Q4 2023 Cricut Inc Earnings Call
Operator: Notifications. I Am No Longer Liked By The Company. I Am No Longer Liked By The Company. Thank you for standing by. Welcome to Cricut Inc.'s fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again.
Okay.
Thank you for standing by and welcome to create Inc. Fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you for your question.
It's been answered and you'd like to remove yourself from the queue simply press star one again.
Jim Suva: As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Jim Suva, Senior Vice President of Finance. Please go ahead.
A reminder, today's program is being recorded and now I'd like to introduce your host for today's program, Jim Suva Senior Vice President of Finance. Please go ahead.
Jim Suva: Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's fourth quarter 2023 earnings call. Please note that today's call is being webcast and recorded on the investor relations section of the company's website. A replay of the webcast will also be available following today's call.
You operator, and good afternoon, everyone. Thank you for joining us on crickets fourth quarter 2023 earnings call. Please note that today's call is being webcast and recorded on the Investor Relations section of the company's website.
A replay of the webcast will also be available following todays call.
Jim Suva: For your reference, accompanying slides used on today's call, along with a supplemental data sheet, have been posted to the Investor Relations section of the company's website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer, and Kimball Shill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host live Q&A.
For your reference accompanying slides used on today's call along with a supplemental data sheet have been posted to the Investor Relations section of the company's website investor Doc cricket Dot com.
Joining me on the call today are Ashish Aurora, Chief Executive Officer, and Kimball Shell Chief Financial Officer.
Today's prepared remarks have been recorded after which ashish and Kimball will host live Q&A.
Jim Suva: Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements, including statements regarding our strategies, business, expenses, and results of operations in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factor section of Cricut's most recently filed Form 10-K or Form 10-Q that we have filed with the Securities and Exchange Commission. However, actual events or results could differ materially.
Before we begin we would like to remind everyone that our prepared remarks contain forward looking statements and management may make additional forward looking statements, including statements regarding our strategies business expenses and results of operations in response to your questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
These statements are based on current expectations of the comps.
<unk> management and involve inherent risks and uncertainties, including those identified in the risk factors section of crickets. Most recently filed Form 10-K or Form 10-Q that we have filed with the securities and Exchange Commission.
Actual events or results could differ materially.
Jim Suva: This call also contains time-sensitive information that is accurate only as of the date of this broadcast, March 5th, 2024. Cricut assumes no obligation to update any forward-looking projection that may be made in today's release or call. I will now turn the call over to Ashish. Thank you, Jim.
This call also contains time sensitive information that is accurate only as of the date of this broadcast.
March 5th 2020 for.
Cricket assumes no obligation to update any forward looking projection that may be made in today's release or call.
I will now turn the call over to Ashish.
Thank you Jim.
Ashish Arora: We moved through 2023 focused on profitability, even as we navigated a dynamic consumer discretionary environment. 2023 was our seventh consecutive year of positive net income. We generated $53.6 million of net income.
We moved through 2023 focus and profitability, even as we navigated a dynamic consumer discretionary environment.
2023 was our seventh consecutive year of positive net income.
We generated $53 6 billion of net income.
Ashish Arora: Even with a $45.9 million excess and obsolete inventory reserve and Fixed Acid Impairment Charges, we are encouraged by our 49% operating income increase in Q4 year over year and the positive uplift from my promotions. However, we were disappointed that sales fell in the quarter and folio by 18 and 14%, respectively.
Even with the $45 9 million of excess and obsolete inventory reserves and fixed asset impairment charges.
We are encouraged by our 49% operating income increased in Q4 year over year and the positive uplift from our promotions in Q4.
However, we are disappointed that sales fell in the quarter and full year by 18 and 14% respectively.
Ashish Arora: Our promotions are planned for smaller than we expected, and this is attributable, in part, to lower retail inventories. But in hindsight, we could have conducted more aggressive marketing and promotion. We intend to boost our marketing efforts and spending in 2024 to generate more interest and demand throughout the. We will continue our deeper promotional strategy while focusing on maintaining great prices. We will keep concentrating on acquiring new users and Enhancing Their Engagement and Revenue Generation. I would like to look back in 2023 on what went well and what we could do better. The areas where we could do better are straightforward.
Our promotions uplift was smaller than we expected.
Is attributable in part to lower retail inventory.
But in hindsight, we could have conducted more aggressive marketing and promotions.
We intend to boost our marketing efforts and spending in 2024 to generate more interest in demand throughout the funnel.
We will continue our deeper promotional strategy, while focusing on maintaining great pricing discipline.
We will keep concentrating on acquiring new users.
And enhancing their engagement and revenue generation.
I would like to look back on 2023 on what went well and what we could do better.
The areas that we could do better straightforward, we need to attract more new users to buy a connected machines.
Ashish Arora: We need to attract more new users to buy our connected machines. We need to reverse weakening engagement trends and re-inject enthusiasm among our users. We need to be more effective competitors in accessories and materials. Much of our discussion today will focus on these priorities. In 2023,
We need to reverse weakening engagement trends and re inject enthusiasm among our users we.
We need to be more effective competitor as <unk> materials.
Much of our discussion today will focus on these priorities.
In 2023.
Ashish Arora: Our total user base increased 13% to over 8.9 million users, paid subscribers increased 6% to 2.77 million, and Engage users in the last 90 days decreased 3% to 3.9 million. Now looking at Q4. We saw a positive uplift from our deeper promotions in Q4, although it was smaller than expected. In hindsight, we could have given more discounts and advertised more aggressively to address consumer affordability concerns. These weaknesses were worsened by lower retailer inventory.
Our total user base increased 13% to over $8 9 million users paid subscribers increased 6% to $2 77 billion.
And engage users in the last 90 days decreased 3% to $3 9 million.
Now looking at Q4 you.
We saw a positive uplift from our deeper promotions in Q4, although it was smaller than expected.
In hindsight, we could have given more discounts and advertise more aggressively to address consumer affordability concerns.
These weaknesses are worsened by lower retailer inventory.
Ashish Arora: We saw several retailers miss out on significant Q4 sales due to insufficient channel inventory for our machine. While we are working with those retailers to restart to more adequate inventory levels, and we are seeing some improvements thus far in Q1. We expect some retailers to continue being conservative on inventory. In addition, addressing consumer affordability and making the overall shopping experience more accessible are significant opportunities.
We saw several retailers missed out on significant Q4 sales due to insufficient channel inventory for our machines.
Well, we're working with those retailers to restart to more adequate inventory levels and we are seeing some improvement thus far in Q1 <unk>.
We expect some retailers to continue being conservative on inventory commitments.
In addition, addressing consumer affordability and making the overall, making experience more accessible a significant opportunities for us.
Ashish Arora: As a category leader, we are significantly increasing our marketing spend, both in media coverage and expanding the size of our marketing talent and team. Our goal is to re-accelerate consumer excitement for the brand and category. Now on to an update on our priorities. Recall that we have four priorities: new user acquisition, user engagement, descriptions, and accessories and materials.
As a category leader, we are significantly increasing our marketing spend both in media coverage and expanding the size of our marketing talent and team.
Our goal is to Reaccelerate consumer excitement for the brand and category.
Now onto an update on our priorities.
Recall that we have four priorities, new user acquisition user engagement subscriptions and accessories and materials.
Ashish Arora: I will briefly review these items and provide some detailed commentary on our new platform innovation. We ended the quarter with over 8.9 million total users, up 13% year on year and approximately in line with their expectations. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drives a monetization flywheel. We have previously shared that our funnel is healthy, and more recent data supports this conclusion. While our platform and products have universal appeal for creators of all ages and demographics, we are particularly focused on women 25 to 44 years old.
I will briefly review these items and provide some detailed commentary on our new platform innovations.
We ended the quarter with over $8 9 million total users up 13% year on year.
And approximately in line expectations.
We continue to focus our new user acquisition and engagement growth on our platform, which ultimately drive our monetization flywheel.
We have previously shared that our funnel is healthy and more recent data support that conclusion.
While our platinum products have universal appeal to creators of all ages and demographics, we are particularly focused on women 25 to 44 years old.
Ashish Arora: After several years of reductions in marketing spend, we accelerated our investment as we prepared for the holiday season. Our plan is to further increase marketing efforts and investment in 2024 to drive food, fun, and excitement. Influencer marketing plays an important role in our strategy. We accelerated the onboarding of new influencers in the back half of the year and increased the number of influencers by more than 4-fold, from adding 57 new influencers in the front half of 2023 to adding 247 in the back.
After several years of reductions in marketing spend we accelerated our investment as we prepared for the holiday season.
Our plan is to further increase marketing efforts and investment in 2024 to drive footfall and excitement.
Influencer marketing plays an important role in our strategy.
We accelerated the onboarding of new Influencers in the back half of the year and increase the number of influencers by more than fourfold.
From adding 57, new influencers in the front half of 2023, two adding 247 in back half.
Ashish Arora: We also expanded our reach through increased work on organic and paid social content on Pinterest, TikTok, Meta, and YouTube. Finally, our investment in media relations paid off with a total potential reach of $555 million for broadcast segments and $651 million through gift guides and product reviews. During the holidays, our partnership with the Kelly Clarkson show holiday giveaway segment also drove excitement and interest in our brand and category.
