Q1 2022 Cricut Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the cricket Q1, 2022 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to turn the conference over to your Speaker today, Ms. Stacie Clements with mature group. Please go ahead ma'am.
Okay.
Thank you operator, and good afternoon, everyone. Thank you for joining us on cricket first quarter 2022 earnings call. Please note that today's call is being webcast on the Investor Relations section of the company's website a replay of the webcast will also be available following today's call for your reference accompanying slides used on today's call along with.
The supplemental data sheet have been posted to the Investor Relations section of the company's web site investor that cricket Dot com joining.
Joining me on the call today are Ashish O'meara, Chief Executive Officer, Kimball Shale, Chief Financial Officer, and Jason <unk> VP of finance.
Before we begin we would like to remind everyone that our prepared remarks contain forward looking statements and management may make additional forward looking statements, including statements regarding our strategy business expenses and results of operations in response to your questions. These 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 risk factors section of cricket. Most recently filed Form 10-K actual events or results could materially differ materially.
This call also contains time sensitive information that is accurate only as of the date of this broadcast may 10th 2020 to click it assumes no obligation to update any forward looking projection that may be made in today's release or call I will now turn the call over to Ashish.
Thank you Stacie and welcome everyone.
Revenue in the first quarter was $244 8 million a significant year over year decline.
Tough call from an exceptionally strong Q1 last year, which benefited from the pandemic.
As anticipated January and February in Florida, reversion to a more typical pre pandemic seasonal trends.
Starting with March began to see additional impacts of strong consumer demand.
Solid business model and our ability to execute operationally continued delivering our 13th consecutive quarter of profitability.
As we enter Q2 and look ahead to the remainder of the year. We anticipate these pressures persisting in the near term and are highly focused on executing with a balanced and disciplined approach.
We continue to view our business through a long term lengths optimizing the many levers within our control.
The focus of the business fundamentals that position us well for medium to long term growth and profitability.
We added more than 495000, new users to the platform in the first quarter.
Subscriptions business was strong with over 33% of our total users being paid subscribers at the end of Q1.
We improved gross margins on a sequential basis, reflecting our diverse revenue streams and the work we have done to stabilize our pricing and promotions.
Balance sheet inventory levels remain healthy.
We continue to operate with agility and discipline, all while delivering attractive profitability.
Coming off of a two year hyper growth period.
Brad just more mainstream retailers have given significantly more shelf space to a great ecosystem of connected products and materials.
We have a strong and passionate user base. This will fuel a flywheel of engagement and increase user monetization for many years to come.
Invested in driving significant customer acquisition, adding more retail partners and influencers across the globe.
At the end of Q1 2020 to nearly 7 billion users on our platform a growth of more than 4 million users from two years ago with 54% of total users engaged over the last 90 days.
We continue to focus on building a robust engagement engine, which ultimately leads to greater monetization.
And just also fuels, our flywheel, creating low cost customer acquisition through strong word of mouth influence.
Firstly energized and focused on everything we need to do to operate in the short term.
Optimizing the tradeoff between current profitability and investments in our long term growth opportunities.
We will continue to invest in international markets against a proven playbook of seeding the market volume for revenue contribution.
Looking at our user base as a whole we have a significant opportunity to drive growth.
Subscriptions and accessories, our materials businesses.
We further strengthened user engagement at the Onboarding experience.
Our product roadmap is robust we are focused on enhancing the value proposition of our subscription product.
We're excited about the new things that we are launching over the next three to six months that will enable more content and functionality for our cricket access subscribers.
We're also making significant investments in our accessories and materials products, where we have an opportunity to expand the cricket ecosystem.
Ultimately these are the drivers that would result in robust growth in the long term as we continue to grow our user base.
For consumers looking for a seamless connected ecosystem for their projects there is no alternative.
<unk> never been a better time to be a click a user.
Underscoring our confidence in our four key trends.
That demonstrates the resilience of the market.
Given our business forward since 2014.
First the desire for personalization.
The digitization of tools that makes personalization easy and seamless.
Third technology has opened the door to a new generation of entrepreneurs and fourth the proliferation of social media that draw.
<unk> community a significant value for entry for others looking to enter the market.
These key trust also vote, two internationally, where we have significant growth opportunity across new and existing markets.
Similarly by macro challenges exist in our more mature international markets like the UK and Australia.
Our newer markets like Germany, and France continued to expand and thrive as we add new stores at a high rate with existing retailers and add new retail and e-commerce partnerships.
Look at things like user engagement levels, Google search terms and brand familiarity all of which have contributed to our success in these markets.
As we enter new markets, we utilize the same cricket playbook with a focus on the same fundamental same strong fundamental drivers of the business.
We have just recently launched in Turkey and are very excited about our upcoming launches in Japan, and South Korea over the next few months.
