Cricut, Inc. (CRCT) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Cricut Q1 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 conference over to your speaker today, Jessica Barker, Investor Relations at Blueshirt Group. Ms. Jessica, please go ahead.
Jessica Barker: Thank you, operator and good afternoon everyone. Thank you for joining us on Cricut’s first 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 have also been posted to the investor relations section of the company’s website, investor.cricut.com. Joining me today on the call are Ashish Arora, Chief Executive Officer, and Marty Petersen, Chief Financial Officer.
Ashish Arora: Thank you, Jessie. Welcome to our first earnings call as a public company. I want to start off by thanking all those that have supported us over the years, our passionate community of users around the world, my special thanks to the Perot family and their investment organization, Petrus Asset Management for their early investment and continued support, and most importantly our entire Cricut team for their hard work and continued dedication to our mission and our culture. In March, we completed our IPO and I want to welcome our new shareholders. We look forward to sharing our journey with you as we continue to grow and fulfill our mission to help people lead creative lives. While the IPO will help support growth across multiple strategic initiatives, we will continue to be very disciplined in our investment approach. We have had a long history of delivering solid growth. In 2020, in addition to COVID, we saw growth because of international expansion, the introduction of the Cricut Joy product family. Cricut Joy helped us expand our retail footprint, acquire more beginner users, and broaden our penetration. I’d like to start by sharing a few highlights from the quarter, and then I am going to spend a few minutes talking about the power of our platform and business model, our passionate community, as well as our growth drivers going forward. Q1 was a continuation of growth in 2020 as we acquired new users efficiently and drove engagement. Revenue in the first quarter was $324 million, or 125% growth over Q1 of last year putting us at a trailing 12-month run rate in excess of $1 billion. EBITDA was $68.6 million in the first quarter, a 232% increase over the first quarter of last year.
Marty Petersen: Thank you, Ashish and good afternoon, everyone. It’s good to be here today on our first public earnings call. Before we move into the detailed financial results, I want to touch on the strength of our business model which has been the engine of our rapid growth. Cricut has a proven track record of strong revenue growth and demonstrated profitability stretching back to 2014. Our sales are diversified across categories and give us revenue streams that are largely predictable. As Ashish discussed, 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. Revenue in the quarter was $324 million, an increase of 125% over Q1 last year and was the primary driver in delivering significant growth in Net Income and EBITDA. Revenue from Connected Machines grew 148% over Q1 last year. Strong machine sales and new-user acquisition throughout 2020 and Q1 of this year helped drive 141% revenue growth in Subscriptions in the quarter and 102% growth in Accessories and Materials. In terms of geographic breakdown, international revenue growth outpaced growth in North America, increasing 253% in the first quarter over the same quarter in 2020. As a percentage of total revenue, International represented 10.3% in the first quarter, significantly up from 7.4% in all of 2020 and 3.6% in 2019. We anticipate the investments we made in 2020, and ongoing future investments, will continue to expand consumer reach and brand awareness internationally. The Cricut community of users drives healthy engagement on our platform and is one of the keys to building our long-term business with sustainable growth and compelling margins. The way we measure engagement is to look at what percentage of our entire user base is using their machines to create something in a given 90-day period. In the first quarter, engagement remained strong at 62% of our entire user base, up from 60% in Q1 of 2020. Sequentially it was lower than Q4, which is to be expected, as Q4 is typically our seasonal high quarter in a given year. As we emerge from the COVID environment, we expect that overall engagement will generally be in line with historical levels, though the ways in which our users engage with us may change. For instance, as users begin spending more time outside the home, we may see them doing fewer home improvement projects and turning back to other types of projects like weddings, parties, back-to-school, and t-shirts for family vacations.
Operator: Thank you. . And your first question comes from the line of Rod Hall with Goldman Sachs. Your line is open.
Rod Hall: Hey guys, can I ask a follow-up, do you guys mind if I…
Ashish Arora: Sure.
