Welcome to the Cricut Q1 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Jim Suva, Senior Vice President of Finance, Treasurer and Investor Relations Services. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's first quarter 2024 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 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 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, May 7, 2024. Cricut assumes no obligation to update any forward-looking projection that may be made in today's release or call. I will now turn the call over to Ashish.

Thank you, Jim, and welcome, everyone. Q1 played out largely as expected. Operating margin dollars grew significantly by 139% or $15 million, driven by lower inventory write-offs, more paid subscribers and higher sales of connected machines despite an 8% year-on-year drop in overall sales. Given the confidence in the sustainability of our profitable operations, the Board of Directors approved three capital allocation items: a special dividend of $0.40 per share, a recurring semi-annual dividend of $0.10 per share, and another $50 million stock repurchase program. Kimball will go over these three capital allocation items in detail in a few minutes. In Q1, Platform revenues increased 3% on paid subscriber growth. Products revenues declined 15% as the positive growth in connected machines from higher units was more than offset by a decline in accessories and materials. The areas where we could do better are straight forward. We need to attract more new users to buy our connected machines. We need to reverse weakening engagement trends and re-inject enthusiasm among our users. We need to be more effective competitors in accessories and materials. Remember we have four priorities: New user acquisition, User engagement, Subscriptions, and Accessories & Materials. I will briefly review these items and provide some detailed commentary on our new platform innovations. As mentioned in our press release, going forward we will talk about active users who have used their connected machines in the past year and Kimball will go into more detail on metrics and KPIs. We ended the quarter with over 5.95 million Active Users who cut in the past year, slightly up from 5.94 million a year ago and in line with our expectations. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drive our monetization flywheel. During Q1, we…

Thank you, Ashish. I would like to provide more details on the capital allocation items. The board of directors approved a special, one-time dividend of $0.40 per share and a recurring semi-annual dividend of $0.10 per share. Both dividends are payable on July 19, for shareholders of record on July 2. The recurring semi-annual dividend of $0.10 is anticipated again in about six months, which would be the January timeframe but is subject to board approval. The board of directors also approved a new $50 million stock repurchase program. As mentioned in our last earnings call, we effectively completed our previously authorized stock repurchase program announced in August 2022. The board of directors views this level of capital allocation, both stock repurchases and dividends, as appropriate given the company's operating and financial plans and will continue to evaluate capital allocation on a regular basis. These capital allocation decisions are possible due to past profitability and our confidence in the sustainability of our profitable operations. We want Cricut to always have ample liquidity to sustain and grow our business, but not to hold excess cash for no reason. We do not anticipate the need for any debt or utilization of our credit line in the near term. Now on to the financials of Q1 and our outlook. Last quarter, I mentioned that we would adjust our reporting segments and KPIs. Recall, Cricut has been a public company for approximately 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 have redesigned some aspects of our quarterly information package. We increasingly view Cricut as a platform business with physical products. My commentary will be consistent with our…

Thank you. [Operator Instructions] Our first question comes from Erik Woodring of Morgan Stanley.

This is Maya on for Erik. The total number of engaged users fell both sequentially and year-over-year. Can you maybe just give us a little bit of details and colors on some of the initiatives you've talked about in prior quarters to increase engagement? And kind of is that -- when do you expect to see that materialize? And when do you think engagement bottoms? And then I have a follow-up.