We also expanded our reach through increased work on organic and paid social content on Pinterest tick tock better and Youtube.
Finally, our investor and media relations paid off with a total potential reach of 555 billion.
Two broadcast segments, and 651 million through gift guide and product reviews.
During the holidays, our partnership with Kelly Clarkson Shell holiday, giving away segment also drove excitement and interest in our brand and category.
Ashish Arora: As planned, we were more promotional in Q4 compared to the rest of the year. The promotions were supported by an Integrated Marketing Plan, including Retailer Programs and Content Marketing Strategies.
As planned we were more promotional in Q4 compared to the rest of the year.
The promotions were supported by integrated marketing plans.
<unk> retailer programs and content marketing strategies, incorporating influencers, social editorial and dealer coverage.
Ashish Arora: Incorporating Influencers, Social, Editorial, and Deals Covered. While we did see an uplift, it did not meet our expectations. As we enter 2024,
While we did see an uplift it did not meet our expectations.
As we enter 2024.
Ashish Arora: We continue to focus on driving bad awareness and pulling people through the funnel. Our plans include accelerated investment in digital marketing, influencer marketing, and a focus on lifestyle and product coverage. In addition, we are expanding our messaging through marketing campaigns that focus on the role Cricut machines can play in different life stages. One example is our partnership with Pinterest around this year's wedding, which will be supported by content on and off the Pinterest platform. Our marketing programs also include animated plans for key moments throughout the year, where there is higher motivation to personalize or make. We introduced the Cricut Make Their Day Valentine's event, which was held February 4-10 in North America and serves as an example of how we plan to leverage promotions throughout 2024.
We continue to focus on driving brand awareness and pulling people through the funnel.
Our plans include accelerated investment in digital marketing, Influencer marketing and focus on lifestyle and product coverage.
In addition, we are expanding our messaging to marketing campaigns.
That focus on the role cricket machines can play in different life stages.
One example is our partnership with Pinterest around this year's wedding trend, which will be supported by content on and off the <unk> platform.
Our marketing programs also include elevated plans for key moments throughout the year.
Where there is higher motivation to personalize our make things.
We introduced the cricket make their day Valentines event, which was held February four through 10 in North America and serves as an example of how we plan to leverage promotions throughout 2024.
Ashish Arora: We saw a meaningful uplift in sales and excitement compared to prior weeks from consumers and retailers. As we move through the year, we expect to instill confidence in our retailers to better partner with us and carry more inventory to leverage these integrated marketing and promotional opportunities. We ended 2023 with 5.93 million users who made a project using their cutting machine in the past 365 days, up 2% from the end of 2022. Engage users at the end of 2023. Defined as users who made at least one project in the last 90 days, this declined year-on-year to 3.93 million, 3% below a year ago.
We saw a meaningful uplift in sales and excitement compared to prior weeks from consumers and retailers.
As we move through the year, we expect to instill confidence in our retailers to better partner with us and carrying more inventory to lever these integrated marketing and promotional opportunities.
We ended 2023 with 593 million users, who made a project using their cutting machine in the past 365 days up.
Up 2% from the end of 2022.
Engaged users at the end of 2023.
As users who made at least one project in the last 90 days declined year on year to $3 93 million, 3% below a year ago.
Ashish Arora: Our focus remains to maximize engagement of our most impactful cohort, which are new users onboarding onto the platform, or onboarders, and AXA subscribers. As we look to our engagement priority for 2024, our focus remains on enabling our users to discover, make, and share projects easily, as well as expanding our marketing capabilities to reach members when they are outside design space to stimulate them to return to our platform. We want to increase the breadth and depth of content, make it easier to find that content, and inspire action through great visualization. Let me first talk about how we increase depth and breadth. We think of content as both projects and images. You can think of them as recipes and ingredients. Over the holidays, we showcase holiday projects that are better photos of the finished project and How to Instructions in a Design Layout.
Our focus remains to maximize engagement of our most impactful cohorts, which are new users onboarding onto the platform.
Our own borders and access subscribers.
As we look toward engagement priority for 2024, our focus remains on enabling our users to discover make and share project easily as.
As well as expanding our marketing capabilities to reach members when outside design space to stimulate them to return to our platform.
If you want to increase the breadth and depth of content.
Make it easier to find that content and inspire action through great visualization.
Let me first talk about how the increased depth and breadth.
We think of content as both projects and images.
You can think of them as recipes and ingredients.
Over the holidays, we showcase holiday projects that are better photos of the finished projects.
How to instructions and our design layout.
Ashish Arora: When a user initiated a new project based on one of those holiday projects, we saw a higher likelihood of cutting relative to a project that did not have good instructions, photos, and layout help. In addition, continuing to grow our library of images remains a priority. A wide choice of images is one of the main benefits our subscribers seek. In Q4, We have surpassed 750,000 images in our Cricut Access Library, with the majority of these now coming from our Contributing Artists Program.
When a user initiated a new project based on one of those holiday projects.
A higher likelihood to cut relative to a project that did not have good instructions photos and layout health.
In addition, continuing to grow our library of images remains a priority.
My choice of images is one of the main benefits are subscribers seek.
In Q4.
We surpassed 750000 images in a cricket access library.
With the majority of these now coming from our contributing artist program.
Ashish Arora: As we mentioned before, search specialization is important to us. As our library grows, so will our search and image navigation capabilities. For example, we are testing personalized search ribbons that show images and projects based on user history.
As he mentioned before search personalization is important to us.
As a library grows so has our search and image navigation capabilities.
For example, we are testing personalized searchable that show images and projects based on user history.
Ashish Arora: You see a higher click rate when showing personalized results. We also measure success in the quality of our library by tracking the share of projects made with images from our library versus projects made with uploaded images. And this ratio is increasing favorably year on year. Now, let me briefly comment on visualization. We also launched a redesigned visualization experience that allows members to mock up any image or a series of blanks, such as a t-shirt, cap, or a tote bag, to inspire action.
You see a higher click rate when showing personalized results.
We also measure our success in the quality of our library by tracking the share of projects made with images from our library versus uploaded images and this ratio is increasing favorably year on year.
Now, let me briefly comment and visualization.
We also launched a redesign visualization experience that allows members to lock up any image.
A series of blanks, such as T shirt cap toward back to inspire action.
Ashish Arora: Paid subscribers were in line with our expectations and increased 161,000 year-on-year and increased 71,000 sequentially in Q4, ending with 2.77 million paid subscribers. Our subscription efforts continue to bear fruit in terms of converting purchasers of new machines into subscribers. On the other end, our subscription attrition curve had remained steady despite declines in engagement.
Paid subscribers were in line with our expectations and increased 161000 year on year and increased 71000 sequentially in Q4, ending with $2 $7 7 million paid subscribers.
Subscription efforts continue to bear fruit in terms of converting purchases of new machines into subscribers.
At the other end subscription.
Subscription attrition curve has remained steady despite declines in engagement.
Alas.
Ashish Arora: Lower new user ads compared to prior years puts pressure on our subscriber growth and attach rates and creates some quarterly fluctuations in 2023 that will likely repeat in 2024. We have a rich roadmap to continually increase the value proposition for subscribers. Including an ever-growing suite of premium design tools along with the content strategies described above. In January, we launched Create Sticker, which dramatically simplifies the process of turning a raw image into a finished sticker in a few easy steps.
Lower new user adds compared to prior years puts pressure on our subscriber growth in attach rate and create some quarterly fluctuations in 2023 that will likely repeat in 2024.
We have a rich roadmap to continually increase the value proposition for subscribers.
Including an ever growing suite of premium design tools, along with the content strategy as described above.
In January we launched create sticker, which dramatically simplifies the process of turning Aurora image into a finished sticker and a few easy steps.
Ashish Arora: Our goal is to make it incredibly compelling to sign up as a subscriber to leverage our software and services. As our engagement efforts bear fruit, we expect to see a boost in subscriptions. Accessories and materials sales declined 28% year-on-year in Q4.
Our goal is to make it incredibly compelling to sign up as a subscriber to leverage our software and services.
Other engagement efforts bear fruit, we expect to see a boost to subscriptions.
Accessories and material sales declined 28% year on year in Q4.
Ashish Arora: Affordability plays a key role in materials, and given current consumer sentiment, consumers are buying less materials overall and engaging less as a result. In addition, we face the stiffest competition in this part of our business, with lower barriers to entry than cutting machines and our digital platform. This has continued pressure on our business. Even so, we feel our share of the materials market has not changed significantly over the past. We are relentlessly focused on driving costs out of this business, so Cricut materials are the obvious choice when users want to make. We will ultimately accomplish this through re-engineered products, re-engineered packaging, and improved supply chain efficiency. We have been incrementally capturing cost reductions in our materials. There's more to come in the coming quarter.
Affordability plays a key role in materials and given current consumer sentiment consumers buying less materials overall and engaging less as a result.
In addition, we faced the stiffest competition. This part of our business with lower barriers to entry than cutting machine at our digital platform.
This puts continued pressure on our business.
Even so we feel our share of the materials market has not changed significantly over the past year.