Rod Hall: I guess, good numbers here obviously, and things are looking good into Q2 as well. I just wanted to double check your user growth expectations, and kind of your commentary there, Marty, in terms of phasing through the year. I assume that you're growing users faster than you normally would here at the beginning of this year, given we've been in lockdown conditions and so on and then -- but then I'm also assuming you would assume that user growth isn't maybe as good in the back end of the year as you normally would expect, but I'm just not quite sure what you're thinking to the back-end of user growth? So that was my first question then I have a follow-up.
Marty Petersen: Yes, so one thing to just re-highlight that we talked about in my prepared comments is that there's a seasonal -- a normal seasonal shift in how new users are acquired. New users in Q1 are quite a bit higher than new users in Q2. And then, as we progress through the year, new user growth picks up later in the year. We have always expected to see some normalization as we emerge from the pandemic. And we're pleased to see that hasn't happened so far. But I think that they are directed back to my prepared comments, and so that we feel comfortable that at a minimum, we will match the number of new users that we brought on last year this year. And last year 2020 was a pretty exceptional year for us. So our expectation is to grow users on top of that strong year.
Rod Hall: Okay. Thanks.
Ashish Arora: I just want to add, thanks for the question, really apt. I just wanted to add a bit more color to what Marty said, because it kind of gives you the overall flavor of the business. So first, I wanted to remind everyone that while 2020 was a strong year, we've grown at a CAGR of 45% for several years prior to COVID, right. And Marty mentioned that, currently we expect to add at least as many new users in 2021 as we did in 2020. What that means is that as we go into the second half of the year, we have a significantly larger number of users than we did going into the second half of 2020, right. And then, so from that we benefit from those users being engaged from ARPU, from subscriptions, accessories and materials. And, I know we mentioned in our prepared remarks, we talked about some engagement behaviors changing, but many of these behaviors will still remain intact, right. So people still have back to school. In fact, they will be bigger this year. People still crowd for Halloween, Thanksgiving Holidays, people still want to use our products for emotional wellness, right. So in some way I just want to reinforce a few things that we tried to highlight in our prepared remarks. We have a durable business model, so the passion in the vital community of users and our fundamentals and trends remain strong and intact.
Marty Petersen: And one thing to just add on there that Ashish touched on, and that is that we have large number of new users that came on in 2020 and in Q1 2021, that generate ARPU. And so if you just quantify that there were a million users that came -- new users that came on in just the second half of 2020, another 600,000 came on in Q1, and another you pick the number, you want to put a plug in there for Q2, and all of those users we know from years of history, that they will generate ARPU continuing not just through the back half of 2021, but for years in the future. And that's in addition to the rest of our user base that does the same. And so that creates a tailwind for us, not just in the near-term, but for the long-term as well.
Rod Hall: Yeah. Hey could I ask a follow up or you guys mind if I…
Ashish Arora: Sure.
Rod Hall: The subscription ARPU progression has been great here. And I know Ashish you had planned to or one of those strategic goals you've got is to continue to increase that. And I know that you guys attempted to make some moves on that around the -- around about the time of the IPO. But I'm just curious kind of what the plan now is, as you look towards the end of the year for continuing to increase the value for that subscription, maybe talk us through that?
Ashish Arora: Yeah, so Rod, as you pointed out, subscriptions is a key part of our portfolio. And we try to drive both engagement and the value proposition of our subscriptions. Today, the subscription value is driven by content and so one of our focus areas has been to significantly add to the diversity and the breadth of the content. But in addition to that, we are adding -- we've launched a few software services that are part of -- that are only available to subscribers. And I think you will continue to see us doing that as to -- as we try to enrich the overall value of subscriptions with enhanced content, software, as well as other services. So I'm really excited about the work the team is doing. And I think you'll see more of that in the future.
Rod Hall: Great, okay, thanks a lot guys. Appreciate it.
Ashish Arora: Thanks, Rod.
Operator: And your next question comes from the line of Katy Huberty with Morgan Stanley.
