Q4 2021 Cricut Inc Earnings Call
Yeah.
Good day and thank you for standing by welcome to the cricket Q4, 2021 earnings conference call.
At this time all participants are in a listen only mode <unk>.
After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if.
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I would now like to hand, the conference over to your first speaker today to Stacie Clements with the Bushehr group because you may begin.
Thank you operator, and good afternoon, everyone. Thank you for joining us.
We entered 2021.
Please note that today's call is being webcast on the Investor Relations section of the company's website.
The webcast.
Well you reference the accompanying slide.
Oh.
Supplemental data sheet.
The Investor Relations section of the company's.
Web site Investor.
Joining me on the call today are our.
Chief Executive Officer, Marty Peterson, Chief Financial Officer, Thank you Rochelle Executive Vice President of operations.
Before we begin I'd like to remind everyone.
They are prepared remarks contain forward looking statements and management.
Sure.
Peyton.
Statements regarding our strategy isn't it.
Operation in response to your questions. These statements do not guarantee future performance.
Reliance should not.
Not be placed upon them.
Okay.
Hum.
And involve inherent risks and uncertainties, including those identified in the risk factors.
Recently filed Form 10-K .
Absolutely that actually events or results could differ materially.
All non-GAAP numbers referenced in today's call are reconciled and especially with a slide presentation on the website.
This call also contains time sensitive.
Right.
It's March eight.
Do you think it assumes no obligation to update any forward looking for that maybe made in todays release, what Paul I will now turn the call.
Yes.
Thank you Stacie and welcome everyone.
Before I get started with my comments I wanted to take a moment to acknowledge the devastating events in Ukraine.
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As part of our virtual team you have software partners that we work with in Ukraine.
My team and I've been in contact with these team members and their leadership.
Expressed that concern and support for that.
We also know these events in fact, many people across our global teams user community as friends and family.
Our hearts and prayers are with all of them.
While these events are clearly top of mind for US all let me now shift to talking about our latest update the cricket.
2021 was an exciting year for us.
With strong momentum across our business.
2021 was also a complicated year.
As quick at our retailers and our customers navigate the ups and downs of a global pandemic.
Total revenue for the year grew 36% a remarkable performance on topics. They took comp in 'twenty 'twenty driven by growth across connected machine accessories are material and subscriptions.
We delivered 16% EBITDA margin for the full year.
Our profitable business model enable us to fund significant investments towards that long term growth strategy.
In addition, we successfully navigated through some supply chain challenges and as a result.
Benefited from a strong inventory and cash position that continues as we enter 2022.
2021 represented the second year in a row that'd be accelerated our growth in two key areas.
The first was the expansion of our consumer base.
The two 1 million new users in 2020 one.
And the second was the revenue contribution from our international effort.
But in 'twenty, one international revenue grew by nearly 10% compared to the prior year and represented 11% of total revenues.
We added new use cases entered into a new market.
Expanding our retail footprint and fostering a growing global community that will continue to fuel our engagement flywheel.
Revenue in the fourth quarter was strong as anticipated, but the holiday season.
Our gross margin pressure has resulted in a much lower EBITDA margin in the fourth quarter than anticipated, which body, who will talk to in a few minutes.
In 2020 , one we added more than 2 million new users an increase of nearly one 8 million users added in 2020.
At the top of our engagement funnel.
Six one for the lead users according to users on our platform.
As anticipated engagement as a percentage of total who goes in the fourth quarter increased sequentially consistent with typical holiday seasonality.
As a percent of total users engagement in the fourth quarter was 60% up significantly from 56% we saw in Q3 at Archrock.
At the end of 2021 we had 1 billion boy users cutting in the last 90 days compared to the end of 'twenty 'twenty.
As we've discussed before the English one metric on a percentage basis will fluctuate as we expand our market opportunity and to acquire new customers.
The expanding beyond our traditional soft consumer by broadening our use cases and great partnerships with various retail job.
Our goal is to drive engagement with these users by offering seamless connected experiences relevant content community and value added services.
This increased engagement in turn drive monetization, whose subscription that material.
Our passionate and easy to fuel our marketing flywheel that over 40% of new users come to know about cricket the word of mouth.
This user acquisition engagement and sharing cycle, how is a business called machine subscriptions and accessories and materials.
There's a symbiotic with each other and the user experience.
At the corner of fifth user experience, we ensure compatibility between not connected machine software content accessories that material.
We then work actively with retail partners, who are passionate about selling the compatibility story.
Your kitchen, they hired a cricket brand.
Delivering a great experience for our consumers.
I've lost my international expansion with one of the highlights for the year.
This past holiday season, we significantly expanded our retail footprint across a broad range of retail channels around the world beyond class, including home office home organization and consumer electronics.
Since the end of 2020, they've introduced cricket products and 16 new market.
They can cook at products now available for purchase at over 45 countries.
Our user acquisition approach is driven by organic word of mouth marketing.
Based on experience to date these international investments will pay off over time and typically take a few years to achieve critical mass in each country.
At the heart of cricket is a passionate community of users.
Our Facebook Tictoc, Instagram and Pinterest pages can project that I use is shared across social channels.
Our goal is to amplify their great work and inspire others around the globe.
Our community provides a powerful competitive mode, while driving organic engagement and new user acquisition.
