Q3 2022 Cricut Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Good day and thank you for standing by welcome to the Cricket Q3 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised for today's conference is being recorded I would now like to hand, the conference over to Stacie Clements Investor Relations. The Blue shirt group. Please go ahead.
Thank you operator, and good afternoon, everyone. Thank you for joining us on the third quarter of 2022 earnings call. Please note that today's call is being webcast and recorded on the Investor Relations section of the company's website a replay of the webcast will also be available following today's call.
You referenced accompanying five used on today's call along with the supplemental data sheet have been posted to the Investor Relations section of the company's website.
<unk> Dot com.
Turning me on the call today are Ashish Ora, Chief Executive Officer, and Carol Shell Chief Financial Officer, today's prepared remarks have been recorded after which as Jason Campbell of her slides Q&A.
Before we begin we would like to remind everyone that our prepared remarks contain forward looking statements and management may take may.
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 quick its most recently filed Form 10-Q.
Events or results could differ materially.
This call also contains time sensitive information that is accurate only as of the date of this broadcast November eight 2022.
Cricket or 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 Stacy and welcome everyone.
As expected we ended the third quarter with healthier channel inventory.
Revenue in the third quarter was 177 billion slightly down from last quarter as retailers continue to work through their inventory.
Underpinning our resilience in this more challenging macro environment as our durable business model and focused investments in high impact initiatives.
We generated net income for the 15th consecutive quarter once again, demonstrating our proven track record of sustainable profitability.
I'm confident in the fundamentals of the business and encouraged by the positive momentum in some areas while navigating challenges in others.
We strongly believe that we have millions of new users to acquire domestically and internationally.
Our user communities have never been stronger.
<unk> III cricket related harsh tides have garnered over 6 billion views and picked up.
<unk> continues to expand with strong search interest on what is cricket and the success that we saw with Amazon Prime day in July and October indicate that our sales are healthy.
These trends give us confidence in our overall market opportunity and point to expanded interest in the category.
We'll continue to run the business for the long term and touring category and brand health.
Our funnel is healthy and we have a large market opportunity ahead of us a call.
<unk> tells us that interest continues to be strong, but customers are taking longer to convert and have a higher threshold before they make a purchase decision.
Prioritize the needs and wants given the current economic environment.
Net new users added in the quarter were down 26% compared to last year, while connected machine revenues were down 49%, indicating the inventory moves through the channel.
So could you just continue to pursue the products at a healthier pace than our revenue suggests.
Highlighting this point is a 30% year over year growth in our user base to nearly $7 5 million up from $5 7 billion the same quarter last year.
I'm, particularly pleased with the growth, we're seeing with our subscription services.
We continue to create a richer with valuable experience for a cricket active subscribers.
New subscriber growth is outpacing the growth on a percentage basis for 11 consecutive quarters.
We continue to drive high margin revenue and leverage the strengths of our platform with attach rates now consistently around 33% compared to the pre pandemic.
Our platform provides an integrated experience that inspires new design Ibs fosters community and support both designing and making.
Because that space is a software platform to the user.
Those create a profile follow other users and connect with the broader cricket community.
Discover something they want to create that can easily create a design modify an existing one using a suite of tools.
They can also easily book what projects images in plants for later use providing us with valuable insight into their personal preferences.
Because they're connected platform all of these interactions including design. The projects are stored in design stage and cannot be transferred to an outside the system.
Thus, making our platform extremely sticky.
Our connected platform creates a competitive moat.
All users buy shoes design space because of that machine.
This gives us valuable touch points.
User base, each time, they create as well as giving us insights into the behavior and preferences.
Our goal is to create a habit forming experience that users come back often.
More recently, we launched a set of robust image manipulation tools typically only available in high end software.
To give you the greater flexibility to easily create designs.
Reducing hours of design time to the process.
The more users interact and design space, the more value they create and derived from our platform.
For example share projects can be leverage within the cricket community.
Users valuable design and editing time.
Okay.
If I could ask as a subscription service fuels their efforts in these areas and offer proven content help you achieve that create a potential.
You've talked about are contributing artist program that provides a marketplace for artists to publish images and shattered revenue streams.
