CRCT - NASDAQ

Good day, and thank you for standing by. Welcome to the Cricut Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Cricut [ph]. Please go ahead.

Thank you, operator and good afternoon, everyone. Thank you for joining us on Cricut's Second 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-Q. 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, August 8, 2023. 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. We finished the quarter in line with our expectations. We continue to manage the business with an eye towards profitability, even as we navigate softer consumer spend. I'm proud of the accomplishments the team has made, and we launched some important innovations that I will discuss in detail. Looking at Q2 highlights, on a year-over-year basis, Q2 total revenues were down 3%, machine sales were up 5% and operating income was down 4%. We are striving to return to growth, but remain disciplined with how we spend. We are also very focused on innovation and strengthening our platform. I'm also excited to share that on July 18, we launched Cricut Venture, the largest and fastest connected cutting machine on the Cricut platform. Cricut Venture represents the fourth all new architecture of connected machines in our history and demonstrates our commitment to innovation. Cricut Venture cuts a wide variety of materials with precision at commercial speeds, as well as rights scores and foils. With Cricut Venture, makers can create for occasions that require larger sizes and quantities. From bigger custom wall decals to large batches of custom T-shirts or tote bags. Cricut Venture is able to cut up to 75 feet of repeated images. It works seamlessly with design space and is compatible with all our existing 13-inch smart materials as well as our newly introduced 25 inch width powered by Cricut design space, our platform helps millions of users discover, make and share their projects, and Cricut Venture expands the ability for users to make. Thanks to enhanced software features that support this new machine. We focus on makeable content featuring projects and art that lend themselves to large projects, including education, parties, weddings, sports events and apparel, large batch quantities, and much more. We are excited to see how makers will use Cricut Venture to create projects and share them with other community members. We launched Cricut Venture in July 18 with our first in person consumer event since 2020. We love the energy these events generate within our community and are planning to do more in person customer events around new products on our Cricut platform. We are pleased with early sales performance. Recall that we have four priorities, which are new user acquisition, user engagement, subscriptions, and accessories and materials. I will briefly review these items and also provide some detailed commentary on our new platform innovations. We added over 200,000 new users in the quarter, approximately in line with our expectations. We continue our focus on new user acquisition and platform expansion to ultimately drive engagement, subscriptions and increase monetization. We have shared previously that our funnel is healthy. And we see an opportunity in holiday to pull consumers through the funnel who have been pausing in their purchase decisions. A recent survey among consumers in the Cricut Cutting Machine funnel confirmed that the current financial situations are a key barrier to purchase. About a third of consumers in the Cricut funnel stated that they are struggling to make ends meet on a personal level. Consumers at the top of the funnel are most interested in understanding the capabilities of the Cricut machine and how it fits into their lives. As consumers get closer to purchasing a Cricut, affordability becomes a constraint. Among these consumers at the bottom of the funnel, affordability is the number one barrier to purchase. About half of those consumers say that they are saving money to purchase a Cricut, while about a third are waiting for a sale or a special deal. We are using these insights to inform our strategy heading into the holiday season. We plan to be more promotional in the fourth quarter, with deeper promotions for shorter periods of time, combined with a 360-degree marketing plan, including adding over 200 paid influencers to pull more consumers through the funnel. We ended Q2 with nearly 3.7 million engaged users, which is roughly flat year-over-year. We are pursuing efforts to drive engagement along our members journey from onboarding to stimulating discovery and inspiration to assisting, making and encouraging sharing. As we have highlighted before, mobile plays an important role in driving more interactions. We launched an enhanced homepage inside Design Space on mobile platforms in July 2022 and continue to make improvements on an ongoing basis. For the first half of 2023, over half the interactions on Design Space homepage came from mobile devices. We have also greatly simplified navigation on the platform for desktop users. This new navigation also makes learning plans, heat guide, Cricut Learn & Shop easily accessible from inside the platform. Increasingly, we