More than $5 7 billion, social media followers actively engage with cricket cross relevant platforms attached.
Gosh I could alone has more than $3 1 million posts just in Instagram.
On Youtube and Pinterest video views of cricket content more than tripled compared to 2020.
We now have people in 3 billion views on Tictoc up from 2 billion that'd be end of 'twenty funny.
I International community has continued to grow as well fueled by hundreds of active influences outside of the U S with a combined wheat in the tens of millions.
In October we liked cricket luck shortly.
Do you see a bigger knows by with light zoom workshops, and sharp searchable on demand video instructions covering everything from popular materials. So how do you use design stage.
As of today, we posted over 80000 members with introductory courses, making up 40% of content can do.
At the same time, we hosted more than 40000, new members in our life workshops.
Education is a significant opportunity to provide members of tools and resources early in the cricket journey, so that they can create more often and with confidence.
We continue to drive engagement through quicker access our subscription service.
We ended $2021 2 million paid subscribers, a 56% increase over the prior year.
This equates to about 32% of our total user base.
Strong attach rate.
Thanks to our continued investment in our subscription services.
We will continue to add new features functionality and content as we continue to increase the value proposition of cricket axis.
Well I don't think I want to highlight is our new contributing artist program.
Currently in beta this new marketplace and houses a content library, enabling artists to upload their artwork duplicate design stage and get compensated.
Is that at what gets us back with the numbers for that project.
With billions of users they can access new authentic and diverse content from their favorite designers.
Marketplace strategy laid the foundation for more to come as we look for ways to further engage with the community globally.
And for the community to further engage with each other.
Our ability to extend the platform as we introduce new machines smart materials tools and accessories.
<unk> use cases and categories as well.
Five years of engagement.
Just yesterday, we introduced an exciting new lineup of key presses.
The past week is our newest model that includes Bluetooth technology, along with the new couldn't beat up too.
Perfect we monitor the heat setting so any project connected platform.
And you could get hot prep enables us and I use is to create personalized high quality hot.
We also launched a flagship heat craft the cricket Auto press the cricket Auto Prep is designed for enthusiasts, who love, making T shirts and other he starts with project.
As well as co coos rumors while using their machines for making key class of product stuff.
We also recently launched the cricket right 360, <unk> lab at the desktop. These labs are designed specifically for that you could use that in every classroom.
The labs are designed to be rich accurate colors and evenly light up your entire workspace.
Very excited about all of these launches.
Our platform enables us to constantly enrich the experience for the entire installed base of users and machines as we roll out software updates across desktop and mobile.
Software updates allow users to benefit from new features and capabilities, when coupled with new content materials and tools.
This is very unique to our platform and allows us to drive engagement by giving users the ability to make new types of projects and expand on their creativity.
Well the holidays, we released the new destination pages on the desktop version of cricket design space.
These pages allow us to teach your targeted content project and images to support key teams and to engage users in a rich and inspiring way.
Also plan to build on that and give our international market to create their own playbook destination pages for each of their respective markets.
The underlying trends that drive our business like personalization and digitization of tools.
LCN intact.
As we further penetrate our Sam we are excited to see a broadening of demographics among our user base.
We see a growing number of big enough doctors joining the platform.
We are seeing younger generations of practice, including both Gen Z and millennials as well as a greater percentage of men becoming quicker users.
One of our core mantras is proud, but hungry and.
And we'll continue to innovate around the platform and create additional value for the user experience within the clinic and ecosystem.
Over the last two years, we've acquired nearly 4 million new users and we've significantly grown the business.
As we head into 2022 we are focused on cultivating this larger user base and creating the best experience we can for that.
These investments will drive further monetization and profitability ultimately fueling more investment and growth for the long term.
Our key focus areas. This year include.
First we will continue to enter new markets and expand across retail channels.
Second we want to simplify the onboarding process and drive engagement across our entire installed base.
This is fundamental to our user acquisition strategy and the marketing flywheel.
Third we want to monetize our user base that doesn't have the engagement.
We plan to do this with the launch of new materials accessories content, and then has the value our users get by subscribing to cricket axis.
Our focus on compatibility across the entire ecosystem is key to driving this.
Balanced with these shorter term objectives, we will continue to invest for the medium and long term.
We are expanding our platform and investing in new types of connected machine that'll serve us well for 2023 and beyond.
Before I conclude my remarks, I would like to thank the entire quick a team for their amazing and tireless work.
I also want to thank Marty for his countless contributions and leadership that have helped build the company to over a billion dollars in revenue.
He has built a tremendous team and I'm grateful for the dedication and passion to the company.
Company culture, our mission and I use it.
He's been an incredible partner to me over these past 10 years and I wish him all the best.
The retirement later this year.
I'm also thrilled to introduce you to Kimball child, who's joining us today on the call for the first time.
So that's part of it that's part of the executive team for the past three years.
And has deep operational expertise and proven leadership a ticket makes him the ideal person for the CFO role.
Three years ago, Kimball was tasked with building a team that could be imagined our supply chain for greater scale and flexibility.
While also serving a growing international market.
Kimball and bodies those are tightly integrated and we're lucky to have Kimball expanded leadership roles within the company.
I'll now turn the call over to Marty.
