Q4 2022 Cricut Inc Earnings Call

March 7, 2023

Good day, and thank you for standing by.

Welcome to the socket.

Q4 full year.

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 session.

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Please be advised that today's conference is being recorded I would like to turn the conference over now to Stacy coming from Blue shirt group. Please go ahead.

Thank you operator, and good afternoon, everyone. Thank you for joining us.

Yeah.

Earnings call. Please note that today's call is being webcast and recorded.

The Investor Relations section of the company's website.

Replay of the webcast will also be available following today's call.

Restaurants accompanying.

Today's call along with the supplemental data sheet have been posted to the Investor Relations section of the company's website investor <unk>.

Dot com.

And me on the call today are chief.

Chief Executive Officer, and Kimball Shell Chief Financial Officer, today's prepared remarks have been recorded.

Kimball will host live Q&A.

Before we begin I'd 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 without stop.

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 <unk>.

Recently filed Form 10-Q.

Actual results could differ materially that's.

This call also contains time sensitive information that is accurate only as of the date of this broadcast March 7th 2023 cricket assumes no obligation to update any forward looking projections that may be made in today's release or call.

I will now turn the call over to Ashish.

Thank you.

From everyone.

Yeah.

We expected 2022.

We are much better.

The results we discuss it.

We expect you to sell more connected machines.

The materials.

That's good.

One five.

As in 2022.

Seven 9 million.

Platform.

Yes.

Expectations at the beginning.

Okay.

Boosted in part by strong connected machine sales in Q4 'twenty one.

Two months of 2022.

Subscriptions also continued to grow.

Turning to Hudson's.

Physical our physical products.

Despite my disappointment in our 2022 financial performance I'm extremely proud and grateful for the team's focus and all be accomplished over the past year.

Let me explain why.

We significantly grew our subscriptions business. We ended this year with $2 6 million people.

Up 28% over 2021.

New features and functionality drove an increase in attach rates for the year.

A particularly noteworthy highlight that suggested we're not just converting new users into cricket access, but also reclaiming existing users.

The number of engaged users who cut on the platform increased sequentially in Q4.

As expected with typical holiday seasonality.

We also saw a significant increase in user interactions like book box and shared projects.

Ross the cricket platform after rolling out multiple new user touch point that enhancement.

Earlier in 2022 coming off a high growth pandemic period.

Retailers reset inventory targets, which put additional pressure on our connected machines and accessories and materials revenue.

We worked diligently with our retail partners to better adjust those levels to the new targets on.

And managed our channel inventory over the second half of the year.

As a result.

We started 2023.

Healthier position.

We also moved quickly to refocus investments.

Towards higher impact initiatives on tightened operating expenses, delivering our sixth consecutive year of net income profitability.

We will continue to operate the company in a fiscally disciplined way.

The opportunity for growth and international expansion has never been stronger.

As we enter 2023, we will intensify our focus around new user acquisition and platform expansion in order to drive engagement subscriptions and increased monetization.

We are also a focus to your path to reaccelerate growth in accessories and materials.

Let me walk through each of these.

We acquired new users when someone buys a connected machine.

We believe that we are in the early days of market development and have only penetrated 6% of our serviceable addressable market from our top six markets, including the U S, Canada, UK, France, Germany and Australia.

This is up from 3% two years ago as cricket has become more widely recognized global brand.

In 2020 to be launched in five new countries and now partner with a network of distributors in over 50 countries.

International growth remains a key priority in 2023 as we deploy the same playbook that has grown our business in North America.

In addition, the investments we make today in new user acquisition engagement and monetization can be leveraged across all markets.

We believe our focus on industrial design innovation and a platform approach along with our connected integration between design space content materials and not connected machine.

<unk> well in the market.

Over the past year, we've conducted numerous research studies to understand our consumers.

Purchase journey.

Our research shows that we have a healthy top of funnel today with significant opportunity to drive consumer interest and shorten the path to purchase.

There are several strategic initiatives in progress today to help simplify the journey from discovery to research to purchase.

Our research also shows that we are reaching a broader and more diverse demographic.

Nearly 50% of new users identifying as big in our crackers.

It was double the rate of 2019 users.

And even if we reach less experienced crafters these new users.

B to purchase a high end machines at.

That ultimately engage similarly to board.

More experienced users.

We're also broadening our reach as we attract more gen Z and millennials.

Going forward, we will plan our design, our marketing use cases to appeal to a broader audience, while still providing the tools the right tools and resources.

For the more advanced user.

A majority of new users or introduced at interact with cricket at multiple touch points prior to actively researching the brand.

What about two friends and family and social channels Youtube tick Tock, Pinterest, Facebook and Instagram continued to play a key role.

The initial touch point for nearly 80% of our new users.

Earlier in the year.

Our audience targeting launched new creative assets, and refreshed cricket content and cricket Dot com.

We continue to expand our influencer partnerships with greater focus around micro influencers that have the ability to increase brand presence and impact social engagement across video platforms like Tech talk on Youtube.

Beyond the initial touch points. We are also focused on a more simpler.

Simpler more streamlined purchase journey as we continue to rollout several new creative assets and tools that big relevant information to consumers more quickly across all channels.

Last month, we launched improved product comparison charts.

We are developing a new simple quest to help consumers decide which machine is right for them.

We are making changes to our website and digital marketing execution to pull users through the funnel to conversion.

Many of these updates will be rolled out across our retail channels and global markets.

We believe this strategy will help bring more users into the funnel as well as shortening the typical purchasing path for consumers.

By investing in these initiatives now we will position the cricket brand for growth and accelerate the purchase decision for when consumer spend returns.

We'll also focus on increasing user engagement with starts the moment, we acquire or use it.

Our data shows that the first few weeks of a new user experiences often indicative of their engagement over time.

In Q4, we introduced a new onboarding process.

<unk> been testing a series of lesson plans for exploratory Omega three.

<unk> population of our users and are pleased with the initial results.

We plan to scale, our learnings extract these initiatives more machines and continue to refine our approach.

Once on board it our focus turned to frequency of engagement.

Over half of our user base cut on our platform in Q4, and 74% of users cut project in 2022.

We have embarked on a number of initiatives to help increase user engagement.

In line with that I am excited to announce that we have appointed one of our senior leaders to a new role entirely dedicated to user engagement.

She previously was responsible for our connected machines portfolio.

And as one of our most seasoned leaders.

Two years ago, we took a similar approach to a subscriptions business, which resulted in revenue growth and higher attach rates.

Both of these leaders will work in tandem with expanded decision rights to drive strategic plans and Roadmaps across several cross functional groups and are ultimately responsible for delivering results for engagement and subscriptions.

Inspiration drives engagement.

Recent studies show that 16% of users get their project inspiration directly from design space at.

At 25% of all other social media.

This gives us significant opportunity to increase traffic sooner in the creative process offering users thousands of ideas to help inspire and accelerate cutting.

We believe that our investments in mobile experiences at other platform enhancements will play a crucial role in this strategy.

In the fourth quarter, we saw a significant increase in book box over Q3.

We ended the year with over a.

$150 million total bookmark, an increase of nearly $30 million sequentially.

It easier for users to save ideas for later use when they come back.

Subscribers are the most valuable members on our platform and drive increased engagement activities versus non subscribers.

We ended the year with $2 6 million paid subscribers a 20.

8% increase year over year.

This growth is a direct result of investments we've made over the past 12 to 18 months as we better communicate the value proposition to users and more places throughout the cricket experience.

For example in Q4.

The onboarding process to optimize messaging around the benefits of cricket axis.

We also added more merchandising touch points would then be engagement journey, giving us the ability to advertise annual subscription plan more effectively.

This latter effort is already showing promise promising improvement to the mix of annual versus monthly plan sign ups without impacting attach rate.

We also continue to expand new content and exclusive cricket access features including automatic background remover monogram maker editable images expanded collections and more.

In many cases these robust highly requested features become an important part in converting users to subscribers.

We're also seeing increased engagement from our contributing artist program, which has accelerated our efforts to bring new relevant and diverse content, if we could access.

Another increasingly important source of content for subscribers come from community projects.

These are projects users create with with cricket images.

But sometimes include instructions alyssa materials to use and suggestions on design layout.

These community projects pass through crickets curation process.

Sure <unk> of content and make ability.

And subscribers by the community project that inspires them.

Instantly personalize it or make it as is saving them the design time of scrap starting from scratch.

This is an example of a community adding value to the platform that subscribers benefit from.

Our goal is to make it even easier for cricket users to share their projects and hence increase the number of community projects and significantly increase the value proposition for subscribers.

And finally, we are increasing our focus on accessories and materials, where we believe we have the right to play and.

And to win.

We are uniquely positioned to build innovative high quality connected products that integrate with our hardware and our software.