Maya, this is Ashish. So as we've kind of mentioned before, engagement is a really important initiative for the company, and we have a team that's focused on it. As you pointed out, engagement did decrease year-on-year. So let me give you -- one of the main reasons for that was when you look at the 2020 and 2021 cohort, which is roughly -- we acquired about 4 million users, as they go through the graduation curve, there's a natural attrition that happens and that's what's putting a lot of pressure and creating a headwind for the company. Now that would typically be offset by newly acquired users that are more engaged, and we obviously would are not acquiring enough of them to offset the 2020 and 2021 headwind. In terms of initiatives, we have a number of initiatives that we have that are focused on driving engagement. One of the main focus areas is as we look at onboarding users, we want to make sure that they have a great positive out-of-box experience. And not only that, they actually make enough projects in the first 7 to 30 days. So we've seen some positive results, as we talked about in our prepared remarks. In addition to that, we have initiatives around education, helping people find inspiration so they can actually find the project and ultimately cut it. So I think there's a number of initiatives. We have a pretty strong conviction that some of these initiatives will pay off. One other initiative that I want to kind of highlight as search and personalization. And we -- again, like I said, we believe that ultimately, this trend will reverse its up and we just need to stay focused and continue to execute on it.

And then as you guys mentioned, international revenue declined for the second consecutive quarter and you called out specifically like U.K. and the EU. Could you maybe speak to a little bit about some of the underlying, whether it's macro trends there and how that compares to North America? And then if engagement differs by region as well.

Maya, this is Kimball. So as you pointed out, 2 regions really kind of overwhelmed some of the goodness that's happening in many of the other countries where we are in our international business. Largely, we're seeing the same kind of consumer pressure there from kind of macroeconomic headwinds that we see in North America and even more pronounced in the U.K., which ways on the business. I would [ taste ] to add that we continue to see international as a huge vector of growth for us in the future, and we're barely -- we think we barely tapped the opportunity there. But the headwinds today kind of overwhelmed some of the goodness that we have in some of the many countries we're in. We're in over 50 countries around the world.

And just one other sub question you asked, Maya was about engagement. It's hard to kind of generalize because there's so many different countries and different stages of their maturity. So I think but more or less, I would say, if I was to aggregate an answer, the engagement is similar to what we see in the U.S. And given -- again, I just want to qualify that. If you are in a country, we see early adopters, so the engagement could be higher with in some of the more mature countries that is going through a similar graduation curve, and we're [ getting ] additional users that may not be as engaged, but I would say overall, the trends that we see over time that we saw in the U.S. are similar to what we are seeing in different parts of the world just so happens to be where they are in terms of their launch process.

Our next question comes from Adrienne Yih of Barclays.

This is Angus Kelleher on for Adrienne Yih. So there's been a lot of noise in the hard goods product segment on gross margins with the stock-outs last quarter in connected machines, some clearance reserves last year in A&M and now with the reporting style shift, do you think you could share some thoughts on what type of margin profile you see out of that segment going forward over both the short term and the long term? And then I have a follow-up.

First, I'd call out that in our prepared remarks, we talked about expectations for full year operating margins being similar to last year. And then if you look at our platform margins -- they are very stable over time and consistent. We were at 88.8% for the quarter, down slightly from last quarter as we have more amortized software costs that flow through COGS for our platform margin. And so if you take those 2 points, that should help you set expectations for what products margins will be for the year going forward.

Okay. My second question is, could you talk about some of the retailer trends around sell-in and sell-out specifically? Has there been any restocking efforts? And if so, how has the consumer response been at the retailers once they receive that fresh product?

So thanks for the follow-up. So at a macro level, this quarter, sell-out continued to outpace sell-in, but at a much more reduced rate that we saw last year. And if you noticed -- we called out that machine sales were actually up 8% year-over-year as some retailers partially restocked. In general, we still saw channel lighter than we would like to see it, and we did see that effect some of the opportunity in -- during the promotions in the quarter.

So let me just kind of reinforce some things which Kimball already said, right, which is we see sell-through higher than sell-in, right, Kimball?

Yes. [ Sell-out ].

Than sell-out, right? So we see sell-in to retailers greater than sell out -- sorry, we see...

Sell-out to [indiscernible].

… consumer is greater than selling to retailers. The second is, as we've gone through a few sales events, we see that some of the retailers have largely or somewhat missed the opportunity because halfway through the sale event, they were out of stock. Now they have started stacking some more than what they had done previously, but we still think of it as a huge opportunity as we really drive and accelerate marketing we think that our team is doing a good job creating the funnel, [ not ] with the promotional strategy, executing and converting the funnel, we just need to make sure that our channels are well stocked and leverage the opportunity to basically sell more machines to consumers.