Thank you Ashish and good afternoon, everyone.
I want to take a minute to thank the entire.
Our Africa team it has been a privilege to be part of this team for the past 10 years I'm Grateful for this amazing experience center have been able to contribute what we do and what we build in power. So many lives around the world I'm honored to be just a small part in helping someone's, creating joy and inspiration.
For the call today I'll quickly recap the financials on an annual basis, we will spend most of my time. This afternoon, giving additional color on our fourth quarter performance.
As a quick reminder, we have posted a supplemental data sheet with historical numbers on our Investor Relations website for easy reference.
We had a strong year delivering $1 3 billion in revenue.
Or a growth of 36% on top of last year's 97% growth.
Driving this growth is our diversified revenue stream with all three segments in 2021 significantly growing year over year.
We increased total cost of revenue by 35% a year.
Gross margins flat with last year at 35%.
Higher cost of sales primarily came from increased levels of promotion promotions compared to the prior year when our promotional activity was unusually low and some higher freight costs.
Costs were partially offset by the increase in revenue and revenue mix.
The strength of our business model enabled us to say.
To significantly invest in multiple growth initiatives, many of which issues just mentioned.
Total operating expenses for the year were 20% of total revenues compared to 14% in 2020.
In absolute dollars, we doubled our operating expenses in 2021 up from suppressed levels in 2020, when he we had caused spending given the uncertainty of the pandemic.
We have a durable business model in 2021 marker <unk> consecutive year of GAAP profitability.
For the year, we delivered $145 million of GAAP net income compared to $154 6 million in 2020.
EBITDA margins for the year, which included $38 1 million of stock based compensation was 16, 2% just shy of our expectation going into the fourth quarter.
This compares to 22, 4% EBITA margin in 2020, which benefited from the lower promotional activity and paused spending just mentioned as well as nominal stock based compensation expense.
Overall 2021 was a year of many accomplishments we saw continued strong revenue growth.
<unk> invest in the business grew inventory back to strong levels success successfully navigated the challenging supply chain environment and continued to generate profits.
Now onto the quarterly numbers.
I'm going to dive more deeply into certain business factors underlying Q4 financial results you'll need this behind the scenes tour in order to evaluate Q4 performance.
To frame the outlook for 2022.
To understand the health and trajectory of the business, we focus on annual year over year trends, which normalize for seasonality.
Normalize for the effects of the pandemic, we believe looking at financial performance on a two year basis yourself.
Revenue in the fourth quarter was $387 8 million, a 5% increase year over year.
On a two year basis revenue was up 123% we.
We saw typical holiday strength in Q4 as anticipated. Additionally, Q4 2021 revenue benefited from a few of our retailers ordering more aggressively and building defensive stock in Q4 2021 as they also navigated concerns about supply chain disruption.
We estimate that this buying in Q4 revenues by roughly $20 million across connected machines and accessories and materials. These.
These revenues will likely pulled forward from the first half of 2022.
Revenue from connected machines was $158 1 million down 7% year over year keeping.
Keep in mind that on a year over year comparative basis.
We're comping two exceptionally to an exceptionally strong Q4 last year.
Additionally, Q4 2021 revenue benefited from some unusual retailer behavior that I just mentioned.
Revenue from subscriptions was $55 7 million up 51% over last year, driven by continued strong machine sales and attach rates throughout the year.
Revenue from accessories, and materials was 174 million up 7% over last year as we grew our engaged user base sufficiently to offset the year over year decline in engagement percentages.
And these revenues also benefited from some higher retail retailer buying during the quarter.
In terms of geographic breakdown international revenue growth continued to outpace growth in North America, increasing 53% in the fourth quarter over the same quarter in 2020.
In the fourth quarter, we added 676000, new users a record number for any single quarter.
Helping fuel our monetization flywheel.
For continued long term growth.
We ended 2021 with more than $6 4 million total users.
As anticipated engagement in the fourth quarter increased on a sequential basis as Q4 is typically strongest the strongest our strongest quarter for engagement due to seasonal trends.
Year over year, the number of users engaged on our platform for the 90 day period, ending December was $3 8 million, an increase of over $1 billion or up 33, 6%.
Also as the as of the end of 2020 152 million of our totaled $6 4 million users had used their connected machines than the prior 365 days.
As a percentage of total users user engagement was 60% in the fourth quarter significantly up from the trough we experienced in Q3.
Engagement was down from 65% in the prior year, which was unusually high.
Keep in mind this calculation will fluctuate over time as we as we broaden our user base and expand into new verticals and use cases.
On a year over year basis, the number of paid subscribers grew by 735000 or 56% ending the year with just over 2 million paid subscribers.
Catch rates held strongly at 32% as of the end of Q4 2021, an increase of two percentage points on a significantly higher totally user base compared to Q4 last year.
Yeah.
We measure our user monetization through average revenue per user.
Subscriptions and accessories and materials by dividing revenue in those segments by our entire user base within that period RP for subscriptions in the fourth quarter was $9 18 down slightly from $9 23.
In Q4 2020.
Accessories and materials are too closely relates to engagement RP from accessories and materials in the fourth quarter was $28 66.
This was up sequentially from $18.79 in Q3 2021.
This compares to Q4 2020 <unk> of $40 76.