We are relentlessly focused on driving costs out of this business. So cricket materials are the obvious choice.
Users want to make.
We will ultimately accomplish that through re engineered product re engineered packaging and improving supply chain efficiencies.
We have been incrementally capturing cost reductions in our materials with more to come over the coming quarters.
Ashish Arora: It will take us some time to work through current inventory as we roll out new products, but we expect to achieve margin improvements in this business over time while still creating a differentiated offering that works seamlessly with our machines and platforms. We expect to provide more details on progress in this area as we move through 2024. Growth in this segment should emerge as we are successful in driving new customer acquisition at a higher rate and our engagement efforts begin to bear fruit. Consistent with prior comments, we will continue our promotional cadence in this category to remain price competitive for consumers with a focus on winning shares. We see that when we are in the price range of our competitors, we get our fair share. We are intensely focused on the overall customer experience.
It will take us some time to work through current inventory as we roll new products.
N, but expect to achieve margin improvement in this business over time.
While still creating a differentiated offering that works seamlessly with our machines and platform.
We expect to provide more details on progress in this area as we move through 2024.
Growth in this segment should it but as we are successful in driving new customer acquisition at a higher rate and our engagement efforts begin to bear fruit.
Consistent with prior comments, we will continue our promotional cadence in this category to remain price competitive for consumers with a focus on winning share.
We see that when we had the pricing of our competitors, we get our fair share.
We are intensely focused on the overall customer experience.
Kimball Shill: And we are motivated to work with those retailers that help us create a great experience, both in the shop and for actual use of our ecosystem. It's our fundamental belief that when we give people more reasons and inspiration to make things that are appealing to them, and we make it easier to make things affordable. We will see a lift in materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current discipline. I will now transition the call to Kimball. Thank you, Ashish, and welcome, everyone.
And we are motivated to work with those retailers that helped us create a great experience both on the shelf and for actual use of our ecosystem.
It is our fundamental belief that when we give people more reasons and inspiration to make things that are appealing to them.
Make it easier to make things affordably.
We will see a lift in materials consumption.
We are driven to continue to innovate while exhibiting both long term focus and current discipline.
I will now transition the call to Kimball.
Thank you Ashish and welcome everyone in the fourth quarter, we delivered revenue of $231 $2 million and 18%.
Kimball Shill: In the fourth quarter, we delivered revenue of $231.2 million, an 18% decline compared to the prior year and below our expectations for the fourth quarter. We generated $11.3 million in net income. A 4% year-over-year increase in our 20th consecutive quarter of positive net income, as we continue to invest in our key priorities. Full year 2023 revenue was $765.1 million. 14% decline over 2022, as retailers took an even more measured approach to inventory commitments and higher average selling prices for machine-stamping consumers. We experienced higher average selling prices as our newer, more expensive machines became a larger part of the mix. Also, retailers were unable to fully leverage promotions we offered because of lighter inventory positions.
Sent declined compared to the prior year and below our expectations for the fourth quarter.
We generated $11 3 million and net income of 4% year over year increase in our 20th consecutive quarter of positive net income as we continue to invest in our key priorities.
Full year 2023 revenue was $765 1, million% to 14% decline over 2022 as retailers took an even more measured approach to inventory commitments and higher average selling prices for machines dampened consumer sales.
We experienced higher average selling prices as our newer more expensive machines became a larger part of the mix.
Also retailers were unable to fully leverage promotions, we offered because of lighter inventory positions. So we spent fewer promotional dollars driving sales than we had planned.
Kimball Shill: So we spent fewer promotional dollars driving sales than we had planned. Breaking revenue down further, Q4 2023 revenue from connected machines was $77.4 million, down 24% over Q4 2022, and full year revenue decreased 21% year over year. Retailer commitments were below demand, causing stock outs to some retailers, which negatively impacted our sales.
Breaking revenue down further Q4 2023 revenue from connected machines was $77 4 million down 24% over Q4, 2022, and full year revenue decreased 21% year over year.
Retailer commitments were below demand, causing stock out to some retailers, which negatively impacted our sales remember when retailers Miss out selling machines to consumers. They also miss out on selling the initial basket of accessories and materials that go along with the machine sale.
Kimball Shill: Remember, when retailers miss out on selling machines to consumers, they also miss out on selling the initial basket of accessories and materials that go along with the machine set. We are working with retailers to restock to more adequate inventory levels as we continue our strategy of deeper promotions in 2024 and our expanded marketing efforts to generate excitement. Revenue from accessories and materials for the quarter was $77.3 million, down 28% over Q4 2022. For the full year, Accessories and Materials revenues decreased 27%.
We are working with retailers to restock to more adequate inventory levels as we continue our strategy of deeper promotions in 2024, and our expanded marketing efforts to generate excitement.
Revenue from accessories materials for the quarter was $77 3 million down 28% over Q4 2022.
For the full year accessories and materials revenues decreased 27%.
Kimball Shill: Subscription revenue for the quarter was $76.5 million, an 8% increase over Q4 2022, reflecting targeted investments in Cricut Access and the expansive improvements made over the last several quarters. For the full year, subscription revenues increased 12% in 2023 compared to 2022. In terms of geographic breakdown, international revenue was $51.5 million, or down 5% compared to $53.9 million in Q4 2022. The year-over-year decline in Q4 was due to a slowdown in the UK, Australia, and META, which we define as the Middle East, Turkey, and Africa.
Subscriptions revenue for the quarter was $76 5 billion, an 8% increase over Q4 of 2022, reflecting targeted investments in cricket access and the expansive improvements made over the last several quarters.
For the full year subscription revenues increased 12% in 2023 compared to 2022.
In terms of geographic breakdown international revenue was $51 $5 million were down 5% compared to $53 $9 million in Q4 2020 to the.
The year over year decline in Q4 was due to a slowdown in the U K, Australia, and meta, which we defined as middle East, Turkey and Africa.
Kimball Shill: As a percentage of total revenue, International was 22% in Q4 2023, compared to 19% of total revenue in Q4 2022. For the full year 2023, international revenue increased 9% and represented 20% of total company revenue. Turning to Users and Engage, We ended the quarter with over 8.9 million total users, or 13% growth compared to Q4 2022. We ended the quarter with over 3.9 million engaged users, which was a 3% decline from Q4 last year. On a full year basis, we had 66% total users engaged during 2023 compared to 74% in 2022. To some extent, this reflects the limitations of our total user method. It is a count of users acquired since the launch of Explorer in 2014, some of whom have not been active in years.
As a percentage of total revenue international was 22% in Q4 of 2023 compared to 19% of total revenue in Q4 of 2022.
For the full year 2023 international revenue increased 9% and represented 20% of total company revenues.
Turning to users and engagement.
We ended the quarter with over $8 9 million total users.
Or a 13% growth compared to Q4 2022.
We ended the quarter with over $3 9 million engaged users, which was a 3% decline from Q4 last year.
On a full year basis, we had 66% total users engaged during 2023 compared to 74% in 2022.
To some extent this reflects the limitations of our total user metric.
It is a count of users acquired since the launch of explore in 2014.
Some of whom have not cut in years, we ended the quarter with $2 $7 7 million paid subscribers up.
Kimball Shill: We ended the quarter with 2.77 million paid subscribers, up 6% from Q4 2022 and up 71,000 sequentially. Our subscription attach rate declined to 31% in Q4 2023 from 33% last year. As discussed in earlier calls, there is some natural subscriber attrition, so subscriber growth will be muted until we increase the pace of machine sales and new user acquisition. Moving to Gress Margin.
Up 6% from Q4 2022.
And up 71000 sequentially.
Our subscription attach rate declined to 31% in Q4 of 2023 from 33% last year.
As discussed in earlier calls there is some natural subscriber attrition.
Subscriber growth will be muted until we increase the pace of machine sales and new user acquisition.
Moving to gross margin.
Kimball Shill: Total gross margin in the fourth quarter was 42%, an improvement compared to 29.8% in Q4 2022. The improvement reflects a higher amount of subscription revenue as a percentage of total revenue and higher machine margins. Breaking it down further, gross margin from connected machines was 17.2% compared to 2.8% in Q4 a year ago. On a full year basis, connected machine gross margins increased to 13% from 3.3%.
Total gross margin in the fourth quarter was 42% an improvement compared to the 29, 8% in Q4 2022.
The improvement reflects a higher amount of subscription revenue as a percentage of total revenue and higher machine margins.
Breaking gross margin down further gross margin from connected machines were 17, 2% compared to two 8% in Q4 a year ago.
On a full year basis connected machine gross margins increased to 13% from three 3%. The increase in gross margins was primarily due to a favorable product mix compared to Q4 of 2022 as legacy machines continue to represent a smaller percentage of machine sales, coupled with higher average selling prices compared to a.
Kimball Shill: The increase in gross margins was primarily due to a favorable product mix compared to Q4 2022, as legacy machines continued to represent a smaller percentage of machine sales, coupled with higher average selling prices compared to a year ago. Also, selling fewer than expected units on promotions in Q4 benefited margins as retailers did not fully utilize the promotional spending we had planned. Subscriptions gross margin for the quarter was 88.7% compared to Q4 2022 of 89.5%. On a full-year basis, subscriptions gross margin decreased 90 basis points.
