Cricut Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by, and welcome to Crayons, Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded.

Operator

And now I'd like to introduce your host for today's program, Jim Suva, Senior Vice President of Finance. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricket's Q4 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. For your reference, accompanying slides used on today's call, along with the supplemental data sheet have been posted to the Investor Relations section of the company's website, investor.

Speaker 1

Cricket.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 Kimbell will host live Q and A. 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.

Speaker 1

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 Cricket's most recently filed Form 10 ks or Form 10 Q that we have filed with the Securities and Exchange Commission. Actual events or results could differ materially. This call also contains time sensitive information that is accurate only as of the date of this broadcast, March 5, 2024. 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.

Speaker 2

Thank you, Jim. We moved through 2023 focus on profitability even as we navigated a dynamic consumer discretionary environment. 2023 was our 7th consecutive year of positive net income. We generated $53,600,000 of net income even with the $45,900,000 of excess and obsolete inventory reserves and fixed asset impairment charges. We are encouraged by our 49% operating income increase in Q4 year over year and the positive uplift from our promotions in Q4.

Speaker 2

However, we were disappointed that sales fell in the quarter and full year by 18% 14%, respectively. Our promotions uplift was smaller than we expected and 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 and demand throughout the funnel. We will continue our deeper promotional strategy while focusing on maintaining great pricing discipline.

Speaker 2

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 where we could do better are straightforward. 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.

Speaker 2

We need to be more effective competitors in accessories and materials. Much of our discussion today will focus on these priorities. In 2023, our total user base increased 13% to over 8,900,000 users, paid subscribers increased 6% to 2,770,000 and engaged users in the last 90 days decreased 3% to 3,900,000. Dollars 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.

Speaker 2

These weaknesses were worsened by lower retailer inventory. We saw several retailers miss out on significant Q4 sales due to insufficient channel inventory for our machines. 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 commitments. In addition, addressing consumer affordability and making the overall making experience more accessible are significant opportunities for us. 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.

Speaker 2

Our goal is to reaccelerate consumer excitement for the brand and category. Now on to an update on our priorities. Recall that we have 4 priorities, new user acquisition, user engagement, subscriptions and accessories and materials. I will briefly review these items and provide some detailed commentary on our new platform innovations. We ended the quarter with over 8,900,000 total users, up 13% year on year and approximately in line with our expectations.

Speaker 2

We continue to focus on new user acquisition and engagement growth in our platform, which ultimately drive our monetization flywheel. We have previously shared that our funnel is healthy and more recent data supports their conclusion. While our platform and products have universal appeal to creators of all ages and demographics, we are particularly focused on women 25 to 44 years old. 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 foot funnel excitement.

Speaker 2

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 44 from adding 57 new influencers into the front half twenty twenty three to adding 247 in back half. We also expanded our reach to increase 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 555,000,000 dollars through broadcast segments and $651,000,000 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.

Speaker 2

As planned, we were more promotional in Q4 compared to the rest of the year. The promotions were supported by integrated marketing plans, including retailer programs and content marketing strategies, incorporating influencers, social, editorial and deals coverage. While we did see an uplift, it did not meet our expectations. As we enter 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.

Speaker 2

In addition, we are expanding our messaging through 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 Pinterest platform. Our marketing programs also include innovative plans for key moments throughout the year, where there is higher motivation to personalize or make things. We introduced the Cricket Make Their Day Valentine's event, which was held February 4 through 10 in North America and serves as an example of how we plan to leverage promotions throughout 2024. We saw a meaningful uplift in sales and excitement compared to prior weeks from consumers and retailers.

Speaker 2

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 5,930,000 users who made a project using their cutting machine in the past 3 65 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, declined year on year to 3,930,000, 3% below a year ago. Our focus remains to maximize engagement of our most impactful cohorts, which are new users onboarding onto the platform or on boarders and access 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 outside design space to stimulate them to return to our platform.

Speaker 2

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 have better photos of the finished projects, how to instructions and a design layout.

Speaker 2

When a user initiated a new project based on one of those holiday projects, we saw a higher likelihood to cut 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 surpassed 750,000 images in our Cricket Access library with the majority of these now coming from our Contributing Artist Program. As we mentioned before, search personalization is important to us.

Speaker 2

As our library grows, so has our search and image navigation capabilities. For example, we are testing personalized search ribbon that show images and projects based on user history. We 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 uploaded images, and this ratio is increasing favorably year on year. Now let me briefly comment in visualization.