The local market level.
Continued growth by identifying influential voices fostering community and partnering with key retailers.
We're also investing heavily in user engagement, starting with how we onboard first time users.
We believe that our great onboarding process.
He's a strong role in driving long term engagement and monetization.
I'll do the first to receive the machine. It is our goal to delight them at every touch.
But the setup as a registration process should be seamless.
We're also developing product bundles are learning experiences, which we believe will help smooth the path for users who are just starting out in.
In addition to our focus on Onboarding, we are investing significantly in our platform to help drive user engagement.
This starts with design space, where we have a unique opportunity to foster more user engagement.
This year, we are focused on bringing more versatile and eligible content along with expanding the amount of diverse content.
We recently launched a new homepage for cricket design space, creating a whole dynamic experience and improving content discovery, both within our app and across our use of social media feeds.
We're also focused on delivering greater parity between the desktop and mobile experiences. So users can have a consistent experience across all of our apps.
We recently launched our design space App for Android in April following a new and improved iOS launch at the end of last year.
Overlap are key to our overall engagement strategy and a critical pillar of our community efforts.
All of these efforts around on boarding and engagement ultimately drive more monetization opportunities on our platform.
Bill were $2 3 billion peak look at active subscribers at the end of Q1.
Nearly 700000 more paid subscribers compared to prior year Q1.
Our strategy to look at options to further expand our offering.
Simply adding more content to include and have software and services to further delight, our user base and bring additional value to that.
Investments in software and subscriptions are resulting in an expansive roadmap of new functionality for our cricket active subscribers one.
One example is Mardi Gras Mako tool that we will be releasing soon and exclusively for subscribers.
This addresses the popular use case the tool now allows users to quickly create beautiful personalized modern brands from a wide variety of template designs in France.
Additionally, our contributing artist program, which I mentioned in the last earnings call has received great feedback from our beta users.
Maintenance significant steps to extend the program to a broader audience over the next month, bringing more orders to the platform and a wide range of diverse content to our users.
We are increasingly advertising quicker access inside design space and now have the ability capabilities to pizza different messaging and upsell offers for cricket access and to measure the effectiveness of each of those placements inside design space.
Another opportunity for monetization as to accessories and materials, but engagement as a key driver.
The more users made some raw materials they need.
Our competitive advantage in accessing the material is a redesigned materials to be seamlessly compatible within the cricket ecosystem.
This means that the materials, specifically designed with our software and connected machines in mind. This is.
An area of significant opportunity for us one where we can differentiate from competitors we.
We will continue and work to work and partner with those retailers, who will help bring these seamless experiences to the end consumer.
We will continue to innovate and leverage our compatibility story to differentiate and drive demand for cricket materials.
Although there's a lot of uncertainty in the current macro environment, we are as confident as ever about our medium and long term opportunity for growth.
We continue to see a large opportunity to expand our nearly 7 million users over time, as we grow into new markets and retailers.
Our focus is on driving deeper engagement, including improving the onboarding process and making it easier for our new users beginning their journey.
Driving more engagement in turn leads to more opportunities to monetize the user base with subscriptions and accessories and materials we continue.
To invest in our future growth through continued innovation that will extend and expand our <unk>.
<unk> platform in <unk>.
This will enable us to continue to deliver profits and delight users around the world.
Notwithstanding the currently bumpy road.
It's still squarely on the accelerator pedal of long term growth.
I will now turn the call over to Kimball for more details on the financials.
Thank you Ashish and good afternoon, everyone for those of you who haven't met me, yet I'd like crickets operations and supply chain for the last three years, our purpose driven mission to help people lead creative lives. It's what inspires me and our teams every day our.
Our products fostering mental health and wellbeing entrepreneurship and community to millions of consumers around the globe.
The diversity of our revenue streams and our proven track record of profitability allow us to operate cricket through a long term lens.
I'm excited to be here today and look forward to meeting you all in the coming quarters.
In the first quarter, we delivered revenue of $244 8 million a decline of 24% compared to prior year Q1, which benefited from a strong pandemic related year over year growth rate of 125%.
Looking at growth momentum over the long term Q1 revenue was up 70% over the pre pandemic comparative quarter of Q1 2020.
In our last call, we talked about our expectations for a reversion to historical seasonality as we emerge from the pandemic in March we also starting to see softening in consumer demand, which we believe relates to current macroeconomic factors that softness continues quarter to date.
First quarter revenue was also impacted by higher channel inventory as discussed on our last call. Some retailers took a more proactive approach and manage their inventory and we entered Q1 with approximately $35 million and higher than normal channel inventory during the quarter. Some retailers work. These inventory levels were down these inventory levels, while others continue to build there.