will integrate more and more video content, learning aids and instructions inside the platform itself, where users spend the majority of their time. We're always listening to our customers and prioritizing enhancements that alleviate pain points and friction and increase the value of our Cricut Access subscriptions. In Q2, we launched enhancements for Print Then Cut. Print Then Cut functionality gives users the ability to print an image on their color printer and then cut the outline of their printed design. This gives them color designs without having to use layers of different materials in different colors. Last quarter, we shared the introduction of Warp, which enables creative effects on text. In the coming months, we will be releasing version two of that feature, where users can Warp their images, giving them greater creative possibilities. In our last call, we mentioned how community projects shared on our platform can help inspire and match content to other users. These mutually reinforcing effects will create value in our platform for all users. At the end of Q2, we improved the way members can search within the library of community projects and saw a notable increase in members engagement with those projects. We ended the quarter with over 2.7 million paid subscribers, which was essentially flat quarter-over-quarter and up 15% year-over-year and was in line with our expectations. AI, machine learning and especially generative AI models are much in the news. I would like to point out some examples of how we are using AI and machine learning to add more valuable benefits to Cricut subscribers. AI is an area of exciting potential for the Cricut platform and is complementary to our strategy. We see opportunities for AI to impact the experience throughout the user journey around both search and discovery and design and make within Design Space. We have been working on machine learning and AI for a long time and we've recently delivered several AI powered capabilities and are in active development on others. I want to give you some insights into these AI and machine learning capabilities. On the design and make site, Automatic Background Remover uses a custom machine learning model and is one of our most popular Cricut access features across our desktop and mobile apps. On the search and discovery side, our Similar Images functionality is powered by a machine learning model that is trained on and tuned for vector images. Building on the Similar Images foundation, we are also developing Semantics Search, a richer search capability that leverages modern machine learning techniques. We are currently testing Semantic Search with both internal and external users. We expect to see richer search capabilities powered by Semantic Search in the future. AI techniques will also be used to drive the display of personalized content on the Design Space homepage and in our engagement marketing, and we continue to actively refine our personalization algorithms. Generative AI is an area of great interest and excitement in Design Software and it holds great promise to augment the already rich Cricut access content offering. We're actively experimenting with generative AI capabilities that allow users to create unique images based on detailed natural language prompts such as a sailboat with Dolphins jumping in the waves nearby. A unique challenge and area of differentiation for Cricut in building generative art functionality is that we will ensure that generative images are optimized for cutting machines. Our teams are investigating other ways in which AI will add meaningful value to our platform, with a focus on facilitating the journey for our members between inspiration and making. We see generative AI as being complementary and will enhance our content strategy in a meaningful and positive way. At the same time, we believe that it does not replace human creativity, but enhances it. We are focused on doing this responsibly while ensuring we protect copyrights and our artists. We are excited about the new ecosystem of materials we launch alongside Cricut Venture, including 25 inch width materials and all new markers developed to support the scale and speeds that Cricut Venture enables. As we've highlighted before, we are on a two year journey to transform this business. Consistent with prior comments, we will continue a promotional cadence in this category to remain price competitive for consumers. We see that when we are in the price range of our competitors, we get our fair share. We have a strong focus on optimizing our products for lower costs so we can compete better in the market with improved margins, while still creating a differentiated offering that works seamlessly with our machines and platform. 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 usage of our ecosystem. I've never felt so encouraged and excited about the Cricut platform. We're in the early days of this transformation while still remaining profitable, we are driven to continue to innovate while exhibiting both long-term focus and current discipline. With that, I will transition the call over to Kimball to go into the financial details.

