Good day and thank you for standing by. Welcome to the Cricut Q4 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your first speaker today to Stacie Clements with the Blue Shirt Group. You may begin..

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Fourth Quarter and Full Year 2021 Earnings Call. Please note that today's call is being webcast on the Investor Relations section of the Company's website. A replay of the webcast will also be available following today's call.

For your reference, the accompanying slides used on today's call, along with the 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; Marty Petersen, Chief Financial Officer; and Kimball Shill, Executive Vice President of Operations and incoming CFO.

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 strategy, business, expenses and results of operations in response to your questions.

These statements do not guarantee future performance and undue reliance should not be placed upon them. These statements are based on current expectations of the Company's management, 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. All non-GAAP numbers referenced in today's call are reconciled in the press release or the slide presentation on the Investor Relations website. This call also contains time-sensitive information that is accurate only as of the date of the broadcast, March 8, 2022.

Cricut assumes no obligation to update any forward-looking projections that may be made in today's release or call. I will now turn the call over to Ashish..

First, we will continue to enter new markets and expand across retail channels; second, we want to simplify the onboarding process and drive engagement across our entire installed base. This is fundamental to our user acquisition strategy and the marketing flywheel; third, we want to monetize our user base and this enhanced engagement.

We plan to do this with the launch of new materials, accessories, content and enhance the value our users get by subscribing to Cricut Access. Our focus on compatibility across the entire ecosystem is key to driving this. Balanced with these shorter-term objectives, we will continue to invest for the medium and long term.

We are expanding our platform and investing in new types of connected machines that will serve us well for 2023 and beyond. Before I conclude my remarks, I would like to thank the entire Cricut team for their amazing and tireless work.

I also want to thank Marty for his countless contributions and leadership that has helped build the Company to over $1 billion in revenue. We've built a tremendous team, and I'm grateful for the dedication and passion to our company culture, our mission and our users.

He's been an incredible part to me over these past 10 years, and I wish him all the best in his retirement later this year. I'm also thrilled to introduce you to Kimball Shill, who is joining us today on the call for the first time.

He's served as part of the executive team for the past three years and his deep operational expertise and proven leadership at Cricut makes him the ideal person for the CFO role.

Three years ago, Kimbell was tasked with building a team that could reimagine our supply chain for greater scale and flexibility, while also serving our growing international market. Kimball and Marty both were tightly integrated and we are lucky to look Kimbell expanded leadership role within the Company. I'll now turn the call over to Marty..

Thank you, Ashish, and good afternoon, everyone. I want to take a minute to thank the entire Cricut team. It has been a privilege to be part of this team for the past 10 years.

I am grateful for this amazing experience since we have been able to contribute what we do and what we build empower so many lives around the world, and I'm honored to be just a small part in helping with someone's created joy and inspiration. For the call today, I'll quickly recap the financials on an annual basis.

I will spend most of my time this afternoon giving additional color on our fourth quarter performance. As a quick reminder, we have posted a supplemental data sheet with historical numbers on our Investor Relations website for you to reference.

We had a strong year, delivering $1.3 billion in revenue or a growth of 36% on top of last year's 97% growth. Driving this growth is our diversified revenue stream with all three segments in 2021 significantly growing year-over-year. We increased total cost of revenue by 35% for the year but held gross margin flat with last year at 35%.

Higher cost of sales primarily came from increased levels of promotions compared to the prior year when our promotional activity was unusually low and from higher freight costs. These costs were partially offset by the increase in revenue and revenue mix.

The strength of our business model enabled us to significantly invest in multiple growth initiatives, many of which Ashish just mentioned. Total operating expenses for the year were 20% of total revenues compared to 14% in 2020.

In absolute dollars, we doubled our operating expenses in 2021, up from suppressed levels in 2020, when we had paused spending given the uncertainties of pandemic. We have a durable business model and 2021 marked our fifth consecutive year of GAAP profitability.

For the year, we delivered $140.5 million of GAAP net income compared to $154.6 million in 2020. EBITDA margin for the year which included $38.1 million of stock-based compensation was 16.2%, just shy of our expectation going into the fourth quarter.

