Cricut, Inc.
Q2 2021 Earnings Call Transcript

Published: 13 Aug 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Cricut Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will a question-and-answer session. I will now like to hand the call to Stacie Clements, Investor Relations, The Blueshirt Group. Please go ahead.

[Stacie Clements:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's second quarter 2021 earnings call. Please note that today's call is being webcast on the Investor Relations section of the company's website. A replay of the webcast will also be available following today's call. For your reference, prepared remarks and accompanying slides used on today's call will also be posted to the investor relations section of the website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer and Marty Petersen, Chief Financial Officer. Before we begin, I 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 Factors section of Cricut's most-recently filed Form 10-Q. Actual events or results could differ materially. All non-GAAP numbers referenced in today's call are reconciled in the press release or the slide presentation on our investor relations website. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, August 12, 2021. Cricut assumes no obligation to update any forward-looking projection that may be made in today's press release or call. I will now turn the call over to Ashish to begin.

[Ashish Arora:]

Thank you, Stacie, and welcome, everyone. We had a solid second quarter, with revenues increasing across all three categories; connected machines, subscriptions and accessories and materials. Total revenue for the second quarter was $334.5 million, an increase of 42% over an exceptionally strong Q2 last year. Strong revenues, coupled with our profitable business model, led to $68.5 million in EBITDA, a 39% increase over the second quarter last year. We also continued to see growth in our user base and healthy engagement and monetization. We added over 430,000 users in the quarter, bringing our total user count to nearly 5.4 million. We saw continued healthy engagement levels at 59% in the second quarter, down modestly from the stay-at-home engagement levels of the prior four quarters. As a result of healthy user growth and engagement, 3.2 million users were engaged on the platform in Q2. This is 1.1 million more users engaged in Q2 compared to Q2 of the previous year. The large influx of users from 2020 and the first half of 2021 provide a powerful flywheel effect to our business with ongoing monetization opportunities, as well as fuel momentum through word-of-mouth referrals. I continue to be amazed by all the projects and creativity from our users. As expected, we're seeing many projects centered around events such as weddings, parties, family reunions, and vacations just to name a few. As users create, they inspire other users to create. The more they create, the more Cricut benefits from network effects that ultimately drive new user acquisition and inspire additional engagement. One of the many ways we are able to monetize engagement is through our subscription service, Cricut Access. We ended the quarter with nearly 1.8 million subscribers to Cricut Access, up from 1.6 million at the end of Q1. We continue to focus heavily on increasing the value proposition of our subscription. We now have over 175,000 images in Cricut Access, an increase of over 40% from Q2 2020. In the coming quarters, we'll continue to aggressively add content, as well as additional software features that will be available exclusively to Cricut Access members. Another important pillar of our growth strategy is international expansion. Revenue from international markets grew 179% year-on-year in the second quarter and continues to grow into a greater proportion of total revenue. Our top markets include Australia, France, Germany and the UK. The international markets are especially promising, given our observations that the motivations and behaviors that are driving growth internationally are very similar to those that have driven growth domestically since 2014. We recently introduced our new direct-to-consumer ecommerce site in the UK, giving our users a complete Cricut-branded shopping experience. We anticipate that more direct-to-consumer sites will be launched in additional geographies in coming quarters, as we see significant synergies with our omni-channel strategy. We also welcomed our first sales team members in Italy and Mexico in Q2 and continued to expand our retailer footprint in markets such as Germany, France, Spain, South Africa, and Southeast Asia. As we think about future investments in international markets, you will see us continue to increase our sales and marketing efforts including adding key influencer relationships across the globe to help raise awareness and drive conversion. We'll also continue to diversify our content offerings, invest heavily in language and currency localization, as well as foster and support international markets with Cricut team members in those geographies. We plan to grow international markets using the proven Cricut playbook

[Marty Petersen:]

Thank you, Ashish and good afternoon. Our second quarter's performance was fueled by strong fundamentals in the business and our powerful community of engaged users. Additionally, Q2 benefited from the new product launches that Ashish mentioned earlier. For those of you who are newer to our story, let me quickly touch on the financial drivers of our model. Dating back to 2014, Cricut has a proven track record of strong revenue growth and profitability. Our sales are diversified across categories and give us revenue streams that are largely predictable. The user journey generally starts with the purchase of a connected machine. The gross profit from that purchase mostly covers our customer acquisition cost. The purchase then triggers a flywheel of engagement which in turn drives ongoing revenue from subscriptions and accessories and materials. With that as a backdrop, I'll now walk through the financial highlights. We continued to see organic adoption. Word-of-mouth marketing drove strong connected machine sales and increased user acquisition. Our new and existing users continued to be highly engaged which drove ongoing monetization through subscriptions and accessories and materials. Revenue in the quarter was $334.5 million, an increase of 42% over Q2 last year, representing strong growth relative to the tough comp of 149% year-over-year growth in Q2 of 2020 at the onset of the pandemic. Strength in the quarter came from across our business, including our ability to replenish lower-than-normal retail inventory levels and the success from our new product launches. Breaking down revenue in the quarter even further