Thank you, Ashish, and welcome, everyone. In the second quarter, we delivered revenue of $177.8 million, a 3% decline compared to prior year. We generated $16 million in net income, our 18th consecutive quarter of positive net income as we continue to invest in our key priorities, breaking revenue down further, revenue from Connected machines was $37.3 million, up 5% over Q2 2022. As Ashish mentioned, new user acquisition was in line with our expectations in Q2 as we continued to experience the effects of softness in consumer discretionary spending. While we are encouraged to see year-over-year machine revenues turn back to positive growth, we are still far from where we aspire to be. Revenue from accessories and materials for the quarter was $64.4 million, down 20% over Q2 2022. Note that in Q2 2022, we benefited from channel fill for the launch of AutoPress and Hat Press. Excluding this, revenue from accessories and materials would have been down approximately 4% compared to Q2 last year. As Ashish referenced, we have more work to do here. Subscriptions revenue for the quarter was $76.1 million, a 13% increase over Q2 2022, reflecting targeted investments in Cricut Access and the expansive improvements made over the last several quarters. In terms of geographic breakdown, international revenue was $32.6 million, up 34% compared to $24.3 million in Q2 2022. As a percentage of total revenue, international is 18%, compared to 13% of total revenue in Q2 2022. Turning to users and engagement, I am pleased to share we ended the quarter with over 8.4 million total users, or 70% growth over Q2 2022. We ended the quarter with nearly 3.7 million engaged users, essentially flat with Q2 last year. We ended the quarter with over 2.7 million paid subscribers, up 15% from Q2 2022 and flat sequentially. Our subscription attach rate declined to 32% in Q2 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 margins. Total gross margin in the second quarter was 49.3%, an improvement compared to the 46.5% in Q2 2022, and reflects a higher amount of subscription revenue as a percentage of total revenue, breaking gross margin down further, gross margin from connected machines was 9.4%. This compares to 1.6% in Q2 of last year. The increase in margin was primarily due to less promotional activity as a percentage of revenue and a favorable product mix compared to Q2 2022, when our end-of-life maker machine was a greater percentage of machine sales. Subscriptions gross margin for the quarter was 89.6% compared to Q2 2022 of 90.9%. Second quarter gross margin for accessories and materials was 24.7%. This compares to 29.1% in Q2 2022. The decline in margin was driven by increased promotional activity and warehouse and operations cost as a percentage of revenue, along with an impairment of unused equipment and components associated with the winddown of manufacturing of certain products. Looking into the second half for both connected machines and accessories and materials, margin pressures from amortizing fixed costs on warehousing and capitalized operations expenses will accelerate through the second half, especially in Q4 as we reduce inventory levels. Also, Q4 is typically our lowest gross margin quarter. Machine sales are seasonally higher with the holidays, which will naturally pressure margins since machines carry lower gross margins than other products and will represent a higher percentage of revenue in that quarter. Total operating expenses for the quarter were $68.4 million. And included $11.2 million in stock based compensation expense. Total operating expense was up nearly 5% from $65.4 million in Q2 2022. While research and development and sales and marketing declined year-over-year, general and administrative expense increased, primarily due to an increase for bad debt allowance, increased personnel related expenses and an increase in professional services. Operating income for the quarter was $19.3 million, or 10.8% of revenue, compared to $20 million, or 10.9% of revenue in Q2 last year. We delivered our 18th consecutive quarter of positive net income. Net income was $16 million, or $0.07 per diluted share, compared to $13.8 million, or $0.06 per diluted share in Q2 2022. Turning now to the 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. Year-to-date, we have generated $159.6 million in cash from operations compared to $13 million a year ago, ending with a cash and cash equivalents balance of $361.5 million before paying the dividend in July and we remained debt free. As you recall, as part of our COVID risk mitigation strategies, we intentionally built up our onhand inventory to ensure we could supply our customers during the pandemic. Starting late last year and continuing for the next few quarters, we began to focus on bringing inventory levels in line with historical norms. As part of the company's ongoing evaluation of capital allocation, we seek to balance multiple considerations, including ensuring that the company has more than adequate liquidity and financial flexibility, evaluating opportunities to invest in our business to drive long-term shareholder returns, whether organically or through potential acquisitions, and returning capital to our shareholders. Given this, in Q2, we announced an additional $234.6 million special shareholder dividend. Of which $232.2 million was distributed in July, with the remainder to be paid upon vesting of restricted shares. This dividend comes as a result of right sizing our balance sheet, post COVID and converting inventory into cash. During the quarter, we used $1 million of cash to repurchase 104,000 shares of our stock. We were constrained on stock repurchases as we were considering the special dividend as well as a higher stock price. We have $27.3 million remaining in the repurchase program. Much of our outlook is consistent with what I communicated in our prior earnings call, but I do want to highlight a few additional items. During Q3 and specifically in July, we paid the special dividend, which will result in a lower cash balance and lower interest income in the second half of the year, we expect to continue generating healthy cash flow from operations and to end the year with substantial cash and no debt. Consistent with our commentary last quarter, we continue to see soft consumer spend and retailers taking a conservative approach to inventory commitments and are thus taking a prudent and prioritized approach in our planning as we look ahead to the second half of 2023. We expect operating margins to be slightly down for the full-year relative to our original expectations. Given first half of the year performance, typical revenue seasonality is 60% in the second half. Given the current macro environment, we expect second half revenue to be slightly softer as a percentage of full-year revenues. In terms of new user growth, we still expect to add fewer new users in 2023 than we did last year. While we have a positive outlook on subscriptions, lower new users will put pressure on our subscriber growth rate and attach rate throughout the year, and paid subscribers may be flat for the year or even down if current trends worsen. Leveraging our consumer analytics, we plan to execute deeper Q4 promotions for machines, combined with comprehensive marketing plans to address consumer concerns about affordability and consumer reluctance to spend. Gross margins will continue to be pressured. On physical products, higher fixed costs as a percentage of revenue in warehousing and capitalized operations expense will continue to be a factor throughout 2023 and more pronounced in Q4 as inventory levels decrease. Accessories and materials will also have a promotional cadence to remain price competitive. As a result, we expect full-year accessories and materials margins will be similar to Q4 2022's gross margin. We remain focused on managing our profitability while investing in areas with the highest impact. Should macro conditions worsen, we will continue to make adjustments as needed. Just as we demonstrated in 2022, we expect to continue generating healthy cash flow from operations and remain committed to our long-term operating margin targets of 15% to 19%. Our proven model has demonstrated that when we operate at scale and drive top line growth, these margins are achievable. With that, I'll turn the call over to the operator for questions.