Which was an all time peak benefiting from higher than normal engagement levels related to the pandemic and some catch up on channel inventory in 2020.
We have a strong focus on monetizing our growing user base through our subscriptions and accessories and materials.
Keep in mind, we grew our user base by $3 9 million.
Or 154% since 2019 this fuels our monetization flywheel as we move forward by adding more beginner and intermediate users, which presents a significant opportunity for us to increase levels of engagement over time and drive these revenue streams to higher levels in the future.
Moving on to gross margin.
As a reminder, historically, we see softer gross margin in the fourth quarter due to a higher revenue mix and connection and connected machines and increased promotional activities around the holidays.
Total gross margin in the fourth quarter was 27% down from 33, 6% in Q4 last year, largely driven by significantly lower margins in our connected machines and accessories materials.
Q4, 2021 was also impacted by a few items that resulted in lower margins for the quarter.
Breaking this down further.
Gross margin from connected machines in the quarter was negative one, 5%, which was unusually low prior.
Prior year Q4 connected machine gross margin was 14, 4%, which was unusually high due to the lower level of promotional activity in the middle of a pandemic.
For context pre pandemic Q4 margin on connected machines typically range in the mid to high single digits.
The decrease was primarily driven by some nonrecurring items as well as ongoing cost headwinds that will continue to impact our machine gross margin as we look into 2022.
First.
Our support for promotions to end consumers by our retail partners was much higher than expected.
Benefit significantly from strong competitive retail partners, who look to us to maintain order in the channel.
In Q4, we stumbled in managing the channel and the promotional activities tightly or not.
To address this channel imbalance, we chose to align and support all of our retail partners appropriately with additional promotional dollars, which drove about five percentage points of the decrease in connected machine gross margin.
Going forward, we have put in place structures and policies to ensure stronger management across our retail channels and will partner with retailers, who strategically aligned with us to prevent these types of issues in the future.
Second Q4, 2021 also reflected a higher level of reserves related to a pricing plan for end of life on certain products used reserves resulted in an additional three percentage points of connected machine gross margin impact.
Additionally, our connected machine gross margins continue to see inflationary impacts across all aspects of our supply chain.
Our teams have been successful in navigating the environment to ensure we have sufficient inventory.
When and where we need it.
As we move through 2022, we expect to continue to feel the impacts of elevated freight warehousing and handling costs as well as increases in commodities.
Going forward to mitigate some of the continued headwinds from inflationary pressures, we intend to implement price increases and adjust our promotional strategies across connected machines and accessories and materials.
Gross margin from subscriptions in the quarter was 88, 4%.
Down slightly year over year due to an increase in hosting cost to support increased functionality of our applications and to scale.
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To grow.
Gross margin from accessories and materials in the fourth quarter was 33, 3% down from 21, 3% in the prior in the prior year due to tight tighter unit costs, including increased freight expenses as well as as well as a change in the revenue mix of products.
Moving onto operating expenses total operating expenses in the fourth quarter were 79 million and included $10 1 million in stock based compensation.
The significant increase over Q4, 2020, or $45 2 million when we pause spending as we navigate the uncertainties of the pandemic. Additionally, Q4 2022 had much lower stock based compensation expense.
Total operating expense as a percentage of revenue was 20% in Q4. This.
This is higher than the prior year figure of 12%, reflecting increased investments in sales and marketing and R&D to extend our platform for future growth.
The main drivers of the year over year increase were led by increased advertising and marketing spending, particularly related to our international expansion.
Additionally, we increased head count, particularly in R&D and stock based compensation as a result of our IPO in March.
Operating income for the fourth quarter was $25 8 million or six 7% of revenue compared to $79 6 million or 21, 5% of revenue in Q4, 2020, driven by lower gross margins plus the increased investments and stock based compensation expense.
I just mentioned.
On a full year basis operating income in 2021 was $192 4 million or 14, 7% of revenue compared to $200 5 million or 29% of revenue in 2020.
We delivered our 12 consecutive quarter of positive net income.
Net income in the fourth quarter was $11 9 million down from $61 4 million in Q4 of the prior year.
In the fourth quarter 2021, we recorded a tax true up of $6 million related to higher sales sales across more states with higher tax rates as well as taxes related to higher stock based compensation. This.
This resulted in a significantly higher effective tax rate for the quarter.
Going forward, we expect our ongoing effective tax rate to be about 25%.
Diluted earnings per share was $5.
Note the cricket cricket did not have a comparable EPS history prior to the reorganization at the time of the last.
At the time of last year's IPO.
EBITDA in the fourth quarter was $31 8 million or eight 2% margin in the fourth quarter, which includes $10 1 million of stock based compensation expense. This.
This compares to unusual.
Unusually high $83 5 million or 22, 5% in the prior year Q4 on.
On a two year basis, our EBITDA grew 122% over 2019.
We generate healthy operating margins and starting in 2022, we will be able to provide year over year EPS comparisons going forward management believes that operating income and earnings per share are the key metrics on which to measure profitability and manage the long term business.
Therefore, this will be the last time that we highlight EBITDA as a key metric note that operating income is closely aligned to how we have calculated EBITDA and of course investors who were still interested in the EBITDA metric can easily calculated from our financial statements.