Our next question comes from Asiya Merchant of Citi.

One for Kimball one for Ashish here. Accessories and materials, they continue to be fairly weak. I know you mentioned there was a lot of competitive intensity there. Maybe you can help us understand how we should think about the trajectory of this business? Should we continue to expect the decline to be at this level going forward? Or is there something that could change the trajectory of this business. The one that I had to Kimball was on operating margin plan. I think you reiterated unless I'm mistaken about 9% operating margins kind of flattish for 2023. You guys obviously just posted very strong operating margin. Why is such a big decline for the remainder of the year?

Asiya, this is Kimball. I'll answer for those questions and Ashish can add commentary after. So I'll answer your last question first. So on the operating margins, first, I'd call out that Q1 was in line with our expectations. So while we're very pleased with the increase of $15 million in profitability and up 139% that was still in line with what we expected for the quarter. And as we look to the rest of the year and we continue to lean into our increased sales and marketing spend, which was 20% of revenue for the quarter, which is a high watermark for us. And we continue our promotional -- deeper promotions on machines and our promotional cadence on accessories and materials that will affect margins as we move through the year. And so we still expect full year margins to be around flattish kind of compared to last year, which was 9.1%. As to your question on accessories and materials, it is a segment where we continue to see pressure. Part of it is lower engagement and as Ashish highlighted in some of his comments. And so when people are cutting fewer projects, they're consuming less materials, and that clearly affects us. We do continue to see competition, both from white label retailer brands for brick-and-mortar retailers as well as more entrants into the marketplaces. So we do continue to see competition in that space. I would like to call out, we are very proud to launch our Cricut Value [ vinyl ] in the quarter. And then we're still in the very early days of that. But it's an example of things we're doing to reinvent that business, where it's reengineered product, reengineered packaging and configurations designed specifically to compete well in online marketplaces. And so that's one example that we've had in the works for a while. There's others that will come in the future quarters, but we're taking steps to help us address this business. But in part, we'll need to see our engagement efforts start to bear fruit to help turn that business around.

And I'll just add one other comment to the accessories and materials. We've talked about in the past, we didn't necessarily address at this time. We continue to be equally -- we know that when we are within a certain range of competition, we hold our share really well. And so increasingly, we have not only reduced the cost of materials, but we will be making sure that we win our fair share and provide a great customer experience. So we -- that's something we you'll see us execute on [ more ].

Great. And if I may, another one. You guys have obviously amazing free cash flow generation here. You're announcing some big shareholder return program. Why not use that cash and whether it's even more marketing or any other inorganic growth that could maybe reverse the declines in the business?

Asiya, this is Kimball. We have a strong conviction that we're a growth company, and we have a huge opportunity in front of us. We also have a core ethos to grow profitably. And so as we look at our investment in marketing today, as we already have highlighted, it was 20% of revenue in self marketing, and that is a high watermark for us. We haven't seen it translate into year-over-year POS yet, but we're encouraged by the leading indicators that we're tracking in terms of reach and clicks and views and increased traffic to cricut.com. We are confident that we're spending on the right things and we're comfortable that we're spending at the right levels. And as we get more data and learn, we will lean into that spend, but we want to make sure that we are doing it responsibly and in a way that helps us manage our business for the long term with a view on profitability.

I'm showing no further questions at this time. I would now like to turn the call back over to Jim Suva for closing remarks.

Thank you, Breanna, and 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 Cricut platform continues to not only strengthen but also provide increased value to our users. We continue to manage the business for sustainable, profitable growth and generate healthy cash flows. I'm excited about the opportunities ahead of us. If you have additional questions, please e-mail me at jsuva@cricut.com. This now concludes this earnings call, and you may disconnect. Thank you.

Thank you for your participation in today's conference. You may now disconnect.