CRCT - NASDAQ

Good day, and thank you for standing by. Welcome to the Cricut Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. 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.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Third Quarter 2025 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, tariffs, capital allocation 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, November 4, 2025. 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 posted solid results in Q3. Sales grew 2%, operating income grew 114%, EPS grew 100% and paid subscribers grew 6% year-on-year. While we are proud of our Q3 results, which represented our second consecutive quarter of positive year-on-year sales growth, we have more work to do, especially on engagement, international sales and accessories and materials. As I mentioned previously, we are relentlessly focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth. We are continuing to lean into these investments even as we navigate the uncertainty introduced by tariffs and their potential impact on consumer discretionary spending. These accelerated investments include hardware product development, materials, engagement and marketing, including increased awareness in our international markets. Thus far in 2025, we have launched 2 new cutting machines, more Cricut Value materials and several improved engagement experiences, which also include AI. We need to continue growing our top line to satisfy the expectations of our team and our shareholders. We have conviction in what we need to do to return to sustainable growth. We are focused on attracting more new users to buy our connected machines by addressing affordability and ease of use while also increasing marketing and awareness. We must ultimately reverse weakening engagement trends and reinject enthusiasm among our users by enhancing and simplifying the making process. We are committed to taking back our share in accessories and materials. I will now talk about 4 priorities: new user acquisition, user engagement, subscriptions and accessories and materials. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drives our monetization flywheel. In Q3, we made 2 adjustments to our marketing strategy that are yielding good results. First, target expansion. We strategically broadened our target audience to reach users with greater disposable income and time, 2 of our major purchase barriers. We are seeing a significantly higher engagement rate with our ads from this new expanded group. Second, increased marketing investment. We directed increased spend into the channels that consistently deliver high engagement and high ROI for the brand, and we are seeing a more than 20% increase in overall marketing engagement year-over-year. These efforts are leading to an increase in searches for What is Cricut on Google, which we have historically watched as a leading indicator. Our sell out units continue to be encouraging with sell out units up in North America and globally in Q3 and year-to-date. Sell out units were also up year-over-year in the recent October Amazon Prime Day. Engagement erosion continues to moderate as we held active users about flat for the year. In Q3, we ended with just under 5.9 million active users, about flat compared to Q3 2024. 90-day engaged users who cut during the quarter declined 3% year-on-year. We are on track to meet our goal of dramatically simplifying the user experience by the end of 2025 for our most popular project types or use cases. The use cases we are developing this year cover a large portion of project types cut each year. For each use case, we guide users by first having them choose what they want to make, for example, an iron-on T-shirt. Our platform uses AI image selection, templates and guided step-by-step flows. The simplified interface exposes only relevant tools and automates complex manual decisions such as image sizing and placement on a youth medium T-shirt. In July, we launched in beta guided flows for vinyl decals and iron-on T-shirts, 2 of our most popular use cases. We have since released them into production during Q3 and their reception has been positive. At the end of Q3, we launched our next 2 most popular use cases of folded cards and cardstock cut-outs for beta testing. We continued our AI investments in Q3 by moving the Create AI feature from beta to production for Cricut Access subscribers with positive early results. A major advantage of this feature is that the generated images are ready to cut, which is not necessarily the case with images sourced elsewhere, thus dramatically improving the likelihood of user success. Finally, we brought in more visitors to Design Space via our engagement marketing campaign in Q3 than in any prior quarter. Despite the continued pressure on our engagement metrics, we are confident in our efforts to simplify our design experience by assisting users based on their project intent, continuing to grow the number of images, fonts and editable templates available to users, most notably for Cricut Access subscribers and improving our capabilities to bring users back to the platform to start or resume a project. In Q3, our paid subscribers increased 6% year-over-year to just over 3 million. Paid subscribers continue to be a big positive for us and increased 166,000 year-on-year in Q3. We are also seeing positive trends on win-backs, where our promotional offers are driving increased sign-ups from prior subscribers. We have a rich road map to continually increase the value proposition for subscribers. As I previously mentioned, we launched Create AI for our Cricut Access subscribers, and we will continue to introduce more AI-driven features. Our goal is to make it incredibly compelling to become and remain a subscriber to leverage our content and software tools. Accessories and materials sales decreased 17% year-on-year in Q3. Over the last several years, we have lost ground to competition and material types where there are low barriers to entry. We continue to see this competitive pressure increase, manifesting in white label brands and retailers as well as new entrants in online marketplaces and in retail. We have embraced the challenge of providing refreshed and cost-competitive materials and accessories offerings. As these offerings continue to roll out over the coming months, we intend to reclaim market share and by doing so, enhance the making experience of our users. We are focused on having the right product configurations in the appropriate channels, so Cricut materials are the obvious choice when users want to make. In Q3, we launched several new project materials, including printable temporary tattoos and magnet sheets. In addition to printables, we also added new finishes and types of iron-on, including flocked, color pop, 3D and puff. We also continue in our relentless focus to drive cost out of this business, including optimizing country of origin by material type. While we have diversified most of our finished goods supply base, largely outside of China over the last several years, we continue to manufacture in several countries in Asia. We believe we have a competitive advantage in the diversity of our supply chain configuration relative to the competition. We remain nimble as we navigate unprecedented tariff uncertainty. Recall in first half 2024, we launched the Cricut Value line of materials. We continue to accelerate this business, launching additional SKUs and material types. We continue to be optimistic about this product line as we see it perform well, but it is still a small portion of our portfolio. We have additional innovation, products and cost reductions coming in the quarters ahead. Our teams did a great job executing during the October Amazon Prime Day, where we saw positive year-on-year growth for accessories and materials. Consistent with prior comments, we will continue our promotional cadence in this category to remain price competitive for consumers with a focus on winning share. We are intensely focused on the overall customer experience. It's our fundamental belief that when we give people more reasons and inspiration to make things easily and affordably, we will see a lift in materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current discipline. With that, I will turn the call over to Kimball.

