line of $150 million remains untapped.
Cash used in operations for the nine months ended September was $138 million, reflecting payments.
For building inventory reserves to help mitigate the supply chain risks mentioned earlier.
Overall, we're pleased with the quarter in our progress to date.
With our base of over 557 million.
We users we have a large market opportunity in front of us we've taken a long term approach to our growth strategy and are choosing not to give short term guidance. However, I would like to provide some color as we head into Q4 and are typically strong holiday season.
For the full year 2021, we are now increasing our expectations to add approximately 2 million new users up from 1.8 million new users added in 2020.
We have already added $1.4 million in the in the first nine months.
This foundation of new users acquired through connected machine purchases fuse fueled further growth and profitability. Most importantly engagement from the user's we've acquired during Covid remains very similar to the engagement patterns of users acquired pre COVID-19.
With the upcoming holidays approaching we're seeing increased engagement across our platform up from the trough we saw in late September.
For the fourth quarter, we expect the number of engaged users to increase year over year, but the percentage of users engaged to be down from from the tough comp year over the tough year over year calm.
On a sequential basis accessories and materials <unk> will likely increase from Q3.
With increased engagement leading into the holidays.
However, on a year over year basis, we expect accessories and materials are declined significantly last year, we benefited from strong engagement related to the holiday season and significantly higher cell in from replenishing depleted channel inventories.
Subscription <unk> in queue for will likely remain relatively consistent with Q3.
Our EBITDA margins are on pace to fall within our long term EBITDA target range of 17% to 20% for the full year 2021.
The fundamentals of our business remains sound, we continue to drive new users and health and healthy engagement.
We have a durable business model with the seven year track record of driving both revenue and profits and remained focused on running our business for the long term.
With that I'll now turn the call over to the operator questions.
As a reminder to ask a question you will need to press star one on your telephone keypad again, if you have questions. Please press star and the number one on your telephone keypad.
Please hold while the compiled a CUNY roster.
Your first question comes from the line of Rod Hall from Goldman Sachs Your lines new opening.
Hi, Thanks for taking my question this is Barbara entourage.
I'll start with the engagement right metric stomach and materially this quarter and it sounds like it is somewhat less than what you had expected, but then it is good to hear back.
Hum September Southlake engagement milkshake engagement trade.
Is improving.
I just want to understand how you're thinking about the December quarter I don't.
Holiday season is really late November.
November and into the month of December so you're not promising the full extent of chance, but any initial thoughts on how to think about the December quarter.
What up.
Yep so thanks.
Thanks Paula.
I know the question of that engagement. So let me just start off by first.
Settled with that position because I think that's the poodle people that we use to get engaged so as we said we've added 1.4 million users through the end of Q3 and expect to add up to 2 million users. This year, which is up to 1.8 million that we had said previously so that's a good starting point for us to drive.
More engagement the.
The second thing one of the weird focus on inside is we look at the total number of engage users and how that number is increasing year over year and that number we saw increased 37%.
Which again is a very positive sign.
From a standpoint of engagement as we look forward I want to kind of highlight a few things. One is that we've acquired a very high quality customer during COVID-19 right with the 2020 cohort was very similar to pre 2020 cohort, which means that we have an opportunity to engage them as activity levels.
Pick up.
The second is that the trends that including personalization that drove people to the cricket platform. Prior to the pandemic are still intact at even though we saw an exaggerated summer where people double down on things that they hadn't done.
Four.
Four 2020, we see that number increasing in the engagement increasingly like we said we've already seen engagement arise since the end of September and when they do come back right because people who are they still want to create they want to make things I wanted to do the projects similar to what they wanted to do before the pandemic and when they come back when they are starting.
To get engaged B believe that there are very few if any substitute platforms for them to go to at our job is to continue is going to be to get them to our platform get them more engaged.
And having them make more projects. So we have a world of dignity.
Holistic long term approach and we think that there's lots of the positive things that were in place leading up to the pandemic is still in place and you have a good opportunity to attract those users.
That's helpful.
And picking up and this engagement right.
Any color on maybe user behavior in different cohorts are.
A different use cases, such as maybe an education or.
Holiday events related.
Any color Ter Ashish.
Yes, I think there's a couple of things that we mentioned in our remarks, one is that as I said the cohorts are behaving very similarly in terms of engagement right and.
Another thing that we mentioned was that engagement was not only with the number of people.