This compares to 22.4% EBITDA margin in 2020, which benefited from the lower promotional activity and pause spending just mentioned as well as nominal stock-based compensation expense. Overall, 2021 was a year of many accomplishments.

We saw continued strong revenue growth, significantly invested in the business, grew inventory back to strong levels, successfully navigated the challenging supply chain environment and continue to generate profits. Now on to the quarterly numbers. I'm going to dive more deeply into certain business factors underlying Q4 financial results.

You'll need this behind-the-scenes tour in order to evaluate Q4 performance and to frame the outlook for 2022. To understand the health and trajectory of the business, we focus on annual year-over-year trends, which normalized for seasonality.

To normalize for the effects of the pandemic, we believe looking at financial performance on a two-year basis is helpful. Revenue in the fourth quarter was $387.8 million, a 5% increase year-over-year. On a two-year basis, revenue was up 123%. We saw typical holiday strength in Q4 as anticipated.

Additionally, Q4 2021 revenue benefited from a few of our retailers ordering more aggressively and building defensive stock in Q4 2021 as they also navigated concerns about supply chain disruption. We estimate that this volume slated Q4 revenues by roughly $20 million across connected machines and accessories and materials.

These revenues were likely pulled forward from the first half of 2022. Revenue from connected machines was $158.1 million, down 7% year-on-year. Keep in mind that on a year-over-year comparative basis, we are comping on to an exceptionally strong Q4 last year.

Additionally, Q4 2021 revenue benefited from some unusual retailer behavior that I just mentioned. Revenue from subscriptions was $55.7 million, up 51% over last year, driven by continued strong machine sales and attach rates throughout the year.

Revenue from accessories and materials was $174 million, up 7% over last year as we grew our engaged user base sufficiently to offset the year-over-year decline and engaging percentages. And these revenues also benefited from some higher retailer buying during the quarter.

In terms of geographic breakdown, international revenue growth continued to outpace growth in North America, increasing 53% in the fourth quarter over the same quarter in 2020. In the fourth quarter, we added 676,000 new users, a record number for any single quarter, helping fuel our monetization flywheel for continued long-term growth.

We ended 2021 with more than 6.4 million total users. As anticipated, engagement in the fourth quarter increased on a sequential basis as Q4 is typically our strongest quarter for engagement due to seasonal trends.

Year-over-year, the number of users engaged on our platform for the 90-day period ending December was $3.8 million, an increase of over $1 million or up 36%. Also, as of the end of 2021, 5.2 million of our total of 6.4 million users had used their connected machines in the prior 365 days.

As a percentage of total users, user engagement was 60% in the fourth quarter, significantly up from the trough we experienced in Q3. Engagement was down from 65% in the prior year, which was unusually high. Keep in mind, this calculation will fluctuate over time as we broaden our user base and expand the new verticals and use cases.

On a year-over-year basis, the number of paid subscribers grew by 735,000 or 56%, ending the year with just over 2 million paid subscribers. Attach rates held strongly at 32% as of the end of Q4 2021, an increase of 2 percentage points on a significantly higher total user base compared to Q4 last year.

We measure our user monetization through average revenue per user in both subscriptions and accessories and materials by dividing revenue in those segments by our entire user base within that period. ARPU for subscriptions in the fourth quarter was $9.18, down slightly from $9.23 in Q4 2020.

Accessories and materials ARPU closely relates to engagement. ARPU from accessories and materials in the fourth quarter was $28.66. This was up sequentially from $18.79 in Q3 2021.

This compares to Q4 2020 ARPU of $40.76, which was an all-time peak, benefiting from higher-than-normal engagement levels related to the pandemic and some catch-up on channel inventory in 2020. We have a strong focus on monetizing our growing user base through our subscriptions and accessories and materials.

Keep in mind, we grew our user base by 3.9 million or 154% since 2019. This fuels our monetization flywheel as we move forward by adding more beginner and intermediate users, which presents a significant opportunity for us to increase levels of engagement over time and drive these revenue streams to higher levels in the future.