Thank you, Ashish, and welcome, everyone. In the third quarter, we delivered revenue of $170.4 million, a 2% increase compared to the prior year. We generated $20.5 million in net income or 12% of total sales in Q3. Breaking revenue down further, Q3 2025 revenue from platform was $82.8 million, up 7% year-on-year. We ended Q3 with just over 3 million paid subscribers, up 6% year-on-year. We continue to expect paid subscribers to be up in Q4 and for the full year. Platform revenue growth was primarily driven by higher paid subscribers year-on-year. ARPU increased 4% to $54.96 from $52.86 a year ago. Q3 revenue from products was $87.7 million, down 3% year-on-year. Connected machines revenue increased 12% due to both higher machine unit sales and higher average selling prices, helped by our newer machine launches and fewer legacy machines. As Ashish mentioned, machine sell out units in North America and globally were up in Q3 and continue to be positive year-to-date. We don't have perfect coverage for sell out data in all channels, so treat this as directional. Accessories and materials revenue decreased 17% year-on-year. Recall, last quarter, we had the opportunity to accelerate shipments of accessories and materials, resulting in 12% year-on-year revenue growth in Q2. If you average these, normalized accessories and materials revenue continued to decline. In terms of geographic breakdown, international revenue for the quarter was $40.5 million, an increase of 5% compared to Q3 2024 and included about 4% of foreign exchange benefit with platform up and products down, similar to last quarter. As a percentage of total revenue, international revenue was 24% for Q3 2025 compared with 23% of total revenue in Q3 2024. We see positive momentum in our U.K. and Western European businesses where we continue to invest in sales and marketing, which sets us up well for peak holiday season. We are also starting to see green shoots in our nascent India and Japan regions with expanding distribution and demand. We are also pleased that Australia is stabilizing in the second half of the year through increased promotions and demand generation. We are increasing sales and marketing resources to further fuel momentum in our international markets. We ended the quarter with over 3 million paid subscribers, up 6% or 166,000 from Q3 2024 and down 6,000 or less than 1% sequentially, partially due to seasonality and the introduction of a new POS feature where we don't count paid subscribers in the metric. Recall, we have highlighted previously that Q3 paid subscribers could be flat to down. Platform continues to be a bright spot for us, and Ashish detailed our efforts that are gaining traction in this area. Moving to gross margin. Total gross margin in Q3 was 55.2%, an increase from 46.1% in Q3 2024. The improvement reflects higher product gross margins and a higher amount of subscription revenue as a percentage of total revenue with higher platform margins. Breaking gross margin down further, gross margin from platform in Q3 was 89.2% compared to 87.1% a year ago. The increase in platform gross margin for the quarter was primarily related to lower amortization of software development costs. Gross margin from products was 23.1% compared to 10.7% in Q3 a year ago. The increase in gross margin for the quarter was primarily due to less reserves compared to last year, the selling of previously reserved excess and obsolete products and a more favorable mix toward newer products. The uplift from these items more than offset our promotional activities. Total operating expenses for the quarter were $71.4 million and included $7.1 million in stock-based compensation. Total operating expenses increased 7% from $66.8 million in Q3 2024. Recall, we increased our marketing efforts during 2024 by $20 million and continued at a similar rate through Q3. We will continue to be data-driven in our future marketing spend and expect to lean in through the holiday season even as we navigate the uncertainty from tariffs and potential impact on consumer spending. We will continue our physical products and platform investments to drive future growth as we manage our business through a long-term lens. Operating income for the quarter was $22.7 million or 13.3% of revenue compared to $10.6 million or 6.3% of revenue in Q3 last year and benefited from the mix of higher sales from platform and higher product margins, which we previously mentioned. The tax rate in Q3 2025 of 20% was slightly higher than the 18.9% in Q3 2024, primarily due to the difference from a decrease in stock-based compensation attributable to a lower stock price upon vesting. For the quarter, net income was $20.5 million or $0.10 per diluted share compared to $11.5 million or $0.05 per diluted share in Q3 2024. Turning now to balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds inventory needs and investments for long-term growth. In Q3, we generated $20 million of cash from operations compared to $70 million a year ago. We ended Q3 with cash and cash equivalents of $207 million and remained debt-free. During Q3, we used $2.3 million of cash to repurchase 441,000 shares of our stock, resulting in $46.9 million remaining on our $50 million authorized stock repurchase program, which the Board replenished in May. In July, we paid approximately $181 million in dividends with a special dividend of $0.75 per share plus a recurring semiannual dividend of $0.10 per share. The Board of Directors recently authorized a recurring semiannual dividend of $0.10 per share for shareholders of record on January 6, 2026, and payable on January 20, 2026. Now on to our outlook. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook. We continue to expect platform sales to increase sequentially year-on-year in Q4 and for the full year on paid subscriber growth. In Q4, higher tariff costs will have a negative impact on margins, and this headwind will accelerate in 2026. Also recall, Q4 is our most promotional quarter of the year. We expect to be profitable in Q4 and generate significant positive cash flow for the year. While tariffs are the reality of today's world, our teams continue to be proactive and nimble with how we execute our strategy as we continue our investments to position the company for growth. With that, I'll turn the call over to the operator for questions.