That are engaged was down but also the total engagement was somewhat lower across the board, but like we had a great run up to Halloween people, making the same kinds of things and we believe that with all the efforts that we're putting in place like the typical holiday behaviors off making gifts.
Making projects that are in the holiday spirit, we don't see anything unusual in fact, if anything we see the number of use cases broadening.
We're very excited about some of the some of the new apps and new functionality. We've created so no I don't think there's any unusual though don't highlight.
Just one clarification.
Ashish said that the number of users engaged was down that's actually easier.
He's referring to the percentage of total users.
That engaged his family at the actual number of engaged users is up quarter, our year over year by about 900037% just wanted to make that clarification. Thanks for clarifying that.
And one follow up with me.
Odd to hear had access and materials is down significantly even if I just put the lower engagement right on the other hand subscription attach state is still very strong.
Yes. My question is how do juxtaposed those to matrix.
So it sounds like most people do on keeps keeps subscribed.
That engaging law.
I just wanted to understand better higher Jackson pushing those to matrix is there anything to read there are are you thinking yes.
So so let's let's take the accessories and materials are poo question first so ashish touched on an important link.
That we need to.
Identify as we talk about this answer and that's the link between access the accessories and materials business measured in this case by <unk> and engagement is when when people are engaging it means that they're they're making.
<unk>, they're making projects and when they make projects they use accessories and materials and so they're buying accessories and materials and so the fluctuation in engagement.
Generally correlates with the fluctuation.
In accessories and materials are now now Bali, you correctly identified that that <unk> is a little bit further down.
Then the percent engaged in where that comes from as well.
While the percentage of our total users engaged.
Is is down to 56%.
Those who were engaged were less active in other words, they're making those who remain engaged we're making for your projects.
And so so what we what we point to here is that.
That as as we entered entered the summer we we talked about this last quarter that were seasonal business summers are soft season, as we as we began entering the summer season.
This year, we saw exaggerated softness so to speak and and we saw that as pandemic opening up people, making up for lost vacations or other things that that they haven't been able to do for for awhile and that is reflected in both the engagement number.
And the.
The accessories and materials RP number in and we believe that explains both the engagement and accessories and ARPA.
You also asked about subscriptions know subscriptions is is not a is not a seasonal.
Metric like.
Like.
The other two are and the reason for that there's there's a couple of there's a couple of things going on so are one our subscriptions are sticky just by nature. We do have some subscribers who are seasonal they come in and and subscribe and craft during holiday and then.
And leave and then come back for Valentine's day, or or something however, in general, especially the larger the user base grows the less fluctuate fluctuation, we've seen and that the other the other point to note is that.
While we experienced a bump in subscriptions are <unk> at the beginning of pandemic seeing it rise significantly it's held pretty strong throughout the pandemic and as we're beginning to emerge from the pandemic and and the reason for that is coincident with that happening we were.
Really focusing heavily on increasing the value proposition of the subscription itself, we began adding dramatically to the content.
Quality quantity relevance as well you've you've seen us here recently start to add design functionality that is exclusive to to subscribers and so well.
Well, we benefited as as we went into the pandemic.
As we are emerging from the pandemic.
We have been watching for some sort of normalization as as people.
Their homes and do other things, but we think that this additional effort that we've been focusing on to increase the value proposition has has really helped.
That are up and we still watch for some sort of normalization that may occur, but we haven't seen that yet.
I'll just make one quick point, the fact that subscriptions or staying flat and the access to the materials are down.
The thing that we think is happening is that people are preparing to make things, they're going to come back to craft for the holidays and so we think that the subscriptions are more indicative of that future engagement. If you will because that's their designing project they want to cut those projects and to come in and out of subscriptions probably does.
Don't see that much happening.
Very helpful.
Thank you Paul.
Moving onto our next question you have a mark asked Margaret from bearing your lines.
Great. Good afternoon, Thanks for taking my question.
Maybe just sticking with that accessories and materials Arco for a moment.
Understanding that there are some exaggerated seasonality. This year I was hoping you could give us a better sense of the level of acceleration you're seeing quarter to date or that you would expect to see in queue for I guess.
I'm trying to get a better sense of what normalization might look like post COVID-19 and perhaps this fall. These last couple of months as the first kind of clean look we've had it that so just any more color you can sure there would be helpful.
Yeah. So so in the prepared remarks, we talked about the fact that we expect R. R.