Thank you. At this time, we'll conduct the question-and-answer session. [Operator Instructions]. Our first question comes from Erik Woodring of Morgan Stanley. Your line is now open.

Awesome. Thank you guys for taking my questions. I have a handful here, a small handful. So, Ashish, maybe just to start off, obviously you launched the Cricut Venture a few weeks ago. Can you maybe just speak a bit to kind of the TAM opportunity with this new product? Obviously, it's a relatively elevated price point, so seems to be targeted more towards your kind of professionals or your prosumers versus your hobby crafters. But just any color on the TAM opportunity you think for that how long it takes to ramp and then any kind of early feedback that you've gotten on the product. Obviously, I realize it hasn't been super long, but any color you have there would be helpful and then I have a follow-up. Thank you.

Thanks, Erik for the question. I'm probably going to deem this as my favorite question of the call. So first of all, we are really, really excited about the product. We have been working on it for a number of years and it's an exciting architecture that we are vested in and it's going to be here for a long time to say. The product is actually geared as you identified it's $1,000 price point. It is geared towards creative enthusiasts who want to make a lot more projects at a time and also they want to make larger projects. They make these projects for schools, for organizations, religious entities. We were just actually on the phone earlier today where actually the operator's wife is an event coordinator for school and she makes these large projects for schools, et cetera. So I think those are the kind of users that we are looking for. So effectively it's an upgrade of an existing product. Now some of those users will also happen to sell, right? We launched the product in July 18. We had an in person customer event, our first customer event in a few years. Super excited, lots of engagement. We then subsequently added on HSN, had a solid sales performance. Since then we've been very pleased with the sales. Overall, we are really excited. We don't break out numbers for individual products, but we believe that again, we have products at different price points. We think it'll be a very good upgrade product. And again, we are a little bit careful in terms of how we launched it in terms of inventories. So it's available on cricut.com on our retailers websites, e-commerce partners, et cetera. So consumers will not find it in store. But that's a phased approach to the launch. And as we continue to understand the market better, we'll actually drive growth and scale the product. So overall, very, very pleased with the early results of this product.

Okay, that's super helpful. Thank you for that, Ashish. And maybe if we just follow-up on that, because it almost takes into account that last point you made. Obviously nice to see Connected Machines revenue get back to growth for the first time in a handful of quarters. But if we were to normalize for the launch of Venture and kind of exclude any of that channel fill, what would Connected Machines kind of growth or declines look like on a year-over-year basis? And maybe if you could outline any impact to Connected Machine gross margins from the Venture impact, that would be helpful as well. Thank you.