Smart materials are a great example of this.

This segment has experienced headwinds since exiting the pandemic as a result of a few consumer dynamics converging at once.

Including increasing price sensitivity.

Machine sales and less frequent engagement.

First we have seen increased price sensitivity from users, particularly as the current economic situation continues.

As consumers become more price sensitive shopping habits for materials are increasingly shifting from bricks and mortar retail to online.

Third party marketplaces, where we have seen an emergence of lower cost lower quality materials.

In response, we have started to work with our retail partners to develop differentiated product configurations and promotional strategies by channels to meet the needs of their customers whether in store or online.

Our goal is to simplify skus to reengineer, a repackaged materials and drive greater supply chain efficiencies to regain healthier margins, while competing in driving share gain across our channels.

Some of this will take time to execute while we move through existing inventory.

In the meantime, we will focus on being cost competitive for consumers and take a more deliberate and analytical approach to promotional strategies to maximize margins, while capturing our share of the market.

Second.

The pressure we have experienced a new machine sales has also affected our accessories our materials segment.

A portion of our materials business is generated through the sale of machine bundle, which is an effective way to deliver two new users the materials they need to quickly start their journey with cricket.

Third our accessories. The materials segment is influenced by how much our users cut.

The intensity of engagement has been lighter since exiting the pandemic.

The strategies, we are building to drive engagement and subscriptions should work in parallel with our efforts to build a more robust online channel without retail.

Our retail partners and together will reignite growth and accessories of materials.

We believe all of these things together increased user engagement combined with new product bundled pricing and cost structure will be a two year journey to reaccelerate the segment of the business.

In summary, we are creating greater alignment within the organization to drive our key priorities.

Acquiring new users globally.

Driving increased engagement and subscriptions and structuring our accessories and materials business for long term success.

We have in depth knowledge of our user base and have identified multiple opportunities to grow and increase monetization over the long term.

Our focus on strengthening every facet of the platform will help enable long term sustainable growth.

And further enhance defensible moat why.

With recurring monetization opportunities that are more characteristic of a platform business.

Although the current macro macro environment will impact overall growth in the short term.

The initiatives, we are deploying now will position us well for when consumer spend returns.

I will now turn the call over to <unk> for the financials.

Thank you Ashish and welcome everyone. Although consumer spend continues to be soft Q4 delivered typical seasonal strength and connected machine revenue user growth subscriptions revenue and user engagement.

In the fourth quarter, we generated revenue of $288 million or 28% decline compared to prior year Q4.

Generated $10 $9 million and net income as we continue to invest in our key priorities.

Full year revenue was $886 3 million or 32% decline over 2021.

Keep in mind, most of 2021 reflected unusually high growth due to the pandemic breaking revenue down further revenue from connected machines for the year was $252 6 million.

Down, 54% over 2021, reflecting softer consumer spend and excess channel inventory levels throughout most of the year.

In mid 2022 retailers began initiating lower inventory target levels in preparation for a weaker economy.

As such connected machine revenue doesn't necessarily align with the increasingly user growth over the year.

And working with our retail partners, we prioritize channel inventory and enter 2023 with healthier alignment between sell in and sell out.

Revenue from accessories and materials for the year was $361 4 million.

Down 35% over 2021 similar to connected machines, we entered 2022 with heavy channel inventory, making a tough year over year comparison.

We continue to see pressure and accessories with materials from the dynamics Ashish mentioned earlier, which contributed to the decline in revenue and <unk> are.

Our strategy for re acceleration in this segment as.

Focused on cost reductions over time.

Some promotional strategies for increased market share more machine immaterial bundles across more diverse channels and driving an overall increase in user engagement.

<unk> revenue for the year was $272 3 million.

At 32% increase over 2021 and benefited from targeted investments in cricket access to the expensive improvements we've made over the last several quarters.

In terms of geographic breakdown International revenue was $142 3 million.

Compared to $148 5 million in 2021.

As a percentage of total revenue international was 16% compared to 11% of total revenue in 2021.

Turning to users and engagement.

Sure we ended the year with nearly $7 9 million total users.

Or 23% growth over 2021, despite softer consumer spend throughout the year. This was just shy of our $8 million total user expectation at the beginning of 2022.

We ended the year with over 4 million users, who cut a project on a machine within the last 90 days. This.

This is up 6% from 2021 to put this in perspective 2022.

In 2022, 74% of total users cut a project in the last 12 months through.

Through the initiatives Ashish outlined we have a significant opportunity to reach these users which is three quarters total user base.

We ended the year with over $2 6 million paid subscribers up 28% from the end of 2021 attach rates were strong at 33% up from 32% last year.

RFP for subscriptions for the year was $38 nine slightly down from $38 37 in 2021 for.

For context, three factors generally explain variability in subscription are approved from one period to the next when subscribers are growing in attach rates you mean high.

Timing of sign ups mix of new versus renewal subscriptions and the increasing mix of international subscriptions.

Accessories and materials <unk> was $50 54 for the year compared to $102.91 in 2021.

We believe the renewed focus we can.

With renewed focus we can reaccelerate accessories and materials revenue over time.

Moving to gross margin total gross margin in the fourth quarter was 30% an improvement compared to 27% in Q4 of 2021.

As a reminder, Q4 has seasonal pressure due to increased revenue contribution from connected machines, breaking gross margin down further.

Gross margin from connected machines was two 8%. This compares to a negative one 5% in Q4 of last year.

When we elected to take price protection on air tool maker units and channel for.

For the full year connected machine margin was.

It was three 3% down from 11, 7% in 2021 and was primarily impacted by higher fixed costs as a percentage of revenue and warehousing and operations expense along with increased warranty expense and promotional activity.

Looking at 2023, decreasing inventory levels, along with fixed costs on warehousing and operations expense will continue to put pressure on margins partially offsetting this we expect end of life machines to become a smaller part of machine mix with small incremental improvements to machine margins.

Subscription gross margin for the full year was 93% up slightly compared to 2021 of 89, 3%.

Gross margin from accessories materials was impacted by increased promotions as well as fixed operating costs amortize over lower volumes, both for the quarter and the full year.

Full year gross margin for accessories, and materials was 26, 5% compared to 37, 9% in 2021 going forward, we will continue to be competitive on price.

Turning to operating expenses, we continue to operate the business with discipline and flexibility to navigate current trends in March we began to see consumers spend softening and started to re prioritize investments as a result, we eliminated $50 million of planned spend and investments throughout 2022 and held operating expenses relatively flat.

<unk> year over year total operating expenses for the year were $269 9 million and included $42 million in stock based compensation expense.

This was up less than 2% from $265 million.

In 2021.

Operating income for the year was $80 million or 9% of revenue, reflecting lower revenue compared to 2021 of $192 4 million or 14, 7% of revenue.

Despite the challenges we face in 2022, we continue to prioritize I think Kevin cash 2022 was our sixth consecutive year of positive net income.

Net income for the year was $60 7 million or.

Or <unk> 28 per diluted share compared to $140 5 million or <unk> 64 per diluted share in 2021.

Turning now to the balance sheet and cash flow, we continued to generate healthy cash flow on an annual basis, which funds annual inventory needs and investments for long term growth for.

For the year, we generated $117 $7 million in cash from operations and it was the balance of $299 2 million.

This strength allows for a flexible yet purposeful approach to capital allocation, including return on returning capital to shareholders.

During the year, we repurchased 235 million shares of stock.

Cost of $18 5 million.

We have $31 $5 million remaining in the repurchase program. In addition on February 15th we used $77 million to pay a special shareholder dividend.

As we look ahead to 2023, we continue to see softer consumer spending patterns and that's taking a conservative approach in our planning we.

We will continue to take a prudent and prioritized approach to investments, while managing for small incremental operating margin improvements and healthy cash generation in 2023.

In terms of new user growth, we expect to add fewer new users in 2023 than we did last year for comparative purposes user growth in Q1 of 'twenty two benefited from strong machine sales in Q4 of 2021 and early 2022.

Conversely, Q1, 'twenty three we will see pressure from softer Q4 holiday sales. In addition, we started 2023 was softer than expected connected machine sales in January and February , but we have a positive outlook on subscriptions lower new users will put pressure on our subscriber growth rate and attach rate from.

From a revenue standpoint, we entered 2023 was healthier channel inventory levels and revenue should be more directly linked to consumer demand in other words in 2023 cricket could sell more connected machines than in 2022, and yet add fewer new users. As a reminder, Q1 of 2023 will be a tough year over year comp and we expect it to be.

<unk> below Q1 of last year, we expect year over year comps to improve starting in Q2 gross margin will continue to be pressured on.

Physical products.

Higher fixed cost as a percentage of revenue in warehousing and operating expense. We will continue to be a factor throughout 2023 accessories and materials will also continue at a similar promotional cadence to remain price competitive and we will likely have reserves for AG inventories as it relates to materials, particularly in Q2.