A year ago.
Also selling fewer than expected units on promotions in Q4 benefited margins as retailers did not fully utilize the promotional spending we had planned.
Subscription gross margin for the quarter was 88, 7% compared to Q4 2022 of 89, 5% on a full year basis subscriptions gross margins decreased 90 basis points. The decline in subscriptions gross margins both for Q4 and 2023 was primarily.
Kimball Shill: The decline in subscription gross margins, both for Q4 and 2023, was primarily related to higher amortization of capitalized software costs, which we expect to continue. Fourth quarter gross margins for accessories and materials were 20.6%, which compares to 15.9% in Q4 2022. The Q4 increase in margins was driven primarily by improved cost per unit and lower freight costs, which more than offset some impairments.
Related to higher amortization of capitalized software costs, which we expect to continue.
Fourth quarter gross margins for accessories, and materials was 26%, which compares to 15, 9% in Q4 2022.
The Q4 increase in margins was driven primarily by improved cost per unit and lower freight costs.
These more than offset some impairments recall, we had some larger impairments in this segment throughout the year, which pressured margins, resulting in full year 2023 gross margins for accessories and materials to decreased to 17, 5% compared to 26, 5% in 2022.
Kimball Shill: Recall, we had some larger impairments in this segment throughout the year, which pressured margins, resulting in full year 2023 growth margins for accessories and materials being 17.5% compared to 26.5% in 2022. Foyer Accessories and Materials margins were in line with expectations. Total operating expenses for the quarter were $80.5 million and included $12.1 million in stock-based compensation.
For your accessories and materials margins were in line with expectations total operating expenses for the quarter were $85 million and included $12 1 million in stock based compensation total operating expenses increased 11% from $72 $5 million in Q4 of 2022.
Kimball Shill: Total operating expenses increased 11% from $72.5 million in Q4 2022. The $8 million increase in total operating expenses was largely due to higher stock-based compensation expense and an impairment of unused equipment and capitalized costs as we further focus our development efforts on connected machines. A careful assessment of our future product roadmap resulted in a decision to terminate certain new machine projects to focus our efforts on more impactful opportunities. In Q4, we wrote off $12.6 million of capitalized development from the discontinued project. Full year 2023 operating expenses increased 1% compared to 2022. Operating income for the quarter was $16.5 million, or 7.1% of revenue, compared to $11.1 million, or 4% of revenue, in Q4 last year.
The $8 million increase in total operating expenses was largely due to higher stock based compensation expense and an impairment of unused equipment and capitalized costs as we further focus our development efforts on connected machines, a careful assessment of our future product roadmap resulted in a decision to terminate certain new machine projects.
To focus our efforts on more impactful opportunities in Q4, we wrote off $12 $6 million of capitalized development from the discontinued projects full year 2023 operating expenses increased 1% compared to 2022.
Operating income for the quarter was $16 5 million or seven 1% of revenue compared to $11 $1 million or 4% of revenue in Q4 of last year.
Kimball Shill: This was a 49% increase in operating income, which we are encouraged by despite the decline in sales and the reserves and impairments that Ashish referenced. For full year 2023, operating income as a percent of sales was 9.1% compared to 9% in 2022. Excluding the impairments of unused equipment, operating income would have been $29.1 million for the quarter. Our tax rate of 38.9% was higher than normal compared to 13.6% in Q4 last year. In 2023, the full-year tax rate was 32.8% compared to 26% in 2022.
This was a 49% increase in operating income, which we are encouraged with despite the decline in sales and the reserves and impairments that ashish referenced.
For full year 2023 operating income as a percent of sales was nine 1% compared to 9% in 2022.
Excluding the impairments of unused equipment operating income would have been $29 $1 million for the quarter.
Our tax rate of 38, 9% was higher than normal compared to 13, 6% in Q4 of last year.
In 2023, the full year tax rate was 32, 8% compared to 26% in 2022.
Kimball Shill: The higher tax rate was due mainly to lower R&D credits in Q4 2023 and an increase in uncertain tax positions. We delivered our 20th consecutive quarter of positive net income. Net income was $11.3 million or $0.05 per diluted share compared to $10.9 million or $0.05 per diluted share in Q4 2022. For the full year, we generated $53.6 million of net income and diluted earnings per share of 24 cents, down from $60.7 million in net income and $0.28 diluted earnings per share in 2022. Turning now to the balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds inventory needs and investments for long-term growth. In 2023, we generated $288 million in cash from operations, compared to $118 million in 2022. We ended 2023 with a cash and cash equivalence balance of $245 million. We remain debt-free, and recall, we are generating higher levels of cash as we work to bring inventory more in line with pre-pandemic norms. Accordingly, inventory decreased by $107 million from a year ago to $244 million at the end of the year.
The higher tax rate was due mainly to lower R&D credits in Q4, 2023, and an increase in uncertain tax positions.
We delivered our 20th consecutive quarter of positive net income net income was $11 $3 million or five cents per diluted share compared to $10 $9 million or five cents per diluted share in Q4 2022.
For the full year, we generated $53 $6 million of net income and diluted earnings per share of <unk> 24 cents.
<unk> from $60 $7 million in net income and 28 diluted earnings per share in 2022.
Turning now to balance sheet and cash flow.
We continued to generate healthy cash flow on an annual basis, which funds inventory needs and investments for our long term growth in 2023, we generated $288 million in cash from operations.
Compared to $118 million in 2022.
We ended 2023 with a cash and cash equivalents balance of $245 million we.
We remain debt free.
Paul we are generating higher levels of cash as we work to bring inventory more in line with pre pandemic norms.
Accordingly inventory decreased by $107 million from a year ago to $244 million at the end of the year.
Kimball Shill: During Q4, we used $15.7 million of cash to repurchase 2.1 million shares of our stock. After the end of the quarter, and through March 1st, we used $10.8 million of cash to repurchase 1.7 million additional shares of our stock, which effectively completes our $50 million approved stock repurchase program that was authorized in August 2022. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2024. We are focused on bringing excitement to our category. We are doing this through an increased focus on marketing and continuing our strategy of deeper promotions on cutting machines and a continued cadence on accessories and materials to drive affordability. However, during the first few weeks of the quarter, we saw sales below expectations.
During Q4, we used $15 $7 million of cash to repurchase two 1 million shares of our stock.
After the end of the quarter and through March one we used $10 $8 million of cash to repurchase one 7 million additional shares of our stock, which effectively completes our $50 million approved stock repurchase program that was authorized in August 2022.
Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2024.
We are focused on bringing excitement to our category. We are doing this through an increased focus on marketing and continuing our strategy of deeper promotions on cutting machines and a continued cadence on accessories and materials to drive affordability.
The first few weeks of the quarter, we saw sales below expectations.
Kimball Shill: In our first deeper promotion combined with integrated marketing, we saw a positive uplift in consumer demand, even topping year-over-year machine sales for the promo. Unfortunately, we saw several retailers with inadequate on-hand inventory that missed out on significant Q1 demand. Accordingly, we do not expect positive Q1 revenue growth year over year. We will continue to accelerate marketing to generate consumer excitement, but given ongoing retailer conservatism and only one major sales event under our belt, it is too soon to call it an inflection point. Hence, we may even see a decline for the full year. However, we expect paid subscriber count and subscription revenue to grow slightly and become a larger portion of total company sales and profits. Lower new user growth rates will put pressure on our subscriber growth and retention, following a similar pattern to 2023.
And our first deeper promotion combined with integrated marketing, we saw positive uplift in consumer demand, even comping year over year machine sales for the promo week. Unfortunately.
We saw several retailers with inadequate on hand inventory that missed out on a significant Q1 demand. Accordingly, we do not expect positive Q1 revenue growth year over year.
We will continue to accelerate marketing to generate consumer excitement.
But given ongoing retailer conservatism and only one major sales event under our belt. It is too soon to call an inflection point, hence we may even see a decline for the full year.
We expect paid subscriber count and subscriptions revenue to grow slightly and become a larger portion of total company sales and profits.
Lower new user growth rates will put pressure on our subscriber growth in attach rates following a similar pattern to 2023.
Kimball Shill: And could result in a seasonal pattern of paid subscriber growth in Q1 and Q4, but flat to declining in Q2 and Q3. Our connected machine revenues will see pressure as we are more promotional with lower average selling prices in 2024 compared to 2023 to address consumer affordability concerns. Our accessories and material sales will see pressure in 2024 due to lower engagement and machine sales following a weaker than expected 2023 and Q1 2024. We expect to see incremental improvement in accessories and materials margins in 2024. Typically, revenue seasonality is 40% in the first half and 60% in the second half of the year.
It could result in a seasonal pattern of paid subscriber growth in Q1, and Q4, but flat to declining in Q2 and Q3 are connected machine revenues will see pressure as we are more promotional with lower average selling prices in 2024 compared to 2023 to address consumer affordability concerns.
<unk>.
Our accessories immaterial cells will see pressure in 2024 due to lower engagement and machine sales following a weaker than expected 2023, and Q1 2024.