[Operator:]

Thank you, presenters. We have our first question from Rod Hall from Goldman Sachs. Your line is open.

[Rod Hall:]

Hi, guys. Thanks for the question. I guess what I wanted to dig into a little bit was the engagement number. And I mean it you juxtapose a little bit lower engagement, maybe than we anticipated, maybe then you did, too, I'm not sure, against really good numbers here. What I'm curious about is whether you think you've learned anything incremental about user behavior that informs you on how this might play out in the second half of the year. I know, some of the commentary sounded pretty cautious there. But I'm just curious what you guys feel like you've learned or have you really learned anything? Are we still kind of waiting to see how consumers behave as we move into the fall? And then I have a follow up.

[Ashish Arora:]

Okay. Rod, let me take that question. This is Ashish. So just to provide context, let me kind of remind people, what - how we calculate engagement. So engagement is calculated by the number of people that cut in the last 90 days divided by the entire user base. So we never churn users out, right. So in Q2, we had, like, as Marty said, 3.2 million users that were engaged in the last 90 days, that is about 1.1 million more users that are engaged this year, than they were last year, right. So the user growth in terms of engagement was pretty significant. However, as you rightly pointed out, the engagement percentage number, 59, was down from Q1. And the reason was, again, the most important learning was that, I mean, clearly, with the extended and amplified seasonality, we saw people taking vacations and getting out of their homes, now that did influence with the types of projects they were making. So we saw people making projects for weddings and parties and getting out for trips, but at the same time, the overall engagement probably because of lesser home improvement and stay at home projects, the net impact of that was declined. So I think the biggest learning was clearly user behavior is changing. We have tried to offset that with a number of - ramping up a lot of our engagement activities by segmenting our users, giving them more inspiration, trying to get them launched education programs. So we will see - while we will see a continued trend in that decline, at least past the summer months, we think we will be able to offset some of that, because of the additional insights and learnings we have. And just to give one more comment, we had a tremendous program lined up for back to school. And just in the last week we can have - we have seen a significant uptick in engagement because of that back to school activities. So I think it's - lots going on in the world out there and we are keeping pretty vigilant in terms of understanding user behaviors, trends and trying to offset some of that as you go into Q3.

[Rod Hall:]

Okay, that's great. Thanks, Ashish. Great color there. And then, Marty, when you talked about margin, some expected margin pressure in the second half due to supplies and freight and so on. Could you maybe do anything there to quantify for us, like, what scale of pressure we're talking about, just so that we can all kind of level set what we should be anticipating for margins in the second part of the year?

[Marty Petersen:]

Yeah, I think that mainly what I was referring to at that time was leaning into more spending on operations investments that we had foregone, or should I say, didn't keep up within the early part of 2020. And, so we came into 2021 working to catch up with those investments. And so, I think that, if you look at the year, as a whole, we continue to expect that our EBITDA margin will remain in our long-term target model range of 17% to 20% but the quarters can obviously fluctuate.

[Rod Hall:]

Okay. And so what we should be thinking is kind of gross margins holding, maybe roughly steady in the second half, but then OpEx - as you say, some of those OpEx investments coming back in and that's the way the model roughly moves in the second half of the year.

[Marty Petersen:]

Yeah, I think that's a fair comment. It will be more in the OpEx side.

[Rod Hall:]

Okay. All right. Thanks a lot. Appreciate it.

[Operator:]

We have our next question from Katy Huberty from Morgan Stanley. Your line is open.

[Katy Huberty:]

Yes, thank you. Good afternoon. Marty, you mentioned the strategic decision to hold more inventory, can you just clarify is not on Cricut's balance sheet or is it also in the channel or a combination of both of those? And then can you help us size the contribution to cue revenue from rebuilding retail channel inventory and selling in the new products, just so that we can understand what was more one-time versus reflecting real sell through?