Speaker 2

We also launched a redesigned visualization experience that allows members to mock up any image on a series of blanks such as t shirt, cap or a tote bag to inspire action. Paid subscribers were in line with our expectations and increased 161,000 year on year and increased 71,000 sequentially in Q4, ending with 2,770,000 paid subscribers. Our subscription efforts continue to bear fruit in terms of converting purchases of new machines into subscribers. At the other end, our subscription attrition curve had remained steady despite declines in engagement. Alas, lower new user adds 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.

Speaker 2

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. 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 to subscriptions. Accessories and materials sales declined 28% year on year in Q4.

Speaker 2

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 faced the stiffest competition in this part of our business, with lower barriers to entry than cutting machines in 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 when users want to make.

Speaker 2

We will ultimately accomplish this through reengineered product, reengineered packaging and improving supply chain efficiencies. We have been incrementally capturing cost reductions in our materials with more to come over the coming quarters. It will take us some time to work through current inventory as we roll new products in, but expect to achieve margin improvements 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 emerge as we are successful in driving new customer acquisition at a higher rate and our engagement efforts begin to bear fruit.

Speaker 2

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 are in the price range of our competitors, we get our fair share. We are intensely focused on the overall customer experience and we are motivated to work with those retailers that help us create a great experience both on the shelf 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 affordably, we will see a lift to materials consumption. We are driven to continue to innovate while exhibiting both long term focus and current discipline.

Speaker 2

I will now transition the call to Kimbal.

Speaker 3

Thank you, Ashish, and welcome, everyone. In the Q4, we delivered revenue of $231,200,000 an 18% decline compared to the prior year and below our expectations for the Q4. We generated $11,300,000 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 $765,100,000 a 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.

Speaker 3

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. Breaking revenue down further, Q4 2023 revenue from Connected Machines was $77,400,000 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.

Speaker 3

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 $77,300,000 down 28% over Q4 2022. For the full year, accessories and materials revenues decreased 27%. Subscriptions revenue for the quarter was $76,500,000 an 8% increase over Q4 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.

Speaker 3

In terms of geographic breakdown, international revenue was $51,500,000 or down 5% compared to $53,900,000 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 Middle East, Turkey and Africa. 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 revenues. Turning to users and engagement.

Speaker 3

We ended the quarter with over 8 point 9,000,000 total users or 13% growth compared to Q4 2022. We ended the quarter with over 3,900,000 engaged users, which was a 3% decline from Q4 last year. On a full year basis, we had 66 percent 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.

Speaker 3

We ended the quarter with 2,770,000 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 gross margin.

Speaker 3

Total gross margin in the 4th 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 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%. The increase in gross margins was primarily due to a favorable product mix compared to Q4 2022 as legacy machines continue to represent a smaller percentage of machine sales coupled with higher average selling prices compared to a year ago.

Speaker 3

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 margins decreased 90 basis points. The decline in subscriptions gross margins both for Q4 and 2023 was primarily related to higher amortization of capitalized software costs, which we expect to continue. 4th quarter gross margins for accessories and materials was 20.6% which compares to 15.9% in Q4 2022.

Speaker 3

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 decrease to 17.5% compared to 26.5 percent in 2022. Full year Accessories and Materials margins were in line with expectations. Total operating expenses for the quarter were $80,500,000 and included $12,100,000 in stock based compensation.

Speaker 3

Total operating expenses increased 11% from $72,500,000 in Q4 2022. The $8,000,000 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 $12,600,000 of capitalized development from the discontinued projects. Full year 2023 operating expenses increased 1% compared to 2022.

Speaker 3

Operating income for the quarter was $16,500,000 or 7.1 percent of revenue compared to $11,100,000 or 4 percent of revenue in Q4 last year. 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 9.1% compared to 9% in 2022. Excluding the impairments of unused equipment, operating income would have been $29,100,000 for the quarter. Our tax rate of 38.9 percent was higher than normal compared to 13.6% in Q4 last year.

Speaker 3

In 2023, the full year tax rate was 32.8% compared to 26% in 2022. The higher tax rate was due mainly to lower R and 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 $11,300,000 or $0.05 per diluted share compared to $10,900,000 or $0.05 per diluted share in Q4 2022. For the full year, we generated 53,600,000 dollars of net income and diluted earnings per share of $0.24 down from $60,700,000 in net income and $0.28 diluted earnings per share in 2022.

