Cricut Inc. Q1 2023 Earnings Call
And thank you for standing by.
Welcome to the cricket Q1 earnings Conference call at this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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I will now have to turn it over to our speaker today, Jim <unk> Senior Vice President of Finance. Please go ahead.
Thank you operator.
Afternoon, everyone.
Thank you for joining us on crickets first quarter of 2023 earnings call.
Please note that today's call is being webcast can recorded on the Investor Relations section of the company's website.
A replay of the webcast will also be available following today's call.
For your reference accompanying slides used on today's call along with a supplemental data sheet had been posted to the Investor Relations section the company's website.
Investor Dot cricket Dot com.
Joining me on the call today, <unk> Chief Executive Officer.
Kimble shell Chief Financial Officer.
Today's prepared remarks have been recorded.
After which ashish in Kimball will host live Q&A.
Before we begin we would like to remind everyone that are prepared remarks contained forward looking statements and management may make additional forward looking statements, including statements regarding our strategies busy.
Business expenses and results of operations in response to your questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
These statements are based on current expectations as of the company's management and involved inherent risks and uncertainties, including those identified in the risk factor section of crickets. Most recently filed Form 10-K.
Actual events of results could differ materially.
This call also contains time sensitive information that is.
Is accurate only as of the date of this broadcast.
May 9th 2023.
Cricket assumes no obligation to update any forward looking projection that may be made in today's release our call.
I will now turn the call over to Ashish.
Thank you Jim and welcome everyone.
As you mentioned last quarter, we expected Q1 revenue to be materially below prior yet.
Even with that revenue in the first quarter was softer than we expected for connected machines.
45% a year on year.
And accessories and materials down 39% year on year as retailers continued to take a conservative approach to inventory commitment and softer consumer spend.
These trends continue quarter today.
<unk> revenue on the other hand grew 16% year over year at 6% sequentially.
Despite these mixed results the strength of our financial profile allows us to deliver positive profits and strong cash flow.
We will continue to operate in a fiscally disciplined way, making focus investments that will deliver increased user engagement and growth over the medium term.
The cricket platform that has over $8.2 million total users up 19% over to one last year.
3.7 million users or 45% of total users have cut a project at least once within the first quarter.
This creates a tremendous opportunity for us to build deeper user engagement on our platform.
Our goal is to bring a majority of users into design space monthly to be inspired.
We believe increasing visits to design space and improving our ability to serve relevant makeup of content that matches the interest of each user.
Will lead to higher engagement at an increase in paid subscribers.
We also want to broaden user engagement activities, such as liking bookmarking and sharing projects.
As users increasingly drive growth and shared community projects.
And I applied for a more effectively matches content tailored to each user these.
These mutually reinforcing effects will create value in our platform for all users.
As the outlying last quarter, we have intensified our focus or a new user acquisition.
That's an expansion in order to drive engagement.
Subscriptions and increased modernization.
We also laid out a two year, Pat to reaccelerate growth and accessories and materials.
These investments are also leveraged across international markets, where the opportunity for growth has never been stronger.
In fact as of the end of Q1, we have crossed a milestone with over $1.1 million international users outside of North America.
We continue to simplify and streamline the consumer purchase journey.
Last quarter, we roll out several new creative assets and tools that bring relevant information to consumers more quickly across all channels.
We will continue to iterate on these experiences and add to the great content on our website on social media channels.
You previously launched a new homepage, along with comparison tables to help users compare various machines.
By way of example.
Since seen an increase of time on our pages for a complete machine comparison tool of over 50%.
Last month, we also added a new simple machine <unk> to help consumers decide which machine is right for them.
Given the success and positive feedback from these assets, we plan to liberate them broadly across all consumer touch points, including several retailers ecommerce destinations.
We have already begun to rule out improved in store retail merchandising to enhance the consumer shopping experience.
For example, we worked at target on a redesign cladogram that has been deployed across 80% of store locations.
This new redesign will improve installed branding and better communicate the value of the cricket ecosystem.
We're also better optimizing our marketing efforts and audience targeting.
As part of this rebalancing some of our investments over the year from bottom a funnel to top a funnel activities such as digital an influencer marketing across proven channels as well as increased pier coverage.
For example, we're very excited about the peer coverage were receiving going into mothers' day.
Could be the perfect gift for moms in our lives.
We believe the strategy, where they're more logged on fruit and have greater lasting branding effects than what our promotional plans during the course of the year.
But also focus on creating greater upfront value for consumers.
One way to do this is through more machine bundled which can include digital content materials and accessories.
These photos and has the out of box experience and ensure users of all the things I need to make initial projects and get them quickly on the path towards user engagement.
As I mentioned last quarter.
Putting a great deal of focus on user engagement. It starts the moment, we acquired a user.