As a result, we expect full year accessories and materials margins will be similar to Q4 2022 results machine gross margins should improve incrementally as machine mix shifts more to our newer machines in the second half of the year.

We remain focused on managing our profitability, while investing in areas with the highest impact for 2023, we anticipate small incremental operating margin improvement on an annual basis with small upticks in the second half that align with stronger seasonality.

Macro conditions conditions worsen, we will continue to manage with the flexibility to make adjustments as needed just as we demonstrated in 2022, we expect.

To continue generating healthy cash flow from operations and we remain committed to our long term operating margin targets of 15% to 19%.

Our proven model has demonstrated that when we operate at scale and drive top line growth. These margins are achievable.

With that I'll turn the call over to the operator for questions.

Thank you one moment, while we put out.

Now the Q&A roster, if you would like to ask a question. Please press star one on your telephone.

The first question, we have is coming from Mark outfits.

<unk> of Baird. Your line is now open.

Good afternoon. Thank you for taking my question.

As we look at the gross margin profile of the machine segment, and the accessories and materials segment.

These recent quarters versus a few years ago, how much of the compression is structural whether related to cost inflation or efforts to drive better affordability versus some more temporary factors.

I guess asked another way could you sort of rebase.

Gross margin expectations for those segments medium to longer term. After you move past some of these kind of temporary factors.

Yes.

Mark Thanks for the question.

So I'll talk about machines, and especially materials.

Separately.

All of our physical products are being influenced by kind of the <unk>.

Cost of inventory and the cost of our physical plant footprint.

Over smaller volumes and that is any pressure that continues with us through the year.

Go ahead through 2023.

In terms of magnitude that that and our promotional.

Yes.

The impact of our promotional strategies and promotional largely spent on machines.

About <unk> are about equal.

And.

We were less promotional.

Annual basis with machines than we were last year.

But still.

It's a fairly significant portion of our gross margin.

We expect.

Machine gross margins to improve incrementally this year as we.

Have a mix shift more towards our newer machines.

On the accessories material side.

We've called out that we will be more promotional and that.

That.

We were in Q4 in particular, but we were.

We were more promotional Q4 for the full year.

And we saw share gains.

From that end.

And our mass and craft channels, where we have data we don't have perfect day to everybody.

Where we do we saw that.

Yes.

Margins are going to be pressured for.

2023.

And probably beyond as we as we go through a germline or accessories materials business.

Alright, why don't I stop there.

A follow up yes.

But thanks for asking the question I'll, just add to <unk> point I just want to go back to the machines and just kind of.

Building on what Kimball said.

One is clearly a lot of fun.

Margins were compressed because of the existing or the legacy machines. If you will.

As we can.

Comment on 2023 with a much cleaner portfolio and as our portfolio mix improves right I think that will be positive for our margins. So I feel good about that.

Rich.

Kind of hinted at in the in.

In the prepared remarks is.

Promotional in the last probably 12 months, even though we've been less promotional in Q4 in general we focus a lot on the bottom of the funnel.

And done a lot of Pos dollars.

I think going into 2023 will be less.

Less promotional and reallocate some of those dollars to top of funnel.

In terms of driving awareness, so I think between at least especially on machines between the portfolio mix.

Our promotional strategy, we will see some positive improvement in margins for machines.

Great. Thank you for all that color and then Ashish.

Ashish I think you mentioned earlier that you really do it.

Nice job on tracking and more beginner crafters to the platform and I think you said your studies.

Just that they're as likely to buy the larger machines as well as things like the Joy I guess I'm a little.

It surprised me that I thought maybe.

<unk> wood over index in some of those beginner crafters. So I'm just curious if you could expand upon your learnings there and just maybe some of the implications as we think about some of the mix impact.

Machine revenue over time.

And then kind of a related question, but the subscription attachment continues to trend nicely is it fair to think that that could continue to edge higher.

More of those beginner craft or enter the platform I would think that some of the benefits of cricket access would be.

What would be potentially higher for those newer crafters that wouldn't otherwise know how to create some of the designs great. Thank you.

Yes.

First of all you know as Kim as we said we were pretty pleased with the fact that we added one 5 million users. So it came up to $7 9 million and Thats just.

Less than 6% or 6% of our SaaS.

Yes.

You pointed out a lot of these are big enough to users and Gen Z and specifically when it comes to begin our users we kind of studied the data.

And we were pretty positively surprised that they didn't.

They didn't differ from other cohorts.

In terms of engagement as well as in terms of the kinds of machine the bond so that was.

We would all feel also very pleasantly surprised with that.

We still do thanks.

Affordability is going to continue to be key.

User base.

Products like cricket Joy will play a role, but I think thats very hard to draw a correlation that it was just getting beginner users just with those.

Entry level machine price points.

Also think that some of the improvements that we've made use of a definitely the starting price point is really important.

As it comes into the category and they've basically is to enter the category. So it has to be a lower price point, but as we do a better job in helping people understand and figuring out their use cases, I think we have an opportunity to continue to improve.

Its users to get the right product, which may or may not be the entry level price point. So we're actually pretty pleased and excited about that although we still think that.

Driving affordability and lower price machines.

Is beneficial to the whole category.

One thing I'll just highlight is that we kind of have a little notation in our presentation is that as we're looking at our data.

A good percentage of users is actually even beyond our SaaS. So these are people that we would not categorize as people would that would have qualified to be in our Sam. So we are actually really excited about the breadth of the penetration that we are seeing both inside and outside and let Kim will talk about the subscriptions.

Thanks for the question, Mike, We're really excited about our subscription business and we think the team has done a great job this year and.

Activating.

Our user base and the growing subscription business.

Very early stages of our road map.

<unk> heard us talk about features like automatic background remover and editorial images and we have a long roadmap of features that will continue to add to the value proposition of subscribers.

You're talking about trading contributing artist program.

That is adding new and diverse content, that's giving a lot of traction.

We're doing a better job of merchandising cricket access throughout the platform and we're seeing results from that as we create more touch points and example of that is we're having an uptick in the number of annual subscriptions as we've advertised it as opposed to monthly subscriptions.

So we I think we have a lot of room for improvement.

As we get better and better there.

That said.

We called out in our prepared remarks that we expect to add fewer new users and.

And 2023.

Sure they are going to put pressure on our attach rate and our growth rate.

Some of it because the largest portion of new subscribers come from adding new UCITS platform.

As we as we get traction on some of these acquisition initiatives that Ashish mentioned.

And also on engagement, we think that that will help us.

Reaccelerate growth.

In the subscription category.

Thank you I'll pass it on.

Thank you one moment, while we prepare for the next question.

Our next question will be coming from jail silver.

Citi. Your line is open.

Hi, Thank you so much for the details so far.

Separately on the machines versus the accessories.

When do you. It sounds like you mentioned January and February were also facing challenging inventory work down in the channel when do you kind of.

That could be more normalized and we're talking another quarter or so or kind of further out and then I'll probably have a follow up.

So Jim Thanks for the question actually.

<unk> entered the year with much healthy channel inventory.

And what we're calling out in our prepared remarks is we had our forecast of what we expected for the quarter and we saw softer demand than we expected in the quarter, but that's not related to unhealthy channel.

<unk> levels.

We ended we ended we have.

A target range of forward looking weeks on hand for our channels and we ended in those ranges. So so this is more a consumer demand impact related to discretionary spend.

More than it was channel inventory issues.

Okay that was very useful and so just to clarify it sounds like what you.

Your channel now now you calculate but what are your channel feedback is that they're also comfortable with the inventory levels in the channel because the reason why I ask is it seems like the channel is working down inventory to levels that pre COVID-19, maybe or even lower pre COVID-19, but if you could comment on the feedback youre getting there.

So the channel is continuing to focus on inventory, but we are.

Continuous dialogue with <unk>.

Channel inventory plans and we are aligned on those plans with our retailers.

I think this is agenda a level of conservatism, but overall layers Kimball said.

We feel good about inventory coming into 2023, we added a healthy one <unk>.

Weeks on hand inventory and I think.

Just kind of watching the consumer spend very closely in terms of discretionary products, but I think there's generally a good balance at this point overall.

Great and my last question is focused on research and development that you're doing internally there at cricket.

Are you kind of keeping safe.

Tim levels and same roadmap or given the macro uncertainties do you need to do some adjustments.

Yes.

Thanks, Jim.

I think a couple of comments I think about six maybe two quarters ago, we had kind of shed two or three quarters ago, Chad that we're going to really lead and double down on connected machines right. So focused less at least in the short term on accessories, but.

Really kind of build out our connected machines portfolio, So I think thats.

We take a very long view on that.

We've continued to innovate we continue to.