Subscribers use derivatives.
While the program is still young subscriber reaction has been very enthusiastic.
Contributing audits are an important source of localized content in many international market.
Also we recently launched a beta version of editable images, a key benefit for cricket active subscribers that we highlighted in our last call.
This represents one of the most significant advancement image architecture and also as a cricket access members a tremendous amount of greater flexibility it added of limited.
We continue to invest in the platform to improve discovery ability and provide more inspiration community features diverse content and design tools.
Some of which will be available only to cricket subscribers.
Okay.
We're creating more advertising touch points, a design space to drive increased monitors and subscribers.
For example via multiple touch points related to user onboarding content searches and designed to deliver context sensitive as depending on what they use it is doing.
Early success in these initiatives is driving an increase in trials and subscribers.
Charge shows our top 10 touch points, but there are many others and we continue to optimize and learn.
Aside from general advertising, a key touch points in the user's journey Cigna.
Significant upsell touch points to create access include content and subscriber only premium design tools.
As a result of these efforts we added approximately 89000 net new subscribers in Q3, which was better than expected in the face of slower machine to bat and user growth.
We have a solid roadmap of features and data driven marketing capabilities to further enrich the platform.
Yeah.
Just as importantly, we continue to invest in our Onboarding initiatives.
Though that the faster user gets up and running the board they create engaged and shared over the entire lifecycle.
Last year, we rolled out an online learning center, which is primarily focused around how to guide.
Specific projects.
More recently, we integrated a virtual learning plan into design space to walk through the step by step to a series of simple and fun lessons.
These lessons teach you the basis of design space and how to use a connected machine cricket materials and more.
In addition, users can take advantage of our learning gets untreated.
Which provide materials and tools to compete specific projects that enable our users to build their confidence in their designs and crafting efforts.
With almost half of our total user base cutting on our platform in the past 90 days with nearly $3 6 billion engage users up 11% year over year.
Now keep in mind that the.
He is engaged users are defined by how many users have actually cut project.
Our current definition of engaged users doesn't take into account the one hundreds of thousands of daily users coming into the <unk> space that are cutting but are taking a variety of options.
For example, you guys have booked over $120 million and this is in projects and we see this accelerating to nearly 2 million bookmarks begot it each week since the middle of Q3.
The majority of these users who come in on any given day at cutting over the next week.
When we ask users who have not cut with their machines and over 90 days.
80% of them are motivated to use their cricket machine more often at.
And expressed a strong desire and interest in doing so.
We believe that if we can give them compelling reasons to come into a design space more often to browse and to be inspired and.
Is it easier and faster to find the right idea and make projects. We can get these users to engage.
Our mobile App play a key role in making it easier for users to take some actions on our platform and have a frictionless experience.
So even the briefest models of engagement, whether it's a specified medicine project discovery.
Checking community notifications, all creative design work.
Our data shows that users who use design stage on more than one device.
Significantly more likely to cut at a much more likely to subscribe to cricket access than those using only one device.
The more times you the standard design space and use the platform the more opportunities we have to monetize that ultimately cut.
Additional monetization opportunities exist within that accessories, and materials business, where we continue to innovate in ways that uniquely leverages our platform.
Last quarter, we noted that we are seeing competition, especially online as well as more placement of competitive materials in our retail channels.
While I never realized that cricket materials was seamlessly without machines that are software users are more price sensitive than they have ever been.
During Q3, we began running additional promotions to help improve affordability and help rightsize channel inventory.
We plan to continue to focus on making our products more affordable to cost to promotions.
We will also continue to expand into new use cases in Q3, we launched a wide range of items from card, making labeling and personalization.
These included watercolor Cogs.
Markers of assets.
<unk> global Dot vital and IRR and several other consumables.
The early results show that these items are driving additional sales of accessories and material and helping people do projects quicker and easier.
Finally, we will lean into those retailers that helped out the entire ecosystem cricket ecosystem story sure.
Kissing compatibility between machine that cricket materials.
International remains an important priority.
The trends that have driven our business. Since 2014 also for two internationally and our research shows that almost universal propensity for crafting.