<unk>.
Fluctuates with engagement and.
And so we talked about the fact that both of those on a sequential basis.
Will.
We'll be up so.
So in queue for I'm talking about specifically.
But the metrics in in queue for last year were just very strong very tough calm.
As.
People were very active in making a number of projects and an engaging and so we don't expect that.
We will we will equal that in fact that was abnormal and so we think will be significantly down from Q4 last year as we as we end queue for this year.
Okay. That's helpful. Thank you Marty.
A separate topic was hoping you could speak a bit about the I guess the pricing strategy, an assortment strategy with the machine portfolio.
You rolled out the upgraded machines earlier this year, but a lot of the prior models are still quite prevalent on both your site and your retail partners.
At lower prices would have been the learnings here, thus far as you've had the new bottles or the older models coexisting in the marketplace and.
How should we think about maybe the gross margin progression as those older machines. So true.
Coming months. Thank you so.
So I left Marty comment of the gross margin, but let me just talk a little bit about a high level strategy.
So I think one of the things that we wanted to do is we wanted to make sure that we had enough overlap between our existing models and the new models because supply chain altered in such a flux.
Part of it was.
Something that we do every time and some of it.
Pretty characteristics of this year.
<unk> to still continue to I would say carry most of the models.
The two machines that we have three machines that we have our goal is to phase out one of them.
And also use the others do as we diversify broaden our channel based as an opportunity to do some chanda pronunciation. So that you can put the right products in the right channel, but other than the supply chain common.
Faith in phase out strategy. This year is not be different from what we've typically deployed and the ability that makes a difference is that we wanted to make sure. We had a healthy overlap between the two models I think from the island body comment on the gross margin makes and how it will impact.
So one one just point to note.
That when we went into Covid.
We.
We elected to retain some of our.
Older products, a little longer and market, just because we because of supply chain and other challenges. We didn't know exactly how things were going to play out. So so we chose not to.
And have like some things that we some products that we normally would have so you have.
More products coexisting today than we normally would have so.
Each of our products has kind of at a lifecycle in terms of promotional cadence.
And the older machines typically carry deeper discounts from MSRP than the than the newer machines and so we do have more.
More older machines in market today for the reasons I mentioned before we we elected to retain them.
Then and so we have more.
Greater proportion of those today, so there could be a tiny bit of pressure.
On margins as a result of that mix and the election that we made to retain some of those.
Older machines longer Mark I, just want to recap a couple of points for your benefit do again, the five bottles more or less right. Those publication combination of it four of them will be ongoing and one will be phased out the second is unlike Ah disconnected.
A machine does not connected a consumer electronics bodily does not connected in our case. These platforms live for years and years right. So even to the extent that we have.
<unk> that are continuing.
Ability to differentiate them by new with new software feature and continued to enhance them.
Is very high so.
Too worried about.
Having that overlap as well as having some of the oil among those continued continue to diversify channels.
That's great. Thank you and best of luck over holiday.
Thank you.
Your next question comes from the line.
Silva from Citigroup. Your line is now open.
Thank you so much and I think you all know as well as investors that I'm quite a crafty person and I was actually making some custom mugs for my kids in school teachers, and some neighbors and stuff, but then I noticed on your website a lot of the mugs were sold out and supplies were sold out so I wanted to.
Talk to you live about supply chain management and is there a bit of restocking. It is about to come in front of the holidays, because otherwise it seems like.
T shirt blanks, a lot of them are sold out months or sold out supplies or sold out and accessories.
Because I know demand is really going to be high here in the next 60 days yourself. So can you talk about supply chain and maybe it's just simply coming in the boat in la or San Francisco and about to be restocked, but I was kind of surprised that I couldn't order more mugs and T shirts.
Thanks, Jim.
I'm actually really happy that it seems that you're excited about our bulk president you are going to be making a lot of bugs as gifts for this holiday.
A lot of people like you that also doing the same so you are absolutely right.
The press has done violin exceeded our expectations the attach rate of mugs to the mud press also very high because again an issue and we had largely this product we will not just focusing on personalizing mugs, who would <unk>.
Actually focusing on redefining the gift market, making it easy for people to make affordable gifts and so we have been.
Trying to keep up with demand again that is one of the product lines that has been impacted by some of the supply chain, mostly because of demand and less about supply, but it is something that we are pretty.
Pretty aware off and we will continue to.