[Marty Petersen:]

Yeah. So as far as inventory goes, my comment was primarily focused on our balance sheet. We don't really have control over, obviously, our channel inventories. But, as I mentioned earlier, we have had a strategy of keeping little higher balances of our accessories and materials, but we're extending that to machines, especially right now, just because of the supply chain challenges that exist today. That being said, we do feel good about the progress that we made in building channel inventories or refilling, let me say, channel inventories from where they were earlier. You'll recall that over the past year, we've been light on inventory from - in terms of being able to meet demand for the channel and we have caught up on that and we did that in Q2, and so we feel pretty good about our position on inventories today. But we continue to build that and we'll continue to build it into the future. As far as Q2 and the impact of the channel fill from the product launches and the inventory re-plan, it's obviously a little challenging to determine exactly what those numbers are because with the channel inventory fill, you've got phase in and phase outs that are implemented by some of the retailers and it's a little bit challenging to define it exactly. But our estimate is about 8% to 10% attributable to the channel fill for the launch, and about 5% to 8% for inventory re-plan.

[Katy Huberty:]

And are those numbers on total revenue or just for device revenue?

[Marty Petersen:]

On total revenue.

[Katy Huberty:]

Total revenue, okay. And then the refill was both for accessories and materials and devices or mostly just the machine side.

[Marty Petersen:]

Yeah, more on machines. We were in a better inventory position earlier on accessories and materials and so, in Q2, it is really mostly machines.

[Ashish Arora:]

And Katy, I just want to add to Marty's color, which is - and part of the reason it's really hard to estimate is that, especially going into the quarter, we still had retailers that are out of product, so we had to kind of net out the sales lost because we didn't have enough inventory in the channel. So, really, hard to - both from a phase in phase out perspective because there's a slowdown in the existing products, while new people are waiting after the announcement for the new product. So, again, we just have to take that with a grain of salt.

[Katy Huberty:]

Okay. That's really helpful. And then just follow up on the discussion around engagement, you mentioned that quarter-to-date, you're seeing a bit of a downtick, should we expect that that looks similar to the down tech from March to June, which was about three points. And then any view yet on whether you would expect to see the normal sequential uptick in the December quarter, the holiday season?

[Ashish Arora:]

Yeah. So I think there are two the two numbers, right. One is that the - what other companies would define as active user growth, I mean, we talked about the engagement numbers. So the absolute numbers will increase quarter-over-quarter, year-on-year, right, because we have a much larger installed base this year and that's what we saw in Q2. Now in Q3, as summer came, and even as we've grown in the last few weeks and months, we've clearly seen that engagement - some headwinds for engagement, what's interesting is that we haven't seen similar headwinds, at least to-date on subscription, which we can kind of look at those two data points in tandem. One of the comments that I was making specifically about our efforts on back to school is that it's kind of shown that people are there, they're just kind of either coming back from vacation, so we've seen an uptick, I would say, in the last week, on those engagement numbers. I think when you look at overall Q3, yes, there will be some pressure. When you look at the engagement percentage number, the number will increase year-on-year. But as we go into the holidays, with similar to back to school, as we see people getting, say, more at home, getting into the holiday mode, Halloween, and Christmas, and everything else that goes with it, we'll see good uptick in some of those numbers.

[Katy Huberty:]

That's perfect. Thank you, Ashish, and Marty.

[Operator:]

We have our next question from Mark Altschwager from Baird. Your line is open.

[Mark Altschwager:]

Good afternoon. Thanks for taking my question. I guess, first, I wanted to ask about the Maker and Explore 3, just any further learnings you can provide on - from the upgrade there. I guess I'm curious to what extent you're seeing existing Maker and Explore owners upgrade their machines, versus just kind of continuing to add features to attract new users to the ecosystem?

[Ashish Arora:]

Yeah, so Mark, just to recap, and again, probably one of my favorite questions, I am a product guy, so I can talk a lot about products. But, overall, I think those two products have been received very well by the market. We've seen we're not breaking out right now in terms of what - it is too - we just don't want to read too much into the initial cycle because it's - it can be very misleading. But we've seen a healthy mix of people upgrading, but also healthy percentage of new users coming into the market, right. So when our goal of launching these products, in addition to getting more speeds and feeds was to add versatility and new use cases, right, so people can - with long cutting, people can actually do more types of projects, and while the core and home improvement and even using the stencils for painting, and that also has a parallel impact in how we are approaching channels and new user segments. So, we actually are pleased with all of that. We've seen people expanding the way how they use our products. We've seen new user types. One of the things that I found very interesting when our creative teams initially launched, Maker 3 is the first time we actually use, there's a fair amount - there's a fair, good representation of men and women doing different projects. So you had this gentleman doing a big sign and other outdoor projects. So I think it's definitely accomplished our strategic objective of increasing the versatility of our platform, but also going after new audiences and segments, as well as upgrading.