So I think I'll take a question in two parts. One is I'll just talk about acquisition overall, right? And again, we can clearly talk about international. Then maybe, Kimball, you can jump in and talk about gross margins and overall how our portfolio mix is improving. So let me kind of just talk at a higher level in terms of acquisition. So our user acquisition this quarter was pretty much in line with our expectations. We talked about early on in the year that we expect to acquire fewer new users in 2023 compared to 2022. And that was somewhat rooted in the fact, given inflation, consumer spending, especially on discretionary products, coupled with the fact that as you pointed out, average prices are higher this year, we're being less promotional, et cetera. So I think, as I said, our new user acquisition this quarter was very much in line with expectations. Now, when we look at our funnel, overall, the funnel is pretty healthy. Our awareness continues to build. And as people are coming through the funnel, you kind of hear a few different things. They kind of defer at the bottom of the funnel. They talk about waiting for a sales event. They talk about saving money or they just will say, okay, I'll buy it a few months later. Now, given that as we are going into Q4 and we talk about this in our prepared remarks, we basically decided that we want to be a little bit more promotional. So we are running deeper promotions in short spurts. And we think it's a really exciting opportunity for us to unlock the funnel that we've been building so that we can actually convert some of those users. And one of the ways we actually planning to do that, and we're going to basically generate a lot of content, is how consumers can actually help, how we can help consumers save money. So that by making things rather than having to buy those things. So we think that that message, along with how we are doubling down in marketing is going to really help the acquisition. And finally, I'll just say when we look at our long-term trends, they're all healthy. We look at our TAM and the broad demographic that we are being able to attract, including a significant percentage of our customers are beginners. We think we're in the very early stages of our penetration. Kimball, why don't you talk about the impact on gross margins, both from a portfolio perspective?

Yes, so Erik, as you pointed out, we were up in our machine gross margins and actually machine revenue for the quarter. And we're really excited about that. There's a couple of things going on that Venture doesn't influence at all. One is we've talked about we're going to be less promotional overall this year than we were last year, and we're seeing the benefit of that. The other benefit is we've seen the mix of our machines tilt more towards some of our newer products that carry higher gross margins. And so even though we don't disclose units, I'll say that we sold marginally fewer units in the quarter than we did a year ago, but we got more revenue and higher profit from them. Venture was entirely an online launch, and so there's no sell in in Q2 related to the launch of that product. And we chose to do that because it's a big product, it's a heavy product, and it's an expensive product. And so we wanted to be conservative in how we launch and engage overall consumer demand. I will say we're pleased with what we've seen in the first several weeks of its launch, and it's for sale on our own D2C channel, as well as on all of our retail partners online offerings. I just reinforced the point because I think you kind of highlighted specifically impact a Venture. We had limited inventory to begin with, and effectively all of the product, or at least most of the sales, are all on a sell through basis. So they're not loading up the channel and recognizing additional sales that drove the connected machines growth. This is impact, we're only recognizing the revenue on a sell through basis, and all the products are being sold through. Even with most of our retail partners, it's on a DSV basis.

That's really helpful. Thank you guys, for all that color. Congrats.

Thank you.

Thank you. And one moment for our next question. Our next question comes from Adrienne of Barclays. Your line is open.

Hey, good afternoon. This is Paul Kearney on for Adrienne. Thanks for taking my question. My first one is on the Accessories segment. So it looks like the Accessories segment margin, while all still down year-over-year, was a little bit better than we had anticipated or we had expected. How should we think about that for the remainder of the year? Your promotions, are they more in the connected machines or are you still having to promote in accessories and materials. That's one. Thanks.

Okay. Thanks for the question. There's kind of two questions I want to answer there. One is what happened with A&M for the quarter because we were down 20% year-over-year, and that's partly because of a tough comp. So if you look at Q2 a year ago, we had channel sales revenue related to AutoPress and Hat Press that represent about $14 million of channel fill. And so we didn't have any comparable products launching in this Q2 that benefited from sell end of channel fill. And so if we adjust for that, that segment was down about 4% year-over-year for the quarter. When we look at A&M overall, there's kind of four things going on as we look at what's guiding us and how we think about gross margins for the year. First is, Q1, we had an $8 million write down we talked about related to smart material and longer lengths of our smart material specifically. And that's going to affect full-year margins. Secondly, we have capitalized costs in our inventory related to procuring that inventory. And we brought in much of that inventory during peak COVID pricing. And so as we bring our inventory levels down and this will be more prominent in Q4 as we lower inventory levels, those capitalized costs flow through the P&L and will pressure margins. And then when Ashish talked about deeper promotions, he's talking primarily about machines. But we've talked about how we have a continued promotional cadence on our accessories and materials to make sure that we're being price competitive and to win our fair share. That promotional cadence will continue throughout the year. And then finally, there's the possibility that we may have some reserves. Based on the velocity of a couple of products, either as we look to Q4 or even maybe Q1 of next year. And those are kind of the factors that are affecting our A&M outlook for the year.