In Q3, we executed a new go to market model in Australia, deploying a local warehouse facility, which will allow us to improve customer experience.
We continue to make strides in continental Europe , especially SaaS in Germany with expanded distribution and awareness.
Our platform investments such as contributing artist program at additive damages will play a key role in our international expansion in existing markets.
We recently launched in South Korea, Japan.
Japan, Saudi Arabia, with imminent launches in India and Taiwan.
Additionally, we localized versions of design space and nine new languages, Swedish Polish Danish Hungarian check Norwegian Romanian finish and tie.
In summary, operating in this type of advice macro environment has been challenging but I believe you are stronger for it with greater focus and discipline than ever before.
As yet.
We believe channel inventory imbalance will be mostly behind us and we anticipate sell in and sell out to be more closely aligned.
If you haven't lost serviceable addressable market with less than 10% penetration and we will continue to drive new machine sales.
Andrew.
For the long term.
We benefit from our design space platform, giving us significant opportunity to drive user engagement and monetization.
Some of the investments are already showing signs of success.
Thanks for that that what we are doing today.
Lastly impact for 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. We continue to see the effects on consumer demand and a softer macro environment.
Retailers orders in September were a little softer than historical trends would have indicated as retailers work through channel inventory positions in October we started to see orders for holiday season, although at lower levels than previous years as retailers are taking a cautious approach to inventory levels.
Given this dynamic we continue to tightly manage what is within our control.
In the third quarter, we generated revenue of $177 million or 32% decline compared to prior year Q3 and regenerated.
Net income.
Breaking revenue down further revenue from connected machines was $52 4 million.
Down 49% year over year again against difficult comps from Q3 2021 related to sell in of next generation cutting machines and continued replenishment orders.
Nuclear ads as a proxy for machine sellouts and consumers were down only 26% for the same period, indicating.
Indicating that consumers continue spending, albeit at a lower level as retailers work through inventory.
As you'll recall, we entered Q3 with some retailers holding higher than normal channel inventory positions, while at the same time managed to lower inventory targets.
During the third quarter, we believe retailer inventory positions are much healthier with most retailers gaining to place new orders to fully capture expected holiday demand.
We believe holiday demand remained seasonally strong.
We're working closely with our retail partners as well as leveraging our more flexible direct to consumer sales channels to place inventory for it needed to meet demand.
We are proud of our subscription performance.
<unk> subscriptions was $68 9 million.
Up 29% over last year, and 2% sequentially. Our continued success highlights the durability of our business model and validates the focus we placed on correct.
Yes, and the expansive improvements we've made over the last several quarters as Ashish mentioned.
Revenue from accessories, and materials was $55 7 million.
Down 47% over last year, when we benefited from channel fill with smart materials related to the launch of next generation cutting machines continued replenishment orders and higher engagement trends.
Let me provide some context around accessories and materials are revenue, mostly derived from selling into retailers and is influenced by multiple factors including considerably.
Consumer buying behavior, such as pantry loading promotional activity competition and currency.
Further we have been more promotional in this segment and see favorable share gains where our products are closer to price parity with the competition.
Accessories and materials continues to be the segment with the most competition.
In terms of geographic breakdown International revenue was $27 6 million.
Down 11, 5% from prior year, Q3, and up 13, 8% sequentially.
International again grew as a percentage of the total business representing 56% of total revenue.
12% in Q3 in the prior year.
Turning to users and engagement.
We ended the quarter with nearly $7 5 million total users up $1 7 million users over the last year.
The number of users engaged on our platform many of those who cut at least once in the 90 day period, ending September 30 was nearly $3 6 million up 11% year over year.
Engagement as a percent of total users dropped from 51% last quarter to 48% this quarter keep in mind. This summer is historically the lowest period for engagement and the scale of this seasonal drop is similar to what we saw from Q2 to Q3 last year.
As expected we are seeing engagement pick up as we head into the holidays and.
As Ashish talked about we are increasingly looking at engagement on a more holistic level starting with the number of users that are interacting design space on a daily and weekly basis, we will continue to invest in content community and software features with a specific focus on mobile to move users through their journey from inspiration to cutting over time.