Bring more supply and we've made some good progress I don't know if you also notice would be revolted expanded a portfolio of bugs et cetera overall.
Love commodity to chime in we feel like we end of when you look at the materials and accessories portfolio at a portfolio level I think.
We feel pretty good about our inventory situation yes.
We feel like our inventory situations good.
There are obviously, there's pockets of.
Products that that for one reason or another we're not as is.
Strong as we would otherwise want to be.
And the Mug press is one of those it's been the demand has been very very strong for it and that's been and it's a new product and so it's.
It's been hard to keep that one in stock, but I think overall our teams have just done a phenomenal job in terms of.
Accelerating.
Purchases of long lead time components.
In terms of rewriting firmware and Reconfiguring boards, so that we have substitution parts.
Planning for worst case scenarios, and then operating to those worst case scenario. So that we can have inventory, where we need it when we need it and that doesn't obviously work when.
When we have.
Nearly 3000 active skews, but we feel pretty good about overall, where we are on most everything.
Great Yeah, I've been very pleased with the mug crossing the outcome. So thank you so much for making our holidays really an enjoyable situation. Thank you.
Your next.
Question comes from the lines Pollack rainy from Barclays. Your lines now opening.
Hey, guys. Thanks for taking my question.
First I think relative to what we were expecting the we were expecting the step up and expenses.
It looks like sales and marketing is increase more than we had previously expected and there's a little bit of a step down in R&D.
On the sales and marketing can you talk about how the.
The results, you're seeing that give you confidence to step off that spend and higher allocating that between.
Adding new users to a platform.
And driving engagement yes.
Yep.
That's a really good question.
As you as you pointed out a sales and marketing for this quarter.
11.6% last quarter, there's about six and a half so is a significant be up in part of it was that it was unusually low for all of the factors related to the pandemic and supply chain and we didn't have enough inventory so unusually low last year.
During this quarter.
I think fundamentally.
Our approach to marketing hasn't changed we have a very efficient marketing flywheel and the benefit from strong network effects.
In a category.
Just to recap some numbers were 40% of our customers first hear about cricket through what about the gross profits on machines.
More or less cover the customer acquisition cost and since 2014, we've been leveraging the same playbook and we will continue to do so which is you know.
Creating great experiences for our members.
Category also is very unique because when people make things of a proud they feel very accomplished they give gifts to people and that lends itself to a lot of word of mouth.
Even to just make it very personal.
They actually shared it on the networks when they've made it but to make it a personal.
My wife, often makes T shirts for my niece and invariably people, Alaska, where did you buy it and that leads to a cricket conversation.
If you look at our Facebook page for example.
We get tremendous engagement every time, we shed I use a project.
And you compare it to other brands.
It's pretty amazing.
One thing that I do want to point out is that as we as you continue to scale.
We understand each of these social networks, maybe two performance advertising, let other folks we don't do long 12 advertising on television et cetera, but.
We have a very good sophisticated understanding of how to leverage each of the social platforms like you tube and Facebook and Pentrust and Instagram and we do that with a variety of organic as well as paid mechanisms.
So again I think our approach to marketing hasn't changed our cost of acquisition.
Is not has not changed significantly one thing that I do want to point out is that as we accelerate international expansion and as we add the number of countries. We do have to make some investments with a couple of key sales and marketing professionals and some upfront marketing investment. So you will see as.
Add more countries faster that those numbers may put some pressure on the on the sales and marketing number but overall our approach hasn't changed.
Suggested unusually low last year.
Just one thing a broader comment on all of the operating expense categories.
You mentioned that R&D.
Was that there was a step down.
Actually from a a both the dollar standpoint, and a percentage of revenue standpoint.
Increased that category means.
Meaning fully as well as sales market and Gina.
All categories are up in much of what you're seeing is.
Catching up from the pause and spend that we took in the in the Covid year 2020, but also.
Leaning into some of these other activities.
We've been talking about an.
Investing for growth.
And so a bit but R&D is one area that we we have been investing in quite a bit.
Okay. Thanks.
Just a second my follow up is.
Can you talk about the the inventory levels and your and channel partners.
The health Health. There is this are we.
Normal levels yet.
Your partner's on both machines and accessories.
Yeah. So.
So given the market supply constraints and increase global supply lead times.
We have seen what we would would characterizes some defensive buying by a few of our.
Our retail partners, but not not across the board just just a few we think of.