Stocks on a net basis, we estimate that these higher than normal channel inventory levels decreased by approximately 20%.
But given current market conditions. This process may continue into Q3.
We have no plans for additional promotional activity to move this inventory and believe higher channel Bill is primarily a result of retailers own proactive approaches to managing inventory.
We view these factors tough year over year comps softer consumer demand due to macro macroeconomic uncertainties and higher inventory levels that retailers as short term in nature.
We continue to believe in our strong business fundamentals and our long term growth trajectory.
Operating margins were up 70 basis points from Q1 2020, despite a nearly 250% increase in operating expenses over the same two year period.
We delivered $23 5 million of net income in the first quarter, demonstrating a durable business model and our continued focus on profitability.
Breaking revenue down further connected machines revenue was impacted by reduced consumer demand trends that began in march as well as the higher than normal channel inventory positions that some of our retailers held entering the quarter revenue from connected machines was $62 4 million.
Down 56% year over year compared to a pre pandemic Q1 2020 connected machine revenues grew nearly 10% on a two year basis.
Revenue from subscriptions was 64 million $64 8 million.
Up 40% over last year, and nearly 238% on a two year basis, driven by seasonally higher machine sales in Q4 and prior investments made to increase the value and cricket access.
Revenue from accessories, and materials was $117 6 million.
Around 14% over last year compared to the pre pandemic Q1, 2020 accessories and materials revenues grew 74% on a two year basis, reflecting growth in our engaged user base.
In terms of geographic breakdown international markets grew as a percentage of the total business.
Presenting 15% of total revenues compared to 10% in Q1 of the prior year revenues from international on a year over year basis increased by about 9% with softness in our most mature markets like the UK offset by growth in newer geographies on.
On a two year basis international revenues have grown 285% compared to Q1 2020.
We continue to fuel our monetization flywheel for long term growth in the first quarter. We added over 495000, new users and ended the quarter with more than $6 9 million total users. The number of users engaged on our platform for the 90 day period, ending March was up 21% year over year climbing to $3 7 million.
<unk> engaged users.
As a percentage of total users user engagement was 54% in the first quarter down from 62% in the prior year when we benefited from stay at home pandemic conditions.
This was down on a sequential basis from 60% typically Q4 is our seasonal high and keep in mind. This calculation will fluctuate overtime with seasonality and as we broaden our user base and expand into new verticals and use cases, we are increasingly attracting gnc's and beginner crafters, creating an opportunity for us in the medium to long term.
As we broaden the appeal of our products and our platform typically beginner crafters will be less engaged at the start of their crafting journey with significant opportunity.
For us to drive higher engagement over time, as Ashish pointed out Onboarding and driving engagement is one of the top priorities for the company and we continue to invest in this area.
We also saw strong momentum with cricket access the number of paid subscribers grew by $696000 on a year over year basis, ending the quarter with just over $2 3 million paid subscribers attach rates in the quarter rose to over 33% up significantly from pre pandemic periods when our attach rates were in the mid twenties.
Subscriber growth is fueled by connected machine sales and new user adds in the prior quarter offset by a historically consistent level of churn against our now much larger user base subscriber base excuse me paid subscriber growth typically lags new user addition by about a quarter as free trials and end users to the transit.
<unk> to paid subscription plans.
As we look to the rest of the year, we expect pressure on subscriber growth, particularly in Q2 and Q3 as we navigate through the short term environment of slower consumer demand and new user adds.
We measure user monetization through average revenue per user in both subscriptions and accessories and materials by dividing revenue in those segments by our entire user base within that period or <unk> for subscriptions in the first quarter was $9 73.
Down slightly from $9 96 in Q1 2021.
Accessories and materials are closely relates to user engagement and channel inventory.
<unk> from accessories and materials in the first quarter was $17 67.
This compares to Q1 2021 <unk> of $29 45.
Which was higher due to unusually high engagement trends during COVID-19 and also reflects heavier buying from our retailers as they restock depleted inventory levels at the beginning of last year.
We have a strong focus on monetizing our growing user base through subscriptions and accessories and materials keep in mind, we grew our user base by $4 1 million users since Q1 2020.
Moving to gross margin totaled.
Total gross margin in the first quarter was 45% an improvement of over 13 points compared to Q4 2021 and up from 37% in Q1 last year. This represents the leverages in our business model associated with our diverse revenue streams as a greater percentage of revenue in the quarter derived from subscriptions.
And with new promotional strategies.
You will recall our comments during our last call regarding our efforts to improve our overall promotions policies, including new strategies to give us greater flexibility on a go forward basis, enabling us to manage the business and support retail partnerships.
Breaking gross margin down further.
Gross margin from connected machines in the quarter was two 7% on a year over year basis connected machine margin is down compared to 15, 3% in Q1 2021, when we were at the height of the pandemic and saw elevated machine sales.