[Mark Altschwager:]

That's great. Thank you. And Marty, I wanted to follow up on your comment on promotions in Q3. I guess just help us understand the strategy behind the increased plans promotionality, especially against the backdrop of a channel that's just kind of recently catching up from a supply perspective.

[Marty Petersen:]

Yeah, so from a - I talked about leaning into our investments that we had kind of lagged on in the high growth periods here recently. The primary things we're leaning into are going to be channel expansion. I'll call it platform development or enhancing our platform, namely software, and then international growth. Those are the three primary things.

[Ashish Arora:]

And Mark, let me - I'll address the promotions part of your question. As we go into the holidays, in general, we see our portfolio mix has more machines that we haven't in, as we go into the holiday season, so the product mix clearly changes. In addition to that, we have some phase out of our existing - one of our existing machines that we are planning as well. So we're just using this as an opportunity to acquire as many users as possible so we can generate ARPU. So the goal is to continue to energize and create excitement, expand into new channels like Marty talked about, as well as expand the international footprint.

[Mark Altschwager:]

That makes sense. Thanks for all the detail and best of luck.

[Operator:]

We have our next question from James Suva from Citigroup. Your line is open.

[James Suva:]

Thank you, and good results to you and your team. I have a question, then a follow up after you answer it, because it might be completely unrelated to it. But on this supply of channel inventories, are you happy and pleased where they're at now? Are they in equilibrium or do your channel inventories need to come higher or lower? I realized during COVID, there was a big rush in backorders and such, but now that we're hopefully coming out of COVID, I was wondering about your channel inventories, I've noticed that Mug Press was sold out originally, and now it's more in stock at stores. I was just kind of wondering about your channel inventory levels, how you feel about them.

[Ashish Arora:]

So in conversations with our retailers and in viewing their weekly data, we feel good about where we are right now. Obviously, we're not - when I make the comment that we refilled the channel, it doesn't mean it's on every single SKU but the vast majority of the SKUs, we've replenished to what I would call a healthy level, a good level that we're comfortable with.

[James Suva:]

Gotcha. And then on the supplies and materials, if I heard correctly, last year, June quarter was inflated, due to like a rush on people buying cutters and accessories for like mass making and COVID-related things and T-shirts and everyone trying to do an at-home business. Is that the way to think about it that last year was overly inflated and in this year, is that kind of a sustainable, the $26 rate you kind of see, or is that still kind of inflated? The reason why I ask is like, our family, we switched from mass making to now birthday party, T-shirt making and stuff like that with our Cricut. So just kind of wondering about the ARPU then versus now and kind of your outlook for ARPU?

[Ashish Arora:]

Yeah, I think your perception, Jim, is correct. And we feel good about the $26.67 cent, ARPU number, and let me explain why. So if you just ignore 2020 for a moment, it was an odd year for a lot of reasons. If you look back to 2018 and 2019, 26.67 is actually $2.50 higher than what it was in 2018. So the calculation for ARPU, remember, is accessories and materials revenue divided by our entire user base. And so we've actually increased that ARPU by $2.50, while quadrupling the user base over that same time period. And so we feel pretty good about that $26.67.

[James Suva:]

That makes sense. Thank you so much for the details and clarification. It's greatly appreciated.

[Operator:]

We have our next question from Adrienne Yih from Barclays. Your line is open.

[Adrienne Yih:]

Great. Thank you very much and well done on the quarter. Ashish, I wanted to get your view on what you're seeing happening in sort of the Maker market trends. You obviously gave a softer guide to third quarter, so are those being supplanted by individual uptake? And then Marty for you, how far is your chip supply bought forward? It sounds like you have plenty of inventory, so I'm just wondering, how far in advance did you buy those chips? Are they all fungible, meaning that you can buy them as forward as you want, and they're pretty much no changes there? And then you mentioned, briefly the potential for promotional activity to pick up perhaps, kind of later on in the year, I'm just wondering if that was prompted by anything that you're seeing currently, or that's just an eventuality, in the future. Thank you very much.