Our data shows that the first few weeks of a new users experience.
And indicative of their engagement overtime.
Our current focus includes improving our onboarding process and driving users to design space early in their user journey.
We are seeing early signs of success and I, expanding our onboarding initiatives like expanding lessons plans over the coming quarters to cover a broader setup machines.
Content drives inspiration, which drives engagement.
Can you think of content both in terms of images and make about projects.
Which include images plus design layout word photos of the finished project and can include instructions that list of materials.
We're creating more effective ways for users to find relevant content by further reducing friction between designing and cutting projects.
For example, we recently introduced visual based search which lets users find similar images.
We are constantly increasing our image library, a contributing artist program also known as cap plunged just one year ago.
The cap program represents an increasingly significant portion of new images on design space.
Source from diverse artists around the World caps also helps me the need for localized content in many markets around the world.
Community projects will increasingly be a fresh source of inspiration and make it.
Content for our subscribers.
These projects are created and designed by our community of users.
And in addition to the design layouts and photos of the finished project.
May also include instructions and a list of materials to use making it easier for others to create.
These projects can be shed inside the platform and on other social media using links thus inspiring other users to make and creating network effects.
This user generated content drives incremental value to design space and is becoming an increasingly important way to add content to the platform.
As we grew our library of makeup of content on our platform. We are also improving the ways, we deliver personalised and created experiences to our members to find the most inspiring and relevant content to them.
You'll be getting a number of projects across our marketing technology commerce and design platforms to.
To significantly improve this experience.
We see this as an important pillar in our journey to drive greater engagement.
We ended the quarter with 2.7 million paid subscribers.
17% increase here over a year.
Benefit from strong attach rates and are increasingly leveraging designed space touch points to better communicate the benefit of a subscription services.
We continue to execute against a roadmap of cricket Axis exclusive software features work with our latest edition.
<unk> enables creative effects on any text object. This is an impactful tool given that over 50% of projects bid on our platform contained text.
And many new cases, new features we launched coincide with increased subscriber growth highlighting visibility to develop valuable highly sought after features.
Our priority is to ensure subscribers continuously discover and use the content features and functionality available to them.
We have an opportunity to increase user awareness of our many feature through touch points and advertising on and off our platform, which.
Which will help us attract and retain subscribers.
We are still in the very early days of a road map.
Subscribers are our most valuable customers.
The primary reason subscribers sub subscribing is that they don't use design space often enough to justify the cost.
So one of our highest engagement priorities is to drive subscribers to engage more frequently.
Closely related is gaining more subscribers.
Capture more subscribers early in the cricket journey, making our onboarding improvements another source of future value.
Turning to accessories and materials.
As I mentioned, we had in the early days of rebuilding this business. We continue to hold market share when we compete on price, but overall users are getting fewer projects and therefore needing less material, which we believe is influence at least in part.
By softer consumer discretionary spend.
Longer term, we believe that accessories and materials will reaccelerate as we focus on cost reductions over time.
South promotional strategies for increased market share more machine and materials bundles across more diverse channels and increase user engagement.
We acknowledge the pressure that muted discretionary consumer spend continues to put unconnected machines and accessories and materials.
Subscriptions continues to be resilient and we are excited about an international opportunities.
We have more focus if you've ever been and are taking the right steps to grow our business for the long term.
Our focus a new user acquisition it starts with the purchase of a connected machine and platform expansion to drive engagement subscription and increased modernization will help us navigate the current uncertainty.
And physician as well for when consumer spend returns.
I will now turn the call or the kimble for the financials.
Thank you Ashish and welcome everyone in the first quarter, we delivered revenue of $181.2 million or 26% decline compared to prior year, we generated $9.1 million in net income as we continue to invest in our key priorities breaking.
Breaking revenue them further revenue from connected machines was $34.1 million down 45% over Q1 2022.
As I said in our last call. We added 2022 with healthier channel inventory levels and anticipated that region retailers would replenish inventory within the quarter retailer.
Retailers, however continued to be cautious and rebuilding inventory to the softer consumer discretionary spend.
They continue to purchase but below our expectations.
Revenue from accessories your materials for the quarter was $72 million down 39% over Q1 2022.
And was impacted by retailers conservative stance and rebuilding inventory levels.
Also impacting revenue in this segment is lower engagement discussed above.
Subscription revenue for the quarter was $75.1 million, a 60% increase over Q1, 2022, reflecting targeted investments and cricket access and the expansive improvements made over the last several quarters as well as an uplift from Q for seasonal strength machine sales.
In terms of geographic breakdown.
International revenue was $33.5 million compared to $36.5 million in Q1 2022.
As a percentage of total revenue international is 18% compared to 15% of total revenue in Q1 2022.