Moving on to gross margin. As a reminder, historically, we see softer gross margin in the fourth quarter due to a higher revenue mix in connected machines and increased promotional activities around the holidays.

Total gross margin in the fourth quarter was 27%, down from 33.6% in Q4 last year, largely driven by significantly lower margins in our connected machines and accessories materials. Q4 2021 was also impacted by a few items that resulted in lower margins for the quarter.

Breaking this down further, gross margin from connected machines in the quarter was negative 1.5%, which was unusually low. Prior year Q4 connected machine gross margin was 14.4%, which was unusually high due to the lower level of promotional activity in the middle of pandemic.

For context, pre-pandemic Q4 margin on connected machines typically range in the mid- to high single digits. The decrease was primarily driven by some nonrecurring items as well as ongoing cost headwinds that will continue to impact our machine gross margin as we look into 2022.

First, our support for promotions to end consumers by our retail partners was much higher than expected. We benefit significantly from strong competitive retail partners who look to us to maintain order in the channel. In Q4, we stumbled in managing the channel and the promotional activity tightly enough.

To address this channel imbalance, we chose to align and support all of our retail partners appropriately with additional promotional dollars, which drove about 5 percentage points of the decrease in connected machine gross margin.

Going forward, we have put in place structures and policies to ensure stronger management across our retail channels, and we'll partner with retailers who strategically aligned with us to prevent these types of issues in the future. Second, Q4 2021 also reflected a higher level of reserves related to our pricing plan.

for end of life on certain products. These reserves resulted in an additional 3 percentage points of connected machine gross margin impact. Additionally, our connected machine gross margins continue to see inflationary impacts across all aspects of our supply chain.

Our teams have been successful in navigating the environment to ensure we have sufficient inventory when and where we need it. As we move through 2022, we expect to continue to feel the impacts of elevated freight, warehousing and handling costs, as well as increases in commodities.

Going forward, to mitigate some of the continued headwinds from inflationary pressures, we intend to implement price increases and adjust our promotional strategies across connected machines and accessories materials.

Gross margin from subscriptions in the quarter was 88.4%, down slightly year-over-year due to an increase in hosting costs to support increased functionality of our applications and to scale capacity for future growth.

Gross margin from accessories and materials in the fourth quarter was 33.3% and down from 41.3% in the prior year due to tighter unit costs, including increased freight expenses as well as a change in the revenue mix and product. Moving on to operating expenses.

Total operating expenses in the fourth quarter were $79 million and included $10.1 million in stock-based compensation. This was a significant increase over Q4 2020 of $45.2 million when we pause spending as we navigated the uncertainties of the pandemic. Additionally, Q4 [2022] had much lower stock-based compensation expense.

Total operating expense as a percentage of revenue was 20% in Q4. This is higher than the prior year figure of 12%, reflecting increased investments in sales and marketing and R&D to extend our platform for future growth.

The main drivers of the year-over-year increase were led by increased advertising and marketing spending particularly related to our international expansion. Additionally, we increased head count, particularly in R&D and stock-based compensation as a result of our IPO in March.

Operating income for the fourth quarter was $25.8 million or 6.7% of revenue compared to $79.6 million or 21.5% of revenues in Q4 2020, driven by lower gross margins, plus the increased investments and stock-based compensation expense, I just mentioned.

On a full year basis, operating income in 2021 was $192.4 million or 14.7% of revenue compared to $200.5 million or 20.9% of revenue in 2020. We delivered our 12th consecutive quarter of positive net income. Net income in the fourth quarter was $11.9 million, down from $61.4 million in Q4 of the prior year.

In the fourth quarter 2021, we recorded a tax true-up of $6 million related to higher sales across more states with higher tax rates as well as taxes related to higher stock-based compensation. This resulted in a significantly higher effective tax rate for the quarter. Going forward, we expect our ongoing effective tax rate to be about 25%.