The lower connected machine margin was the result of pricing on end of life machines and the impact of fixed costs were significantly lower unit volumes.
In addition on a year over year basis, Q1, 2020, two's impact of elevated freight warehousing and handling costs as we move through 2022, we also anticipate the impact of increases to commodities and labor costs.
On a sequential basis connected machine margins improved from prior quarter of negative one 5% as we took corrective actions to the promotional challenges during Q4.
Gross margin from subscriptions in the quarter was 92%, which is essentially flat year over year.
Gross margin from accessories and materials in the first quarter was 33% down from 41, 7% in the prior year, primarily driven by higher costs, including higher freight and handling as well as lower average selling prices starting in Q2, we began to implement price increases we are in the process of rolling this out with our retail and distribution.
Partners across connected machines accessories and materials to help mitigate the impact of the recent cost Escalations. We expect these actions to begin benefiting margins later in Q2 with a material impact in the second half of the year.
Moving onto operating expenses, we continue to significantly invest in the business with a disciplined focus while making long term improvements in operating margin on a two year compare we improved operating margin by 70 basis points, while more than doubling operating expenses.
Total operating expenses in the first quarter were $67 6 million and included $8 9 million and stock based compensation. This was an increase over the $55 6 million in Q1 of 2021, primarily reflecting continued investments in niche outlined.
Total operating expenses as a percentage of revenue was 28% in Q1, an increase from 17% from a year ago, primarily due to lower revenues in the quarter.
Okay.
Operating income for the first quarter was $31 4 million or.
Or 12, 8% of revenue compared to $64 $7 million or 20% of revenue in Q1, 2021, driven by lower revenues for the quarter and increased investments as.
As we navigate headwinds in the short term, we remain focused on managing our resources and continued continuing to deliver healthy operating margins, even though in the short term they will likely be below the long term target range of 15% to 19% or.
Our business remains durable with.
With a healthy profitability profile, we delivered our 13th consecutive quarter of positive net income.
Net income in the first quarter was $23 $5 million down from $49 4 million in Q1 of the prior year diluted earnings per share was 11 <unk>.
Compared to 24 in Q1 2021.
Turning now to the balance sheet and cash flow our balance sheet is strong and enabled us to navigate through periods of market volatility. We ended the quarter with $245 million $245 7 million in cash and cash equivalents and healthy inventory levels.
Our credit line of $150 million remains untapped cash.
Cash generated from operations for the quarter was a positive $15 $6 million, we plan to carry higher inventory levels to mitigate supply chain risks as we continue to see long lead times for components and materials. We are carefully monitoring known risks and plan to manage down inventory levels to match as risks unwind.
Let me spend a few minutes talking about what we see as we look ahead to the rest of the year. As a reminder, Q2 is typically a softer quarter for us.
Also as we mentioned we saw significant consumer softness starting in March and that continues so far in Q2.
Based on this our target of reaching 8 million total users and this year will likely prove to be more challenging than we previously thought which will likely impact subscriber growth.
As I mentioned earlier, new subscriber growth typically lags user growth. Therefore, we expect the number of paid subscribers in Q2, and Q3 to be flat or possibly decline primarily related to fewer new user adds.
Added to the platform, we continue to see churn rates that are consistent with historical trends. We view this flat to decline in subscribers as short term in nature. We remained focused on the user's journey, which we believe will increase the value proposition and maximize user monetization.
Looking at the long term, we believe the trends that have driven our business over the last eight years remain intact. We are strongly confident and the unique value proposition that cricket brings to millions of users and to the millions more around the world that we have an opportunity to bring to the cricket platform.
The significant growth of our user base over the last few years also provides opportunities to further drive engagement and monetization over a larger base of users. We are focused on managing our profitability, while investing in areas with the highest impact, including improving onboarding fostering higher levels of engagement and innovating on our platform to drive.
Growth in cricket access and our accessories and materials business, we remain focused on driving profitable growth and are committed to our annual operating margin targets of 15% to 19% over the long term and the short term as we continue to invest we will likely be below this range by a few percentage points for the remainder of this year we have a.
A strong balance sheet solid cash position and unique business model that enables us to navigate these uncertain times and remain focused on our long term opportunities. We have a consistent track record of driving profitability, while managing our financial resources. Our disciplined approach has been cultivated since 2014 and is ingrained in how we manage and all.
Our business model the tremendous growth we've achieved lays the foundation for us to scale and grow even further and we are as focused as ever on optimizing the things that will truly drive our business forward.
With that I'll turn the call over to the operator for questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone.
My question has been answered or you wish to remove yourself from the queue. Please press the pound key once again Thats star one on your Touchtone telephone to ask a question.
