Cricut, Inc. — Q1 2022 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Cricut sells connected crafting machines, subscriptions and accessories and materials. At quarter-end it reported 6.9 million users and 2.3 million paid subscribers.
Financial highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $244.8 million | $323.8 million | Down 24% |
| Gross profit / margin | $99.0 million / 40.4% | $120.3 million / 37.1% | Profit down 18%; margin up about 3.3 points |
| Operating income / margin | $31.4 million / 12.8% | $64.7 million / 20.0% | Down 51% |
| Net income | $23.5 million | $49.4 million | Down 52% |
| Diluted EPS | $0.11 | $0.24 | Down $0.13 |
| Operating cash flow | $15.6 million | $(22.0) million | Improved by $37.5 million |
Revenue mix: Connected machines revenue was $62.4 million, down 56%; subscriptions were $64.8 million, up 40%; and accessories and materials were $117.6 million, down 14%. Subscription growth reflected a 43% increase in paid subscribers. Users creating in the trailing 90 days fell to 54% from 62%; accessories and materials ARPU declined to $17.67 from $29.45, while subscription ARPU was $9.73 versus $9.96.
Margins and expenses: Connected machines gross margin fell to 3% from 15%, which management attributed to lower selling prices, higher warranty costs and freight and handling costs. Accessories and materials margin fell to 33% from 42%, reflecting higher freight costs and lower average selling prices. Subscription margin was 90%, versus 91%. Operating expenses rose 22% to $67.6 million, including higher R&D investment and sales and marketing costs. The effective tax rate was 25.1%, compared with 23.5%.
Liquidity and debt: Cash and cash equivalents were $245.7 million at March 31, 2022, up from $241.6 million at year-end. Inventory increased to $483.0 million from $454.2 million. Current assets were $879.5 million and current liabilities $232.7 million. No borrowings were outstanding under the $150 million asset-based revolving facility; the full $150 million was available. Management said cash, expected operating cash flow and facility availability should cover requirements for the next 12 months and beyond. Lease liabilities totaled $21.9 million.
Material changes and management commentary
- Revenue fell as post-pandemic demand for machines and accessories softened; management said 2021 demand was unusually high and is not a reliable basis for future growth. The filing states revenue growth is expected to decline compared with prior years.
- Management expects inventory and supply-chain dynamics to continue to pressure margins in 2022. It also expects R&D spending to rise as a percentage of revenue to support future products and services.
- Operating cash flow turned positive, primarily reflecting greater reductions in accounts receivable and less cash used to fund inventory year over year; cash use for customer sales incentives partly offset the improvement.
- Q1 product launches included Bright 360 Lamps, Hat Press, Autopress and EasyPress 3. New products partly offset lower accessories and materials sales.
- The CFO transition was underway: Martin Petersen stepped down as CFO effective March 31, 2022 and was to serve as an executive vice president and senior advisor through September 30. Kimball Shill was identified as CFO and signed the filing.
Risks, contingencies and other items
- Key risks include weaker discretionary demand and consumer confidence, inflation, competitive pricing, supply-chain disruption, freight costs, inventory forecasting and dependence on a primary contract manufacturer and limited component suppliers. The company also relies on major retail partners and third-party logistics providers.
- Management noted that the rate of adding users was declining and paid subscribers could remain flat or decline in the short term. Historically, sales skew toward the second half and holiday season; Q1 2021 demand was atypical.
- The company reported no material pending legal proceeding and said ordinary-course claims were not expected to materially affect its financial position, results or liquidity. It is participating in litigation challenging U.S. tariffs imposed under the Section 301 action concerning China.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It cautioned that controls provide reasonable, not absolute, assurance.
- Cricut has dual-class shares: Class B shares carry five votes each, versus one vote for Class A. Petrus and affiliates held approximately 67% of voting power, and the company qualifies as a controlled company.
Important facts for investors to verify
- Whether machine demand stabilizes and subscription growth continues to offset weaker hardware and accessories sales.
- Whether gross margins recover as freight, warranty, pricing and supply-chain pressures evolve, and whether elevated inventory leads to discounting or write-downs.
- Whether user engagement and paid subscriber trends improve or deteriorate, including the decline in users creating during the trailing 90 days.
- Whether operating cash flow remains positive and liquidity remains adequate as inventory, sales incentives and growth investment change.
- Developments in tariff litigation, supplier concentration, the CFO transition and the practical implications of controlling shareholder voting power.