Diluted earnings per share was $0.05. Note, the Cricut did not have a comparable EPS history prior to the reorganization at the time of the last -- at the time of last year's IPO. EBITDA in the fourth quarter was $31.8 million or 8.2% margin in the fourth quarter, which includes $10.1 million of stock-based compensation expense.

This compares to an unusually high $83.5 million or 22.5% in the prior year Q4. On a two-year basis, our EBITDA grew 122% over 2019. We generate healthy operating margins and starting in 2022, we will be able to provide year-over-year EPS comparisons.

Going forward, management believes that operating income and earnings per share are the key metrics on which to measure profitability and manage the long-term business. Therefore, this will be the last time that we highlight EBITDA as a key metric.

Note that operating income is closely aligned to how we have calculated EBITDA and of course, investors who are still interested in the EBITDA metric, can easily calculate it from our financial statements. To align this as framework, we will manage towards long-term operating margin targets of 15% to 19%.

Our long-term target ranges for gross margin and operating expenses remain unchanged. For reference, our historical operating margins are included within the data sheet and long-term target ranges are included in the appendix of our earnings predication, both are available on our Investor Relations website.

Turning now to the balance sheet and cash flow. We ended the year with a strong balance sheet of $241.6 million in cash and cash equivalents and healthy inventory levels. Our credit line of $150 million remains untapped. Cash used in operations for the year was $104.9 million, which was primarily used to rebuild depleted inventories.

Consistent with what we have said over the last few quarters, we plan to continue paring higher-than-normal inventory levels to mitigate supply chain risk. We are carefully monitoring known risks and plan to manage down inventory levels to match as risks unwind. In summary, 2021 marks two consecutive years of hyper revenue growth.

On a two-year basis, revenue grew over 165%, and we added nearly 4 million new users to the platform. We grew operating income over 255% over the same two-year period. At the same time, we held gross margin flat while managing through a complex supply chain environment and have continued to significantly invest in the business.

I believe we are a stronger organization today than we were pre-pandemic, and we will continue to tightly manage what is within our control. As we look to 2022, it is important to keep in mind the first half of last year was unseasonably high.

If 2021 had followed our typical seasonality pattern similar to years prior to COVID, the quarterly revenue distribution would have looked significantly different. So as we return to a more normal seasonality pattern, this makes first half 2022 comps very difficult.

Moreover, while we don't have full visibility into the channel, we are operating on the belief that retailer inventories entered 2020 to about $35 million above what retailers would consider normal levels. This figure includes the roughly $20 million of the sense of buying that occurred during Q4 by a few retailers.

Combined, these factors create headwinds in the first half, which we can already see early in 2022. As we move further into 2022, we expect to benefit from traditionally stronger seasonality and easier comps over second half 2021. However, we're mindful of uncertainty around some of the macroeconomic pressures of inflation and consumer spending.

We expect to end 2022 with at least 8 million total users. The significant growth in our user base over the last two years also provides opportunity to further drive engagement and monetization over a larger base of users.

We remain focused on driving profitable growth and committed to our annual operating margin target of 15% to 19% over the long term. Given the uncertainties of the current environment as we enter 2022, we do see pressure on operating margins that may put us below the range in the short term.

We believe the same trends that have fueled our growth from 2014 will continue for many years to come. We have a consistent track record of driving profitability while managing our financial resources. This dynamic macro environment plays to the strength of our disciplined approach we have cultivated since 2014.

The tremendous growth we've achieved lays the foundation for us to scale and grow even further. With that, I'll now turn the time over to the operator for questions..

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

Just to start out on gross margin, could you maybe talk a little bit more about the levers that you have within your control to help stabilize the machine margins and the materials gross margin through 2022? Just what are the puts and takes there? And if you could say, I guess, net of the price increases and promotional changes, how are you thinking about sort of the gross margin in those segments of the year?.

So let's just talk really quick about just recap a couple of things on gross margin, specifically talking about machine. So the machine gross margin was lower than we would normally see. And this was in -- due in part to three things primarily.

The first would be unusually high level of promotional activity that we highlighted that occurred in the quarter that represented about 5 percentage points of the decline. The -- that's on gross -- on machine gross margin. The second was the end-of-life reserves that we took.