Your first question comes from the line of Mark <unk>.
Go from Baird. Your line is open.
Hello. This is Amy Husky answer Mark. This afternoon I'll just start off could you give us a bit more color on what youre seeing with user engagement.
What types of projects are consumers engaging in now versus six months ago, and we saw some amplified seasonality last time or would you expect that to play out Similarly this year.
Yes.
Let me take that and people are going to jump in so I think when we look at engagement I wanted to go back and make sure that we define what the how we calculate the engagement percentage.
So the way, we calculate engagement percentages the number of users that have cut in the last 90 days divided by all our user base.
Entire user base, so we don't graduate any user.
In Q1, we don't like typical seasons we.
See a slowdown from Q4, because Q4 people at the holidays, when we look at that engagement percentage number.
We actually kind of look at two metrics in tandem and we.
Look at the total number of engaged users that are also engaged at that time, so just to give that number and just to kind of.
Repeat that at the end of Q1, we basically had $3 7 billion engaged users, which is about 640 650000 compared to the same quarter last year. So I think.
Expected engagement to go down from.
From a seasonality perspective.
The range of projects that people are doing.
I mean, clearly we had Valentine's and more recently, we have mother's day and Easter.
We don't see a big difference.
Hi deposits people are doing but they're still doing okay.
Cause that T shirts, and labels and it allows us also depends on what stories, we tell.
Kimball talked about and I mentioned briefly one of our core areas of focus is too.
Drive Onboarding and engagement. So we are looking at a number of initiatives that we believe will help drive those numbers up but again.
A very important metric for the company and we are hyper focused on it.
Great. Thank you.
And as a follow up how have you seen your customers respond to inflationary pressures in particular, you talked about bringing some more beginner crafters in gen <unk> into the network or are you seeing any.
Differences between the heavy users and those newer younger customers yes.
Yes.
Really good question one of our core goals as a company has been to go beyond the Super engaged enthusiast right as they have lost retail partnerships as we have partnered with Influencers. Our strategy has been to broaden being the creativity out and everybody.
So.
<unk>.
The fact that more big and those <unk> are joining the platform.
Somewhat by design by strategy, where we believe that.
We want to make it easy.
Less time consuming for people to create things so whether they want to organize their home we want to bring creativity not just on special occasions, but in everyday life.
The kinds of projects that you would guess theyre looking for to do a simpler projects, we have a lot of focus on.
<unk> people do things and less than five minutes or less and then as they get engaged to kind of bring them up the engagement curve over time.
We don't see a lot of innovation as I talked about in our software.
We can bring these users on board, we have launched cricket learn as a platform for driving both education as well as our platform itself.
<unk> will feature a significant amount of engagement I'll give one more example, we recently launched our homepage, which used to be kind of bidding one dimensional.
Now the hope it is multi dimensional where we have we are featuring projects from the community. We are featuring projects will begin NBC people book marketing project savings projects connecting with community members et cetera, and we think that we had in the very very early days of driving that rich engagement on our platform, which is even beyond cutting.
I think thats really something that is particularly helpful to four new begin so as I said, we will stay very focused on expanding in bringing creativity in everyday life.
And then complementing that with the infrastructure on our platform to help drive that so.
Talk about crossing the chasm really focus of that and we are proud of what our teams have done.
I think we have long ways to go.
Alright, Thank you I'll turn it back.
Your next question comes from the line of Eric <unk>.
<unk> from Morgan Stanley Your line is open.
Hey, good afternoon, guys. Thank you for taking my questions, maybe I'll start one with you obviously without giving too many details beyond what youre, what you'd be comfortable sharing maybe can you just elaborate a bit on kind of what excites us so much about the three to six months product roadmaps, meaning.
Would these products be Tam expanders.
How can we think about their fit within your ecosystem and then.
Just adding to that does the consumer demand environment impact the way that youre thinking about the product launch roadmap of what products to come out with the price points to come out with and then I have a follow up.
Okay.
Hover chassis havoc.
As much as you want.
Yes.
You asked the products' CEO whats the roadmap and he can go on forever.
I think there's a number of exciting things that I am proud of our team just launch a number of products in the heap first category we launched.
Lots of hard pressed with gave people the ability to personalize has lots of presume a focused product at a 1000 bottles that we can talk about the auto press.
And as well as we have upgraded our EZ pass line and we have Tom <unk> innovation coming.
Thing that excites me the most over the next three to six months is a platform and again, what I mean by a platform as cricket design space, It's the mobile app.
As I said this is a number of things that we are doing that will help drive onboarding. There's a number of things that we're doing to make it easier for the community to connect with each other to be inspired to share projects with each other.
Thank all of that will really lay the foundation for monetization.
The next thing I would say just building on that track is we have a massive.