Turning to users is engaged and engagement I'm pleased to share we ended the quarter with over eight 2 million total users or 90 per cent growth over Q1 2022, as we increasingly agents through the initiatives Ashish outline we have a significant opportunity to bring new users through the cricket experience. This.
This includes onboarding them with more more effectively and getting them to engage more quickly and design space.
We ended the quarter with over 3.7 million engaged users. This was flat over Q1 last year.
We ended the quarter with over 2.7 million paid subscribers up 17% from Q1 2022.
Description attach right match Q1, 2022 at 33%.
Moving to gross margin total gross margin in the first quarter was 42.3% and improvement compared to 45% in Q1 2022.
Breaking gross margin down further gross margin from connected machines was 3.1%.
This compares to 2.7% in Q1 of last year.
Looking at 2023 advertising fixed costs, and warehousing and Capitalised operations expense across lower volumes will continue to put pressure on margins.
Setting this partially end of life machines, which carry lower gross margins are becoming a smaller part of our machine mix is expected, which is helping machine margins.
Descriptions gross margin for the quarter was 89.8% down slightly compared to 2022 of 93%.
Gross margin for access from accessories, and materials was impacted by an excess inventory right down fixed operating costs amortize over lower volumes for the quarter and a consistent cadence and promotions.
First quarter gross margin for accessories materials was 11.3% and included a write down of $8.6 million of excess inventory primarily related to bulk configurations of smart iron-on and vinyl materials.
Excluding this right down and margin would have been 23.2% in the quarter. This compares with 33% in Q1 2022.
Turning to operating expenses, we continue to operate the business with discipline and flexibility to navigate current trends.
Given the pressure ESAU coming into Q1, we implemented cost reductions, including an 8% reduction in force, resulting in a 1.2 million dollar charge in Q1 as a result, we expect to produce gross savings of $6 $7 million for the full year.
Total operating expenses for the quarter were $66 $1 million and included $9.8 million in stock based compensation expense. This was down 2% from 67 $6 million in Q1 2022.
Operating income for the quarter was $10.5 million or 5.8% of revenue compared to $31.4 million or 12.8% of revenue in queue and last year.
The decrease is related to lower revenue and an $8.6 million inventory right down excluding the inventory right down operating margin would have been 10.5%.
We delivered our 17th consecutive quarter a positive net income net income was $9.1 million or four cents per diluted share and seven.
Per diluted share, excluding the inventory right down and related tax effect compared to $23.5 million or 11 cents per diluted share in Q1 2022.
Now to the balance sheet and cash flow, we continued to generate healthy cash flow on an annual basis, which funds inventory needs and investments for long term growth for the quarter regenerated $95 $2 million in cash from operations ending with a balance of 307 $3 million and we remain that free.
During the quarter, we used $3.2 million of cash to repurchase 347000 shares of our stock we have $28.3 million remaining of the repurchase program. In addition in queue. When we used $75 $5 million to pay a special shareholder dividend.
Consistent with our commentary last quarter, we continued to see softer consumer spend and retailers, taking a conservative approach to inventory commitments and thus taking a prudent and prioritized approach and are planning as we look ahead to 2023, we expect operating margins to be slightly down for the full year given Q1 performance for.
Revenue standpoint, we entered 2023 with healthier channel inventory levels and revenue should be more directly linked to consumer demand, but as already noted retailers continue to be conservative on inventory commitments in the current environment.
However, we expect typical second half seasonality and year over year comps should improve in the second half.
In terms of new user growth, we still expect to add fewer new users and 2023 than we did last year and we started 2023 with softer than expected connected machine sales in Q1, which puts further pressure on new user growth.
We have a positive outlook on subscriptions lower new users will put pressure on subscriber growth rate and attach rates throughout the year and paid subscribers, maybe flat for the year or even down if current trends worsen.
Gross margin will continue to be pressured on physical products higher fixed costs as a percentage of revenue and warehousing and operations expense will continue to be a factor throughout 2023 accessories and materials will also continue at a similar promotional cadence to remain price competitive as a result, we expect full year accessories and materials margins.
Will be similar to Q4 2020 twos gross margin of 15.9% inclusive of the write down this quarter.
We remain focused on managing our profitability, while investing in areas with the highest impact should macro conditions worsen. We will continue to make adjustments as needed justify demonstrated in 2022, we expect to continue generating healthy cash flow from operations and remain committed to our long term operating margin targets, 15% to 19%.
Are proven model has demonstrated that when we operated 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 at this time, we will conduct a question and answer session.
Gary Castle question, you'll need to start one one on your telephone and wait for your needs.
Can I try your question. Please press Star one went again please.
<unk> will be compared to Q&A roster.
Alright first question comes from the Max line.
Pakistan.
Go ahead <unk>.