Speaker 3

Turning now to 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 $288,000,000 in cash from operations compared to $118,000,000 in 2022. We ended 2023 with a cash and cash equivalents balance of $245,000,000 We remain debt free. Recall, we are generating higher levels of cash as we work to bring inventory more in line with pre pandemic norms.

Speaker 3

Accordingly, inventory decreased by $107,000,000 from a year ago to $244,000,000 at the end of the year. During Q4, we used $15,700,000 of cash to repurchase 2,100,000 shares of our stock. After the end of the quarter and through March 1, we used $10,800,000 of cash to repurchase 1,700,000 additional shares of our stock, which effectively completes our $50,000,000 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.

Speaker 3

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. During the 1st few weeks of the quarter, we saw sales below expectations. 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 week. 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.

Speaker 3

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 and attach rates, following a similar pattern to 2023 and could result in a seasonal pattern of paid subscriber growth in Q1 and Q4, but flat to declining in Q2 and Q3.

Speaker 3

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 for 2024. Typical revenue seasonality is 40% in the first half and 60% in the second half of the year. 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.

Speaker 3

In terms of new user growth, we expect to add fewer new users in 2024 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. We expect to be profitable each quarter and generate significant positive cash flow during 2024.

Speaker 3

Our long term financial model remains unchanged with operating margin targets of 15% to 19%. Our proven model has demonstrated that when we operate at scale, which we define as revenue above $1,000,000,000 and drive top line growth, these margins are achievable. Cricket has been a public company for almost 3 years. 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 3 years of business evolution, we are planning to redesign aspects of our quarterly information package for 2024.

Speaker 3

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.

Operator

Certainly, one moment for our first question. And our first question comes from the line of Adrian Yih from Barclays. Your question please.

Speaker 4

Hi, this is Angus Kelleher on for Adrian Yee. Thanks for taking my question. Could you provide some color on the hardgoods segment 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.

Speaker 3

Angus, thanks for the question. So I would just say that the retailer you're talking about is a very important part to us, has been and continues to be. There's a dynamic situation that we're following closely and we have adequate reserves that in any eventuality we don't expect a material impact to our financials.

Speaker 2

Actually, do you want to also talk a little bit about Angus, this is Ashish, what our diversification looks like and all retailers are less than 10%.

Speaker 3

Yes. Good point. And just call it Angus, we don't have any retailers that represent more than 10% of our business in terms of revenue.

Speaker 4

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 farthest to go against your long term goals? What are the leverage opportunities look like there for fiscal 2024 and beyond? And how might the influencer forward marketing affect that?

Speaker 3

Well, so I mean, when we look, the 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 bucket in the P and L, there's lots of stuff in there including bank charges that for all our subscriptions, those kind of things. But discretionary marketing is an area discretionary marketing is an area where we think we 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.

Speaker 3

And so it's an area where we expect to lean in to do precisely that.

Speaker 2

Yes. So, Alex, let me add to that. So our conviction and our research continues to show that the opportunity is very large for us globally. So basically, we think there's a large market. We've talked about the funnel being healthy.

Speaker 2

Now obviously in Q4, what we learned from that is that as we are 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 for a major sales event like and had 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 we want to lever. So our strategy as we kind of shared in our prepared remarks, which is continue to ramp up marketing and we have a lot of we're basically deploying different types of vehicles. I think we're doing more marketing than we've ever done in our history.

Speaker 2

I think it's the right investment because we see the funnel being full. We want to pull people through the funnel. That coupled with a more frequent and deeper promotional strategy, we think is going to help drive growth in the next 6 to 9 months. But we're really excited about marketing. We have doubled we actually tripled the size.

Speaker 2

We have basically added significantly to the team. Our goal is to continue to ramp that up and just do different kinds of marketing and we've kind of included some of those details and color in our prepared remarks. We're very excited about

Speaker 3

it. I just want to clarify, Ashish isn't calling inflection point of 6 to 9 months, right? 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 you just talked about.

Operator

Got you. Thank you. Thank you. And our next question comes from the line of Eric Woodring from Morgan Stanley. Your question please.

Speaker 5

Hi, thank you. This is Maya on for Eric. 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 could you help us understand when your engagement efforts will start to move higher?

Speaker 2

Thank you for the question. So as we've kind of pointed out before, engagement is one of the top priorities of the company. We have leadership that has a lot of credibility and we're going to continue to ramp those efforts. In Q1 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.