Do exciting things in that category. So I think youll see some great innovations from us over time.

The thing that I would say that we have really kind of.

Focusing on is building out the software and the platform, you'll see the benefit of that and subscriptions already.

I think you'll see a number of initiatives around engagement and even more so I would say the <unk>.

Company is really going to become a platform. If you will always a platform company, but youll see more and more investments in the software platform and we are really excited about that but we've taken a very balanced approach to our R&D and feel that we've got.

Streamline R&D approach to what our strategy is of a priority is that.

Great. Thank you so much for the color and congratulations and for all the details.

Thank you.

Okay.

Thank you.

Like to ask a question. Please press star one on your telephone.

One moment, while we prepare for the next question.

The next question is coming from Adrienne <unk>.

Barclays. Your line is open.

Yes.

Thank you very much.

I wanted to get some more.

Details on kind of your target customer do you have good data on sort of the target household income.

It sounds like the new users are more beginners, Sam Morton does that mean that maybe they are more seasoned users are kind of coming out of the active user base and then of the 74%.

Hi.

Can you tell us what proportion of them are heavy users first in sort of one time users and for the one time users is there an active method, reaching out to them and being more personalized to engage them more. Thank you so much.

Yes.

So thanks again for the question does the number of questions and if I don't get to all of them. Please feel free to follow up or we can follow up.

Call.

One of the things I feel really good about we're so early on in the cycle right and even though we added $1 5 million users and we have seven nine in total at the end of the day is less than six close to 6% Sam and like I said, we've even broaden outside our Sam.

Would say that.

I don't think market is shifting I think our market is expanding.

Right, so and what I mean by that is we are definitely continuing to Ed.

Attract the big enough advanced craft and they engage crafters.

Also broadening so.

The way to think about it as we kind of.

Lastly, the bell curve, if you're above the long tails are getting fatter. So we think that we have.

As we expand the market, which is what our strategy is.

As our products become easier to use more affordable and there's still a long ways to do that we are keeping the color an engaged customer base, we are getting to the craft.

But also we are getting to a user base that we've always wanted to add.

And like I said, the good news about attracting big enough factor is that at least at this point, we don't see that cohort.

Doing anything different from a more engaged cohorts.

So that's kind of my overall remark on the acquisition piece I think from an engagement perspective.

We have gotten better and better at understanding the various cohorts. So we haven't kind of the data is not mature enough to shed outside but the way we look at engagement as we are able to differentiate between subscribers and non subscribers.

Able to classify people, who are monthly users and quarterly users occasional and semiannual.

The one good thing that when we ask our customer base.

The people who've not engage with us for 12 months right as to what's that experience be quicker than what drives them to cricket, we see a very high percentage of you've shed. This number in the past like close to 80% of people really to say Wow.

These are people that actually.

Use the platform in nine to 12 months and they will say.

I love using the platform and I think thats when we get into the question and say well why didn't you.

It typically would be shared as well I just ran out of time, our life got in the way and well, they're probably saying is that yes.

We have an opportunity to make the experience, even simpler better and as we build and mobile strategies et cetera.

Opportunity to attract to bring back that user.

Having said that.

Ended there.

We clearly want to go after if you think about the folks that are engaged in specifically subscribers. Our number one focus is an engaged subscribers.

Because these are the people that we want to keep engaged you want to keep subscribers, having said that we do have an opportunity to go after the folks at all.

Not as engaged or not subscribed.

Number of strategies in place to go after them, but I would say in terms of the pecking order. Our number one focus is lets keep on engaged engaged users engaged and let's keep that engaged subscribers engaged and subscribed.

Okay, that's super helpful.

Just a couple of follow ups I guess the community aspect of it that way.

Just kind of front and center I think the the machine sales has okay.

Co op that that in terms of the story discussion.

Just wondering content creation, you did talk about it.

Can you talk about kind of the community development in that aspect of it.

Has that.

It seemingly kind of taken a backseat in the mind of the year.

Or is that not the case and for Kimball.

You talked about a two year horizon and I wanted to make sure that I understand.

Sure.

Dale.

If I got that correct.

<unk>.

How are you thinking about managing the cost side of the P&L under that circumstance.

So Andrew let me take the first half of the question and then I'll, let Kimball after the second half no I think.

What drove the category in terms of the network effects in terms of the community.

<unk>.

There are strong as they've ever been flat, we continued to have very high percentage of users coming from friends and family.

80% of users come to know about cricket through some kind of social media on friends and family or some kind of demos that somebody did for them. So that aspect even outside the platform and then I'll talk about the platform continues to be very healthy and very robust. So nothing has changed from that standpoint.

As far as a focus on community itself.

I would say and I made this.

Comment too Mark asked the question, but.

Actually I think Jim asked a question about R&D.

We are building.

Community right inside the platform right and the community is creating projects said subscriber is able to benefit from.

And that helps them save over time.

We've created other high value add actions were.

Not able to follow each other people able to bookmark. So all of that we think that takes an expanded view of our length and engagement. So I would say in summary.

Outside of our platform and inside our platform community plays a massive role and I think those network effects will continue to drive that.

I think as the consumer spend returns over time, we think that we will benefit from the funnel that we are building the network effects that we are driving.

But also as I said community.

Front and center.

Part of our platform.

I think we will see the benefit of that in terms of content that the community will generate and contribute to the platform.

Yes, Andrew Thanks.

Sorry, I didn't mean to cut you off thanks.

Thanks for the question.

When I talked about two years Reacceleration I was really talking about the accessories and materials not machines.

So let me talk about what we're seeing and what we're doing.

As additional context association's prepared remarks.

We're seeing a price sensitive consumer.

Also seeing cheaper inferior materials.

Showing up in the market, especially online alright, and so are our strategy there is to be cost competitive.

Over the last year and.

For the next.

A couple of years, you'll see us being more promotional right in the short term as because we want to make sure that our products are affordable to consumers and.

And as I mentioned that when we are closer to price parity. We win our fair share right. We were more promotional in Q4, and where we have data to measure we saw that we actually improved our share position.

Yes over the medium term, we are going to reconfigure our supply chain to drive cost out to help improve our margins.

Even as we are being more promotional and price competitive.

Secondly, we saw a lot of our materials through bundled so when we sell a new machine, we bundle it and when we had fewer new machine sales that also translates into fewer material sales.

And as we work with our retail partners Youll.

Youll see us being leaning into bundles.

Your proposition, both in brick and mortar and online.

And then the third factor is.

Slow engagement alright.

Even though our engaged users are up 6% year over year.

We're seeing since the pandemic people cutting fewer projects right and so that drives the amount of material usage and so that's where the engagement initiatives and ashish referenced.

Really come into play.

And this is a space, where our materials work seamlessly with our machines and we believe we have a right to win.

So yes, it's.

It's going to take some time, we've got inventory that we have to work through and so between supply chain reconfiguration and working through inventory.

We think it is kind of a two year journey.

I just wanted to highlight that.

We're very focused on managing our costs and being responsible and and I think we demonstrated that in last year with response to how the year played out for us.

And we will continue to be flexible based on what we see but overall for the overall business. We do expect to improve margins incrementally over the course of the year.

Okay. Thank you so much that's all very helpful detail.

Okay.

Thank you.

One moment, while I will take a follow up question.

We have a follow up question coming from James Suva of Citi. Your line is open.

Hi, I have a couple of follow up questions I believe it was Kimball mentioned.

Some changes to the supply chain are you, referring more to like some book bundles like when Jim Suva bought the premium.

Bundle with the machine and the first time is that what you mean by Reconfiguring the supply chain for those packages are you talking about reconfiguring the supply chain like how you make the machines, where you make the machines, where you do your distribution centers or what did you refer by.

Just to your distribution. Thank you.

Channel.

Yes. So again my comments are mostly on the reconfiguration, mostly directed towards success into materials.

And.

It involves everything from looking at how we package, how we differentiate across different channels with with configurations and product along with machines.

And where some of those activities take place so.

Okay.

We may look at at some.

Near shoring different materials.

What we're trying to figure out how we can serve the market more effectively and frankly do it with less inventory.

Okay and then my second follow up is on.

Cash flow and what your plans are there it sounds like you've mentioned worked down inventory still some more is is that correct.

So how should we think about your cash flow and what youre going to use.

Well so.

We do expect to be cash flow accretive for the year.

We are starting to work through our inventory positions.

Back to a more of a payback to pre pandemic levels, but it will take us some time to get there.

Great and my last question is seasonality.

With Covid, it's been tough.

Earmark, what is normal seasonality, but kind of.

I would assume that.

Second half of the year stronger than the first half and probably Q4 is the strongest of the quarters is that the seasonality, we should expect or all these moving parts something I should be aware of to calibrate a little bit more correctly first seasonality.

