Good day, and thank you for standing by. Welcome to the Circuit Q1 Earnings Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn it over to our speaker today, Jim Suva, Senior Vice President of Finance. Please go ahead, Jim.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's First Quarter 2023 Earnings Call. Please note that today's call is being webcast and recorded on the Investor Relations section of the company's website. A replay of the webcast will also be available following today's call. For your reference, accompanying slides used on today's call, along with a supplemental data sheet, have been posted to the Investor Relations section of the company's website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer; and Kimball Shill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host live Q&A. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements, including statements regarding our strategies, business, expenses and results of operations in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations as 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-K. 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, May 9, 2023. Cricket assumes no obligation to update any forward-looking projection that may be made in today's release or call. I will now turn the call over to Ashish.

Thank you, Jim, and welcome, everyone. As we mentioned last quarter, we expected Q1 revenue to be materially below prior year. Even with that, revenue in the first quarter was softer than we expected for connected machines, down 45% year-on-year and accessories and materials down 39% year-on-year as retailers continue to take a conservative approach to inventory commitments and softer consumer spend. These trends continue quarter-to-date. Subscription revenue, on the other hand, grew 16% year-over-year and 6% sequentially. Despite these mixed results, the strength of our financial profile allows us to deliver positive profits and strong cash flow. We will continue to operate in a fiscally disciplined way, making focused investments that will deliver increased user engagement and growth over the medium term. The Cricut platform now has over 8.2 million total users, up 19% over Q1 last year. 3.7 million users' or 45% of total users have cut a project at least once within the first quarter. This creates a tremendous opportunity for us to build deeper user engagement on our platform. Our goal is to bring a majority of our users into design space monthly to be inspired. We believe increasing visits to design space and improving our ability to serve relevant, makeable content that matches the interest of each user will lead to higher engagement and an increase in paid subscribers. We also want to broaden user engagement activities such as liking, book marking and sharing projects. As users increasingly drive growth in shared community projects and our platform would effectively matches content cater to each user, these mutually reinforcing effects will create value in our platform for all users. As we outlined last quarter, we have intensified our focus on our new user acquisition and platform expansion in order to drive engagement, subscriptions and increase monetization.…

Thank you, Ashish, and welcome, everyone. In the first quarter, we delivered revenue of $181.2 million, a 26% decline compared to prior year. We generated $9.1 million in net income as we continue to invest in our key priorities. Breaking revenue down further, revenue from connected machines was $34.1 million, down 45% over Q1 2022. As we said in our last call, we ended 2022 with healthier channel inventory levels and anticipated that retailers would replenish inventory within the quarter. Retailers, however, continue to be cautious in rebuilding inventory due to softer consumer discretionary spend. They continue to purchase but below our expectations. Revenue from accessories and materials for the quarter was $72 million, down 39% over Q1 2022 and was impacted by retailers' conservative stance on rebuilding inventory levels. Also impacting revenue in this segment is lower engagement discussed above. Subscription revenue for the quarter was $75.1 million, a 16% increase over Q1 2022, reflecting targeted investments in Cricut Access and the expansive improvements made over the last several quarters as well as an uplift from Q4 seasonal strength in machine sales. In terms of geographic breakdown, international revenue was $33.5 million compared to $36.5 million in Q1 2022. As a percentage of total revenue, international was 18% compared to 15% of total revenue in Q1 2022. Turning to users and engagement. I'm pleased to share we ended the quarter with over 8.2 million total users or 90% growth over Q1 2022. As we increase engagement through the initiatives Ashish outlined, we have a significant opportunity to bring new users through the Cricut experience. This includes onboarding them more effectively and getting them to engage more quickly on design space. We ended the quarter with over 3.7 million engaged users. This was flat over Q1 last year. We ended…

[Operator Instructions] Our first question comes from the line of Mark Altschwager from Baird.

Maybe just first off, a quick clarification. When you say that the trend in connected machines and material sales continue quarter-to-date, are you referencing a continuation in the year-over-year growth rate that you saw in Q1 because the comparison gets quite a bit easier Q2 versus Q1. So I just want to be clear about what you're referencing there.