So aligned to this framework, we will manage towards long term operating margin targets of 15% to 19%.
Our long term target ranges for gross margin and operating expenses remain unchanged.
For reference our historical operating margins are included within the data sheet and our long term target ranges are included in the appendix of our earnings presentation. Both are available on our Investor Relations website.
Turning now to the balance sheet and cash flow.
We ended the year with a strong balance sheet of $241 6 million in cash and cash equivalents and healthy inventory levels, our credit line of $150 million remains untapped.
Cash used in operations for the year was $104 9 million, which was primarily used to rebuild depleted inventories.
Consistent with what we have said over the last few quarters, we plan to continue carrying higher than normal inventory levels to mitigate supply chain risks.
We are carefully monitoring known risks and plan to manage down inventory levels to match as risks unwind.
In summary, 2021 marks two consecutive years of hyper revenue growth on a two year basis revenue grew over 165% and we added nearly nearly 4 million new users to the platform. We grew operating income over 255% over the same two year period at the <unk>.
Same time, we help gross margin flat, while managing through a complex supply chain environment.
And have continued to significantly invest in the business.
Yeah.
I believe we are a stronger organization today than we were pre pandemic and we will continue to tightly manage what is within our control.
As we look to 2022 it is important to keep in mind. The first half of last year was unseasonably high.
2021 had followed our typical seasonality pattern similar to years prior to Covid. The quarterly revenue distribution would have looked significantly different.
So as we return to a more normal seasonality pattern. This makes first half 2022 comps very difficult.
Moreover, while we don't have full visibility into the channel.
We are operating on the belief that retailer inventories entered 2020 to about $35 million above what retailers would consider normal levels.
This figure includes the roughly $20 million a defensive buying that occurred during Q.
Q4 by a few retailers.
Combined these factors create headwinds in the first half, which we can already see early in 2022.
As we move further into 2022, we expect to benefit from traditionally stronger seasonality and easier comps over the second half of 2021.
However, we are mindful of uncertainty around some of the macroeconomic pressures of inflation and consumer spending.
We expect to end 2022 with at least eight 8 million total users.
Growth in our user base over the last two years also provides opportunity to further drive engagement and monetization over a larger base of users.
We remain focused on driving profitable growth and committed to our annual operating margin targets of 15% to 19% over the long term.
Given the uncertainties of the current environment as we enter 2022, we do see pressure on operating margins that may put us below the range in the short term.
We believe the same trends that have fueled our growth from 2014 will continue for many years to come.
We have a consistent track record of driving profitability, while managing our financial resources This dynamic macroeconomic.
This dynamic macro environment plays to the strengths of our disciplined approach we have cultivated since 2014.
The tremendous growth we've achieved by the foundation for us to scale and grow even further with that I'll now turn the time over to the operator for questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.
Please stand by while we compile the Q&A roster.
I show. Our first question comes from the line of Mark <unk> from Baird. Please go ahead.
Good afternoon, Thanks for taking my question.
Just to start out on gross margin could you maybe talk a little bit more about the levers that you have within your control to help stabilize the machine margins in the materials gross margin through 2022.
What are the puts and takes there and if you could say.
I guess net of the price increases and promotional changes how are you thinking about sort of the gross.
And those segments for the year.
So, let's let's just talk really quick about it.
Just recap a couple of things on gross margin specifically talking about about machine. So the machine gross margin, which was lower than than we would normally see and this was.
In.
Due in part to three things primarily.
The first was the.
Unusually high level of promotional activity that we.
We highlighted.
That occurred in the corner that that represented about five percentage points of the decline.
The.
That's ongoing on machine gross.
Most margins. The second was the end of life reserves that we took.
You may recall that that we had elected to delay the end of life of certain of our products, particularly machines as we went into the pandemic because we wanted to make sure that we could.
We didn't know exactly when and where and what machines and other products, we would be able to produce so we chose not to end of life.
Those machines when normal schedule.
And so in Q4, we were comfortable enough with our supply chain going forward that we elected to.
Uh huh.
<unk> plans to end of life shows in 2022, and so we took a reserve on on those plants. The final one and that was about three percentage points. If you look at those two nonrecurring items.
Machine.
Gross margins would have been.
Basically in the range of eight for Q4, where we were we saw.
Q4, 2018 in 2019.
Pre pandemic.
Add on top of that though.
Inflationary pressures across the supply chain that we're experiencing particularly in in freight and warehousing.
And and <unk>.
You get something closer to.
Where we would where we would expect it to be normally that being said if we look forward we are.
We saw freight and warehousing levels peaked in Q4, and we don't see any relief from that.
At least through the first half.
And probably moving into.
Into 2023.
But that we are implementing price increases to help.
Offset some of that.
And and and we expect those too likely.
Take effect some of them somewhat mostly in the second half.
Let me just let me just add to that Mark.
I wanted to just double click on the.
Promotional strategy and why it was a little bit of an anomaly.
So we have a great partnership with all our retail partners and we plan. These promotion six to nine months ahead of the holiday season. During the holidays. We had one major retail partner that actually was a lot deeper than we had anticipated and we at that point given the hyper competitive environment chose to support our retail partners.
But additionally, Pos dollars.
Make them competitive but.
We've put in place processes to help a wide will mitigate these in the future. So that is one event that.