We're expecting normal seasonality as we look to 2023.

Okay.

I mean Q1 is going to be a particularly difficult quarter for us. If you recall last year. It was in March.

As of March shift in consumer behavior and so.

I think Q1 will be challenging, but we expect we expect improvements starting in Q2, but we think normal seasonality is how we're looking at the year.

Great. Thank you so much for the follow up.

Thank you.

I would now like to turn the call back over to management for closing remarks.

Thank you operator, and thank you all for joining US this afternoon will actually be at the Morgan Stanley Conference Tomorrow.

Looking forward to seeing everyone them. So thank you again.

Thank you all for joining this evening you all have a great day you may now disconnect.

The.

Conference will begin chose will begin shortly to raise and lower Johan during Q&A you can dial star one one.

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Good day, and thank you for standing by.

Welcome to this target.

Q4 full year.

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 session.

Excuse me a question and answer session.

Ask a question during this session you will need to press star one on your telephone.

You will then hear an automated message advising your hand is right.

To withdraw your question. Please press star one again please.

Please be advised that today's conference is being recorded I would like to turn the conference over now to Stacy coming from Blue shirt group. Please go ahead.

Thank you operator, and good afternoon, everyone. Thank you for joining us on critical fourth quarter.

<unk> core earnings call. Please note.

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 the call.

For your reference.

Today's call along with the supplemental data have been posted to the Investor Relations section of the company's website investor.

Dot com.

On the call today are <unk> Chief Executive Officer.

From wholesale Chief Financial Officer, today's prepared remarks have been recorded after with Jason Campbell with <unk>.

Before we begin I'd like to remind everyone that our prepared remarks contain forward the portfolio and management may make additional forward looking statements, including statements regarding our strategy.

Thanks, Ed and results of operations in response to your questions. These statements do not guarantee future performance and therefore.

Undue reliance should not be cocoa karma will statements or both.

Okay.

Okay and involve inherent risks and uncertainties, including those identified in the risk factor section a couple of questions.

Paul.

The results from that channel.

This call also can call coming from kind of information that is accurate only FERC.

Recall that this bobcat March seven 2020 growth quicker no obligations.

Forward looking projection that may be more.

Paul.

I will now turn the call over crystals.

Thank you Stacie and welcome everyone.

I wanted to acknowledge upfront that we expected 2022 to be a much better year for cricket and the results we discuss today reflect.

Entering the year, we expected to sell more connected machines and accessories and materials.

Said, we added one 5 million new users in 2022, ending the year with nearly $7 9 million total users and the credit platform.

Just shy of our initial expectations at the beginning of the year of 8 million users.

Boosted in part by strong connected machine sales in Q4, 'twenty, one and the first two months of 2022.

Subscriptions also continued to grow notwithstanding the headwinds.

Physical our physical products.

Despite my disappointment in our 2022 financial performance I am extremely proud and grateful for the team's focus and all we accomplished over the past year.

Let me explain why.

We significantly grew our subscriptions business. We ended this year with $2 6 million Pete cyber was up 28% over 2021.

New features and functionality drove an increase in attach rates over the year.

A particularly noteworthy highlight that suggests that we are not just converting new users into cricket access, but also reclaiming existing users.

The number of engaged users who cut on the platform increased sequentially in Q4 as expected with typical holiday seasonality.

We also saw a significant increase in user interaction like book box and shed projects across the cricket platform. After rolling out multiple new user touch point and enhancement.

Earlier in 2022 coming off a high growth pandemic period retailers reset inventory targets, which put additional pressure on our connected machine and assesses and materials revenue.

We worked diligently with our retail partners to better adjust those levels to the new target.

And manage down channel inventory over the second half of the year.

As a result.

Started 2023 and a much healthier position.

We also moved quickly to refocus investments.

Towards higher impact initiatives and tightened operating expenses delivering our sixth consecutive year of net income profitability.

We will continue to operate the company in a fiscally disciplined way.

The opportunity for growth and international expansion has never been stronger.

As we enter 2023, we will intensify our focus around new user acquisition and platform expansion in order to drive engagement subscriptions and increased monetization.

We are also at a focused two year path to reaccelerate growth in accessories and material.

Let me walk through each of these.

We acquired new users when someone buys a connected machine.

We believe that we are in the early days of market development and have only penetrated 6% of our serviceable addressable market from our top six markets.

<unk> the U S, Canada, UK, France, Germany and Australia.

This is up from 3% two years ago as cricket has become more widely recognized global brand.

In 2020 to be launching five new countries and now partner with a network of distributors in over 50 countries.

International growth remains a key priority in 2023 as we deploy the same playbook that has grown our business in North America.

In addition to the investments we've made today and new user acquisition engagement and monetization can be leveraged across all markets.

We believe our focus on industrial design innovation and a platform approach.

Along with our connected integration between design space content materials and our connected machine.

<unk> well in the market.

Over the past year, we've conducted numerous research studies to understand our consumers.

Purchase journey.

Our research shows that we have a healthy top of funnel today with significant opportunity to drive consumer interest and shorten the path to purchase.

There are several strategic initiatives in progress today to help simplify the journey from discovery to research to purchase.

Our research also shows that we are reaching a broader and more diverse demographic.

Nearly 50% of new users identifying as begin our crackers.

<unk> doubled the rate of 2019 users.

And even if we reach less experienced crafters.

Those are as likely to purchase a high end machine at.

That ultimately engage similarly to board.

Our experienced users.

We're also broadening our reach as we attract more gen Z and millennials.

Going forward, we will plan our design our marketing use cases.

To appeal to a broader audience, while still providing the tool the right tools and resources.

For the more advanced user.

A majority of new users I introduced at interact with cricket at multiple touch points prior to actively researching the brand.

What about some friends and family and social channels.

Youtube tick Tock, Pinterest, Facebook and Instagram continued to play a key role.

The initial touch point for nearly 80% of our new users.

Earlier in the year, we improved our audience targeting launched new creative assets and refreshed cricket content and quicker Dot com.

Beyond the initial touch points. We are also focused on a more simpler.

Simpler more streamlined purchase journey as we continue to rollout several new creative assets and tools that bring relevant information to consumers more quickly across all channels.

Last month, we launched improved product comparison chart.

We are developing a new simple queries to help consumers decide which machine is right for them.

We are making changes to our website and digital marketing execution to pull users through the funnel to conversion.

Many of these updates will be rolled out across our retail channels and global market.

We believe this strategy will help bring more users into the funnel as well as shortening the typical purchasing path for consumers.

By investing in these initiatives now we will position the cricket brand for growth and accelerate the purchase decision for when consumer spend returns.

Well also focus on increasing user engagement with starts the moment, we acquire to use it.

Our data shows that the first few weeks of a new user experiences often indicative of their engagement over time.

In Q4, we introduced a new onboarding process.

<unk> been testing a series of lesson plans for exploratory Omega three.

<unk> population of our users and are pleased with the initial results.

We plan to scale, our learnings expand these initiatives more machine and continue to refine our approach.

Once onboard it our focus turned to frequency of engagement.

Over half of our user base cut on our platform in Q4, and 74% of users cut project in 2022.

We have embarked on a number of initiatives to help increase user engagement.

In line with that I am excited to announce that we have appointed one of our senior leaders to a new role entirely dedicated to user engagement.

She previously was responsible for our connected machines portfolio.

And as one of our most seasoned leaders.

Two years ago, we took a similar approach to a subscriptions business, which resulted in revenue growth and higher attach rates.

Information drives engagement.

Our recent studies show that 16% of users get their project inspiration directly from design space.

At 25% of all other social media.

This gives us significant opportunity to increase traffic sooner in the creative process.

Offering users thousands of ideas to help inspire and accelerate cutting.

We believe that our investments in mobile experiences at other platform enhancements will play a crucial role in this strategy.

In the fourth quarter, we saw a significant increase in book box over Q3.

We ended the year with over a $150 million quarterly bookmark, an increase of nearly $30 million sequentially.

It easier for users to save ideas for later use when they come back.

Subscribers are the most valuable members on our platform and drive increased engagement activities versus non subscribers.

We ended the year with $2 6 million paid subscribers.

28% increase year over year.

This growth is a direct result of investments we've made over the past 12 to 18 months as we better communicate the value proposition to users and more places throughout their treatment experience.

For example in Q4, we used the onboarding process to optimize messaging around the benefits of cricket axis.

We also added more merchandising touch points within the engagement journey, giving us the ability to advertise annual subscription plan more effectively.

This latter effort is already showing promise promise.

<unk> improvement to the midst of annual versus monthly plant sign ups without impacting attach rate.

We also continue to expand new content and exclusive cricket axis features including automatic background remover.

To grab maker editable images expanded collections and more.