Katy Huberty: Thank you, good afternoon. It was impressive to see the acceleration in year-on-year growth, even as we start thinking about lapping COVID at the tail end of the March quarter. When I think about the acceleration from 114% growth in December to 125% growth in March that's about $17 million of incremental revenue. Any color, just generally speaking on what drove that incremental revenue base, was it largely related to the Mug Press launch, are you starting to see retailers build more channel inventory as they prepare for increased traffic in their stores, are there other factors that we should think about that help drive the growth acceleration? And then I have a follow-up.
Marty Petersen: Yes, a couple of things, Katy. So I think you correctly identified two items. One is channel fill of machines. We're getting back on top of our inventory or our supply constraints with machines. And so part of what you're seeing is in machines, in particular, is replenishment of channel inventories as well as just strong demand that continues in Q1 carried over from 2020. As well in accessories and materials, our Mug Press is doing well as well as our entire easy press line has grown faster than that segment as a whole. And so I think those -- as well as subscription. So if you can look at subscriptions as well, our ARPU has increased, and that's largely driven by increased attach rate of subscribers to users. So really kind of all three of our segments have contributed to the growth.
Katy Huberty: And Marty, just a follow-up on that. How many more quarters do you think it would take you to get to the appropriate channel inventory levels and catch up with some of the backlog in the business, I mean I appreciate that it depends on what happens with supply but is it multiple quarters in a normal supply environment to get to normal channel inventory levels or is it quicker than that?
Marty Petersen: Yes. That's -- you're correct, that's a tricky question to be able to answer because there's multiple facets to it. One is demand, where does that go in the second half of the year and beyond. But more importantly, it's on the supply chain. And there's a number of factors that are affecting the supply chain. There's logistical issues where there's some constraints on shipping, on containers, on commodities, on other components. And so it's a little tricky to be able to say when we will be back on top and in a comfortable position on our machine inventory. But I think that a lot of these supply chain constraints will be present, at least in some form, our plan is through the end of the year. Now we've done a number of things to try to mitigate those as much as possible, that I think that we should look through at least through the end of the year to see some of that. Now on the materials and accessories side, we're back into a pretty comfortable position on those. So really, the machine areas where we're more supply-constrained at the moment.
Katy Huberty: Okay. Helpful...
Ashish Arora: Katy, I'll just add a comment, I think, very consistent as Marty said. We're definitely better in the Q2 and the rest of the year time frame than we were in Q4 and Q1 last year. But I think the challenges that Marty has highlighted continues to exist, but I think we're definitely in a better position today and for the next few months and quarters than we were three or six months ago.
Katy Huberty: Okay. And then, Ashish if I can just ask you a follow-up. You're not providing quantitative guidance because it's hard to know how the world normalizes post the pandemic, and that is a big investor debate across all consumer stocks that saw a boost in their business as consumer behavior changed last year. Can you just talk at a high level, what metrics are you as CEO and the management team tracking to understand how your business might evolve and what are some of the leading indicators that we should think about that helps us understand early what the normal run rate of this business overall and the consumer behavior will be within your user base?
Ashish Arora: Yes. So I think I'd like to start off by just saying, one of the things that we obsess about or very focused on is our overall how we estimate the market size, right. And then so we are consistent, we are constantly focused on understanding how we get further penetration in our SAM and TAM. Some of the macro level drivers, which I believe are leading indicators, we look at the trends, like -- and I know you talked about KPIs, but let me just kind of get to that. We're constantly looking at, are these trends, what is the seasonality of these trends, are they here to stay the mainstream. So as we look at trends like personalization, right, as we look at trends like social media and the digitization and more and more prosumers happening, those are broad indicators that we look at to make sure that none of our assumptions about our business have changed. As far as our specific metrics that we look at, I would say, clearly, net new user growth is a big one, but also engagement, right. One of the fundamental drivers or one of the drivers of our growth is that our users are engaged and that engagement not only drives ARPU, but it also drives the word of mouth. And so the more people make, the more projects they make, the more they tell people about it in the digital or the physical space. And for us, it's very important to make sure that engagement stays high. And if we can continue to drive that, we think that we'll be -- we'll stay in a healthy place.
Katy Huberty: Thank you, congrats on the strong quarter.
Ashish Arora: Thank you, Katy.
Operator: Your next question comes from the line of James Suva with Citigroup.