Really kind of.
<unk> event that happened and we have to just manage it during the quarter.
A couple of other things that Marty mentioned that I think will help one is clearly.
You know changing we're gonna be impacting pricing.
Both to our retailers as well as to the consumers that will help drive the gross margins up.
You know as we go into the second half of the year, our mix of the product, especially on machines, though.
Gravitate towards the higher price point, and the products with better margins.
So I think those.
We think that all of those combined.
We will start to gravitate back to the long term margins in the longer term so.
But what we saw was a trough.
Please.
Thank you for all that detail.
And maybe to follow up Ashish, we saw the announcement yesterday on some of the new products.
I guess.
To what extent some of this innovation geared toward greater monetization of some of your current users. Your power users I guess I think the auto price is at $1000 price point on it.
Versus attracting new users to the platform and then more generally ashish any details youre willing to share on the innovation pipeline for 2022 beyond those announcements would be great. Thank you.
So you know.
I think you're very astute in terms of first and foremost that strategy with all of the launches, including the labs that we have.
Earlier in the quarter.
Really good first and foremost I couldn't quite could use it to help drive monetization of the existing installed base.
We do believe that over time as you know as you've said in the past.
Certain percentage if I use those like yourself, we believe that in addition to the enthusiasm the hobbyists.
There will be some of our users.
Will attract new users, who actually come at it more from a commercial perspective, so I think it's probably a combination of both.
We've had some we're really excited about all of these launches they've got some really good signals of consumer passion and demand around that.
From our innovation pipeline perspective.
You know first and foremost let up a.
Fundamental because we're a platform company.
We continue to invest significantly in the platform right, which is the data out of the content the community services and the software.
Across desktop and mobile so that's going to be a continued ongoing investment.
We will pursue.
I think we've kind of said we are we will continue to we believe that the current category. We are still in the early days so from a connected machines while cutting.
We still have a lot of runway ahead of that and so we will continue to innovate in that area and then finally.
I alluded to this that we will be investing in because we are a platform company and these connected machines that on top of the platform. We are continuing to invest in other types of machines that are different than what we do today. So a little bit excited about that but those are again medium to long term investments.
Great. Thank you.
Thank you.
Our next question comes from the line of James Suva from Citigroup. Please go ahead.
Thank you so much for the details it's Jim Suva I have a question I think it was Marty mentioned that inventory levels were a little bit higher than normal to the neighborhood I, probably wouldn't underwrite around $35 million I might be wrong or right on that one.
What was the reason for higher inventory levels was it.
Retailers were expecting another kind of COVID-19 growth here or there.
They were concerned about supply chain issues in kind of a double order and the reason why I ask is a lot of society seeing shortages of inventory and it sounds like youre talking about extra inventory. So if you could help us with that that'd be great.
Yes, sure Jim So let me just addressing a distinction between our inventory and channel. The comment that you are talking about is channel inventory and just just very quickly we've.
We've been talking over the past few quarters about our own intention.
And practice of carrying higher levels of inventory.
Then than we normally would to mitigate against supply chain challenges and we ourselves ended the end of day.
Year about on target with where we we plan to beat we watch metrics very closely we have.
Designated metrics.
Two to look at relative to certain certain risk factors.
And we mentioned in last quarter's call that we had seen defensive buying similar to what we were doing.
On the part of a few of our retailers and we saw that buying continue all the way through the end of Q4.
We estimated.
The pull forward.
Of that defensive buying into Q4 from future periods of about 20 $20 million.
As we look at the balances the channel inventory balances with exist.
Existed at the end of the year looking forward into 2022.
Based on what we would estimate to be normal levels of inventory, we saw about $35 million in additional inventory that was being Terry.
Perfect and then just to clarify the $20 million that you mentioned 35 to 35 that includes the $20 million I assume more uniquely.
Uniquely different.
Yes, it does I'm, sorry, I should have clarified that the 'twenty to 'twenty is within the 35.
It's about time.
And then last question is if we compare to say two years ago again kind of taking out the co over the year a little bit.
Accessories.
How should we think about why assessed series are trending what they are versus.
<unk> materials versus two years ago is that.
Is there some type of trend, we should extrapolate I don't want to compare to one year ago, because I think that's an unfair.
Relationship, but what's your thoughts about versus two years ago for accessories and materials in the direction of such.
Yes, so we agree with you that comparing to a year ago.
<unk>.
It is not valid just because of so many things going on last year and so on.
I'm talking about accessories and materials are specifically.
And so if we look at.
Accessories and materials are at the end of 2019.
So pre pandemic relative to accessories and materials in.
In 2021.
<unk> declined about about.
About 7% and now <unk> is for us.
Is a measure and a yardstick of.
Our arm production.
And profitability of every person who has ever.
Registered a machine whether they put it in the closet or not.
So because that's the denominator and so we look at.
Revenues from accessories and materials divided by that entire user base.
So over that same period, we increased our user base by 153% or 4 million people and so.
We feel we feel pretty good about that about that.
2021 RFP number.
Does increasing the numbers that quickly and only declining.
7%.
Feels pretty good.
Yeah.
Thank you for the details and clarification and yes, Indeed, all our Christmas Bug Presley's did come out for all of our family members and a great man or so thank you for that experience.