In many cases these robust highly requested features become an important part in goodbody users to subscribers.

We're also seeing increased engagement from our contributing artist program, which has accelerated our efforts to bring new relevant and diverse content duplicate access.

Another increasingly important source of content for subscribers come from community projects.

These are projects users create with with cricket images.

With sometimes include instructions alyssa materials to use and suggestions on design layout.

These community projects pass through cricket curation process.

Ensure authenticity of content and make your ability.

When subscribers by the community project that inspires them.

Ticket instantly personalize it or make it as is saving them the design title Scott starting from scratch.

This is an example of a community adding value to the platform that subscribers benefit from.

Our goal is to make it even easier for cricket users to share their projects and hence increase the number of community projects and significantly increase the value proposition for subscribers.

And finally, we are increasing our focus on accessories and materials, where we believe we have the right to play.

And to win.

We are uniquely positioned to build innovative high quality connected products.

Integrated with our hardware and our software.

Smart materials are a great example of this.

This segment has experienced headwinds since exiting the pandemic as a result of a few consumer dynamics converging at once.

Including increasing price sensitivity.

Machine sales and less frequent engagement.

First we have seen increased price sensitivity from users, particularly as the current economic situation continues.

As consumers become more price sensitive shopping habits, where materials are increasingly shifting from bricks and mortar retail to online.

Third party marketplaces, where we have seen an emergence of lower cost lower quality materials.

In response, we have started to work with our retail partners to develop differentiated product configurations and promotional.

Strategies by channel.

The needs are there.

Their customers whether in store or online.

Our goal is to simplify skus re engineered and repackaged materials and drive greater supply chain efficiencies to regain healthier margins.

While competing in driving share gain across all channels.

Some of this will take time to execute while we move through existing inventory.

Second.

The pressure we have experienced a new machine sales has also affected our accessory the materials segment.

A portion of our materials business is generated through the sale of machine bundles.

Which is an effective way to deliver two new users the materials they need to quickly start their journey with cricket.

Third our accessories. The material segment is influenced by how much I use those cuts.

The intensity of engagement has been lighter since exiting the pandemic.

The strategies, we are building to drive engagement and subscriptions should work in parallel with our efforts to build a more robust online channel with our retail partners.

Our retail partners and together with reignite growth in accessories and materials.

We believe all of these things together increased user engagement combined with new product bundled pricing and cost structure will be a two year journey to Reaccelerate. This segment of the business.

In summary, we are creating greater alignment within the organization to drive our key priority.

Acquiring new users globally.

Driving increased engagement and subscription and structuring our access in the materials business for long term success.

We have in depth knowledge of our user base and have identified multiple opportunities to grow and increase monetization over the long term.

Our focus on strengthening every facet of the platform will help enable long term sustainable growth.

And further enhance defensible moat.

With recurring monetization opportunity.

More characteristic of a platform business.

Although the current macroeconomic macro environment will impact overall growth in the short term.

Initially as we are deploying now will position us well for when consumer spend return.

I will now turn the call over to <unk> for the financials.

Thank you Ashish and welcome everyone. Although consumer spend continues to be soft Q4 delivered typical seasonal strength.

Connected machine revenue, new user growth subscriptions revenue and user engagement.

In the fourth quarter, we generated revenue of $288 million or 28% decline compared to prior year Q4.

The other eight of $10 $9 million and net income as we continue to invest in our key priorities.

Full year revenue was $886 3 million at 32% decline over 2021.

Keep in mind, most of 2021 reflected unusually high growth due to the pandemic breaking.

Breaking revenue down further revenue from connected machines for the year with $252 6 million.

Down, 54% over 2021, reflecting softer consumer spend and excess channel inventory levels throughout most of the year.

In mid 2022 retailers began initiating lower inventory target levels in preparation for a weaker economy.

Assets connected machine revenue doesn't necessarily align with the increase in the user growth over the year.

And working with our retail partners, we prioritize channel inventory and enter 2023 with healthier alignment between sell in and sell out.

<unk> from accessories and materials for the year was $361 4 million.

Down 35% over 2021 similar to connected machines, we entered 2022 with heavy channel inventory, making a tough year over year comparisons.

We continue to see pressure and accessories with materials from the dynamics issues mentioned earlier, which contributed to the decline in revenue and our peers are.

Our strategy for re acceleration in this segment is focused on cost reductions over time.

Promotional strategies for increased market share more machine immaterial bundles across more diverse channels and driving an overall increase in user engagement.

Subscriptions revenue for the year with $272 3 million at 32% increase over 2021 and benefited from targeted investments in cricket access to the expansive improvements we've made over the last several quarters.

In terms of geographic breakdown International revenue was $142 3 million.

Compared to $148 5 million in 2021.

As a percentage of total revenue international was 60% compared to 11% of total revenue in 2021.

Turning to users and engagement.

This year, we ended the year with nearly $7 9 million total users.

Or 23% growth over 2021, despite softer consumer spend throughout the year. This was just shy of our 8 million total user expectation at the beginning of 2022.

We ended the year with over 4 million users, who cut it project on a machine within the last 90 days. This.

This is up 6% from 2021.

This perspective 2022.

In 2022, 74% of total users Keta project in the last 12 months through.

Due to the initiatives Ashish outlined we have a significant opportunity to reach these users which is three quarters total user base.

We ended the year with over $2 6 million paid subscribers.

One 8% from the end of 2021 attach rates were strong at 33% up from 32% last year.

ARPA for subscriptions for the year was $38 nine.

Slightly down from $38 37 in 2021 for.

For context, three factors generally explain variability in subscription <unk> from one period to the next when subscribers are growing in attach rates you mean high.

Timing of sign ups mix of new versus renewal subscriptions and the increasing mix of international subscriptions.

Accessories and materials <unk> was $50 54 for the year compared to $102.91 in 2021.

We believe the renewed focus we can.

With renewed focus we can reaccelerate accessories your materials revenue overtime.

Moving to gross margin total gross margin in the fourth quarter was 30% an improvement compared to 27% in Q4 of 2021.

As a reminder, Q4 has seasonal pressure due to increased revenue contribution from connected machine.

Breaking gross margin down further.

Margin from connected machines was two 8%. This compares to a negative one 5% in Q4 of last year when.

When we elected to take price protection on air tool maker units and channel for.

For the full year connected machine margins was.

It was three 3% down from 11, 7% in 2021 and was primarily impacted by higher fixed cost as a percentage of revenue and warehousing and operations expense along with increased warranty expense and promotional activity.

Subscription gross margin for the full year was 93% up slightly compared to 2021 of 89, 3%.

Gross margin from accessories materials was impacted by increased promotions as well as fixed operating costs amortized over lower volumes, both for the quarter and the full year.

Full year gross margin for accessories of materials were 26, 5% compared to 37, 9% in 2021 going forward, we will continue to be competitive on price.

Turning to operating expenses, we continue to operate the business with discipline and flexibility to navigate current trends in March we began to see consumer spend softening and started to re prioritize investment.

As a result, we eliminated $50 million of planned spend and investments throughout 2022.

The operating expenses relatively flat year over year.

Operating expenses for the year were $269 9 million.

And included $42 million in stock based compensation expense.

This was up less than 2% from $265 million in 2021.

Operating income for the year was $80 million or 9% of revenue, reflecting lower revenue compared to 2021 of $192 4 million or 14, 7% of revenue.

Despite the challenges we face in 2022, we continue to prioritize I think Kevin cash 2022 was our sixth consecutive year of positive net income.

Net income for the year was $60 7 million or.

<unk> <unk> 28 per diluted share.

To $140 5 million or <unk> 64 per diluted share in 2021.

Turning now to the balance sheet and cash flow, we continued to generate healthy cash flow on an annual basis, which funds annual inventory needs and investments for long term growth for.

For the year, we generated $117 $7 million in cash from operations and it was the balance of $299 2 million.

This strength allows for a flexible yet purposeful approach to capital allocation, including return on returning capital to shareholders.

During the year, we repurchased 235 million shares of stock.

Cost of $18 5 million.

We have $31 $500 remaining in the repurchase program. In addition on February 15th.

$77 million to pay a special shareholder dividend.

As we look ahead to 2023, we continue to see softer consumer spending patterns and that's taking a conservative approach in our planning we.

We will continue to take a prudent and prioritized approach to investments, while managing for small incremental operating margin improvement and healthy cash generation in 2023 and.

Conversely, Q1, 'twenty three we will see pressure from softer Q4 holiday sales. In addition, we started 2023 with softer than expected connected machine sales in January and February , but we have a positive outlook and subscriptions lower new users will put pressure on our subscriber growth rate and attach rate.

From a revenue standpoint, we entered 2023 with healthier channel inventory levels have revenues should be more directly linked to consumer demand in other words in 2023 cricket could sell more connected machines than in 2022.