We expect to see incremental improvement in accessories and materials margins for 2024.
Typical revenue seasonality as 40% in the first half and 60% in the second half of the year.
Kimball Shill: However, we anticipate 2024 seasonality will look a lot like 2023, where revenues were distributed 47% in the first half and 53% in the second half. In terms of new user growth, we expect to add fewer new users in 2024 than we did last, given 2023 holiday performance and a slower than expected start to Q1. In 2024, our operating expenses will increase modestly as we increase our marketing spend to reinvigorate excitement in the category. We expect total operating margins to be about flat year over year.
However, we anticipate 2020 for seasonality will look a lot like 2023, where revenues were distributed 47% in the first half and 53% in the second half.
In terms of the user growth, we expect to add fewer new users in 2020 for it than we did last year, given 2023 holiday performance and a slower than expected start to Q1 2024.
In 2024, our operating expenses will increase modestly as we increase our marketing spend to reinvigorate excitement in the category.
We expect total operating margins to be about flat year over year.
Kimball Shill: We expect to be profitable each quarter and generate significant positive cash flow during 2024. Our long-term financial model remains unchanged, with operating margin targets of 15-90%. Our proven model has demonstrated that when we operate at scale, which we define as revenue above a billion dollars, and drive top-line growth, these margins are achievable. Cricut has been a public company for almost three years.
We expect to be profitable each quarter and generate significant positive cash flow during 2024.
Our long term financial model remains unchanged with operating margin targets of 15% to 19%. Our proven model has demonstrated that when we operated scale, which we define as revenue above a $1 billion and drive top line growth. These margins are achievable.
Cricket has been a public company for almost three years.
Kimball Shill: During 2020, in preparing to go public, we developed a package of quarterly information to provide meaningful transparency for investors, including our reporting segments and KPIs. After three years of business evolution, we are planning to redesign aspects of our quarterly information package for 2024. We increasingly view Cricut as a platform business with physical products. Going forward, we are changing the way we report our segments to be platform and product. We will also update our public KPIs to focus on the most meaningful indicators for our current and future operations. With that, I'll turn the call over to the operator for questions. Certainly, one moment for our first question, and the first question comes from the line of Adrienne Yih from Barkley. What is your question, please? Hi, this is Angus Kelleher on behalf of Adrienne Yih.
During 2020 and preparing to go public we developed a package of quarterly information to provide meaningful transparency for investors, including our reporting segments and kpis.
After three years of business evolution, we are planning to redesign aspects of our quarterly information package for 2024, we increasingly view cricket as a platform business with physical products going forward. We are changing the way we report our segments to be platform and products.
We will also update our public kpis to focus on the most meaningful indicators for our current and future operations.
With that I'll turn the call over to the operator for questions.
Certainly one moment for our first question.
And our first question.
Comes from the line of Adrian <unk> from Barclays. Your question. Please.
Hi, This is Angus kelleher on for <unk>. Thanks for taking my question could.
Angus Kelleher: Thanks for taking my question. Could you provide some color on the hard goods segment regarding the quantity of the impact, if any, that you have factored into your outlook due to the going concern status of one of your specialized craft retail partners? And then I have a follow-up. Angus, thanks for the question.
Could you provide some color on the hard goods segment regarding the quantity of the impact if any that you have factored into your outlook due to the going concern status of one of your specialized crafts retail partners.
And then I have a follow up.
I guess, thanks for the question.
Kimball Shill: So, I will just say that the retail you're talking about is a very important part of us, has been, and continues to be. There's a dynamic situation that we're following closely, and we have adequate reserves so that, in any eventuality, we don't expect a material impact on our future. Actually, do you want to also talk a little bit about, Angus or Ashish, what our diversification looks like, and, you know, all retailers at less than 10%? Yeah, no, good point.
So.
I would just say that retailers youre talking about is a very important part Suez has been and continues to be.
There is a debt now there is a dynamic situation that we're following closely and we have adequate reserves that eventuality, we don't expect a material impact to our financials.
Okay.
John also talked a little bit about Amazon's Ashish. Thank you know about our diversification looks like.
All retailers at less than 10%.
Kimball Shill: And just call it, Angus, that we don't have any retailers that represent more than 10% of our business in terms of revenue. Okay, thank you. And for my follow-up question, how do you balance your plans to invest in marketing against the fact that it appears to be one of the line items with the farthest to go against your long-term goals? What are the leverage opportunities like there for fiscal 24 and beyond? And how might forward-focused marketing affect that? Well, so I mean, when we look back, with 20-20 hindsight, I think marketing is an area where we have pulled back a little bit too much. And by that, I mean discretionary marketing.
And just call. It I guess, we don't have any retailers that represent more than 10% of our business in terms of revenue.
Okay. Thank you.
And for my follow up how do you balance your plans to invest behind marketing against the fact that it appears to be one of the line items with the furthest to go against your long term goals.
What are the leverage opportunities look like there for fiscal 'twenty, four and beyond and how might be influencer forward forward marketing affect that.
Well, so I mean.
When we look.
But 2020 hindsight I think marketing is an area, where we have pulled back a little bit too much and by that I mean discretionary marketing. So if you look at our total sales and marketing.
Kimball Shill: So if you look at our total sales and marketing, Bucket and the P&L, there's lots of stuff in there, including bank charges for all our subscriptions, those kind of things. But discretionary marketing is an area where we think we've pulled back too much. We think we have an opportunity as a category leader to generate enthusiasm in the category and reinvigorate consumers and, in turn, our retailers. And so it's an area where we expect to lean in to do precisely that. So, let me add to that.
Bucket in the P&L, there's lots of stuff in there including bank charges.
For all of our subscriptions those kind of things, but discretionary marketing is discretionary marketing is an area, where we think we pulled back too much.
We think we have an opportunity as the category leader to generate enthusiasm at the category and.
Invigorate consumers.
And in turn our retailers and so it's an area, where we expect to lean in to do precisely that.
Let me add to that so you know.
Ashish Arora: So, you know, our conviction and our research continues to show that the opportunity is very large for us globally. So, basically, we think there's a big market. We've talked about the funnel being healthy.
Conviction and our research continues to show that the opportunity is very large for us globally.
So basically we think there is a large market we've talked about the funnel being healthy now obviously in Q4, what we learned from that is that.
Ashish Arora: Now, obviously, in Q4, what we learned from that is, you know, as we were kind of ramping up marketing towards the end of the year, plus our Q4 promotions, we had an uplift but didn't deliver the uplift that we needed. Now, in Q1, as we continue to ramp up marketing, as well as combine that with, you know, a major sales event and promotions, especially during Valentine's week, we saw a pretty significant uplift, and we're very pleased with that data. So, as we go into Easter, Mother's Day, and throughout the rest of the year, including back to school and some other moments, I think marketing is the area that we want to leverage. So our strategy, as we kind of shared in our prepared remarks, which is to continue to ramp up marketing. And we have a lot of them; we're basically deploying different types of vehicles.
As you are kind of ramping up marketing towards the end of the year plus our Q4 promotions. They had an uplift but didn't deliver the uplift that we need and now in Q1, as we continued to ramp up marketing as well as combined.
A major sales about it like that.
Promotions, especially during valentines week.
We saw a pretty significant uplift MBIA. Please.
With that with that data so as we go into Easter mother's day and throughout the rest of the year, including back to school and some other moments I think marketing is there.
One of the lever.
So our strategy is we've kind of shared in our prepared remarks, which has continued to ramp up marketing and we have a lot of basically deploying different types of vehicles. I think we are doing more marketing than we've ever done in our history. I think is the right investment because we see the final being fall do you want to pull people through the funnel that coupled with a more.
Ashish Arora: I think we are doing more marketing than we've ever done in our history. I think it's the right investment because we see the funnel being full. We want to pull people through the funnel.
Ashish Arora: That, coupled with a more frequent and deeper promotional strategy, we think is going to help drive growth, you know, in the next six to nine months. And we're really excited about marketing. We have, you know, doubled, actually tripled, basically added significantly to the team.
More frequent and deeper promotional strategy.
We think is going to help drive growth.
In.
In the next six to nine months, but we're really excited about marketing we have yes.
Double actually tripled basically add significantly to the team.
Ashish Arora: Our goal is to continue to ramp that up and, you know, just do different kinds of marketing. And we've kind of included some of those details in color in our prepared remarks. We're very excited about it. Well, I just want to clarify. Ashish isn't calling an inflection point of six to nine months, right?
One is to continue to ramp that up and just two different kinds of marketing and we've kind of included some of those details and color in our prepared remarks, well I'm very excited about it and that's why I clarify Ashish, calling an inflection for six to nine months right.
Kimball Shill: I mean, it may be a few quarters, but we are focused on investing for the long term and how do we drive that excitement that Ashish talked about. Gotcha. Thank you. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone.
Maybe a few quarters, but but we are focused on investing for long term and how do we drive that excitement as you've talked about.
Gotcha. Thank you.
Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.
Operator: One moment for our next question. And our next question comes from the line of Erik Woodring from Morgan Stanley. Your question, please? Hi, thank you. This is Maya. I'm for Erik.
One moment for our next question.