[Operator Instructions] Our first question today is from Erik Woodring from Morgan Stanley.

Ashish, I appreciate all the commentary you provided on the different ways you're trying to improve engagement, reaccelerate sell-through in parts of your business, et cetera. If you take a step back, what do the kind of spending trends in your business in 3Q tell you about the health of spending kind of across the different parts of the category you play in? And how does that inform your view on revenue seasonality for 4Q when we think about historically revenues up about 40% sequentially in 4Q? Are those spending trends conducive of growth better than that, worse than that? Would love if you could just put that all kind of into context and any quantification would be helpful.

Thanks, Erik, for the question. Let me -- I think there are 2 parts to your question. So let me kind of address the first one, and then I'll let Kimball talk to some of the other aspects of your question. So I think overall, from an innovation standpoint and across the 3 -- across various categories, as we've indicated, we will continue -- in fact, we have ramped up innovation in products, which includes hardware in existing and some new categories. And that -- we expect that investment to continue as we go through the next 12 to 18 months and even longer for that matter. The second is on materials. So again, we will see -- we've taken a very proactive stance on that, and you'll see a tremendous amount of innovation, cost reductions and excitement there. And most of all, on the platform side, which basically is fuels engagement and our subscriptions offering, we will see we've had a higher level of investment, and we see that investment sustained over a period of time. And the last area I would highlight is -- the last 2 areas are international and marketing. Both of them basically are -- were a big focus this year and they will continue to be our focus. All of this is with the lens of we are a growth company. While the last couple of years have been tough, we're very excited about the business, and we think that there's a tremendous amount of innovation to be done and to further penetrate our SAM. So we expect that as we said, with a longer-term lens as we reposition and drive the company back for growth. Kimball, you may want to add more color to that.