Matthew a lot of effort going on in helping improve could access right. So.
We talked about the contributing artist program that will massively expand the library of content and the diversity of content genres of content not just within the U S. But also globally.
In addition to expanding the content library I briefly mentioned this what editable content, what I mean by that is that.
People, who will be able to manipulate content exponentially easier that what they can do today.
We are complementing that content with services, such as and software tools such as <unk> <unk> is a perfect example of matching that to our roadmap as we begin our crafters come in how do you make it really easy for them to do something that they love doing which is making a autograph by it and they can do that within a couple of clicks. So that's kind of fuels.
Examples of the road off the platform, but I think as we achieve more parity between mobile and desktop I think that will really enable us to not only enrich the products that are in the market today, but also allow us to introduce new products and new categories that I'll be odd cutting machines.
That.
That product life cycle is a little bit longer, but we have been working on technologies and innovations that could really expand what cricket means to people beyond the cutting machine. So those are all the things that I'm excited about and I hope I answered.
Two quick questions, Yes, no no no that's perfect.
Just as a follow up obviously, there is a lot of moving pieces.
A lot of dynamics going on in the market.
Just to kind of help level set and make sure we're thinking about it correctly.
You correctly from a seasonality perspective.
If we look back over over the past few years, there's been quarters, where June is up fairly strong obviously during the pandemic last year, we were up kind of low single digits. Given the commentary that you provided should we think about both net new users and total revenue being down sequentially.
And just maybe any any any guidance you can provide on kind of the magnitude of that again, just just so we can kind of all level set where we're expectations might be for Jim to.
To the best of your ability.
Obviously, we're not providing any specific quarterly guidance, but let me kind of talk about the number that we have talked about and hopefully it addresses some of the aspects of your question.
We said in the last earnings call, we basically talked about 8 million users at the end of 2022.
As you can see from Q1, we added 295000 users, which is even higher than we expected towards the strong.
That was driven by a strong sell through in Q4 last year.
January and February looked very typical month from a seasonality perspective, we are fairly satisfied with how those perform.
Starting boss things slow down and again in a number of factors that you probably are aware off from inflation to sentiment to pandemic opening et cetera.
One thing that I didn't talk about in our prepared remarks as he saw mother's day.
Mothers day kind of brought a similar level of excitement that we have seen in the previous year is at least a week over week month over month, there whether it was people searching for our brand our excitement about the brand.
There's a lot of that and that gives me confidence that as we go into why we see a.
Continued slow slow growth in users for the next couple of quarters, we believe that as we head into Q4, the same kind of thing that drive cricket.
Every year, which is holidays on Halloween and Christmas and gift, giving and home declaration will be the growth drivers now that may not be enough to offset the slower growth in Q and Q2 and Q3.
I want to highlight is that.
Like other platforms. Unlike other categories, but theres a lot of alternatives for people that we don't believe that there is a expansive platform like ours from a creativity perspective, so when that demand does come back because people are always going to make T shirts, and do guests and everything else is I don't think thats going to go away we believe.
<unk> will be the platform of choice and that's what gives me confidence.
I know you asked me. This question specifically in the shorter term, but I do want to address yi.
Optimistic and confident about the medium to long term because again as I said before.
On personalization on social media marketplaces, the fact that people want to sell things haven't changed so.
Early on in <unk>.
Awareness and familiarity right. So as we improve engagement as we help people may pull projects do you think those by word of mouth. So again, we just have to get past. These short term macroeconomic challenges but.
We remain fairly confident with our strategy and what we need to do to drive growth going forward.
The medium through alright.
Thank you for the color Ashish I appreciate that.
Your next question comes from the line of Jim Suva from Citigroup. Your line is open.
Thank you very much first question, probably for Kimball and that is when you mentioned the subscribers likely to be soft or going down I think you mean on absolute basis, not a deceleration basis like the numbers of subscribers actually going down not deceleration if I heard that right.
And if so I followed your company since IPO time, and I don't recall, a quarter of subscriber growth actually going down and maybe that's because we've lived in a world of COVID-19 for the past two and half years, but looking back historically more our their normal periods.
Normally Q2 should be down or are we just because of we're coming back meeting with people all of society and out of Covid that now it's kind of an.
Abnormality that we see subscribers going down thank you.
Thanks for the question, Jim So really there's three factors that go into.
Overall subscriber growth and the first and most important factor is machine sell through that drives news your new user adds that leaves to subscribers.
Second is churn, which has been fairly consistent with a natural level of churn.
Over the long term and then and then reactivation during the period, where whereas subscribers will drop back drop out and come back in.
The largest factor is just lower consumer demand and as we go through.
Yes. The next couple of quarters that that will put pressure on subscriber growth and.
Just to be clear, we are talking about total subscribers as opposed to just the rate of subscription or attach rate remains.