And our next question comes from the line of Erik Woodring from Morgan Stanley. Your question. Please.
Hi, Thank you.
Maya Neuman: So the percentage of engaged users dropped to a December quarter low of 44% and remains near all-time lows. Where do you think engagement bottoms out? And can you help us understand when your engagement efforts will start to move higher? Thank you for the question. So, you know, as we've kind of pointed out before, engagement is one of the top priorities of the company. We have, you know, leadership that has a lot of credibility, and we're going to continue to focus those efforts. In Q1, I'm sorry, in Q4, our engagement numbers, and this is the actual number of users, declined by 3%. So let me kind of give you some color on what some of the headwinds and tailwinds were.
Eric.
The percentage of engaged Cantor has dropped to a December quarter low of 45% and remains near all time lows, where do you think engagement bottoms out and can you help us understand why here engagement effort for factory in Ohio.
Thank you for the question. So you know as you've kind of pointed out before engagement is one of the top priorities of the company.
Leadership that has a lot of credibility and we're going to continue to wrap those efforts.
In Q1, I'm sorry in Q4.
Our engagement numbers and this is the actual number of users declined by 3%. So let me kind of give you some color on what some of the head headwinds tailwind as well.
Ashish Arora: Now, in 2020 and 21, we acquired a massive cohort of people. And as those people are going through a typical graduation curve, and you know, that curve stabilizes over time, we see that as those people graduate, as the engagement levels come down to more normal levels, we see that as a headwind. Now, on the flip side, as we continue to onboard people, as we acquire people, that creates a tailwind. So those users are much, much more engaged, but we're not acquiring enough users to offset the people that are graduating. Now the question is, how can we improve engagement overall, which is where our efforts have been more focused? And so the good news there is that when we ask people, you know, people who have not come onto the platform for the last three to six months, over 80% of them basically tell us that they really want to use the Cricut platform. And the reasons they cite are, you know, hey, I just ran out of time; I couldn't find the right reason or the right inspiration.
Now in 2020, and 21, we acquired a massive cohort of people and as those people are going through a typical graduation curve that curve stabilizes over time, we see those as those people graduate.
As the engagement.
<unk> levels come down to more normal levels, we see that as a headwind.
Now on the flip side as you as we continue to onboard people as we acquired people that creates a tailwind. So those users are much much more engaged but not in we're not it quieting enough users to offset the people that are graduating now.
Then the question is how can we how can we improve engagement overall, which is where our efforts have been more focused.
And so the good news there is that when we ask people.
Who have not come onto the platform for the last three to six months over 80% of them basically to tell us that they really want to use the cricket platform and the reason they cite.
Hey, I just ran out of time I Couldnt find the right reason or the right inspiration and those we think are controllable factors right. So our goal is to make the product easier to use make it more reliable give people a lot of inspiration that we can actually send proactively to them. So in our prepared remarks, we talked about.
Ashish Arora: And those, we think, are controllable factors. So our goal is to make the product easier to use, make it more reliable, and give people a lot of inspiration that we can actually send proactively to them. So in our prepared remarks, we talked about expanding the inspirational content, making it easy for people to search for that content, and actually making it much, much more personalized. So again, even though we will continue to see headwinds because of the 2020-21 cohort, I have strong confidence in the team that this will at some point reverse over time. So we just have to stay focused and keep driving. Does that answer your question? Yes, great. Thank you. Thank you.
Expanding the inspirational content, making it easy for people to search said content and actually making it much much more personalized so again.
Even though we will continue to see headwinds because of the 2020 'twenty one cohort.
I have strong confidence in the team that this will.
At some point it was overtime. So we just got to stay focused.
Keep driving it.
Does that answer your questions.
Yes, great. Thank you.
Operator: One moment for our next question, and the next question comes from the line of Asiya Merchant from Citigroup. Your question, please. Great, thank you for taking my question. The margins have been masked by significant write-downs and impairments, etc. So if you wouldn't mind, like, walking us through 24 expectations, are we, is this an end to, you know, all these kinds of write-offs and margins? And then I have a follow-up. Thank you.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of <unk> merchant from Citigroup. Your question. Please.
Great. Thank you for taking my question.
The marsh had been masked by.
Significant write downs and impairments et cetera, So if you wouldn't mind like.
Walking us through 'twenty four expectations or is this an end to all these kind of write offs and margin.
Then I have a follow up.
Asiya Merchant: Asiya, thanks for the question. I mean, write-downs were an important part of our story in 2023, and we ended up having total write-downs of $45.9 million. But for that, and for those write-downs, we would have an operating income of $116 million. So, a very profitable business, and we're proud of that. The write-downs really kind of break down into two buckets, the asset impairments that both Ashish and I referenced in my prepared comments, and that represents about 40% of that overall bucket for the year.
Thanks.
Thanks for the question I mean write downs were an important part of our story in 2023, and we ended up having total write downs of $45 9 million.
And but for that.
But for those write downs, we would have operating income of $116 million, so very profitable business and we're proud of that.
But right now, it's really kind of break down into two buckets the asset impairments that both ashish referenced and I did in my prepared comments that represents about 40% of that overall bucket for the year and that's really as we've become more focused on R. R.
Kimball Shill: And that's really because we've become more focused on our Hardware Platform and the most impactful opportunities around cutting machines. We've had to make some hard decisions and cut some projects, and that resulted in impairment. But ultimately, I think that's gonna be the right thing for our business as we're gonna be more focused on what can be most impactful. The second piece of that really is around excess inventory on finished goods inventory across most of the accessories and materials segments of the business. And, you know, if you look back in 2021 and early 22, when we were ordering most of these materials, we had a much higher run rate business; we had higher expectations. And, you know, GAP requires that we do the periodic look back to say what our current velocity is versus how much we have on hand.
<unk>.
Hardware platform the.
The most impactful opportunities around cutting machines.
Had made some hard decisions and to cut some projects and that resulted in impairment, but ultimately I think that's the right thing for our business is we're going to be more focused on what can be most impactful. The second piece of that really is around.
Excess inventory on.
Finished goods inventory.
Across most of the accessories and materials segments of the business and <unk>.
If you look back in 2021 in early 'twenty, two and reordering most of these materials, we had a much higher run rate business, we had higher expectations and GAAP requires that we do the fair enough look back to say what is our current velocity versus how much we have on hand, and so that required us to take some adjustments this year.
Kimball Shill: And so that required us to make some adjustments as we adjusted inventory on the balance sheet. But also, we're going through the process of rationalizing our consumables portfolio, where we've historically had as many as 2,500 active SKUs. We're gonna be focused on fewer high-volume SKUs than we have in the past with a much smaller tail, which will reduce our risk. So as we launch new products, there's always going to be some bets we get right, and some of them we get wrong. So there'll always be some, but you can expect them to be less impactful as we go forward than they have been this year. Great, thank you.
As we as we adjusted inventory on the balance sheet, but also that we're going through the process of.
By rationalizing, our our consumables portfolio, where we've had historically as many as 2500 active skus, we're going to be focused on on fewer high volume skus than we have in the past with a much smaller.
Much smaller tail, which will reduce our risk so as we launch new products. There is always going to be some best we get right and some of them get wrong. So there'll always be some but you can expect it to be less impactful as we go forward than it has been this year.
Great. Thank you and then if I may one for Ashish you guys are reiterating your long term model in your prepared remarks on your presentation as well.
Ashish Arora: And then, if I may ask one for Ashish, you guys are reiterating your long-term model in your prepared remarks for your presentation as well. I know things are a little bit tough in fiscal 24, because you guys are guiding for some revenue pressures and margin impact. But can you walk us through kind of the line of sight as you see, you know, maybe the exit rates that you're expecting for fiscal 24, that sort of gives you the confidence that, let's say, on a medium-term model, which my models show for three years, that you can walk towards your margin guidance that you guys reiterate, or with disruptions of medium to long term. Thank you. Asiya, let me start and then, you know, I'd love for Kimball to jump in, right?
I know things are a little bit tough in fiscal 'twenty four it because you guys are guiding for in revenue pressures in margin in.
In fact, but can you walk us through kind of a line of sight as you see maybe the exit rate that youre expecting for fiscal 'twenty four it sort of.
Gives you the confidence that let's say over a medium term model, which my models over three years. If you can walk to work our margin guidance.
As we iterate.
So medium to long term thank you.
Yeah, Let me start and then.
For Kimberly jumped right. So I think again I want to reiterate that we've continued to do a lot of diligence around the market size. We continue to see and believe in that there is a huge market for our product in a category and we've done more segmentation research and we believe that.
Ashish Arora: So I think, again, I want to reiterate that, you know, we've continued to do a lot of diligence around the market size. We continue to see and believe that there is a huge market for our product and our category. And we've done more segmentation research and believe that the opportunity is global for us, so we're very excited about the business. Now there's a couple of things that internally when I talk about what it takes for us to go after that mass market, so, you know, we talked a little bit about focusing on the 25 to 44-year-old segment. Having said that, the product appeal is pretty universal, right, across many age demographics, et cetera. So the areas of focus, and then Kimball will talk about the long-term model, are we want to drive for affordability, right? We want to make sure not only is it affordable to buy the initial machine to get started, but also the ongoing usage of the machine is affordable, right?