Yes. So Erik, thanks for the question. I would point out that our sell out of machines continues to be up in North America and internationally for the quarter and year-to-date. So we look to that as evidence that our marketing efforts are working and engaging consumers. We do acknowledge we still have pressure in our accessories and materials business. There was a little bit of noise because we had an opportunity in Q2 to accelerate some demand. But if you average Q2 and Q3, that business remained under pressure. As Ashish mentioned, I think the teams have done a great job of driving cost out of that business and introducing new products. We talked about our value line materials, for example, that compete well specifically in online marketplaces. And I think we have more opportunity there, as Ashish mentioned. There is an element of engagement with consumers that we ultimately need to get more consumers in the door and we need to get them cutting more frequently to also help turn the tide on overall engagement. And Ashish talked about some of the things that we're doing in that area. In terms of holiday and how we see consumers showing up, we're pretty encouraged by what we saw with October Prime Day and some parallel channel promotions that we had where we saw pickup in units and in revenue across those promotions. I would add one cautionary note is we do regular consumer surveys. And for the first time in our internal surveys, we're seeing our consumers express concern about how tariffs may impact their family household spending. So we think we're in a good position for holiday. We've got great marketing in place. We have a great promotional calendar lined up. we're excited about it, and we think we've got appropriate channel inventory across the board, but we are waiting to see how consumers show up in the back half of the quarter.

And let me just kind of add just a slightly macro level picture to that, right? As we've continued to research, we have a strong conviction that our market is significantly more than we penetrated it. The macro -- the secular trends have not changed. Users -- people -- consumers want to personalize. They want to be creative. And if you look at Google trends on what is Cricut, we see significant interest in the brand year-on-year, especially with all the efforts of marketing. And finally, we believe that a lot of our investments that we are making, both from an innovation perspective and from a platform perspective, we believe that, that opportunity is in making the platform and the product incredibly simple and how do we reduce friction. And that's what the team has been actively focused on. And again, we're very excited and convinced that we are working on the right things.

And then I'll just add one more comment relative to Q4. Recall that there's some seasonality to engagement and Q4 tends to be the highest engagement quarter. We're also, as I mentioned, seeing year-to-date sales out continue to be up. We think that bodes well for subscriber growth in Q4 and in Q1 as we look forward to that.

Okay. Perfect. I think I got all of that. And then maybe, Kimball, obviously, here at the end of your prepared remarks, you alluded to higher tariff costs negatively impacting margins that will accelerate in 4Q in 2026. Can you unpack exactly what that means? And any financial framework you can help us with? I'm just going back to your comments last quarter where you materially outperformed margins this quarter. So just trying to get a financial framework for how to think about gross margins. Is that up or down year-over-year? Just anything that can help us kind of narrow the range of where we should be?

Yes. Thanks, Erik. So let me break my answer in 2 parts. First, I'll talk about some unique helps to margin this year that don't necessarily carry over into next year, and then I'll address your question on tariffs. So there's a number of things where this year, for example, there's an absence of reserves on excess inventory that was a big part of the story last year. And so that helps the comparison. And in conjunction with that, we've also done a good job of monetizing excess inventory this year and some of the easier chunks of that inventory to monetize will be exhausted as we kind of exit Q4. And so that won't necessarily help as we move through next year. And then there has been a mix shift towards newer products, which has also benefited margins this year. So there have been some things that have really helped margin. And then as we look to next year, as I mentioned in my comments, we're seeing some of that impact in Q4. We'll see that accelerate next year. And it's still a bit of a dynamic situation. If you recall, we started seeing incremental tariffs in April, then they picked up in August and they're changing with announcement as late as last week. So a bit of a moving target. But in terms of a framework, the way we think about it is a significant portion of our revenue and profit comes from platform. Platform is not impacted by tariffs at all. And then if you look at our trailing 12 months of cost of goods sold, about 1/4 of that is international. That's not impacted by tariffs, but 75% of that is. And we've got exposure to 4 Asian countries primarily: Malaysia, South Korea, Thailand and some finished goods still from China. So if you think about an average tariff rate of around 20% and how you apply that across that subset of cost of goods sold I mentioned. And then think about the timing of inventory turns. So even though we've been importing all along throughout the year, getting ready for holiday and building inventory at this point for next year, we pay those tariffs as it comes in, but it takes time for those tariffs to flow through the P&L, which is why we're just seeing really impact starting in Q4 and accelerating through '26.

Okay. I appreciate all that color. And maybe just one quick clarification, Kimball, on that. The average tariff rate of 20%, that just takes into account the decrease in IEEPA tariff in China last week. I just want to make sure that just confirm that.

Yes. I mean that's our best estimate based on what's changing because South Korea got an announcement next week as well as China. So we haven't seen anything official other than what in the press.