Speaker 2

Now in 2020 2021, we acquired a massive cohort of people. And as those people are going through a typical graduation curve and that curve stabilizes over time, we see those as those people graduate as the engagement return as the engagement 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 acquire people, that creates a tailwind. So those users are much, much more engaged, but not in we are not acquiring enough users to offset the people that are graduating. Now then the question is, how can we improve engagement overall, which is where our efforts have been more focused.

Speaker 2

And so the good news there is that when we ask people, people who have not come on to the platform for the last 3 to 6 months, over 80% of them basically to tell us that they really want to use the Cricket platform. And the reasons they cite are, hey, I just ran out of time, I couldn't 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 expanding the inspirational content, making it easy for people to search their content and actually making it much, much more personalized.

Speaker 2

So again, even though we will continue to see headwinds because of the 2020, 2021 cohort, I have strong confidence in the team that this will at some point reverse over time. So we just got to stay focused and keep driving it.

Operator

Does that answer your questions?

Speaker 5

Yes, great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Asiya Merchant from Citigroup. Your question please.

Speaker 6

Great. Thank you for taking my question. The margins have been masked by significant write downs and impairments, etcetera. So if you wouldn't mind like walking us through 2020 4 expectations, are we is this an end to all these kind of write offs and margins? And then I have a follow-up.

Speaker 6

Thank you.

Speaker 3

Asiya, thanks for the question. I mean write downs were an important part of our story in 2023 and we end up having total write downs of $45,900,000 And but for that, but for those write downs, we would have operating income of $116,000,000 So very profitable business and we're proud of that. The write downs are going to break down into 2 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 our hardware platform, on the most impactful opportunities around cutting machines.

Speaker 3

We've had to make some hard decisions and to cut some projects and that resulted in impairment. But ultimately, I think that's going to be the right thing for our business as we're going to be more focused on what could be most impactful. The second piece of that really is around excess inventory on finished goods inventory across most of the accessories and material segments of the business. And if you look back in 2021 early 2022 when we're ordering most of these materials, we had a much higher run rate business, we had higher expectations and GAAP requires that we do the periodic 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 as we adjusted inventory on the balance sheet.

Speaker 3

But also we're going through the process of rationalizing our consumables portfolio where we've had historically as many as 2,500 active SKUs. We're going to 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 that we get wrong. So there will always be some, but you can expect it to be less impactful as we go forward than it has been this year.

Speaker 6

Great. Thank you. And then if I may one for Ashish. Ashish, you guys are reiterating your long term model in your prepared remarks on your presentation as well. I know things are a little bit tough in fiscal 2024 because you guys are guiding for some revenue pressures and margin impact.

Speaker 6

But can you walk us through kind of the line of sight as you see maybe the exit rates that you're expecting for fiscal 2024 that sort of gives you the confidence that let's say over a medium term model, which my model is over 3 years that you can walk towards your margin guidance that you guys reiterate

Operator

over

Speaker 2

the sort of

Speaker 6

the medium to long term? Thank you.

Speaker 2

Asiya, let me start and then I love for Kimbal to jump in, 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's a huge market for our product in our category. And we've done more segmentation research and we believe that the opportunity is global for us. So we are very excited about the business.

Speaker 2

Now there's 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. But having said that, the product appeal is pretty universal, right, across many demographics, etcetera. So the areas of focus and then I'll Kimber will talk about the long term model is we want to drive for affordability, right. We want to make sure the not only is it affordable to buy the initial machine to get started, but also the ongoing usage of the machine is affordable, right.

Speaker 2

So our materials, our content and all of those things. The second is, 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's a lot more to be done. So that's where 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 there's a that long term model still is valid.

Speaker 2

I'll let Kimbal talk from the financial piece.

Speaker 3

Yes. And so 15% to 19% is our goal, but I'll call out in our prepared remarks, we mentioned that we think operating income 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 our target when we are operating at scale, but that means we need to be $1,000,000,000 plus in revenue, which we weren't last year. And given where we are on Q1 sales being softer, we're not calling for that this year.

Speaker 3

Again, we just want to call out that's where we think we get to as we get our business back to growth and scale, but we need to be growing and operating above $1,000,000,000 to hit those kind of operating margins.

Speaker 2

And I'll add just one last comment, right. I think in 2023, we had a strong focus on operating income. And we basically as we looked at the state of mind of the consumer, as we looked at where trends were and 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 Kimbal's point, as the business gets back to growth 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 along to model.

Speaker 6

Okay, great. 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 shares impact and buybacks to offset any dilution? Thank you.