Paid subscribers grew by more than 600000 on a year over year basis, and approximately 89000 sequentially.
In the quarter with nearly $2 5 million attach rates remained high at 33%.
We measure user monetization through average revenue per user and both subscriptions and accessories materials by dividing revenue for the period and those segments by our entire user base.
Our booth of subscriptions in the third quarter was $9 40.
Down slightly from $9 60 in Q3 2021 for context three factors generally explain variability in subscriptions are true from one quarter to the next when subscribers are growing in attach rates remain high first timing of sign ups during the quarter second mix of new versus renewal subscriptions and third the <unk>.
Creasing mix of international subscriptions.
Accessories, the material <unk> was $7 61.
Compared to Q3, 2021, <unk> of $18 79 to.
Due to lower sell in revenue in the quarter.
Moving to gross margin.
Gross margin in the third quarter was 46, 2% an improvement of nearly 7% compared to Q3, 2021, and effectively flat on a sequential basis, which highlights the benefit of our diverse revenue streams.
<unk> gross margin down further gross margins in connected machines was six 1% up 450 basis points sequentially from Q2, reflecting a benefit in product mix. This compares to 14, 5% in Q3 of last year the year over year decline in margin was primarily attributable to an increase in promotions as a percentage of <unk>.
Particularly on older machines moving to end of life subscriptions was effectively flat last year at 96%.
Margin from accessories.
Was 29, 2% down from 38, 2% in the prior year, reflecting increased promotions as well as fixed operating costs over lower volumes.
Going forward Youll see us offer more promotions in our materials business with a focus on remaining competitive on price and market share.
Total operating expenses were $64 4 million and included $11 1 million in stock based compensation. This.
This was essentially flat compared to the $64 3 million in Q3 2021, as we continue investing for the long term.
Operating income for the third quarter was $17 4 million or nine 8% of revenue compared to $37 7 million or.
Or 14, 5% of revenue in Q3 2021.
Operating income was impacted by lower revenues in the quarter, while maintaining targeted investments for long term growth.
We delivered our 15th consecutive quarter of positive net income.
Net income in the third quarter was $12 4 million down from $30 million in Q3 of the prior year.
Diluted earnings per share was <unk> <unk> compared to <unk> <unk> sequentially and 13 in.
In Q3 2021.
We continue to manage the business for the long term, while navigating short term headwinds our profitable business model gives us the flexibility to continue to invest and delivered healthy operating margins as we work toward our long term target range of 15% to 19%.
Turning now to the balance sheet and cash flow.
We benefit from a strong balance sheet, we ended the quarter with $198 million in cash cash equivalents in marketable securities and our $300 million credit line remains untapped.
During the quarter, we repurchased 138 million shares of our stock at a cost of $10 million.
As a reminder, we generate cash on an annual basis cash generated in the primary source of funding toward our annual inventory needs and additional investments for long term growth. This fosters a balanced and disciplined approach to capital allocation.
It is common for us to be cash flow negative in Q2, and Q3, as we build inventories and generate cash in Q4 with higher seasonal sales we.
We were positive cash flow from operations year to date in Q3.
As we look to the fourth quarter, we expect to see sequential growth as demand picks up.
We have seen some retailers ordering appropriately to meet holiday demand, while others have taken a conservative inventory approach. Our goal is to have product on shelves throughout holiday and enter 2023 with healthy channel inventory levels.
Downside risks include the timing of the remaining retail orders.
So retailers reluctance to spend dollars on new inventory of anytime.
We anticipate operating margins in Q4 to be lower versus Q3 as revenue mix is more weighted to physical products, along with the impact of higher inventory procurement costs flowing through the P&L and some inventory reserves tied primarily to accessories and materials.
As you look ahead to 2023, we are taking a conservative approach in our planning we anticipate entering 2023 was healthy channel inventory levels and plan to maintain a more linear relationship between sell in and sell out going forward.
Given our success of our most recent investments in subscriptions and a profitable business model, we are able to invest at consistent levels to drive long term growth, while we remain committed to our annual operating margin target of 15% to 19% over the long term, we expect small incremental improvements towards that goal towards the end of next year.