James Suva: Thank you. And congratulations on your results and the qualitative outlook that you gave about subscribers. Following up on some of the earlier questions about as the year progresses, I've been trying to buy some of the product online for my wife and stuff like that, and it continues to be sold out, which is a good situation of demand exceeding supply. It sounds like you've mentioned equilibrium and supply, did you say by the end of this calendar year and does that account for semiconductor shortages, not for your supplies but for your equipment, and does that include also restocking the channel?
Marty Petersen: So just a point of clarification, Jim, my comment about the end of the year was intended to be at least through the end of the year. I'm not necessarily saying we'll be back in stock in the end of the year or back at normal levels. It's just too hard to be able to make that judgment but I think that a lot of the things that we're facing in the supply chain will be prevalent and manifest themselves at least through the end of the year. Now in terms of components, there are shortages in components, but we've done much to mitigate those shortages by going out and securing longer-term agreements with the manufacturers. And many of those agreements carry us at least through the end of the year. And so what I would point to is despite some of the shortages that you see in other industries, we've still been able to grow machine growth just in Q1 at 148%. So we're still able to manufacture a number of machines. We're just not -- we're still not able to manufacture as many as demand would want at the moment.
James Suva: Great. And then as my follow-up, my wife won't let me take apart her machine to see what's all inside of it but I do note there's metal and plastic. And in the world, there's been some changes of both metal and plastic costs. Is that going to hurt your margins or is it just in aggregate, they don't add up to be meaningful enough, but any thoughts about raw materials, not semiconductors, but plastics and metals, cutting knives, tools, all these things that my wife uses? Thank you.
Marty Petersen: Yes, Jim. Yes, we are now seeing increase in these commodity prices, sheet metal, resin, glue, polymers, etcetera, most of the commodities that you would expect. We're seeing those now. We -- that's really a supply/demand issue and we believe it's transitory. So we think that it will impact some -- have some margin impact in the short-term, but we think that over the medium term, that supply/demand balance comes back into line.
Ashish Arora: And Jim, I'll just add to that comment from Marty, which is, clearly, there's -- as you rightly pointed out, there's increase in commodity costs. One of the things that I'm very proud about on behalf of the team is that as we have continued to broaden our supply chain, as we bring additional contract manufacturers, we will mitigate some of that with just more competition on the supply -- on our supplier side. So we're definitely taking some proactive steps to make sure you're offsetting some of those cost increases when we see them.
James Suva: Thank you so much for the details and clarifications. Its greatly appreciated.
Marty Petersen: Thank you Jim.
Operator: Your next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih: Good afternoon. I will add my congratulations. It was very nicely done, great start to the year. Ashish, I want to stay -- I want to stay on the inventory issue and I guess my question is, what are the forward order books like in the wholesale channel, are you able to meet that demand or do you have to kind of push it off a little bit based on the uncertainty? That's my first question. And then my second question for you is what is your go-to-market strategy in a new geography, do you have customized software, and how much do you prep the market with advertising in a new market? And then I have one for Marty, thank you.
Ashish Arora: Okay. Well, I think Adrienne on the inventory side, we were constrained in Q1. So we adapted our promotional strategy to accommodate the fact that it didn't make sense for us to be -- to follow our regular cadence of promotions when we're having some inventory shortages. As we've gone through the quarter, we think the situation we have in a much better position and I think we are -- as we go into Q3 and Q4, we'll definitely not be in an oversupply situation, but I think we'll be -- we'll do fairly well when it comes to a healthy mix between supply and demand. That's what I would say to that. On the international front, let me -- I'm actually really excited about that because one of the things that really helps us is that people are creative everywhere. So the behaviors and the intrinsic motivation of what drove our growth in the U.S. and in some of the markets we are in today, they're global. We have not yet found a country that we've gone in, and we've seen that, that behavior is different, there are some nuances though. One is in some of the countries, the channel may not be as developed, and that has allowed us, so they may not be specialty retail but the user need and the demand is there. So we have actually been -- we've been successful in working with mass retailers, electronics retailers, office stores to bring some of those solutions to our user base. Our international spend in marketing and sales will be somewhat higher, but not dramatically higher in some of these countries. But the go-to-market formula is not changing and what that go to formula entails is basically driving user engagement, seeding our products, using digital and social very actively, and really kind of creating raving paths. So it's a very ground up model. We definitely create awareness from that, but we also make sure that we are providing a great experience, and we are building off that engagement, which ultimately then drives network effects and word-of-mouth marketing. So I think both from a channel perspective and from a consumer marketing perspective, the core of the formula remains the same.