You may recall that we had elected to delay the end of life of certain of our products, particularly machines as we went into the pandemic because we wanted to make sure that we could -- we didn't know exactly when and where and what machines and other products we'd be able to produce.

So we chose not to end of life those machines when normally scheduled. And so in Q4 we were comfortable enough with our supply chain going forward that we elected to make plans to end of LIFOs in 2022. And so, we took a reserve on those plans. The final one and that was about 3 percentage points.

If you look at those two nonrecurring items, machine gross margins would have been basically in the range of -- for Q4, where we saw Q4 2018 and 2019 pre-pandemic.

And on top of that, though, the inflationary pressures across the supply chain that we're experiencing, particularly in freight and warehousing and you get something closer to where we would expect it to be normally.

That being said, if we look forward, we are -- we saw freight and warehousing levels peaked in Q4, and we don't see any relief from that at least through the first half and probably moving into 2023. But we are implementing price increases to help offset some of that.

And we expect those to likely take effect somewhere around somewhat mostly in the second half..

Let me just add to that, Mark. I want to just double-click on the promotional strategy and why it does live for an anomaly. So we have a great partnership with all our retail partners, and we plan through these promotions six to nine months ahead of the holiday season.

During the holidays, we had one major retail partner that actually was a lot deeper than we had anticipated. And we at that point, given the hypercompetitive environment, chose to support our retail partners with additional POS dollars to make them competitive. But we've put in place processes to help avoid or mitigate these in the future.

So that is one event that was clearly kind of a surprise event that happened and we had to just manage it during the quarter. A couple of other things that Marty mentioned that I think will help.

One is clearly, we are changing -- we're going to be impacting pricing both to our retailers as well as to the consumers that will help drive the gross margins up. As we go into the second half of the year, our mix of the product, especially on machines will gravitate towards the higher price points and the products with better margins.

So, I think those -- we think that all of those combined will start to gravitate back to the long-term margins in the longer term. So what we saw was trough in Q4 base..

And maybe to follow up, Ashish, we saw the announcement yesterday and some of the new products.

I guess -- to what extent is some of this innovation geared toward greater monetization of some of your current users, your power users, I guess, I think the Auto Press has a $1000 price point on it versus attracting new users to the platform? And then more generally, as you -- any details you're willing to share on the innovation pipeline for 2022 beyond those announcements would be great..

So, I think you're very astute in terms of our first and foremost, our strategy with all of the launches, including the lamps that we had announced earlier in the quarter. I really care first and foremost towards our current Cricut users, right, is to help drive monetization of the existing installed base.

We do believe that over time, as we've said in the past, a certain percentage of our users like to sell, we believe that in addition to the enthusiasts and the hobbyist, there will be some of our users or we'll attract new users who actually come at it more from a commercial perspective. So I think it's probably a combination of both.

We've had some -- we're really excited about all of these launches, and we had some really good signals of consumer passion and demand around that.

From an innovation pipeline perspective, first and foremost, one of our fundamental because we're a platform company, we continue to invest significantly in the platform, right, which is the data, the content, the community, the services and the software across desktop and mobile.

So that's going to be a continued ongoing investment that we will pursue. I think we've kind of said we will continue to -- we believe that the current category, we're still in the early days. So from a connected machine for cutting, we still have a lot of runway ahead of that. And so we will continue to innovate in that area.

And then finally, I alluded to this that we will be -- we are investing in because we are a platform company and these connected machines sit on top of the platform, we are continuing to invest in other types of machines that are different than what we do today. So we're really excited about that.

But those are, again, medium to long-term investments..

Our next question comes from the line of Jim Suva from Citi Group. Please go ahead..

It's Jim Suva. I have a question I think it was Marty mentioned that inventory levels were a little bit higher than normal to the neighborhood. I remember right around $35 million.

I might be wrong or right on that? What was the reason for higher inventory levels? Was it retailers were expecting another kind of COVID growth here or they were concerned about supply chain issues and kind of double order? And the reason I ask is a lot of societies see shortages of inventory, it sounds like you're talking about extra inventory.