Speaker 3

So hopefully those are Board decisions that obviously management plays an important role in how we think about that. So let me talk about kind of our framework and how we do think about it. First, we want to make sure we have sufficient inventory to operate the business. After that, we're making sure that we're making the right investments for the medium and long term so that we have the 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.

Speaker 3

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. And as you've seen in the last year, we've used both special dividends as well as share repurchase programs. And so all those tools are in our portfolio. But again, the timing and deployment is up to the Board.

Speaker 6

Okay. Thank you.

Operator

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.

Speaker 7

Thank you so much for taking the questions. Maybe 2 if I could. 1 more short term, 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 there is 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 Q1 versus Q4? That's the shorter term one.

Speaker 7

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 so much.

Speaker 3

Yes. So thanks for the question. I mean, 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're expecting in 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.

Speaker 3

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 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 plan throughout the year, but we are encouraged by kind of that single data point that we have at this point.

Speaker 2

And Eric, let me talk to the second part of your question, which is around marketing. And we think it's a very assured observation and a question. So let me take a couple of let me just stay 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, social media, our category itself and our product lends itself very well to word-of-mouth and 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 in acquisition that as those 3 plus 1,000,000 people or close to 4,000,000 people engage with our platform, they make projects and they tend to share that on social media.

Speaker 2

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, etcetera. Last year, I would say we heavily leaned in on performance advertising and to some degree, 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 this demographic.

Speaker 2

If you think about the 25 year 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. The second aspect, which we kind of briefly alluded to, right, 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, 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 the amount of money that is spent on a wedding or getting married, it's not just about the wedding, it's all the life it's all the things that lead up to the wedding, right? There's 4 to 6, 7 events.

Speaker 2

And it's not just the bride, it's several people involved from bridesmaids to bachelorette parties to mother in laws or moms. So I think us leaning in heavily on the 25 to 44, coming up with the right brand messaging and basically helping drive network effects. I think those are the things that we will see. I'm actually again, I'll reinforce really excited about the creativity in our marketing team, some of things that we are looking at in PR, social media. And I think you're again very optimistic about what role marketing will play in acquisition going forward.

Speaker 7

Great. Really appreciate the color. Thanks.

Operator

Thank you. One moment for our next question. And our next question is a follow-up from the line of Eric Woodring from Morgan Stanley. Your question please. Eric, you might have your phone on mute.

Speaker 5

Sorry about that. International was down around 5% year over year. Can you help us understand kind of how international has been trending Q1 to date? I know you called out a little bit of weaker U. K.

Speaker 5

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?

Speaker 3

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. And let me kind of break that down a little bit. So in 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.

Speaker 3

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, where in Q2 of sorry, Q4 of 2022, there were some large channel fill orders related to new distribution in those markets that didn't have similar comps. And so that kind of put pressure on Q4 this year. That said, we think we have a huge opportunity for us in our international growth sector over time, and we're really excited about it.

Speaker 3

We've seen again some softness in the larger markets in Q4 similar to what we've already talked about in our U. S. Market. So that piece of it hasn't turned around. But we are excited about the medium and long term prospects of international for growth.

Speaker 2

Yes. I'll just add to that. I'm actually just about a week, week and a half away from heading to Europe. We have a large event going on in Germany and then we have several meetings lined up in rest of Europe, including Netherlands. We think the opportunity, as Kimbal said, is global.

Speaker 2

The two factors that again I'll reinforce, right, affordability was a factor. It affected most of our markets. We are obviously earlier on in the cycle, but affordability was a challenge for that consumer and it's actually even to some degree more pronounced in some parts of the world, especially in Europe. So I think we have we've got some work to do to resolve that. The second is awareness and acquisition, right.

Speaker 2

So the same thing that we talked about that we are driving in North America, we're going to ramp 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 cricket users or other people who want to buy a cricket. 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.

Speaker 2

So again, I think we're in the very early stages of our global platform.

Speaker 5

Right. Thank

Operator

you. 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.

Speaker 1

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'm excited about the future opportunity ahead of us.

Speaker 1

We will be at the Morgan Stanley Technology, Media and Telecom Conference tomorrow, Wednesday, March 6 in San Francisco, California and the ROTH MKM Conference, Monday, March 18 in Laguna Niguel, California. If you have additional questions, please email me at jsuvacricket.com. This now concludes this earnings call and you may now disconnect. Thank you.

Operator

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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Earnings Conference Call
Cricut Q4 2023
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