Net add fewer new users.

As a reminder, Q1 of 2023 will be a tough year over year comp and we expect it to be materially below Q1 of last year, we expect year over year comps to improve starting in Q2 gross margin will continue to be pressured.

On physical products.

Higher fixed costs as a percentage of revenue in warehousing and operating expense will continue to be a factor throughout 2023 accessories and materials will also continue at a similar promotional cadence to remain price competitive.

And we will likely have reserves for AG inventories as it relates to materials, particularly in Q2.

As a result, we expect full year accessories and materials margins will be similar to Q4 2022 results. We've seen gross margins should improve incrementally as machine mix shifts more to our newer machines in the second half of the year.

<unk> conditions worsen, we will continue to manage with the flexibility to make adjustments as needed just as we demonstrated in 2022.

We expect to continue generating healthy cash flow from operation and we remain committed to our long term operating margin targets of 15% to 19%.

Our proven model has demonstrated that when we operate at scale and drive top line growth. These margins are achievable.

With that I'll turn the call over to the operator for questions.

Thank you one moment, while we put out.

While the Q&A roster, if you would like to ask a question. Please press star one on your telephone.

The first question, we have is coming from Mark outfits Lagger of Baird. Your line is now open.

Good afternoon. Thank you for taking my question.

As we look at the gross margin profile of the machine segment, and the accessories and materials segment.

These recent quarters versus a few years ago, how much of the compression is structural whether related to cost inflation or efforts to drive better affordability versus some more temporary factors.

I guess asked another way could you sort of Rebase peak gross margin expectations for those segments medium to longer term. After you move past some of these kind of temporary factors.

Yes.

Mark Thanks for the question.

So I'll talk about.

<unk> and accessory materials.

Separately.

All of our physical products are being influenced by kind of the cost of our peak inventory and add the cost of our physical plant footprint.

Over smaller volumes and that has pressured that continues with us through the year.

Going through 2023.

In terms of magnitude that that and our promotional.

Yes.

The impact of our promotional strategies and promotional largely spent on machines.

Are about equal.

And.

We were less promotional on.

Annual basis with machines than we were last year.

But still it's.

It's a fairly significant portion of our gross margin.

We expect.

Machine gross margins to improve incrementally this year as we.

Have a mix shift more towards our newer machines.

On the accessories material side.

We've called out that we will be more promotional and that.

That.

We were in Q4 in particular, but we were.

We were more promotion in Q4 that were for the full year.

And we saw share gains.

From that.

And our mass and craft channels, where we have data we don't have perfect data every place.

Where we do we saw that.

Yes.

Margins are going to be pressured for.

2023.

And probably beyond as we as we go through or Germline accessories materials business.

Well why don't I stop there.

A follow up yes.

But thanks for asking the question I'll, just add to <unk> point I just want to go back to the machines and just kind of.

Building on what Kimball said.

One is clearly a lot of our mesh.

Margins were compressed because of the existing or the legacy machines. If you will.

As we come into 2023 with a much cleaner portfolio and as our portfolio mix improves right I think that will be positive for our margins. So I feel good about that the second which we.

You kind of hinted at in the in the prepared remarks is.

Promotional in the last probably 12 months, even though we've been less promotional in Q4 in general the focus a lot on the bottom of the funnel.

And done a lot of Pos dollars.

I think going into 2023 will be less.

Less promotional and reallocate some of those dollars to top of funnel.

In terms of driving awareness, so I think between at least especially on machines between the portfolio mix.

Our promotional strategy, we will see some positive improvement in margins for machines.

Great. Thank you for all that color and then Ashish.

Ashish I think you mentioned earlier that you are really doing.

Nice job in tracking and more beginner crafters to the platform and I think you said your studies.

Just that they are as likely to buy the larger machines as well as things like the Joy I guess im little bit surprised by that I thought maybe.

Joey with over index in some of those beginner crafters. So I'm just curious if you could expand upon your learnings there and just maybe some of the implications as we think about some of the mix impacts on <unk>.

<unk> revenue over time.

And then kind of a related question, but the subscription attachment continues to trend nicely is it fair to think that that could continue to edge higher.

More of those beginner crafter.

The platform I would think that some of the benefits of cricket access would be.

Would be potentially higher for those newer crafters that wouldn't otherwise knowhow to create some of the designs great. Thank you.

Yes.

First of all as we said we were pretty pleased with the fact that we are.

We added one 5 million users so came up to $7 9 million and Thats, just less than 6% or 6% of our SaaS.

And as you pointed out a lot of these are big enough users and Gen Z and specifically when it comes to begin our users we kind of studied the data.

And we were pretty positively surprised that they didn't.

They didn't differ from other cohorts both in terms of engagement as well as in terms of the kind the machines. The bond so that was.

We would all be it also very pleasantly surprised with that.

We still do think that.

Affordability is going to continue to be key.

For our user base, so I think products like cricket Joy will play a role, but I think thats very hard to draw a correlation.

Yes.

Any beginner users just with those.

Entry level machine price point I also think that some of the improvements that we've made user will definitely the starting price point is really important.

They use it comes into the category and they've basically to enter the category. So it has to be a lower price point, but as we do a better job in helping people understand and figuring out their use cases, I think we have an opportunity to continue to improve.

Users to get the right product, which may or may not be the entry level price point. So we're actually pretty pleased and excited about that although we still think that.

Driving affordability and lower price machines.

Is beneficial to the whole category.

One thing I'll just highlight is that we kind of have a little notation in our presentation is that as we're looking at our data.

Pretty good percentage of users is actually even beyond our SaaS. So these are people that we would not categorize as people would that would have qualified to be Sam. So we are actually really excited about the breadth of penetration that we are seeing both inside and outside I'll, let Kim will talk about the subscriptions.

Thanks for the question Mark we're really excited about our subscription business and we think the team has done a great job this year.

And.

Activating.

Our user base and growing subscription business and we're in the.

Very early stages of our road map.

Here to talk about features like automatic background remover and editorial images and we have a long roadmap of features that will continue to add to the value proposition of subscribers.

Talking about trading contributing artist program.

That is adding new and diverse content that is getting a lot of traction.

So we think we have a lot of room for improvement.

As we get better and better there.

That said we.

We called out in our prepared remarks that we expect to add fewer new users and.

And 2023, and so that naturally is going to put pressure on our attach rate and our growth rate.

Simply because the largest portion of new subscribers come from adding new UCITS platform, but as we as we get traction on some of these acquisition initiatives and Ashish mentioned.

And also on engagement, we think that that will help us.

Reaccelerate growth.

The subscription category.

Thank you I'll pass it on.

Yes.

Thank you one moment, while we prepare for the next question.

Sure.

Yes.

Our next question will be coming from Joel silver.

Citi. Your line is open.

Hi, Thank you so much for the details so far.

Separately on the machines versus the accessories.

When do you. It sounds like you mentioned January and February were also facing challenging inventory work down in the channel when do you kind of expect.

That could be more normalized and we're talking another quarter or so or kind of further out and then I'll probably have a follow up thanks.

Thanks.

So Jim Thanks for the question actually.

Entered the year with much healthier channel inventory.

A target range of forward looking weeks on hand for our channels and we ended in those ranges. So so this is more a consumer demand impact related to discretionary spend.

More than it was channel inventory issues.

Okay that was very useful and so just to clarify it sounds like what Youre channel now not where you calculate but what are your channel feedback is that they're also comfortable with the inventory levels in the channel because the reason why I ask is it seems like the channel is working down inventory to levels pre COVID-19.

It may be or even lower.

Covid, but if you could comment on the feedback youre getting there.

So I think the channel is continuing to focus on inventory, but we are in continuous.

Dialogue with <unk>.

On.

Channel inventory plans and we're aligned on those plans with our retailers.

I think this is agenda level of conservatism, but overall layers Kimball said.

We feel good about inventory coming into 2023, we had a healthy on <unk>.

Weeks on hand inventory and I think people would be just kind of watching the consumer spend very closely in terms of discretionary products, but I think there's generally a good balance at this point overall.

Great and my last question is focused on research and development that you're doing internally there at cricket.

You kind of keeping same levels and same roadmap or given the macro uncertainties do you need to do some adjustments.

Yes so.

Thanks, Jim.

I think a couple of comments sooner I think about six maybe two quarters ago, we had kind of shed two or three quarters ago, Chad that we're going to really lean in and double down on connected machines right. So focus less at least in the short term on accessories, but.

Really kind of build out our connected machines portfolio, So I think thats.

We take a very long view on that.

We've continued to innovate we continue to.

Do exciting things in that category. So I think youll see some great innovations from us over time.

The thing that I would say that we have really kind of.

Focusing on is building out the software and the platform you'll see the benefit of that in.

Subscriptions already.