Adrienne Yih: Very helpful. And for Marty, this is a little bit of a loaded question because it's got so many components to it. So far, what I'm hearing on the cost side is that raw materials are going up, but you have new unit breakpoints, which are sort of economies of scale, you're shifting countries of manufacturing. And so I guess my question is, let's just take the 600 basis points of gross margin expansion in the quarter. If you take out the country mix, so how would we think about the IMU or the initial margin on the manufacturing of the product versus perhaps mix shift of higher-margin subscriptions and accessories and materials and that's why I say the loaded question because there's so much going on in there, so any help there would be super helpful? And maybe one of the easiest ways to start that is when did you shift to Malaysia from China as a full quarter and maybe that will help me give myself a baseline? Thank you.
Marty Petersen: Okay. So I'll talk to your last question first, and that is our machine production shift. So we began shifting that in 2019 and the tariffs on machines increased in mid-2019. So early 2019, you didn't -- while there was a 10% tariff, you didn't see as much. The second half, you saw a lot more. And we, for the most part had gotten all of our manufacturing to Malaysia by early 2020. But then the pandemic hit, Malaysia and other countries began closing their manufacturing doors. And so we shifted some manufacturing back to China. And so we really haven't had a full quarter of non-tariffs because in order to meet demand, we have been manufacturing some of our machines back in China as well because demand has been so strong. So we have flexed back and so even today, we haven't had a full quarter out of China. In terms -- and I'm sorry, what was your other question?
Adrienne Yih: Yes, the other question was of the 600 basis points, I guess, just let's use that as an example, gross margin year-on-year improvement, how much of that would be manufacturing costs, maybe -- and maybe that's the easier way, manufacturing costs itself versus a mix shift to other categories, subscriptions and accessories and materials?
Marty Petersen: Yes, most of that was tariff related. You can see that in Q1 2020 our machines carried a gross margin of 9%, and they're 15% this quarter, and that's really tariff related. And so most of it was that. But at the same time, you do see that subscriptions, for example, was a full percentage point higher when subscriptions carry essentially a 90% gross margin. And so -- but the majority of it is really tariff-related as well as some manufacturing cost reductions because we have been able to negotiate and with some of our new manufacturers as we expand our supplier base to others.
Ashish Arora: I'll just add to that and just say that promotions is another area that probably contributed some. We were more promotional in Q4. In general, people are -- just more promotional activity. And in Q1, we are constrained, so we also did less promotions.
Adrienne Yih: Yes, makes sense. Well, best of luck and I'm glad to hear Q2 is off to a strong start as well.
Ashish Arora: Thank you, Adrienne.
Operator: And your last question comes from the line of Mark Altschwager with Baird.
Mark Altschwager: Great, good afternoon. Thanks for taking my question and let me offer my congrats on the quarter and your first call here as a public company. So to start out, I wanted to ask about engagement. Really nice to see that up year-over-year, any perspective you can provide on how engagement has trended in kind of maybe the March, April, May time frame, I know that the metric you provide is a 90-day metric, so maybe just qualitatively, I'm trying to understand your user behavior recently here as vaccine distributions picked up and we're seeing kind of more demand for the out-of-home activities and just any key learnings as we've begun to -- lockdowns that's really forming your outlook for the remainder of the year?