Maybe a little heavier just in in defense of some of these challenges. So we believe we believe channel inventory, maybe a little bit heavy.
But it's it's hard to say at this point.
One thing that I can say is that.
We've been.
Awarded incremental shelf space.
From from some retailers that we believe in some cases is is because others couldn't couldn't fill the shelves and they knew we could so they gave us that space and so it's it's hard to know exactly how all of that is going to play out, but we take a.
From our inventory perspective, our our view is we want to keep shelves full and we want to be on the side of the coin of doing that rather than.
Being on the side.
Doesn't have inventory and is losing shelf space, because I can't keep show spotty and I just want to go back to I think it's gonna also going back to Jim's question that he asked earlier.
Some of the inventory like cricket like the mugs were not available on cricket Dot com.
One of our goals is first and foremost made sure we prioritize I'd retail retail partners to keep them in stock. So again as we've taken that approach we wanted to make sure that the products get to the shelves and.
Two products available for consumers to come in and buy them.
In addition to a site.
Thank you.
Your next question comes in the lineup Eric routine from Morgan Stanley. Your line is now open.
Hey, good evening guys. Thank you for taking my call maybe maybe to follow up on that question. Just can you quantify what if any channel excuse me connected machine channel inventory filled there wasn't the third quarter and then just going back to your earlier comment.
Marty.
Is it safe to say or is it fair to say there is a greater mix of legacy products and the channels today than normal just because of the product carrying <unk> had over the last 12 months amount of a follow up thanks.
So on your on your first question channel fill in in Q3, I think you're asking about from a machine sandpoint.
We were.
Supply constrained.
In Q3 on.
Almost all of our products, whether it be machines or accessories and materials. How are we started to catch up.
On channel inventory on accessories and materials late in Q3. So there there is some channel fill in.
Impact.
In Q3, 2020 that that we saw.
At an accessories and mature is not so much on machines.
And then we continued to catch up on.
Materials in.
In Q4.
Which.
Which that that we were making good good headway and catching up on that on that with with.
Accessories and materials, but machines were still light and so.
For all of 2020 at.
At least the second half.
I wouldn't I wouldn't characterize that.
Machine channel fill is really a factor.
I'm sorry.
Eric I missed your second question what was your second question. Yeah, just just in terms of the composition of the channel today.
Safe to say, you're fair to say that there is a greater mix of a legacy products and the channel today, just given the product kittens that you've had in some of the long life that you have.
Of some of the prior models that you've now refresh over the last three months.
Actually I want to clarify a comment that I made earlier.
Describe addresses your question as well first of all.
<unk> goal is to even though we have five models are three of them that were existing in two new models.
Goal is not to do a broad fees out of any of that right. So.
They are going to use them to four continued differentiation, whether you're in the north American markets or across international Geography's B.
The capabilities of these platforms.
Somewhat unique and we think that there is an opportunity for us to differentiate channels.
And then secondly.
But I've been we'd lots of machine at last four to seven plus years.
Virtually have not phased out anything again, because they are connected we can continue to expand their functionality.
With new features and new capabilities. So we're not looking at it as a legacy.
Issue that we are dealing with as I said, you know how we decide to leverage the five models may vary on the model, but the fact is that those five water, they're going to stay in some form or fashion four of them are going to be broadly available and the fifth one is also going to be available in certain channels.
Okay does that help with yeah, yeah, no definitely thank you issues and then maybe.
You mentioned enough taken user engagement at the end of September just curious how does that compare to normal seasonality mean is that is that similar to past years or you've seen an uptick them engagement in September.
Yeah. So.
When we say normal seasonality, we started tracking engagement in.
In.
Mid 2019, and so we don't have and then 2020 was an odd year, just because of all the dynamics of the pandemic. So it's a little it's a little bit difficult to say.
What what actual seasonality looks like from an engagement standpoint, but I mean, we know that people are more active we've always known that people are more active in in queue for than any other quarter and so when we go back to 2019 and even 2020, we saw that we saw.
That play out.
Now.
And we expect that again this year, we think that engagement will be higher in queue for than it was in Q3. We just think that Q4 of 2020 was just extraordinarily high and we're not will be significantly below that.
Okay Super Thank you Marty.
I am showing you're afraid your questions. At this time. This concludes today's conference call. Thank you all for your participation you may now disconnect.
Yeah.
Okay.
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