Looking at the long term, we believe the trends that have driven our business over the last eight years remain intact.
We're confident in the unique value proposition and 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 with.
The significant growth in our user base over the last few years also provides opportunity to further drive engagement and monetization. We are focused on managing our profitability, while investing in areas with the highest impact, including improving onboarding faster and higher levels of engagement and innovating on our platform to drive growth in cricket access and our access.
<unk> and materials business.
With that I'll now turn the call over to the operator for questions.
Certainly.
As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.
And our first question will come from Mark <unk> of Baird. Your line is open.
Hi, Thanks for taking my question.
First related to inventory are you able to quantify how much destock you believe has taken place across machines and materials and accessories. This year.
I'm, taking your question in terms of of.
Channel inventory and.
If you recall our comments back to Q1 right.
We called out that we ended the year with what we thought was $35 million heavy.
But what changed as we went throughout the year is.
That was relative to what had been the historical trend through Covid, and we think retailers have changed their targets over time and so it was a moving target throughout the year.
We are confident with us.
The number of weeks, we have on hand in channel.
By channel and so the targets are a little different but we are at a point, where most retailers need to be reordering related to holiday.
And we have seen those reorders in most cases.
Coming close to our expectations.
Although it is a call that my in my prepared remarks.
In September we saw a little bit lighter orders than we would've expected, but those have picked up in October .
Mark I'll, just add to <unk> point I think there's a couple of data points that we are sharing some of this is really hard to exactly quantify it. One is if you look at our machines.
Our revenues are down 49%.
Net new user adds which is.
A little bit of a proxy for sell through.
It was down only 26% we saw the same thing in materials and accessories, which is.
Sell in revenues, which is what is in the artwork calculation was.
Not as positive, but we saw better sell through and materials in accessories than that auto number suggests.
It was still lower than last year, but it is much better than sell in revenues.
So both of those basically indicate to the fact that we were able to move.
Pretty significant channel inventory and feel like we are after several quarters are in line with.
Selling and sell through and correlate.
That's helpful color, Thank you and with the promotions on materials and accessories that you've been leaning into in recent months.
What have been some of the key takeaways so far Im curious what youre seeing in terms of basket size or order frequency from some of your users than any other metrics you can share on maybe the market share.
Users using cricket materials versus alternative materials. Thank you.
Okay. I appreciate the question. So we're omnichannel and so there are limitations of our data, but some of the lessons we've learned as we have.
<unk> been more promotional the closer we get to price parity with competition, we hold our own or pick up share with specific retailers, where we have where we have reliable data and so.
We also know from our own proprietary consumer research that.
There is a higher hurdle for consumers apart with $1 right now and so what youll see from US is as being more promotional in that category both to address affordability to the consumer but also to continue to capture market share on materials.
Great. Thanks for all the detail I will jump back in the queue.
As a reminder, if you do have a question. Please press star one on your Touchtone telephone.
Anne Please press star one one for additional questions.
Our next question will come from Jim Suva of Citi. Your line is open.
Sure.
Thank you my first question is on the accessories and materials.
$7 61.
Is lower than last quarter and weighed lower than a year ago.
Is that due mostly to retail.
Destocking because I believe you recognize the revenues on the retail sell through and does it lead one to believe that we're at the bottom of our critical lower and I. Just wonder are people just being more prudent with what they spend or they're doing more outdoor activities.
Entire life of your company.
Don't know if we've actually seen it this lower so any commentary you can give us on the accessories that would be great.
Yeah, Jim Thanks for the question and as you pointed out there are a bunch of dynamics impacting the revenue in that segment.
It is a cell and metric and our revenue largely derived from sales to retailers, who then sell through to end consumers and so the channel inventory that we've talked about.
The challenge when Destocking.
Has continued to be a headwind.
Throughout the year.
And.
But we also as Ashish pointed out.
Just a minute ago is <unk>.
Sell through is healthier now we don't have perfect data on sell through so we don't report on it but the.
The data we do have suggests that that sell through is much healthier than sell in and so we believe that's a better indicator for the health of the category.