So if you could help us with that that would be great..

Yes. Sure, Jim. So let me just address a distinction between our inventory and channel. The comment that you're talking about is channel inventory.

And just very quickly, we've been talking over the past few quarters about our own intention and practice of carrying higher levels of inventory than we normally would to mitigate against supply chain challenges. And we -- ourselves ended the year about on target with where we plan to be. We watch metrics very closely.

We have pre-designated metrics to look at relative to certain risk factors. And we mentioned in last quarter's call that we had seen defensive buying similar to what we were doing on the part of a few of our retailers. And we saw that buying continue all the way through the end of Q4.

And we estimated the pull forward of that defensive buying into Q4 from future periods of about $20 million. But then as we look at the balance, the channel inventory balances that existed at the end of the year looking forward into 2022, based on what we would estimate to be normal levels of inventory.

We saw about $35 million in additional inventory that was being carried..

Perfect. And just to clarify, the $20 million that you mentioned and $35 million, the $35 million, that includes the $20 million, I assume? Or is it uniquely different..

Yes, it does. I'm sorry, I should have clarified that. The $20 million is within the $35 million..

That's what I thought. Okay.

And then the last question is, if we compare to, say, two years ago, again, kind of taking out the COVID year a little bit, accessories, how should we think about why accessories are trending what they are versus accessories and materials versus two years ago? Is that -- is there some type of trend we should extrapolate? I don't want to compare it to one year ago, because I think that's an unfair relationship.

But what are your thoughts about versus two years ago for accessories and materials in the direction of such?.

Yes. So we agree with you that comparing to a year ago is not valid just because of so many things going on last year. And so I'm talking about accessories and materials ARPU specifically. And so if we look at accessories and materials ARPU at the end of 2019, so pre-pandemic relative to accessories and materials in 2021, ARPU declined about 7%.

And now ARPU is, for us, is a measure and a yardstick of our production and profitability of every person who has ever registered a machine, whether they put it in the closet or not. And so -- because that's the denominator and so we look at revenues from accessories and materials divided by that entire user base.

And so over that same period, we increased our user base by 153% or 4 million people. And so we feel pretty good about that 2021 ARPU number because increasing the numbers that quickly and on declining 7% feels pretty good..

Thank you for the details and clarification. And yes, indeed, all our Christmas Mug Presses did come out for all of our family members in a great manner..

Jim, let me just add one comment to Marty's statement.

And one other thing, and I think it kind of informed the question you asked as well, which is we are continuing to see a lot of beginner and intermediate crafters Gen Zs and millennials, which is actually exactly what we want, right? Because broadening the market going after the highly engaged enthusiasts.

So as we've added retail channels, as we've added use cases, we are seeing the broadening of demographics. Now what will happen is initially, when those demographics will come in, the engagement will not be as high as somebody who lives and breathes crafts. However, the total number of engaged users will be significantly higher.

But on a per user basis, that will go up -- that will put some pressure. And over time, we think that's again an opportunity for us to continue to bring them down the funnel and increase engagement and drive monetization.

But I do want to -- I think your question, there is an element of the broadening demographics, which speaks to the market opportunity, but it will impact the ARPU numbers of materials in a....

Your next question comes from the line of Erik Woodring from Morgan Stanley. Please go ahead..

I guess we have the guidance for 8 million users at the end of 2022. Is there any way that you can put additional kind of framing of how 2022 might look either from an ARPU perspective, or margins, OpEx. Really, what I'm just trying to get at is you've left 2022 a bit open.

And I'm just trying to give you a chance to be to help guide us as to how we might think about 2022 across any of those metrics? And then I have a follow-up..

So I'll let Marty talk about one of the other key concepts that we introduced with seasonality, but -- and I'll let him talk to that. But let me kind of give you my perspective on the $8 million. So if you calculate the numbers that basically means that we're going to add another 1.6 million users in 2022.