So as we called out, we were below our expectations for Q1. And we had called out that Q1 will be down year-over-year, but we saw demand even softer than we expected. Those are the trends that we're referring to as we move through Q2 so far. So we're seeing... Just... Demand is softer than we expected to.

And Mark, I'll just jump in. This is Ashish. I think there are 2 things to consider. One is that we clearly had a sell-through our new user acquisition, which is lower than what we expected. It's a lot more exaggerated for the sell-in, right? Because the point that Kimball made in his prepared remarks that the retailers took a conservative approach and we're consolidating inventory, which had an exaggerate impact on 7. So we took more inventory out of the channel. And at some point, we believe that, that will reverse in terms of they will have to order inventory going into the holidays as we expect regular seasonality.

And on the retailer front, I mean, the hesitation regarding inventory is understandable. But I'm wondering, do you have a sense of what the sell-through rates look like with your channel partners? And I guess, specifically with materials and accessories, I'm curious how the new pricing strategy and the promotional strategy is hitting the mark and any learnings you have over the last few months?

So as Ashish pointed out, to your last question, sell-through tends to be healthier than sell-in. And on materials specifically, when we are more promotional and closer to cost parity with competition that we are holding share or even gaining share. and we have maintained that promotional cadence and see that going forward so that we can be price competitive, especially when consumers are so cost conscious in the current environment.

And maybe just finally, curious if you could expand upon some of the marketing strategies you talked about with respect to new customer acquisition and refilling the funnel. Any particular tactics or areas where you're seeing the best results?

So let me kind of spend a couple of minutes on this, Mark. Again, as we said before, we believe we have a large TAM, and we're in the early days of that category, right? And one thing that gives me a lot of confidence and comfort and we've talked about this previously, is that we are attracting Gen Zs and beginner crafters, which really kind of speaks to the breadth of the category, right? And when you look at the trends that especially drove growth prior to COVID, these are secular trends like personalization and access to digital tools, et cetera. Now clearly, in the shorter term, we are being impacted by some of the headwinds that we've talked about in terms of inflation economy, consumer sentiment. But our job and what we think -- what we think we have more control over is how do we add people to the funnel? And one other thing that I know you look at Google Trends, if you look at the specific search term on what is Cricut, that can -- and if you compare it to a regular year like 2019, it shows the amount of interest if you compare April over April, the last over the few years, it basically shows that the interest exceeds what we are seeing in terms of sell-through, right? So there's clearly pent-up demand that we believe exists the funnel. As far as the follow is concerned, the way we are approaching, and I'll speak to all 3 stages of the funnel. From the top of the funnel perspective, we basically, we are focusing on digital media, social media tools, network effects, and we believe that works very well for our brand, word-of-mouth marketing. As we pull people through the funnel, which is -- this is where you heard me talk about the assets that we are developing in terms of comparison tables, product with and anything that would help address the users' questions and purchase barriers. And I think you'll see us continue to do that. And finally, when it comes to the bottom of the funnel, that's where we've been less promotional. We think it's the best thing for the brand. Instead, what we have done is we focus on affordability and value, which is where we've been offering bundles and that will continue to be a big part of our strategy. At the end of the day, we think that us focusing on those things, us continuing to build the funnel just like what happened right at the start of COVID, we saw the -- there was a funnel, it converted quickly, right? We think the same phenomena is going to exist as and when some level of normalcy returns. And in the meantime, we need to continue to build this infrastructure around the marketing funnel that we believe will ultimately pay off as the world returns back to normal.

[Operator Instructions] All right and that all we have today. I would like to turn our call back over to Jim Suva for closing remarks.

Thank you, Haley. Thank you all for joining us this afternoon. We have a large opportunity over the long term to drive new user growth and increased engagement. We believe the initiatives we are deploying now will position us well for when consumer spend returns. We will continue to manage the business for sustainable, profitable growth and generate healthy cash flow. I'm excited about the opportunities ahead of us. We will be at the Baird Global Consumer Technology and Services Conference in New York on June 7 and look forward to seeing everyone then. This now concludes this earnings call. If you have additional questions, please e-mail me at jaysuvaa@cricut.com. Thank you.

Thank you for participation in today's conference. This does conclude our program. You may now disconnect.