And then there is really kind of three influences that we look at on sell through one is on is promotional activity. Yes. There is competition and we do see increasing competition in that space, but the other is engagement because it is a proxy for users consuming the materials and needing to repurchase and.
In any given quarter, it's hard to quantify the impact.
To isolate the impact of each one of those factors, but we know each of those come into play.
And we do know that.
Summer is usually our lowest.
Periods of the year for engagement and so we do think that has played a role in.
And.
Sell through activity.
Okay.
And then as a follow up on the accessories are you trying to educate the users or maybe it's just my family who has it.
Terrible experience of using knockoff cricket brands were gummed up our cutters and all of this and we've now gone back to the original equipment cricket branded for the vinyls and such but is there a way to educate investors are you doing that or you just do that.
Promotional dollars out there because saving 50 dollar may seem attract.
Attractive to people until they realize it will kind of mess up their machines or is there a way like.
QR code, it and make it authentic or I'm, just trying to think out loud about.
Well I used to educate and keep the lower quality.
Supplies from eroding your company's profitability. Thank you.
So Jim we actually work really hard to communicate the benefits of our materials and we think in general our our users understand.
That they get an optimized experience when they use cricket materials.
I've said as I've mentioned.
Our research we've been doing.
With our consumers there is just a higher hurdle rate there is a lot of price sensitivity and so that has been.
Driving in our promotional strategy to make sure that we are addressing affordability, even as we continue to tell that story and make sure that that we're getting the right.
Price value tradeoff in the mind of the consumer so that we can be competitive in the materials space.
Jim I'll, just add to <unk> answer I mean.
Clearly the points really well made and we know you are very discerning consumer as well. So clearly we are working with retailers, we're doing providing messaging providing data to help better explain the value proposition and the ease of use and seamless compatibility.
As we have also.
Increasingly integrating settings.
Inside our software so that people can have a hassle free experience with our materials because they are all being tested rigorously across.
For that individual specific machine and last but not the least which I think is really important driver, which is that we're going to continue to partner and leader with retailers that are going to showcase the compatibility of our materials and really we focus on.
Giving the customer the best experience because we ultimately think that that will ultimately be good for engagement in the long term health of the category and really gives the consumer a best experience. So we agree with you that anything less than that is frustrating and ultimately.
Phil.
While we may elect.
Turning to materials the customer doesn't have an experienced project is not being made afterwards.
And then my last question is are we an equilibrium now for machines and accessories or are we still working down and if we are still working down.
Hit that point mid calendar Q4 or what's your.
Forecast that equilibrium. Thank you.
So as I as we can.
Called out in our prepared remarks.
We exited Q3 with what we consider to be much healthier channel inventory levels and that most retailers. We are in a position where they needed to be placing orders in order to capture the holiday demand that we expect to see.
And so.
We are.
Yes.
We are watching retail orders, we have seen them pick up over the course of October even though they were a little bit lighter than we expected towards the end of September .
There are still I think some.
Some potential headwinds with retailers in terms of being concerned about investing in inventory of any type in the current environment and so they continue to be cautious but.
Generally I think we're in a good channel inventory position and we're looking to exit the year and keep that keep that at kind of a healthy healthy never weeks in channel.
Okay. Thank you so much I appreciate all the details.
One moment.
And our next question comes from Erik Woodring with Morgan Stanley . Your line is open.
Hey, guys. Good afternoon, and thank you for taking my questions, maybe the first one ashish kimball or kind of elaborate to either one of you and that is you know I. Appreciate there are still a number of kind of macro and micro cost cross currents at play today I realize the holidays are incredibly important.
But like I guess, something we're less than 60 days away from the end of the year and so I'm. Just curious what are the kind of most significant factors that kind of limit your visibility into things.
Like year end users or revenue by any of the segments or margins or just your ability to provide any more kind of incremental information about <unk> and then I have a follow up thanks.
Yeah. So thanks.
Thanks for the question, Eric Let me provide some color on this.
I think one other thing that I know you look at and other categories that we've kind of shed for the first time. This time is when we look at Google trends and we see the interest in the brand with either what is cricket cricket.