Jim Let me just add one comment to bodies.
But one other thing I mean, I think you've got to inform the question you asked as well which is.
We are continuing to see a lot of beginner and intermediate factor of Gen Z and millennials, which is actually what exactly what you want right, but just broadening the market going after the the highly engaged enthusiast. So I'll do bad at retail channels. As we've added use cases, we're seeing the broadening of demographics now what would happen is initially when those demographics.
Come in they engagement.
<unk> will not be as high as a somebody who lives and breathes class. However, the total number of engaged users would be significantly higher but on a per user basis that'll go out that does put some pressure on over time.
That's been again, an opportunity for us to continue to bring them down the funnel and increase engagement and drive monetization, but I do want to I think your question. There is an element of the broadening demographics. It speaks of the market opportunity, but it will impact the numbers of material.
Great. Thanks, so much for the additional color.
<unk>.
Thank you.
Next question comes from the line of Erik Woodring from Morgan Stanley . Please go ahead.
Hey, good afternoon, guys. Thanks for taking the question I guess you know we.
We have the guidance for 8 million users at the end of 2022 is there any way that you can put additional.
Kind of framing of how 2022 might look either from an RFP perspective of margins you know opex really what I'm just trying to get at is.
2022, a bit open and I'm just trying to give you a chance maybe to to help guide us as to how we might think about 2022 across any of those metrics and then I have a follow up.
So I'll, let Marty talk about you know one of the other key concept that we introduced with seasonality, but and I'll, let him talk to that but let me kind of give you my perspective on the $8 million. So if you calculate the number that basically means that we're going to add another $1 6 billion users in 2022, and you know given the promotional strategy.
And the pricing, we feel really good about that number.
Just to give you some context that'll be twice as many users that we.
In 2019, and it builds on the roughly 338 4 million users that we acquired in.
2020 in 2021, so you know.
If you take the $3 8 million users that we acquired in the last two years plus the $1 6 billion and we think Thats a wonderful platform for us to further monetize.
With subscriptions accessories immaterial I do think that again.
I want to comment on the other aspects of the question but.
Well one of the things that we are seeing is devoting back to seasonality that we hadn't seen in the last couple of years, yes. So so on the seasonality point.
I highlighted this.
A little bit in my prepared remarks, but.
We're a seasonal business and year on year out pre pandemic it was pretty consistent.
That about 40% of our revenues would.
I come from the first half and about 60% in the second half pandemic kind of turn everything upside down and specifically 2021.
It was a front end loaded.
About 50% coming from first half and 50% in the second half now as we exit the pandemic.
And we are.
Moving back to.
A more normal season.
Seasonality pattern, what that what that means is that we're moving from 50% revenues in the first half last year to 40% is our expectation this year and so.
When we're looking at comps on year over year growth rates by quarter.
It means that the first quarter.
Difficult comps for us to meet the second half so if youre looking at that.
Comps will be a bit easier. So I just want to make sure that that youre thinking about that.
In your analysis as well as the.
Additional channel overhang.
We believe we think that that will probably work itself out.
Yeah.
Of the year.
Okay. Thank you that is that's helpful. And then one just clarification question on the channel inventory.
Marty you talked about the $35 million $20 million of which was estimated pull forward, what's the incremental $15 million from just sounds a better understanding of how we get to that 35 million in total thank you.
Yes that would have been prior to Q4 in other words we.
We had seen some defensive buying in advance of Q4.
So just to clarify it essentially.
The channel was elevated going into <unk> and now with a defensive buying you add up to those two quarters, when you get to that $35 million.
That's right.
Okay perfect. Thank you so much.
Thank you I show. Our next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question. This is Bala entourage.
I'm going to kick it off with linearity.
The quarter in the December quarter and also.
In the months of January and February .
Both in terms of engagement and also the user additions in elektron up.
So I'm not let me let me answer what I think you were talking about.
We're just looking at.
I think youre looking at how Q1 is shaping up so far.
And just keeping in mind that there's there are a couple of the.
Two items that I mentioned that.
Are the dynamics that I mentioned that are impacting the first half one is a reversion to normal seasonality and the other one channel overhang as we look at consumer demand.
We look at it relative to two.
<unk> 'twenty.
2020, the first year or the first quarter of 2020, which was pre pandemic.
We feel good about the demand the demand is strong and so.
From from that perspective, as well as search and other things we.
We feel real good that.
<unk> demand is strong.
Okay. Thanks for that market I guess, what I'm wondering is.
Some companies in the space here.
Kind of flag this slowdown.
Especially last month in February just wondering.
What are you seeing in terms of.
The user Activations.
In the context of your.
Fully a user growth of one 6%.
I'm, just wondering comparing back to last year.
This time last couple of years.
Now COVID-19 work from home impact, but given the addressable market is so huge I'm just wondering if the slowdown in user editions in 'twenty to 'twenty one.
Is that dynamic cough, maybe what you've been seeing lately over the last couple of months.
So I think.
Let me, let me take that.
One is we are.
So first of all the the trend the shape of our business. We feel are very much intact right personalization digital tools and everything that's driven our business.
Very much intact, and we don't see anything changing dramatically that right because given the number of one 6 million ads for the year, which again you know at this point given all the dynamics of the marketplace of the market. We just you know we are basically comfortable with that $1 6 billion add number.