Our next call is from Michael Cadiz with Citi.

This is Mike Cadiz for Asiya Merchant at Citi. Your Create AI offering is very interesting. Would you mind helping us understand your current AI strategy? And when [indiscernible] would be -- it may be challenging, I think, in gaining paid subscribers because what if those users can then get those AI images for free. So if you can help me bridge that gap, that will be great.

Mike, thanks for the question. So we're actually pretty excited about AI. We believe it's complementary to our content strategy overall. And I'll give you a couple of examples. And you called out Create AI, which is our generative AI offering that we had in beta in Q2 and has since moved into production. And it's optimized to produce images that are ready to cut. And so as you call out, consumers can go and generate images elsewhere, which may work well on a printer because they're bitmap, but they're not -- we need them in vector form for a consumer to be able to cut them and use and make a project effectively. And so we do think we have an advantage there. We have seen in limited data at this point that it actually is helping us bring in new subscribers. But it's not the only where we're using AI in our platform. We also have embedded in our search algorithm so that we have our large library of images, and we're using that to help serve content to users that match their interest, their skill set and their project type. And we continue to learn and get better, leveraging AI in there. We also are using AI to accelerate efficiency and speed in our software development. I think it is worth calling out that as we see adoption pick up, especially in the generative AI part of the platform that over time, we could see some pressure on platform margins.

Yes. So Michael, this is Ashish. Let me just add a little bit more color and reinforce a couple of points that Kimball has made. So one is we term Create AI as a user-facing feature. And as Kimball pointed out, what we specialize in is vector-based images as opposed to raster images that are optimized for cutting, right? So Create AI is a tool that we offer to consumers that basically allows them to generate specifically those types of images that are optimized for vector graphics and cutting. The second is in addition to those tools that are to generate images, we have a lot of complementary tools like [indiscernible] and Google, et cetera, that do require subscription today. And then on top of that, we are using AI to help users discover content based on the images they put, how do you find them complementary images. So AI is being basically leveraged across many, many parts of our system, including from search technologies to find similar or complementary images to how AI is supplementing how people work with fonts and all of that stuff. So we think AI is definitely -- it's a very rapidly evolving market. We are embracing that, and we think it's ultimately a net positive for us as ultimately, we want to be the platform where people come to exercise their creativity. So we're really excited about what the team is doing across the board and AI.

And our next question comes from Adrienne Yih with Barclays.

This is Angus Kelleher on for Adrienne Yih. I have a couple of quick questions regarding retailer partners. So my first question is about channel inventory. Does it feel balanced going into holiday? And what steps are you taking to avoid channel stuffing or demand pull forward after Q2? And has that Q2 pull-in been fully absorbed? And then I have a quick follow-up.

Angus, thanks for the question. We actually feel like we're in a pretty good position overall from channel inventory going into holiday. I think there are pockets where we'd love to see more. But in terms of the new normal that has evolved post-COVID, I think we're well positioned. I would call out relative to the pull-in demand we saw in Q2, and that was specifically around accessories and materials that if you look at -- I mean, we were down in the quarter in Q3 on that. So if you average Q2 and Q3, that's still down. At the end of the day, I think it varies a little bit by channel. But I think overall, we're in a very good position. We see enthusiasm with our retail partners. I've already expressed the one concern we have of seeing how tariffs may impact consumers. But early signs based on Prime Day and parallel promotion we can in channel, we're optimistic about Q4, waiting to see how consumers show up for the rest of holiday.

Great. Second question, do you think you could share any early thoughts on margins for 2026? It's sort of a follow-up to Erik's question, but anything directional you could share related to and beyond tariffs and pricing strategy, maybe just how you're looking at marketing investment and how it all comes together to affect operating margins in 2026?

So I'm going to be careful on forward-looking commentary because with tariffs, it is a bit of a moving target, but let me share kind of how we're thinking about it. We do expect margin pressure next year because of tariffs. And really how we think about dealing with that from a consumer affordability standpoint is we will continue to manage the mix of price and promotional strategies so that we can try to do as much as we can to maintain affordability for our consumers. We will continue to drive cost out of the supply chain, including getting participation from our supply partners to help us offset some of these tariff impacts. But at the end of the day, there will be some absorption to gross margin as we move through '26 on tariffs.

I'm showing no further questions at this time. So I'd now like to turn it back to Jim Suva for closing remarks.