Cricket searched.
We see that mostly flat year on year, right, and we see that significantly higher than 2019 and yet the data.
The sell through doesn't.
Clearly reflect the 2021 results.
<unk> also done some proprietary research that.
We've talked to people, who are well down the funnel and this is pretty exhaustive research that we did but it was quantitative so it wasn't quantitative but happy to share.
Shed some insights from.
So basically people who've gone from awareness to consideration to research and nobody was interested in the product, there's just a higher threshold.
For them to make that purchase now we do see that when we promote the product in and we did that.
Both prime days that consumer comes in so we've definitely we feel that there's a healthy demand healthy awareness interest and the Callaway there and.
We are focused on the long term, we believe there'll be a lot of time ahead of us. So our expectation is that as the consumer spending returns that consumer will come in and shop the category one.
One other point that I'll, just make specifically around October is.
In the last couple of years, we've started our promotional periods.
Early on in the year, just given everybody is worried about getting the product to the house. So this year, we've kind of havent really gotten into that.
Promotional period that we've typically done at the time of October . So I think we are seeing some of that but again as I look at the fundamentals of the category.
Overall brand interest been awareness internal research external factors, such as Google trends.
Feel that there is the marketing funnel.
Is healthy and it's just.
How do we get.
It was just the consumer waiting to make their conversions spend.
Just wanted a clarification when she says we're flat in Google trends year over year.
Our interest peaked in 2020 and were essentially flat we're matching this year interest from two.
2020, and 2021, so 2021 is the point of reference that I.
Specifically brought up in September and we basically flat year on year compared to 2021 and significantly higher compared to 2019.
The interest in the brand at the peak of Covid pandemic was.
Higher but.
<unk> 2021 in terms of brand interest for the most part in September .
Okay. Thank you that was very helpful. Thank you for that color.
I guess maybe.
One other modeling question and then a.
A strategy question, if you look at sequential growth in.
Net new users historically.
It would suggest that you could end the year kind of right around Europe .
Original $8 million total user target you guided to a few quarters ago I realize that's not the hard and fast guide today, but why would that not be the case should we expect net new user growth kind of below normal seasonality or just any comments you can help US you can give us to help us think about that.
Yeah, So I think just for.
Just to get the details thanks, Erik again.
We definitely after the initial guidance you basically.
Kind of reflected that given everything that's going on it's very hard to predict so we kind of mirrored that a little bit.
We continue to believe that.
We're doing all the right things to get from an awareness standpoint, like I said, there's just such a the holiday is such a big part of the sales right, especially given the fact that there's pent up demand as the funnel. This fall at least we think it's really healthy now with the customer jump in.
This is kind of hard to kind of give any guidance on how the economy and consumer sentiment I mean, you read that just as well as we do.
We feel good about awareness.
And we think that we are doing all the right things to get the customer to make that purchase I think theres, a lots going to depend on what happens in November and December .
And where the customer decides to spend the money, but we feel that we're in a good position going into November December the other thing that we feel good about as we've talked about is that given the fact that we've been able to work through the channel inventory.
Feel that we'd have a higher correlation between selling and sell through next year. Yeah. Okay. Okay. And then my last question Ashish for you as you made an interesting comment earlier on the call just about the hundreds of thousands of users that arent necessarily engaging with their machine, but are on the design space, but obviously you've had really nice.
Performance on the subscriber side, even if there is just a tiny bit of RP pressure. There. So I guess my question is is there an opportunity that you see on your end to kind of better monetize this kind of non connected machine in <unk>.
I mean.
It's just the business that is clearly outperforming and so obviously subscriptions are really nice to have and I'm. Just wondering if you can monetize some of this engagement that actually isn't on the machine, but instead on the app, even if not in a subscription basis and Thats. All from me. Thank you so much.
Yeah. So thanks, Eric.
Really good question and something that I'm incredibly excited about so let me talk about that so just because the reminder.
Is the way we calculate our engagement metric is the number is the number of users cutting right.
<unk> users cutting in the past 90 days as a percentage of the total users we acquired two 2014.