[Ashish Arora:]

So let me take the first part of the question and Marty, you can jump in for the second. So, one thing that we - we have a very long-term focus, and there are some broad macro trends that we think are very well intact, and probably will stay intact for the next many, many, many years. These are like personalization. There's nothing that has happened pre-pandemic, during pandemic or post-pandemic that will lend itself for us to believe that that's changing. The second is the proliferation of social media. So, again, that's going to continue to inspire people, and people are going to be more and more intent driven, in terms of what they're trying to do, and have the tools necessary, the proliferation of digital tools for people to be able to make things. And then finally, like you pointed out Etsy seller trends, right. So, while there may be tiny variation in some of these things, in the shorter term, we believe that those are long term secular trends that we need to continue to focus on. What we have seen is, clearly, especially during the summer, certain types of projects being done less off, and other types of projects being done a lot more off. And one of my favorite examples, especially as we are continuing to expand our channels, use cases and audiences is people using our products for labeling and organizing, right. So I'm part of many Facebook groups for professional organizers, and one of our products that we've talked about in the past is Cricut Joy, which is to go after mass market. So a lot of these organizers and even people at home are using Cricut Joy to create very beautiful labels and to help organize things whether it is their kids bedrooms, or even as we go into class - into schools and classrooms. So, very pleased about that. And then I think one of the other trends that I think, when you look at it from a holistic standpoint, rather than from a month-by-month is international, right. I get bombarded almost every other day by some country - by somebody in some country saying, when is Cricut coming to XYZ. So, I think those are things that - there are a few things that have changed in the shorter term that I think was really kind of with the opening of economy and the fact that people hadn't gotten out of their homes for a while. But as we look at it, over the medium to long term, I think, everything we feel is intact and we are going to continue to execute on going after broadening our use cases, adding versatility to our platform, and expanding our channels to reach those new types of users.

[Adrienne Yih:]

Very helpful, Ashish. Thank you.

[Marty Petersen:]

So, your question about chips and components, first of all, our supply chain team has done an excellent job in helping us mitigate a lot of this risk. And it was about a year ago that we began very aggressively working with the manufacturers of these chips and components to lock in supply further out in the future. And some of those components and chips are as far as 52 weeks out that we have locked in. And so as we look at our longer term forecast potential, we feel very good and comfortable with where we are at this moment in locking in those chips and components. And the same comment can be made on shipping and our team's efforts there. We work very hard to build inventory, especially on machines fast so that we could beat the peak congestion that we're experiencing right now in shipping and so we were able to get a fair amount of inventory in before we knew the crunch was coming. And so, from a supply chain standpoint, overall supply chain standpoint, we feel pretty good about our position and where we stand.

[Adrienne Yih:]

And Marty on the promos .

[Ashish Arora:]

Do you mind repeating the question on promotions again?

[Adrienne Yih:]

Yeah, it was - you mentioned the potential for more promotional activity, potentially pressuring margins later on. And I was wondering if that stemmed from anything that you might be seeing in current day, or it was sort of just a warning for the future? Thank you.

[Marty Petersen:]

I wouldn't characterize it as a warning. I don't think - like, again, with the model that we have, you're going to stay within that kind of those parameters. I think what I was pointing out to is that, in general, in every Q4, as we head into the holiday season, we have a promotional strategy and we - based on the year, we have a different cadence towards the proportional strategy. I think we're going to see this very similar trend, as we go from Q2 to Q4. In addition to that, we are - we have - in many - in any other categories that have been a part of, sometimes when you have a phase in, phase out, it's a wonderful opportunity to create some energy and excitement in the market without damaging the price cadence structurally over the long term. So that's what I was commenting on, which is you're going to see the seasonality that you typically do and in addition to that, we may opportunistically use some of that to gain new customers and create excitement while keeping - when the new model comes out, it's at a full price and the old model comes out, you try to be aggressive with it. But again, I don't think there's anything out of ordinary.

[Adrienne Yih:]

Okay. Makes total sense. Thank you very much.

[Operator:]

There are no further questions at this time.

[Ashish Arora:]

Okay, Stacie, is there anything else we need to we need to cover?

[Stacie Clements:]

I think that's it. Ashish, do you want to -

[Ashish Arora:]

I think that's the end.

[Stacie Clements:]

Thank you, everyone, for joining us on the call today. And we look forward to speaking with you over the coming quarter.

[Ashish Arora:]

Yeah, so thank you again, everyone, for joining our call and appreciate your time and focus on us.

[Operator:]

Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may not disconnect.