Thank you. Second, I wanted to ask about international. It looks like it was bright spot of growth and understand it's earlier than the mature market, but could you provide any kind of KPIs so that we can help dimensionalize it? Maybe the number of users, subscribers, or maybe engagement metrics that you're seeing in the international markets?

So as we commented last time, we shared that we crossed the milestone of 1.1 million users internationally, but that we wouldn't give an update on that metric every time. But as we kind of hit key milestones, we will. We are excited about the fact that we grew 34% year-over-year and that International now represents about 18% of our overall business. What we see in international is while Ashish will emphasize that we're not mature in any market, in our larger markets, we continue to see headwinds similar to what we see in the U.S. But we're in over 50 countries around the world, and so there are many countries where we're continuing to get additional shelf space and distribution and that's helping drive that growth. The other factor that's influencing international growth is we launched our D2C channel in multiple countries and late last year, and that's helping propel our growth.

So I would like to just add to a couple of comments. You talked a little bit, you kind of briefly referred to engagement and subscriptions. It's actually very -- we have to look at country-by-country, but overall we feel like engagement and subscriptions at a very healthy rate and very comparable across all markets. I'm very proud of the team across the world, but specifically, I think there's a lot of marketing, a lot of excitement, a lot of consumer awareness events going on in the international market that's such a varied group of countries, as Kimball said, with some of the larger markets like U.K. and Australia, some similar headwinds. But even there we're in the relatively early parts of the cycle. But then there are other markets around the world that we are just in such early stages. But again I'm actually going to be doing a trip very soon in a few weeks in some of the markets around the world, especially in Europe. And I think we're again really excited about what we are seeing in international markets. And the last comment I'll make is also on the platform. We have significant investments that we are adding content, localizing markets, adding projects, adding influencers, and our approach to driving network effects is so unique and that's particularly playing a great role in our marketing playbook for international.

Excellent. Thank you.

Thank you. One moment for our next question. [Operator Instructions]. Our next question comes from Mark Altschwager of Baird. Your line is open.

Good afternoon. Thanks for taking my question. I guess first off, can you talk about the feedback you're getting from channel partners with respect to current inventory levels and sell through rates? I was curious what the order book looks like for the back half of the year and your level of confidence that you can sustain positive inflection in connected machines based on what you're hearing from your retail partners?

Mark, thanks for the question. So as we look to the back half of the year, we are comfortable with our channel inventory levels. Sorry, let me restart on that one. So let me kind of talk I think there's two or three different perspectives, Mark, that I can provide. One is, I think as we look at clearly, retailers have taken a very conservative approach in the first half of the year, and we've seen continued destocking as we've gone through the year. Right now, as we look at the second half of the year, I think it's still early on for the orders in Q3. But one of the things that I am particularly excited about and our team is we're really excited about the promotional strategy as we go into Q3 and Q4. We are working on a deeper promotion calendar. As I said, we have a pretty good, solid funnel that's been building up over time, and we think that there's an opportunity to unlock that funnel as we go into the Q4 with a deeper promotion. The other opportunity I would have is saying, as we create, we are actually going to be adding about a couple of hundred influencers to create content. And we think that this is a wonderful opportunity for us and our retailers to work together to basically unlock this funnel that we keep talking about.

Yes, as you look to unlock that funnel, not to get too near-term focus, but I'm just curious, as we kind of approach the back-to-school season, is there anything that you're seeing in terms of engagement or sell through rates on some of the machines that would kind of give you an indication that that funnel might be beginning to convert at a higher rate?