I think we will see a number of initiatives around engagement and even more so I would say the <unk>.

Company is really going to become a platform. If you will always a platform company, but youll see more and more investments in the software platform and we're really excited about that but we've taken a very balanced approach to our R&D and feel that we have.

Streamline R&D approach to what our strategy is and our priorities.

Great. Thank you so much for the colors.

Graduations and for all the details.

Thank you.

Like to ask a question. Please press star one on your telephone.

One moment, while we prepare for the next question.

The next question is coming from Adrienne <unk>.

Barclays. Your line is open.

Great. Thank you very much.

I wanted to get some more details.

Details on kind of Garrett target your customer do you have good data on sort of the target household income.

It sounds like the new users are more beginners, Sam Morton does that mean that maybe getting more seasoned users are kind of coming out of the active user base and then of the 74%.

Right.

Can you tell us what proportion of them are heavy users first in sort of one time users and for the one time users is there an active method.

<unk> out to them and being more personalized to engage them more thank you so much.

Yes.

So thanks again for the question does the number of questions and if I don't get to all of them. Please feel free to follow up or we can follow up.

Call.

Would say that the.

I don't think market is shifting I think our market is expanding.

Right, so and what I mean by that is we are definitely continuing to Ed.

Attract the big enough advanced Kraft, they engage crafters, but we also broadening so.

The way to think about it as we kind of.

Lastly, the bell curve, if you will the long tails are getting fatter. So we think that we have.

As we expand the market, which is what our strategy is.

As our products become easier to use more affordable and there's still a long ways to do that we are keeping the color an engaged customer base, we are getting to the cloud.

But also we are getting to a user base that we've always wanted to add.

Like I said, the good news about attracting big enough factor is that at least at this point, we don't see that cohort.

Doing anything different from a more engaged.

So that's kind of my overall remark on the acquisition piece I think from an engagement perspective.

Able to classify people, who are monthly users and quarterly users occasional then semiannual.

The one good thing that when we ask our customer base even.

Even the people who've not engage with us.

<unk> months right as to what's that experience be quicker than what drives them to cricket we see a very high percentage. We've shared this number in the past like close to 80% of people really to say well.

These are people that actually.

Not use the platform in nine to 12 months and they will say.

Love using the platform and I think that's going to get into the question of saying well why didn't you.

Typically what we showed is well I just ran out of time, our lifeblood and the way, they're probably saying is that yes.

We have an opportunity to make the experience, even simpler better and as we build and mobile strategies et cetera.

<unk> opportunity to attract to bring back that user.

Having said that.

Ended there.

We clearly want to go after if you think about the folks that are engaged in specifically subscribers. Our number one focus is an engaged subscribers right.

Because these are the people that we want to keep engaged you want to keep subscribers.

<unk> said that we do have an opportunity to go after the folks that are not.

Not as engaged or not subscribed.

A number of strategies in place to go after them, but I would say in terms of the pecking order. Our number one focus is lets keep on engaged engaged users engaged and let's keep it engaged subscribers engaged and subscribed.

Okay that helps.

Paul.

Just a couple of follow ups I guess the community aspect of it that way.

Kind of front and center I think the machine sales has.

Co opted that that in terms of the story discussion and I'm. Just wondering content creation you did talk about it but can you talk about kind of the community development in that aspect of it.

Has that seemingly.

Seemingly kind of taken.

<unk> taken a backseat in the mind of the user.

Is that not the case and for Kimball.

You talked about a two year horizon.

Wanted to make sure that I understand it.

Pressure on sale and if that if I got that correct.

How are you thinking about managing the cost side of the P&L under that circumstance.

So Andrew let me take the first half of the question and then I'll, let Kimball.

For the second half.

I think what.

The category in terms of the network effects in terms of the community.

Stronger.

As strong as they've ever been right we continue to have.

High percentage of users coming from friends and family over 80% of users come to know about cricket through some kind of social media on friends and family or some kind of demo that somebody did for them. So that aspect even outside the platform and then I'll talk about the platform continues to be very healthy and very robust so none.

<unk> has changed from that standpoint.

<unk> is a focus on community itself.

I would say and I've made this call.

Comment too Mark asked the question, but.

And I think Jim asked a question about R&D.

We are building the <unk>.

<unk> right inside the platform right.

The community is creating projects said subscriber is able to benefit from that.

And that helps them save over time.

We've created other high value add actions were.

Not able to follow each other people able to bookmark. So all of that we think that takes an expanded view of our length and engagement. So I would say in summary.

Outside of our platform and inside our platform community plays a massive role and I think those network effects will continue to drive that.

I think as a consumer spend returns over time, we think that we will benefit from the funnel that we are building the network effects that we are driving.

But also as I said community.

Front and center.

Part of our platform.

I think we will see the benefit of that in terms of content that the community will generate and contribute to the platform.

Yes, Andrew.

Sorry, I didn't mean to cut you off thanks.

Thanks for the question.

When I talked about two years, so the acceleration as you've been talking about the accessories and materials not machines and so let me talk about what we're seeing and what we're doing.

As additional context Ashish his prepared remarks.

We're seeing a price sensitive consumer we're also seeing cheaper inferior materials.

Showing up in the market, especially online alright, and so are our strategy there is to be cost competitive.

So over the last year and.

For the next.

A couple of years, you'll see us being more promotional right in the short term as because we want to make sure that our products are affordable to consumers and.

As I mentioned that when we are.

Closer to price parity, we win our fair share right. We were more promotional in Q4, and where we have data to measure we saw that we actually improved our share position.

Yes over the medium term, we are going to reconfigure our supply chain to drive cost out.

Help improve our margins.

Even as we are being more promotional and price competitive.

Secondly, we saw a lot of our materials through bundled so when we sell a new machine, we bundle it and when we had fewer new machine sales that also translates into fewer material sales and and as we work with with our retail partners.

Youll see us being leaning into bundles.

Value proposition, both in brick and mortar and online.

And then the third factor is.

Slow engagement, alright, even though our engaged users are up 6% year over year.

We're seeing since the pandemic people, having fewer projects alright, and so that drives the amount of material usage and so that's where the engagement initiatives as ashish referenced.

<unk> really come into play.

And.

This is a space, where our materials work seamlessly with our machines and we believe we have a.

Right to win.

So yes, it's going to take some time, we've got inventory that we have to work through and so between supply chain reconfiguration and working through inventory. That's why we think it's kind of a two year journey.

I just want to highlight that.

We're very focused on managing our costs and being responsible and and I think we've demonstrated that in last year with response to how the year played out for us.

And we will continue to be flexible based on what we see but overall for the overall business. We do expect to improve margins incrementally over the course of the year.

Okay. Thank you so much that's all very helpful detail.

Okay.

Thank you.

One moment, while I will take a follow up question.

We have a follow up question is coming from James Suva of Citi. Your line is open.

Hi, I have a couple of follow up questions I believe it was Kimball mentioned.

Some changes to the supply chain are you, referring more to like some book bundles like when Jim Suva bought the premium.

Bundle with the machine. The first time is that what you mean by Reconfiguring the supply chain for those packages are you talking about reconfiguring the supply chain like how you make the machines, where you make the machines, where you do your distribution centers or what did you refer by.

Just to your distribution.

You argue your channel.

Yes. So again my comments are mostly on the reconfiguration, mostly directed towards successes materials.

And.

It involves everything from looking at how we package, how we differentiate across different channels with with configurations and product along with machines.

And where some of those activities take place so.

Okay.

We may look at Tom.

Near shoring different materials.

What we're trying to figure out how we can serve the market more effectively and frankly do it with less inventory.

Okay and then my second follow up is on.

Cash flow and what your plans are there it sounds like you've mentioned worked down inventory still some more is that correct.

So how should we think about your cash flow and what youre going to use.

Well so.

We do expect to be cash flow accretive for the year.

We are starting to work through our inventory positions.

Back to a more of a payback to pre pandemic levels, but it will take us some time to get there.

Great and my last question is seasonality.

With Covid, it's been tough.

Earmark, what is normal seasonality, but I.

We would assume that.

We're expecting normal seasonality as we look to 2023.

Acknowledging that Q1 is going to be a particularly difficult quarter for us. If you recall last year. It was in March.

As of March shift in consumer behavior and so.

I think Q1 will be challenging, but we expect we expect improvement starting in Q2, but we think normal seasonality is how we're looking at the year.

Great. Thank you so much for the follow up.

Thank you.

I would now like to turn the call back over to management for closing remarks.

Thank you operator, and thank you all for joining US this afternoon will actually be at the Morgan Stanley Conference Tomorrow.

Looking forward to seeing everyone them. So thank you again.

Thank you all for joining this evening you all have a great day you may now disconnect.

Q4 2022 Cricut Inc Earnings Call

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