Cricut, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Figures are unaudited; dollar amounts below are in millions unless noted.
Business context
Cricut sells connected crafting machines, subscriptions and accessories/materials, supported by design apps and a user community. It reported three segments: Connected Machines, Subscriptions, and Accessories and Materials. At quarter-end, it had 8.64 million users and nearly 2.70 million paid subscribers.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $174.9 | $177.0 | $533.9 | $605.5 |
| Gross profit | $81.9 | $81.8 | $246.3 | $266.3 |
| Gross margin | 46.8% | 46.2% | 46.1% | 44.0% |
| Operating income | $23.7 | $17.4 | $53.5 | $68.9 |
| Operating margin | 13.5% | 9.8% | 10.0% | 11.4% |
| Net income | $17.2 | $12.4 | $42.3 | $49.8 |
| Diluted EPS | $0.08 | $0.06 | $0.19 | $0.23 |
- Revenue mix: Q3 Connected Machines revenue was $49.5 million, down 6%; Subscriptions were $76.3 million, up 11%; Accessories and Materials were $49.1 million, down 12%. For the nine months, those segments changed by -20%, +13% and -27%, respectively.
- Segment margins: Q3 gross margins were 16% for Connected Machines (6% prior year), 89% for Subscriptions (91%), and 12% for Accessories and Materials (29%). The latter segment’s margin was pressured by inventory write-downs and higher warehousing and operations costs.
- Cash flow: Nine-month operating cash flow was $196.0 million, compared with $0.6 million in 2022. Investing cash outflow was $44.0 million; capital expenditures, including capitalized software, were $18.9 million. Operating cash flow less these expenditures was approximately $177.1 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $72.6 million and marketable securities were $101.1 million. No borrowings were outstanding under the $300 million revolving facility; the company reported all covenants in compliance and $300 million available. Current assets were $585.8 million and current liabilities $174.0 million.
- Balance sheet: Total assets were $718.9 million, down from $949.6 million at December 31, 2022; total stockholders’ equity was $526.3 million. Cash declined by $152.4 million over the nine months, primarily reflecting dividend payments.
Material changes versus comparable periods
- Q3 revenue was down 1% year over year; nine-month revenue declined 12%. Lower machine demand and weaker accessories/materials unit sales outweighed subscription growth.
- Subscription growth reflected an 11% increase in paid subscribers to 2.70 million. However, Q3 Subscription ARPU declined to $8.93 from $9.40, and Accessories and Materials ARPU fell to $5.75 from $7.61.
- Engagement was mixed: users grew to 8.64 million from 7.46 million, and users creating in the trailing 90 days increased to 3.64 million from 3.56 million; the percentage creating declined to 42% from 48%.
- Higher Q3 operating income reflected lower operating expenses and improved Connected Machines gross margin. Nine-month operating income fell 22%, as revenue and gross profit declined and general and administrative expense rose 24%.
- Other income, net rose to $7.8 million for the nine months from $0.5 million, primarily due to increased interest income.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management said cash, marketable securities, expected operating cash generation and available revolver capacity should fund requirements for the next 12 months and beyond.
- Management cited lower consumer demand, a challenging macroeconomic environment and inventory management as factors affecting results. It expects the historical pattern of stronger holiday-quarter sales to continue, while noting higher seasonal promotions can reduce gross margin.
- Accessories and Materials cost of revenue included $8.2 million of excess inventory write-downs in Q3; the nine-month amount was $17.9 million. The company also reported $2.0 million of impairments in the nine-month cash-flow reconciliation. A January 2023 restructuring generated $1.2 million of severance costs; management expected approximately $6.7 million of gross 2023 savings from the plan.
- Key risks include discretionary consumer demand and declining engagement/ARPU; reliance on retail partners and third-party manufacturers and suppliers; inventory forecasting and obsolescence; competition and pricing pressure; tariffs and international operating risks; and cybersecurity, privacy, product-quality and intellectual-property matters.
- The company declared a $1.00-per-share special dividend in May, payable in July. The aggregate dividend was $234.6 million, including dividend equivalents; $217.4 million in cash was paid to Class A and Class B holders in July. No material pending legal proceedings were reported, though ordinary-course claims and a tariff-related lawsuit against the U.S. government were disclosed.
- Voting control is concentrated: the filing states that Petrus and affiliates held approximately 72% of voting power, and the company qualifies as a Nasdaq controlled company. The CEO and a director adopted Rule 10b5-1 plans providing for potential sales of up to 1,868,516 and 447,867 Class A shares, respectively.
Important facts for investors to verify
- Whether subscription growth can persist and stabilize subscription ARPU as engagement rates and accessories/materials ARPU decline.
- Whether inventory write-downs, warehousing costs and weak materials demand continue to weigh on segment and consolidated margins.
- Holiday-quarter demand, promotional intensity and the resulting effect on revenue and gross margin.
- Cash generation and liquidity after the large special dividend, including the amount and terms of any future capital returns.
- Retail-partner concentration, supplier/manufacturer dependence, and the implications of Petrus’s voting control and disclosed insider trading plans.