And given the promotional strategy and the pricing, we feel really good about that number. And just to give you some context, that will be twice as many users that we added in 2019, and it builds on the roughly 3.8 million or 4 million users that we acquired in 2020 and 2021.

So you take the 3.8 million users that we acquired in the last two years, plus the 1.6 million. We think that's a wonderful platform for us to further monetize with subscription, industries and materials.

I do think that, again, I want Marty to comment on the other aspects of your question, but one other thing that we are seeing is reverting back to seasonality that we hadn't seen in the last couple of years..

Yes. So, on the seasonality point and I highlighted this a little bit in my prepared remarks, but -- we're a seasonal business. And year in, year out, pre-pandemic, it was pretty consistent that about 40% of our revenues would come from the first half and about 60% in the second half. Pandemic kind of turned everything upside down.

And specifically, 2021 was a front-end loaded year with about 50% coming from first half and 50% in the second half. Now as we exit the pandemic and we are moving back to a more normal seasonality pattern. What that means is that we're moving from 50% revenues in the first half last year to 40% is our expectation this year.

And so when we're looking at comps or year-over-year, growth rates by quarter, it means that the first quarter are difficult comps for us to meet. The second half, though, if you're looking at that the comps will be a bit easier.

So I just want to make sure that you're thinking about that in your analysis as well as the additional channel overhang that we believe -- we think that, that will probably work itself out at the first half of the year..

Okay. That's helpful. And then one just clarification question on the channel inventory, Marty, you talked about the $35 million, $20 million of which was estimated pull forward. What's the incremental $15 million from? Just so as a better understanding of how we get to that $35 million total..

Yes, that would have been prior to Q4. In other words, we have seen some defensive buying in advance of Q4..

So just to clarify, essentially, the channel was elevated going into 4Q and now with that defensive buying, you add up to the two quarters and you get to that $35 million..

That's right..

Our next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead..

This is Bala on for Rod. I want to kick it off with linearity through the quarter, in the December quarter and also in the months of January and February, both in terms of engagement and also the user additions. And I got a follow-up..

So I'm not -- let me add to what I think you're talking about. We're just looking at -- I think you're looking at how Q1 is shaping up so far. And just keeping in mind that there's -- there are a couple of -- the two items that I mentioned that are the dynamics that I mentioned that are impacting the first half.

One is a reversion to normal seasonality and the other one, channel overhang. As we look at consumer demand and we look at it relative to 2020, the first year -- the first quarter of 2020, which was pre-pandemic. We feel good about the demand. The demand is strong.

And so at least from that perspective as well as search and other things, we feel good that consumer demand is strong..

Okay. I guess what I'm wondering is some companies in the space here kind of flagged the slowdown especially last month in February. I'm just wondering.

What are you seeing in terms of new user activations? In the context of your full year user growth of 1.6 million users, I'm just wondering, comparing back last year, I understand last couple of years, there was this COVID work-from-home impact, but given the addressable market is so huge, I'm just wondering if the slowdown in user additions in '20 '21? Is the dynamic of maybe what you've been seeing lately over the last couple of months?.

Yes. So I think, Bala, let me take that.

One is we are clearly -- first of all, the trends that shape our business, we feel are very much intact, right, personalization and digital tools and everything that's driven our business are very much intact and don't see anything changing dramatically there, right? We've given the number of 1.6 million adds for the year which, again, at this point, given all the dynamics of the marketplace or the market, we just -- we are basically comfortable with that 1.6 million add number.

The third is, which is like what we saw in the last year at least in 2021 was something that is uncharacteristically not seasonal, right? And I think what we are -- what Marty, the comments that Marty made is relative to the seasonality that we've seen in a typical year coming into COVID or prior to the pandemic, we feel good about the demand.

But at this point, we are not giving further guidance or information on that at this point..

And I got one follow-up, if I may. On price increases that you're planning, I guess I'm wondering how you're thinking about these price increases potentially impacting user adds in the context of this normalization on demand.

Because I was thinking, I suppose your goal would be to prioritize user acquisition or profitability, especially in the medium term.

Is that still the right thinking? Any color there?.