And if you think about it like almost half of the entire user base by 48% of them cut on the machine, but and we saw that number increase year on year.
Now we've been.
We've kind of been shedding this a little bit and we probably went into a lot more detail like we've been obsessed and we have been focusing on really getting the user to interact and very rich ways on the platform.
So they are creating book box, which is effectively an intend to come back and make that thing.
<unk> project. The following are the user the connecting people, they're shedding staff and we know from our data when they.
They come in in design space, there's a higher likelihood to cut and we made a comment to that.
In our prepared remarks.
Our goal is how do we get more people coming into design space, even when they're not when they are away from that machine I think mobile is going to play a huge strategy.
I think that that will ultimately convert to either of them cutting on monetizing. So one data point specifically to your question. This is a proof point is that today, we have not we've seen the benefit of that but selling cricket access right. So not only are we do we have.
Significantly better blend has cricket access product.
You're also able to merchandise that.
Create AD impressions at many many many different places in the App right. So we think that our continued focus on engagement.
Continued focus on bringing users to design space getting them to interact and lots and lots and lots of time, we will have the opportunity to monetize that as.
In ways, we've defined traditionally which is cutting but also in many other ways.
We ended very early stages, but.
We have a lot of exciting initiatives I'm very proud of the team.
<unk> really kind of.
We are building a platform where that activity is adding every users creating value adding value in deriving value on the platform.
Awesome. Thank you so much for the detail.
One moment.
And our next question comes from Paul Kearney of Barclays. Your line is open.
Hi, everyone. Thanks for taking my question.
If we.
If we kind of hit the goal of exiting Q4 and healthy inventory levels at retail can you maybe help us parse through the puts and takes for the topline growth into FY 'twenty three for the first half in the back half.
So what are some of the maybe some of the channel dynamics that we have to think of within our model. Thanks.
Yes.
So the question is yes.
Given.
All of that.
Macro dynamics going on we're taking a conservative view in our own planning.
To look at next year right.
Where we had significant headwinds from channel inventory that will be largely behind us alright, there are still some pockets that we will face.
Next year related to it related to that especially in our <unk>.
Segment.
What we are confident about is she is talking about our awareness funnel and what we understand of our consumers and we're confident that when consumer spending returns that were well positioned to capture capture growth.
But.
Right now we're planning that the first half of next year, probably looks a lot like the current environment.
Okay helpful.
Maybe a longer term strategic question.
Can you just maybe update us on what you think the long term user growth trajectory for this business and maybe you can start with <unk>.
Where are your awareness levels are today.
With the increased promotional activity do you think that the consumer is.
It's going to continue to need promotions or.
Maybe just some metrics on where the user is today and the perception of the brand. Thanks.
Yes.
Thanks for the question Paul.
One other thing that again I want to kind of point out that our revenues were down 49% of net new user growth was down 26%.
We've talked a little bit about the brand interest in the category. It does.
People type in the term cricket what is cricket.
Continue to use the same levers that we have in the past, which is network effects social media word of mouth et cetera.
We have not provided this we've not shared this detail, but we do a lot of awareness we do.
Rod based awareness and index study, we stress test, our serviceable addressable market by saying well what if.
Defined it one way well, what if we get a lot more rigorous about it and everything that we know both in the domestic markets and international markets leads us to believe that.
We have a large Sam ahead of us we have a large market opportunity.
Again, the things that we control today are build passion for the brand create awareness.
Even though our sales and marketing numbers as a percentage of sales look higher we believe that that.
It's really because of the sales being low, but the effectiveness of that sales and marketing dollars to get that awareness and driving people down that funnel.
Is pretty effective now there are number of things that our team is working on based on <unk>.
Tremendous amount of research as to how do we bring people into the funnel what are the things that we control in terms of helping the user get through.
To get the reset that theyre looking for et cetera. So we feel that they are putting in place a lot of.
The fundamentals in place and we have continued to build on things that we knew about the customer and continuing to build on that.
And we believe that all of that will ultimately help us.
<unk>.
Get more conversion when the consumer spending returns.
Feel really good about.
Our initiatives.
Thank you.
And ladies and gentlemen.
This concludes today's conference. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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