Good afternoon. Thank you for taking my question, maybe just dispersed off a quick clarification, when you say that the trends and connected machines and materials sales continue quarter to date.
Are you referencing a continuation in the year over year growth rate that you saw it in Q1.
The comparison gets quite a bit easier cutesy versus Q1, so I just wanted to be clear about what you're referencing there.
Some art thanks for the question.
We called out.
We were below our expectations for Q1 and we.
We had called out that Q1 will be down to year over year, but we saw demand even softer than we expected those are the transit we're referring to as we move through acute two so far.
So we're seeing discipline demand is softer than <unk> than we expected and Mark I'll just jump in.
<unk> I think the two things to consider one is that we clearly had a sell through our news or acquisition, which is lower than would be expected.
Lot more exaggerated for the salad right because the point the table made in his prepared remarks that.
The retailers took a conservative approach and we're consolidating inventory, which had an exaggerated impact on seven so we took more.
Inventory out of the channel at some point, we believe that a robust in terms of they will have to order inventory going into bothered as we expect regular seasonality.
Thank you and the retailer front hesitation regarding inventories understandable, but I'm wondering do you have a sense of what the sell through rates look like with your channel partners.
Specifically with materials and accessories I'm curious, how the new pricing strategy in the promotional strategies is hitting the market and any learnings you have over.
Over the last few months.
So.
She has pointed out and your last question sell sell through tends to be healthier than cell in <unk>.
Head on materials, specifically, when we are more promotional N and closer to cost parody with competition that we are holding share or even gaining share.
And we have maintained that promotional cadence and.
See that going forward, so that we can be price competitive, especially when consumers are are so cost conscious in the current environment.
Great and Memphis finally curious if you could expand upon some of the marketing strategy you talked about with respect to new customer acquisition and refilling the funnel.
Any particular tactics or areas, where you're seeing.
The best results.
Yeah, So let me cut off.
Spent a couple of minutes of this mark.
Again, as we said before we believe we have a lot Sam and then the early days of that category. Right. Then one thing that gives me a lot of confidence and comfort and we've talked about this previously is that we are attracting jen these and big enough crafters, which really kind of speaks to the breast of the category right now when you look at the trends that especially drove growth.
Covid.
A secular translate personalization and ask.
Access to digital tools et cetera, now clearly the shorter term we are being impacted by some of the headwinds that we've talked about in terms of inflation economy consumer sentiment, but you know our job and what do you think that we think we have more control over is how.
How do we ask people to the funnel and one other thing that I know you look at Google trends. If you look at the specific searched on what is cricket.
Right that tens NFU compared to a regular you had like 2019 at shows the amount of interest if you compare April worry for the macho, a boss or with a few years. It basically shows that the interest exceeds what we are seeing in in terms of sore throat right. So there's clearly pent up demand that we believe exists the final.
As far as the follow is concerned the way, we approach and I'll speak to all three stages of the funnel from the top of the final perspective.
Basically we are focusing on digital media social media tools network effects, and we believe that works very well for a brand word of mouth marketing.
The poor people through the funnel.
This is why you heard me talk about you know the.
Assets that we are developing in terms of comparison tables, you know <unk>.
Quiz at anything that would help address the users questions and purchase barriers and I think you'll see us continue to do that and finally when it comes to the bottom of the funnel that's W. Being less promotional we think is the best thing for the Brad instead, what we've done is we've focused on affordability and value, which is where we are.
We've been offering bundles and that will continue to be a big big part of our strategy.
At the end of the day, we think that you know us focusing on those things are continuing to build the federal just take what happened you know.
Right at the start of Covid, we saw that there was a funnel it converted quickly.
We think the same phenomena is going to exist as and when some level of novelty returns and in the meantime, you know we we need to continue to building this infrastructure around the marketing funnel that we believe it will ultimately pay off as the world returns back to normal.
That's a great color, thank you and best of luck.
Alright, I can relate to ask her in her arms TK that question. Please.
One line on your telephone.
<unk>.
Please stand by and see some panic Union.
Alright.
At <unk>.
<unk> I would like to change I call back over to Jim's Sylvester closing remarks.
Thank you Hayley. Thank you all for joining us. This afternoon, we have a large opportunity over the long term to drive new user growth and increased engagement.
We believe the initiatives, we are deploying now proposition as well for when consumer spend returns.
We will continue to manage the business for sustainable profitable growth.
And generate healthy cashflow.
I'm excited about the opportunities ahead of us.
We will be at the bird global consumer technology and services confidence in New York on June 7th.
Forward to seeing everyone than this.
This now concludes this earnings call. If you have additional questions. Please E Mail me at J Suva at cricket Dot Com. Thank you.
Thank you Sir.
And change conference.
You may now disconnect.
Mmm.
[music].