Yes. So I'd revert back to my 1.6 million add, right? I mean the environment is just there's so many dynamics going on in the market that really kind of isolating the impact on higher pricing or decreased promotions is hard to estimate.

But given all of that, we basically wanted to we wanted -- we basically think that we'll end the year at 8 million users, which is roughly an add of 1.6.

From a standpoint of whether we should be promoting more or less we believe that we have always been very long in the business, right? And we believe that going forward, our promotional strategy is more in line with what strategically we want to do, both in terms of user acquisition, but also in terms of where we want the relative margins to be.

So our goal is to definitely get our margins back to where they need to be. Now again, nobody can predict inflation right now, et cetera. But I think right now, given everything that we know, we feel good about the 8 million number. Yes.

And again, the one thing that I want to make sure that we remind ourselves of the business model, right, which is that when we talk about user acquisition, right, a key part of what drives our business model is engagement, right? And I think that's one of the top priorities as we highlighted in our release, that it's one of the topics of the Company.

So our goal is to drive engagement and drive monetization with subscription, accessories and materials..

Our next question comes from the line of Paul Kearney from Barclays. Please go ahead..

I wanted to go back to one of the things you said was the competitive environment contributing to the need for increased promotions.

I'm wondering what you're seeing competitively in the market? Are you seeing promotions from some of your competitors? Or has anything kind of changed on how you view yourself position? And then I have a quick follow-up..

Okay. Well, let me clarify. We are the category leader, right? And we have significant market share and I would say that, in fact, if there are -- the competitors that we do have or probably had lack of inventory and saw significant inventory shortages.

At least and again, this is anecdotal because we're just looking at the shelves that our teams are going around.

The competitive environment that I talked about was more at the retailer partner up, right? So we wanted to make sure, given our strategic partnership with all our retailers that when one major retailer kind of was more aggressive on the promotions, we took a decision in the -- for the benefit of our partnership with other retailers to support other retailers to compete in the market.

So it was more enabling our partners rather than us being in a competitive environment relative to other competitors in our space..

Okay. That makes sense. My second question is to harp on it a little bit, but on gross margin is clearly the biggest variance of where at least consensus and we were estimating for this quarter.

How should we think about modeling gross margin, at least for the next few quarters, specifically on both connected machines and accessories? Are we -- when does it -- when do the price increases that you talked about come through into the model? And should we expect some pressure on this line in the near term?.

Yes. So I explained the sort of nonrecurring items if you remove those on an annualized basis, we were -- from an EBITDA standpoint, we were at the low end of our long-term target range. We still are facing pressures from freight and warehousing and other inflationary pressures.

We're starting to feel more of the increase in raw materials, and that is the reason why we're working on a price increase. We are in the -- we're working with our retailers now on what exactly what that price increase would look like and when it would take effect that our expectation is the primary impact would be second half.

It's hard for me to comment anything beyond that..

Our last question comes from the line of Jim Suva from Citi Group. Please go ahead..

As a follow-up, is it fair to assume that the margins in 2022 will be lower than 2021 due to all the myriad of things that you're referring to? Or any color because as Rod Hall and I kind of mentioned that there is a lot of concern about gross margin. So any color you can give there? And if not, then I may have a follow-up on a different topic..

So, we're not giving specific guidance on where we expect margins to be for 2022. But what we will say is our long-term target model remains something that we feel good about. Where, long term, we expect gross margins to be in the 37% to 38% range and operating margin to be in the 15% to 19% range..

Okay. And then my quick follow-up.

The Hat Press, light, these additional things you've launched, are they consistent with corporate average profitability or above or below? Or they need volumes to really help out? Or how should we think about your kind of flurry of recent product announcements?.

Yes. No, I think they're relatively in line with where we want it to be. So we price them accordingly to make sure that we are in the -- and again, the materials and accessories is a blended margin. So, there's a variety of things in there, but those are healthy products and good margins.

We just announced them, they're still not at retail it will be a few weeks so..

That concludes our Q&A session, and that concludes today's conference call. Thank you all for participating. You may now disconnect..

So, thank you, operator..