Yes, very high we're at our highest point with slightly over 33% attach rate compared to a pre pandemic mid twenty's and our attach rate.
Looking forward, we do expect to return to growth in Q4 as as we move into a more normal seasonal high and machine sales.
Pick up.
In the meantime, I just want to reinforce that we're continuing to invest in and.
The value of our cricket access.
Subscription products.
And thats manifested with the attach rates I talked about.
But also we are starting to move the needle on reactivation.
Reactivation, but it's not it's not enough to overcome just the drop in consumer demand and the impact of that.
Well historically have there been periods like pre pre IPO awards pretty normal or is this subscriber going down kind of just an abnormal bump that we should not.
Cedar to be a normal thing of the past and going forward.
This is.
I would call it.
It's a bump.
Okay and part of it is we've talked about kind of a natural level of churn we have a much larger subscriber base than we did two years ago.
Our churn rate Hasnt increased but we still have a fairly consistent level of churn and as growth moderates in this near term.
In the near term it just.
Works out that way, but we expect to resume growth in Q4.
Okay, and then a question for Ashish on more strategy and your prepared comments you mentioned your excitement for the next three to six months is that more on like enhancements of software and enhancements to your ecosystem or is that on new physical products as we think about your excitement.
Yeah, So I think for them.
We've talked about building new types of technologies and innovations that will leverage our platform, but when I really talk about the next three to six months, mostly talking about the platform.
Because I think there's a significant opportunity to onboard users better to drive higher levels of engagement and fair.
Fair amount of focus on driving quicker access, which is a subscription product and so we've been working on.
A variety of soft we've been working with the contributing artist program. So thats, what I would say we have definitely accelerated our efforts in driving those three thing because they're kind of unrelated.
The board engaged users.
Engage with US we have it will drive higher level of subscribers. So I would say for the next three to six months, what will be what we'll be able to share publicly as all of the software platform Arena.
As the hardware and new technology has taken a lot longer we are.
Feverishly working on some exciting new things that.
We'll be launching in the next couple of years, but at this point.
I am talking commodity about our software platform.
Great. Thanks, so much for the details and right now I'm actually drinking now that my cricket months, some hot cocoa, so I figured out the onboarding and user experience at least thank you so much.
Yes.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Hi, Thanks for taking my questions.
Entourage.
I guess I am on.
And I'll talk to it.
You mentioned consumer demand in March maybe could you maybe elaborate a bit more on it it looks like you are seeing that weakness both.
In terms of new users given that you have.
Our full year.
He was our guidance.
Guidance.
Also it looks like engagement has come down so is it more or less across the board. Both in terms of engagement and also new user Onboarding and I have a follow up.
Yes, so I think as we mentioned like new.
New use of ads.
Driven by machine sell through.
So stuff that is stored in October November December that has a certain lag by the time people come off the cloud subscriptions. So in March we didn't necessarily see a slowdown in the number of user ads compared to our expectations. What we saw was a slowdown in machine sell through which will that impact.
Q2 and Q3.
I think like I said from an engagement perspective.
Slide January or February similar to the typical seasonality, we see coming off of Q4.
So we didn't necessarily see anything any any did a markedly different and be clear.
Really saw I think would be attributed to the effects of inflation can do by spending maybe even return to office and the stresses that puts on life et cetera, one insight that we have.
Specifically talked about is the feedback that we get when we talk about engagement at research user base is.
All intentions of engaging that just out of time. So it's something that we are focusing on heavily as to how do we make it easier and less time consuming for people to do some other things, but again as I said the user add stayed fairly healthy and consistent with expectations. That's why we added 495000 users in Q1.
The sell through.
And we had a baby and somewhat engagement that we saw slowdown in March that will manifest.
Manifest itself in the next few months.
That makes sense.
And a follow up I guess I'm wondering.
I meant like this where consumer demand is weakening.
Do you plan to go after chasing new users by doing more promotions.
Do you just plan to continue to be disciplined.
And now focus on profitable I guess.
I wanted to better understand.
Just trying to see extra Shannon.
Yes, so that's.
Thats a really good question and I'll ask this slightly differently for accessories and materials versus our machines.
I think as we've talked about before we are being very thoughtful about our promotional strategy.
It's a very challenging consumer spending environment, we don't believe that it's the right thing for the long term business to hide the highly promotional and leave money on the table and it also kind of destroyed to some degree dilutes the value of our brand what we would like to do is.
It has the value in both in terms of functionality and the thing that people can do with our product and also make it significantly easier right. So our goal is.
Typically that's what you'll see with all major brands is that pricing and brand value can go hand in hand, and these things that our current strategy of being less promotional that we've talked about is the right strategy for us, but we'd like to do is no. We have 7 million users on our platform.