Ashish Arora: Sure. So Mark, one of the things that -- so we're actually really excited about our engagement and how it stayed consistent, in fact, done better than we were in the same -- at the same time last year. And it's particularly meaningful because as you're bringing in new users and majority of our users who are joining our platform are first time users, and it takes them a while to get on-boarded and get really familiar with the platform. So the fact that it stayed as healthy as it has, is really a good thing. So we really haven't noticed very many changes in the types of engagement, even in the last few weeks and months. We had a strong engagement on clearly throughout the Q1. But even more recently, like as we've gone into Mother’s Day and we've seen healthy engagement. As we go through the second half of the year, as we go into summer, there's a hypothesis that some of that engagement patterns may change. So maybe people are doing less home DIY projects but one of the beautiful things about our platform and our category is that all of a sudden, there will be weddings, and there will be people -- there will be lots of t-shirts and people will plan trips and cruises, and they'll want to wear matching t-shirts. Back-to-school will be much bigger, so there is patterns of engagement that we're keeping very -- keeping a handle on, and we're also kind of matching our content programs. But one thing I want to emphasize, as I said before, is that, yes, there will be some engagement patterns that will change but there is a lot of engagement that will stay consistent. People will still have the same festivals and people prepare for holidays, people will be doing gift -- they'll be gifting. So we continue to monitor the situation, and we will continue to adapt our engagement. One final point I'll add is that we've actually really been investing in our dedicated engagement team, and I'm really excited about that because I think we'll be able to not only understand how user behavior is changing, but be very proactive in making sure that, that engagement stays healthy.
Marty Petersen: Mark, and just one quick comment on a general comment on engagement. Engagement does have some seasonality in it, lots of engagement, particularly in Q4 when people are making things for the holidays, both Thanksgiving and Christmas. And so you do see some seasonality patterns in engagement.
Ashish Arora: And one last final point, Mark I'll make is that because we are -- like we had a platform and because we are connected, we can see this engagement in real time, right. So we have not only programs that are forward planning, but we can also react to daily, weekly basis. And if you see a downturn, we can really kind of try to understand what's driving that and also put in place programs that offset some of that. But I just wanted to say this is a benefit of having a cloud-based platform that we can actually look at some of this behavior in real time.
Mark Altschwager: That's great color, thank you. And then I wanted to follow-up also on international. Maybe just a bit more -- I mean great growth there. Just the 10% of sales level, is that something you would expect to sustain for the year? And then just any more color you can provide on the drivers, new retail relationships versus sales to your existing partners or any notable differences on the accessory materials, ARPU, and subscription penetration versus what you're seeing in your domestic markets? Thank you.
Ashish Arora: Thanks Mark. Those are about five questions but all good ones. So we're not right now commenting on what the business will look like in the future, whether it's -- where we'll achieve. But needless to say, we are really excited, and we are learning a lot as we go into some of these markets. As you saw that 10% of the business of our total revenues in Q1 came from international. And we are very focused on driving additional countries, so while we've launched in the four markets that we've talked about, we are now in several countries in Europe, including the Nordics, Spain, Italy. We have added Middle East, South Africa. We are already -- we're building up a team in Singapore, Malaysia, and Asian countries as well. And as I said before, in some of these markets, they're specialty retail, and we understand that, and we call it the core of our concentric go-to-market strategy. But in many countries we have not had the benefit of that. And so we've been very -- we've been successful in working with other retailers like consumer electronics retailers and office retailers and mass retailers and bringing those solutions to the market. Our go-to-market strategy, which I talked about earlier still remains the same. One difference, I will highlight that I think we will encounter in some of these international markets is what we call prosumers. So while -- when we started off in North America, for example, we initially really focused on the hobby market and then we saw as we noted, 29% of our users also not upselling things made for our products. As we are going in some of these countries, there will be situations where we will enter the market more focused on small businesses and prosumers and then kind of building on that into the hobbies market. But overall, again, as I said, we are in the very early stages, and we have a great team in place, and it's the first innings.
Mark Altschwager: Great, thank you. And best of luck.
Ashish Arora: Hey, thank you Mark.
Operator: Excuse me speakers, I'm showing no further questions at this time. You may continue.
Marty Petersen: I think that's it then. We want to thank everybody for joining us today and we look forward to many more of these calls. Thank you.
Ashish Arora: Thanks everyone.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