The opportunity is global for us. So we're very excited about the business now there is a couple of things that internally when I talk about what does it take for us to go after that mass market. So we talked a little bit about.
Focusing on the 25% to 44 year old segment, having said that the product appeal is pretty universal right across many age demographics et cetera.
The areas of focus and then I'll Kimble to talk about the long term model.
We want to drive for affordability, Brian do you want to make sure.
Not only is it affordable to buy the initial machine to get started but also the ongoing.
Usage of the machine is affordable right. So our materials content in all of those things the second which I think is really the thing that we have to drive most aggressively is the ease of use of the platform. We have to make it incredibly easy to use we've made significant progress, but I think there is a lot more to be done so that's where the.
Ashish Arora: So our materials, our content, and all of those things. The second thing, which I think is really the thing that we have to drive, you know, most aggressively, is the ease of use of the platform. We have to make it incredibly easy to use.
Ashish Arora: We've made significant progress, but I think there's a lot more to be done. So that's what the team is focused on, and that's what leads us to believe that while the path to get there is a bit longer than we had expected, we think that that long-term model is valid. I'll let Kimball talk about the financial piece. Yeah, and so 15 to 19 percent is our goal, but I'll call out, you know, prepared remarks. We mentioned that we think operating income is going to be about flat for the year as a percent of revenue.
Team is focused on and that's what leads us to believe that while the path to get there is a bit longer than we had expected.
We think that there's a that long term model.
As valid I'll, let Gabe will talk from the national piece, and so 15% to 19% is our goal but.
I'll call out in our prepared remarks, we mentioned that we think operating NIM is going to be about flat for the year as a percent of revenue we expect to be below that this year and really that's that's our target. When we are operating at scale, but that means we need to be.
Kimball Shill: We expect to be below that this year, and really that's our target when we are operating at scale. But that means we need to be, you know, a billion plus in revenue, which we weren't last year, and given where we are on Q1 sales being softer, you know, we're not calling for that this year. Again, we just want to call out that's where we think we can get to as we get our business back to growth and scale, but we need to be growing and operating above a billion dollars to hit those kind of operating margins. And I'll just make one last comment, right?
$1 billion plus in revenue.
Which we werent last year, and given where we are on Q1 sales being softer.
We're not calling for that this year again, we just want to call out that's where we think we get to as we get our business back to growth in scale, but we need to be growing and and operating above $1 billion to hit those kind of.
Operating margins.
Just one last comment right I think in 2023.
Ashish Arora: I think in 2023, we had a strong focus on operating income, and, you know, we basically, you know, as we looked at the state of mind of the consumer, as we looked at where trends were, and, you know, hindsight's 20-20, but we were focusing on maximizing and making sure that we ran a very profitable model. I think we are definitely leaning into more promotions and more marketing this year, but to Kimball's point, you know, as the business gets back to growth and as we drive it in full scale, that's when we start to see some of those margins; we approach closer to those margins that we talked about along tomorrow. Okay, great.
Our strong focus on operating income and we basically as.
As we looked at the state of mind of the consumer as we looked at where trends were.
Hindsight is 2020, but we were focusing on maximizing and making sure that we run a very profitable model.
I think we are definitely leaning into more promotions and more marketing this year, but to kimberly's point.
As the business gets back to growth and as we drive in full scale. That's when we start to see some of those margins.
We approach closer to those margins that we talked about our long term model.
Okay, great and if I can squeeze in one more just with your capital allocation I think you mentioned that you've now completed.
Kimball Shill: And if I can squeeze in one more, it's just with your capital allocation. I think you mentioned that you've now completed what was authorized. So how should one think about further shareholder shares impact and buyback to offset any dilution? So ultimately, those are board decisions, and obviously, management plays an important role in how we think about that. But let me talk about our framework and how we do think about it. First, we want to make sure we have sufficient inventory to operate the business.
Authorized how should one think about further sheryl shares impact.
And buybacks to offset any.
Any dilution thank you.
So ultimately those are those are board decisions that obviously management plays an important role in how we think about that.
So, but let me talk about kind of our framework on how we do think about it.
First we want to make sure we have sufficient inventory to operate the business.
Kimball Shill: After that, we're making sure that we're making the right investments for the medium and long-term so that we have growth opportunities, and that includes both our hardware product roadmap as well as our platform, which we're in the very early days of continuing to invest in that platform. We also would consider acquisition opportunities as a means of growth, especially as it would accelerate strategic initiatives. But beyond that, we do look for efficient ways to return capital to shareholders.
After that we are making sure that we're making the right investments for the medium and long term. So that we have growth opportunities and that includes both our hardware product roadmap as well as our.
Platform, which we're in.
The early days of <unk>.
Continuing to invest in that platform.
We also would consider acquisition opportunities as a as a means of growth, especially as it would accelerate strategic initiatives, but beyond that we do look for efficient ways to return capital to shareholders and as you've seen in the last.
Kimball Shill: And as you've seen in the last year, we've used both special dividends and share repurchase programs. And so all those tools are in our portfolio. But again, the timing and deployment are up to the board. Okay, thank you.
Here, we have excess we've used both.
Special dividends as well as as.
Share repurchase programs and so all of those tools are in our portfolio, but again.
The timing of deployment is up to the board.
Okay. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Erik Sheridan from Goldman Sachs. Your question, please. Thank you so much for taking the questions. Maybe two if I could.
Thank you one moment for our next question.
And our next question comes from the line of Eric Sheridan from Goldman Sachs. Your question. Please.
Thank you so.
So much for taking the questions maybe two if I could one more short term you've called out marketing had an improved output yield in Q1 relative to what you saw in Q4, I know youre not guiding to Q1, but is there either a quantification of that or a little more qualitative color you can give on what that step up might be.
Erik William Richard Woodring: One more short term one, you called out marketing had an improved output or yield in Q1 relative to what you saw in Q4. I know you're not guiding to Q1, but is there either a quantification of that or a little more qualitative color you can give on what that step up might be in terms of return on marketing spend in Q1 versus Q4? That's the shorter term one.
In terms of return on our marketing spend in Q1 versus Q4, that's the shorter term one and longer term coming back to some of the topics we've talked about already but if you think about influencer marketing more broadly how should we think about efforts.
Kimball Shill: And longer term, coming back to some of the topics we've talked about already, but if you think about influencer marketing more broadly, how should we think about efforts spent on influencer marketing today that might yield a higher ROI longer term as maybe you're able to build more LTV on the back of influencer marketing efforts that have some duration around them rather than quarter to quarter annualized performance marketing spend? Thanks.
<unk> marketing today that might yield a higher ROI longer term as maybe youre able to build more LTV on the back of Influencer marketing efforts that have some duration around them rather than core.
The quarter annualized performance marketing spend thanks, so much.
Ashish Arora: Yeah, so thanks for the question. We had the single promotional event that we talked about around Valentine's Day, where we actually saw a year-over-year comp of machine units and sales. Now that was, and we got the uplift that we were expecting from that, and we found that encouraging. But it's kind of one data point against kind of a lower baseline of demand as we entered the year. So if I can just kind of point back to some of our Q3 comments and then how we saw consumers behaving in Q4. Demand was a little bit softer than we expected.
Yes, so thanks for the question.
Okay.
Yes.
We had the single commercial value, we talked about around Valentine's.
Valentine's day, where we actually saw a year over year.
<unk> of machine unit sales now that was and we got the uplift that we're expecting in that as well.
Found that encouraging but as kind of one data point.
That's kind of a lower baseline of demand as we entered the year. So.
If I can just kind of point back to some of our Q3 comments and then how we saw consumers behaving in Q4 demand was a little bit softer than we expected we haven't seen that.
Kimball Shill: We haven't seen a real change in our consumers thus far in the quarter outside of promotional events. And so we do have a number of those that we planned throughout the year, but we are encouraged by kind of that single data point that we have at this point. And let me talk to the second part of your question, which is around marketing. And we think it's a very astute idea. Let me just take a couple of minutes on it. So we actually agree with you that there's a lot of leverage that we have, especially in deploying marketing, such as influencer marketing, some of the stuff that we talked about in our partnership with Pinterest, PR, and social media. Our category itself and our product lends itself very well to word of mouth and network effects. And to think about it, as people make a project, which is why I think engagement plays such a critical role, even in acquisition, that as those three plus million people or close to four million people engage with our platform, they make projects, and they tend to share that on social media. They tend to feel really good about it, right?
A real change in our consumers, thus far in the quarter outside of promotional events and so we do have a number of those that we've planned throughout the year.
But we are encouraged by that single data point that we have at this point.
Yes.
Let me talk to the second part of your question, which is around marketing, we think it's a very astute.
Observation and a question. So let me take a couple of Adobe to stay a couple of minutes on it. So we actually agree with you that there is a lot of leverage.
We have especially in deploying marketing such as Influencer marketing.
Some of the stuff that we've talked about.
Our partnership with Pinterest.
Our social media, our category itself and our product lends itself very well to word of mouth of network effects right and if you think about it as people make a project, which is why I think engagement plays such a critical role even an acquisition that as those.