And our goal is to help drive engagement and help improve the overall experience because we know even though it's not a shotgun approach. We know that windows users are more engaged they will make for a project and they'll tell their friends and family and as some of these short term macroeconomic factors go away that will help drive demand for the overall product and again.
We as a company have always taken of a long term view of the world.
Sound in that strategy and we need to continue to execute on it in a very disciplined and profitable way.
Core to our ethos and hobby grew up on the material side.
We are working very hard to improve the value of our materials. Both in terms of how users perceive the value of our materials, but also.
And giving them value because everybody is worried about gas bill.
The food expenses et cetera, So we are being a little bit more promotional on materials and accessories in that category versus machines and I think we are going to at least for now stay pretty strong with sound on our strategy of being less promotional than really kind of focusing on the basics of the business.
Really a time for us to just get back to the basics and things that I think for us to do.
Very helpful Ashish I got it.
For example, if I may just wanted to touch base on gross margins clearly there are better in the quarter.
It helped a lot.
Going through the year, how should we think about gross margins and a weakening.
Jim.
Enlightenment.
Any color there would be helpful.
Yes so.
As we mentioned in our prepared remarks, we remain committed to our long term operating margins of 15% to 19%.
We do think for the rest of the year will be a few points below that.
And gross margins this quarter benefited as you called out from from a mix of revenue so to the extent that that accessories materials and subscriptions.
We are a larger part of the mix that that actually helped our gross margins in the quarter.
Overall.
The machine machine revenue was about 25% when usually it's usually in the low <unk> and so.
We expect gross margins to.
Continue.
I guess could you get current rates until we see.
The <unk>.
Machine sell through pick up.
And so, especially as we get to the to the fourth quarter, which is typically our highest season, our highest quarter for machine sell through.
That's how we're looking at gross margin.
Our goal as a company is to continue to drive profitable growth are clearly, there's just a lot of uncertainty in the world out there and a lot of it is going to depend on just inflation in commodity costs and everything else, but our strategy is.
As I said, we want to be less promotional machines, we ought to continue to drive the subscription access product and we want to give more value. So how everything plays out it's really hard to predict in the short term, but our general strategy is to get back from an operating margin standpoint in the 15% to 19%.
But when that happens the question at this point.
Got it thanks very much.
Your next question comes from the line of Paul <unk> from Barclays. Your line is open.
Hi, everybody. Thanks for taking my question I was wondering if you can comment on quarter to date trends of engaged users are you on track to grow sequentially in terms of the absolute number of engaged users and then also longer term how should we think about your targets for engaged user user growth.
Yes.
It really given.
Specific guidance on the number of engaged users as I said, we look at the two numbers in tandem with each other one is the percentage of engagement.
Again, it will be decided by the total installed base.
The second is the total number of engaged users so I think.
For the year, given our focus and I think we will see some of these initiatives manifest themselves towards the later part of the year. Our goal is to look at that number.
Probably but provide a more richer.
Variation of that today, we defined engagement innovate now a specific way.
Our goal is to continue to.
To drive engagement now from a number of users standpoint again, you obviously don't graduate user base. So you will see the same.
You'll see your user base continue to grow.
Understood and then.
You mentioned.
I think theres pricing initiatives that are in place starting in <unk> I was wondering if you can just provide more detail on that.
Is it bolt in connecting machines and accessories.
Is it in all channels as well.
And then also how do you reconcile that with the promotions the recent promotional activity.
So we are in the process of rolling out price increases.
Across all of our physical segments so machine.
Both machines and accessories and materials and.
That's still a work in process and so we will see some benefit of.
Of that in Q2, but that's mostly going to impact the second half of the year.
Understood and then just like for like price increases or is this through innovation new products.
Well so the.
Price increases.
Not so.
Okay.
Could you repeat your question again.
I'm just.
Wondering are the price increases are they like for like price increases has been the same same products from last year or are you introducing more so through innovation.
New products. So I think there's a couple of things going on.
Four we actually when we were running a lot of price increases. Therefore, therefore, all our products across the board, but it is going to change is the mix of the products.
We have.
A couple of products that are end of life.
As we go through the some of those products would go away that last do you have a positive impact on gross margins, but the pricing increase that we implemented a mostly across the board.
So but.
We were just trying to work through some of the inventories.
Okay. Thank you.
Your last question comes from the line of Erik Woodring from Morgan Stanley . Your line is open.
Hey, guys, sorry, I just wanted to ask one follow up question to to Jim's question earlier and that was when we were talking about.
The trajectory of subscribers those comments about flat to decline or growth in <unk>. Those are on a sequential basis correction not a year over year basis, yes that is correct. Okay.
Just a clarification thanks.
Okay.
Yeah.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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