The third is which is you know like what we saw in the last year or so.
In 2021 was something that was uncharacteristically not seasonal right and I think what we are what Marty the comments that Marty made is.
Then the tip to the seasonality that you see in a typical year coming into Covid.
I had to the pandemic, we feel good about the demand but at this point, we are not giving further guidance or information on that.
At this point.
Thanks Ashish.
I've got one follow up for me on price increases that you are planning.
I guess I guess I'm wondering how you're thinking about this price increases potentially impact paying user ads.
In the context of this normalization on demand.
Because I was thinking.
I suppose it could go would be to prioritize user acquisition or profitability, especially in the medium term.
Is that still the right thinking any any color there.
Yes.
But back to my once it's been an add right I mean, the the environment is just there's so many dynamics going on in the market that really kind of isolating the impact then.
On higher pricing.
Decreased promotions.
It's hard to estimate but given.
Given all of that we basically wanted to be.
Wanted we basically think that bill and the 8 million users, which is roughly in out of one six.
That went off.
Whether we should be promoting more or less do you believe that you know we've always been very long, but the business right and we believe that.
Going forward, our promotional strategy of more in line with what strategically we'd want to do.
Both in terms of user acquisition, but also in terms of where we want the relative margins to be so our goal is to.
Definitely get our margins back to where they need to be now again, nobody can predict the inflation right now that's a debate I think right now given everything that we know we feel good about the 8 million number.
I appreciate it thanks, Josh.
Now and again you know the one thing that I want to make sure that we'd remind ourselves that the business model right, which is that when we talk about user acquisition right of key part of what drives our business model is engagement right and I think you know.
That's one of the top priorities as we highlighted in our release that it's one of the topics that the company. So our goal is to drive engagement and drive monetization with subscriptions accessories and materials.
Got it thanks.
Thank you.
Our next question comes from the line of Paul Cheng from Barclays. Please go ahead.
Hey, guys. Thanks for taking my question.
I wanted to go back to one of the things you said was.
The competitive environment contributing to the need for increased promotions Im wondering what youre seeing competitively in the market are you seeing promotions for more from some of your competitors or has anything kind of changed on how you view yourself position and then I have a quick follow up.
Okay, well, let me clarify.
Yeah.
We are the category leader and be a significant market share and I would say that in fact, they are the competitors that we do have probably had a lack of inventory.
Significant inventory shortages or at least they're not again. This is anecdotal because we just looking at the shelves of the teams are going around the competitive environment that I talked about was more at the retailer partner level right. So we wanted to make sure given our strategic partnership with all our retailers that when one major retailer.
Kind of was more aggressive in the promotions.
We took a decision in the strat.
For the benefit of our partnership with other retailers to support other retailers to compete in the market. So it goes more to enabling our partners.
Rather than us being in a competitive environment relative to other competitors in our space.
Okay. Thank you that makes sense.
My second question is.
So harp on it a little bit but on gross margin is clearly the biggest variance.
At least consensus than we were.
Estimating for this quarter.
How should we think about modeling gross margin at least for the next few quarters, specifically on both connected machines and accessories are weak.
When does it when do the price increases that you talked about come through into the model and should we expect some pressure on those lines in the near term. Thanks.
Yes so.
I explained the.
Sort of nonrecurring items.
If you remove those.
On an annualized basis, we were.
From an EBITDA standpoint, we were at the low end of our long term target range, but we still are facing pressures from.
Yeah.
Freight and warehousing and other.
Inflationary pressures were starting to feel more of the increase in raw materials and that's that is the reason why Merck.
Working on a price increase.
We are in that we're working with our retailers know exactly what that price increase would look like and when it would take effect.
Our expectation is is that.
Primary impact would be second half, it's hard for me to comment.
Going beyond that.
Okay. Thank you best of luck.
Thank you. Thank you.
Thank you.
Sure. Our last question comes from the line of Jim Suva from Citigroup. Please go ahead.
Yes.
As a follow up is it fair to assume that margins in 2022.
Be lower than 2021 due to all the myriad of things that you're referring to or are any color because it is.
Rod Hall, and I kind of both.
Mentioned that there was a lot of concern about gross margin. So any color you can give there and if not then.
You may have.
A follow up on a different topic.
So we're not we're not.
Giving specific guidance on where we expect margins to be for 2022.
What we will say is.
Our long term.
Target model remains.
Something that we feel good about where long term, we expect gross margins to be in the 37% to 38% range.
And our operating margin to be in the 15% to 19% range.
Okay, and then my quick follow up.
Perhaps light these additional things you've law launched are they consistent with corporate average profitability or above or below or they need volumes to really help out or how should we think about your kind of flurry of recent product announcements.
No I think they're relatively in line with Debbie you want to be.
So we price.
Price them accordingly to make sure that would be yes.
And again.
Materials and assesses the blended margin so there's a variety of things in there, but those are those are healthy products.
Good margins.
Great. Thanks for the details.
I mean, obviously, we just announced them they are still not at retail it would be a few weeks.
Thank you.
That concludes our Q&A session and that concludes today's conference call. Thank you all for participating you may now disconnect.
So thank you operator.
Sure.
Yes.
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