I would say to date, what we have is we've done a good job. And I'll talk a little bit about engagement in a second. As we look at the funnel overall, basically we've seen people being effective at the top of the funnel, right? And this is where we've been able to bring a lot of people. We know from our research that there's a lot of people in the top of the funnel. The second thing that I've talked about previously is the middle of the funnel, which is there are questions that people asked that we were not doing a good job in helping them understand which machine to buy and what the cost of ownership is. Now, the data that I'm actually particularly excited about, which has kind of really influenced our strategy for Q4 is that when we ask people saying, well, when are you going to convert? Or what is your conversion intent, a significant majority of them basically tell us that they are waiting for a sale, which is very telling. Right, second is they are saving money to buy the product. Or third is they just want to see the economy improve and they'll ultimately convert that into purchase, right. That's kind of really led to our decision of going deeper in promotions that we've had for the first six to nine months. To date, we have not driven some of those events. I will say anecdotally not to put some numbers on it. We see a tremendous opportunity in schools. Our sales team and our marketing teams attended some education events. We see a lot of demand in those channels over time. But again, we are very early on and really kind of struck programs and marketing around that. I want to talk quickly, Mark. You mentioned the word engagement, and I want to talk to you a little bit about engagement as to what we are seeing. And there's some good data points I want to share. One is clearly we are flat on engagement 3.7 million users this quarter, and that is flat year-on-year, quarter-over-quarter. Obviously, we like to see that number being a lot higher, right. And that's a huge priority for the company. Now, when we ask users why they are not engaged, over 80% of them, and this is the good news, right, which is over 80% of them are people who have not come onto the platform for the last three, four, five months will say they really like using their Cricut, they want to use the platform more often. And the reasons they cite our lack of time, lack of a nudge or a trigger that reminded them to make something or they couldn't find a project, that's what we are focused on in terms of our platform and helping them discover that content, effectively make that content and that share that content on the platform. Now, when we look at engagement, we today look at that as a cutting metric. People who have cut in the last 90 days, we have strong conviction that the more people come to our platform more often, even if it was to engage, maybe they won't cut because they're worried about the cost of materials. But the more behaviors we drive to have them come back to our platform, engage with our platform, come onto our mobile devices, the more likely they will be to cut. Now, one data point that, again, I'm not going to call it a trend, but in July we saw more project cuts happened compared to the July last year and that was a reversal that we saw. And again, one month's data doesn't point to a huge swing back. But we believe that as some of these economic headwinds go away and as the consumers start to engage more on our platform, it will lend itself to more and more people engaging on the platform and ultimately driving network effects on the platform. I'd also call out that as we move into the holidays, there's seasonality to engagement and so that will naturally pick up as we move into the holidays.

It's really helpful color. Maybe one last one for me. Just back to the Cricut Venture for a moment. I think in the past you've said that around a quarter of your users are creating projects that they're ultimately selling. Is that still a good metric to be thinking of, or do you have any updates there? And then if we think about that sort of subset of your user base, the more call it Pro users. Have you done any surveys or studies that would give you a sense what percent of that segment of our user base would value the capabilities of the Venture and would consider the Venture even at the $1,000 price point and trying to sort of size up kind of the opportunity there? Thank you.

Yes, we obviously do that research on a periodic basis. We haven't revised that number, but I would say it'll still be in the ballpark of that. The 25%, 26% of people that are selling was people that have made a sale. That doesn't mean that they are primarily identifying themselves as Prosumers, right. The other kind of data that we have looked at is the number of people that have multiple machines, and they are just so engaged in the category. So, again, if I was to summarize again, we have two audiences for this product. One is just enthusiasts, right, there's people who buy multiple machines. There are people who buy every single machine we've ever launched, right. So anybody that has two or more machines, anybody that comes onto our platform who is making off what they call off the mat large projects that are making projects for schools or weddings or decals or religious organizations, that's our primary audience, number one. Secondly, a set of those also happen to sell. They either do badges of 25 T-shirts or 50 tumblers or make large projects. Also a strong audience. I think we're going to take our time to build this market. We have limited inventory. As time goes on, we'll have more pricing flexibility. We felt that given our inventory, given how we want to phase this product, we are in the early stages, but this is a platform that we are super excited about. It's a platform that I think will lend itself for the next many, many years and there's a lot of room over time to build that ecosystem. So again, taking a very cautious at least we wanted to take a very phased approach to this. So it's not like we're not going to go Gunko and put product in every channel, but we are very confident and feel really good about this product and platform.

Great. Thanks again.

Thank you. That completes our Q&A segment. I will now turn this over to Jim Suva for closing remarks. Jim?

Thank you, Chris, 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. We believe the initiatives we are deploying now will position us well for when consumer spend returns and the Cricut platform continues to not only strengthen, but provide 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 opportunities ahead of us. We will be at the Goldman Sachs Communacopia and Technology Conference in San Francisco on September 5 and Citigroup's Global Technology Conference in New York on September 7 and look forward to seeing everyone then. If you have additional questions, please email me at [email protected]. This concludes our earnings call, and you may now disconnect.