Three plus million people have close to 4 million people engage with our platform they make projects and they tend to share that on social media. They tend to feel really good about it right and we've made a lot of we're building a lot of capabilities in our platform itself to drive and to share some of that inspiration et cetera.
Ashish Arora: And we've made a lot of, we're building a lot of capabilities in our platform itself to drive and share some of that inspiration, et cetera. You know, last year, I would say we heavily leaned in on performance advertising, and to some degree, you know, there's not too much scale in that. And where we actually cut down, which we have now revamped in a very significant way, are things like influencer marketing, right? So as we partner with influencers, we are focusing on, you know, this demographic. If you think about the 25 to 44-year-old target segment that we have, that particular demographic specifically looks at all the social platforms, right? The way they shop, the way they share messages, the way they communicate with brands; we think influencer marketing plays a really good role.
Last year I would say, we heavily leaning in on performance advertising and to some degree there's not too much scale in that and where we actually cut down which we are now revamped in a very significant way are things like influencer marketing right. So as the partner within trend says we are focusing on.
There's demographic if you think about the 25% to 44 year old target segment that we have that particular demographic specifically it looks at all the social platforms right the way they shop the way they share messages the way they communicate with brands, we think Influencer marketing plays a really good roll.
Ashish Arora: The second aspect, which we kind of briefly alluded to, which is that our research tells us that as you think about life stages, like things like getting married, having a baby, buying your first home, you know, all of those things play a huge role and are kind of a point in time where people make the decision around personalization, right? If you think about, you know, the amount of money that is spent on a wedding or getting married, it's not just about the wedding; it's all life, it's all the things that lead up to the wedding, right? There are over four to six, seven events. And it's not just the bride; it's, you know, several people involved, from bridesmaids to bachelorette parties to mother-in-laws, you know, or moms.
The second aspect, which you kind of briefly alluded to right, which is that our research tells us that as you think about life stages like things. They are getting married having a baby buying their first home.
All of those things clear huge role and kind of a point in time.
People make the decision around personalization right. If you think about it.
The amount of money that is spent on on a wedding or getting married is not just about the wedding. It's all the lives. It's all the things that lead up to the wording, but theres a 4% to six seven events and is not just the bright its.
Several people involved from bridesmaids do bachelorette parties to mother in law.
Moms, so I think us leaning in heavily on the 25% to 44.
Ashish Arora: So I think us leaning in heavily on the 25 to 44, you know, coming up with the right brand messaging and basically helping drive network effects, those are the things that we'll see. I'm actually, again, I'll reinforce, really excited about the creativity in our marketing team, some of the things that we are looking at in PR and social media, and I think I'm again, very optimistic about what role marketing will play in acquisition going forward. Great I really appreciate the color.
Coming up with the right brand messaging and basically helping drive network effects I think those are the things that you'll see.
Again, I'll reinforce really excited about the creativity and our marketing team some of the things that we're looking at in PR, social media and I. Thank you again.
Optimistic about what role marketing will play an acquisition going forward.
Great really appreciate the color. Thanks.
Erik William Richard Woodring: Thank you, Thank you. One moment for our next question. Our next question is a follow-up from the line of Erik Woodring from Morgan Stanley. Your question, please. Erik, you might have your phone on mute.
Thank you one moment for our next question.
And our next question.
As a follow up from the line of Erik Woodring from Morgan Stanley. Your question. Please.
Okay.
Eric you might have your phone on mute.
Sorry about that.
Operator: International was down around 5% year over year. Can you help us understand kind of how international has been trending in Q1 so far? I know you called out a little bit of a weaker UK.
International is down around 5% year over year can you help us understand.
Kind of how.
International has been trending in Q1 to date I know you called out a little bit of weaker UK.
Maya Neuman: And I know that it's been a big driver of growth for you guys over the past few years. So how are you thinking about the international segment as we look into 2024? Thanks for the follow up. And, as you correctly pointed out, Q4 was down 5% year over year. But we were up 9% for the full year.
And I know that Thats been a big driver of growth for you guys over the past few years, how are you thinking about the international segment.
We look into 2024.
Well, thanks, Thanks, and thanks for the follow up and then as you correctly pointed out Q4 was down 5% year over year.
We were up 9% for the full year.
Kimball Shill: And let me kind of break that down a little bit. So in some of the larger markets, like the UK, we've seen the same consumer pressure and concern around affordability as we've been experiencing in the US. And so that was clearly a factor.
And let me kind of break that down a little bit so.
Some of our larger markets like UK, we've seen the same consumer pressure.
And concern around affordability as we've been experiencing in the U S and so that was clearly a factor in Australia, and our meta region, which again is middle East, Turkey and Africa for US there was kind of a situation where it's more difficult comps were in Q2, sorry Q4 of 'twenty two.
Kimball Shill: In Australia, and our meta region, which again is Middle East, Turkey, and Africa, for us, there was kind of a situation where it was more difficult comps, where in Q2 of, sorry, Q4 of 22, there were some large channel fill orders related to doing new distribution in those markets that didn't have many comps. And so that kind of puts pressure on Q4 this year. That said, you know, we think we have a huge opportunity for us in our international growth vector over time. And we're really excited about it. We've seen, again, some softness in the larger markets in Q4, similar to what we've already talked about in our US market. So that piece of it hasn't turned up yet.
There was there were some large channel fill orders related to two new distribution in those markets.
That didn't have favorable comps is that kind of put pressure on.
On Q4 this year.
That said.
We think we have a huge opportunity for us and our international growth vector over time, and we're really excited about it.
We've seen again, some softness in our larger markets in Q4 similar to what we've already talked about.
In our U S market.
That piece of it hasnt turned around but.
Kimball Shill: But we are excited about the medium and long-term prospects of international growth. I'll just add to that. I'm actually just about a week, week and a half away from heading to Europe.
We are excited about the medium and long term prospects of international for growth.
Yes.
I'll just add to that I'm actually just about.
Week week, and a half away from heading to Europe, we have a large event going on in Germany, and then we have a separate meetings lined up in rest of Europe, including Netherlands. We think the opportunity is Kimball said is is global the two factors that again I'll reinforce affordability was a factor that affected most of our markets. We are obviously earlier on in the cycle.
Ashish Arora: We have a large event going on in Germany and then we have several meetings lined up in the rest of Europe, including the Netherlands. We think the opportunity, as Kimball said, is global. The two factors that, again, I'll reinforce, right; affordability was a factor.
Ashish Arora: It affected most of our markets. We are obviously earlier on in the cycle, but affordability was a challenge for that consumer. It's actually, to some degree, more pronounced in some parts of the world, especially in Europe.
But affordability was a challenge for that consumer that's not even to some degree and more pronounced in some parts of the world, especially in Europe.
Ashish Arora: So I think we've got some work to do to resolve that. The second is awareness and acquisition, right? So the same thing that we talked about, that we are driving in North America, we're going to ramp it up. In fact, we are ramping up our efforts in marketing. And again, this event that I'm going to in Germany has tons and tons of Cricut users or other people who want to buy a Cricut, and I'll be on stage, I'll be talking to them. And again, I think we will see some of the benefits of the investment that we're making. So again, I think we're in the very early stages of that global platform. Great, thank you.
So I think we have.
Got it we've got some work to do to resolve that the second is awareness and acquisition right. So at the same things that we've talked about.
We are driving in North America, we're going to wrap up we had in fact, we are ramping up our efforts in marketing and.
Again this event that I am going to in Germany has just tons and tons of cricket users or other people, who want to buy a cricket.
Beyond stage I'll be talking to them and again I think we will see some of the benefits of.
The investment that we're making so again I think we are in the bay early stages of our global platform.
Alright, thank you.
Jim Suva: Thank you. This does conclude the question and answer session for today's program. I'd like to hand the program back to James Suva for any further remarks.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jim Suva for any further remarks.
Jim Suva: Thank you everyone for joining us this afternoon. We have a great opportunity over the long term to drive new user growth and increased engagement. The Cricut platform continues to not only strengthen but also provide increased value to our users. We will continue to manage the business for sustainable, profitable growth and generate healthy cash flows. I'm excited about the future opportunities ahead of us. We will be at the Morgan Stanley Technology, Media, and Telecom Conference tomorrow, Wednesday, March 6th in San Francisco, California, and the Roth MKM Conference Monday, March 18th in Laguna Niguel, California.
Okay.
Thank you everyone for joining us. This afternoon, we have a large opportunity over the long term to drive new user growth and increased engagement. The cricket platform continues to not only strengthen but also provide increased value to our users. We will continue to manage the business for sustainable profitable growth and generate healthy.
Cash flows I am excited about the future opportunity ahead of US we will be at the Morgan Stanley Technology Media and Telecom Conference Tomorrow Wednesday March six in San Francisco, California, and the Roth MTM Conference Monday March 18th and Laguna Niguel caliber.
If you have additional questions. Please email me at Jay Suva, a cricket Dot Com. This now concludes this earnings call and you may now disconnect. Thank you.
Operator: If you have additional questions, please email me at jsuva at Cricut.com. This now concludes this earnings call, and you may now disconnect. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day, www.cricut.com
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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