Cricut, Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Cricut Q3 2021 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. I would now like to hand the conference over to your speaker today, Stacie Clements, Investor Relations at the Blue Shirt Group. Thank you. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Third Quarter 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, prepared remarks and the accompanying slides used on today's call will also be posted to the Investor Relations section of the company's website. Joining me on the call today are Ashish Arora, Chief Executive Officer; and Marty Petersen, Chief Financial Officer. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make 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 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. All non-GAAP numbers referenced in today's call are reconciled in the press release or the slide presentation on our Investor Relations website. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, November 10, 2021. 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.

Thank you, Stacie, and welcome, everyone. We are pleased with the results in the third quarter. Total revenue grew 24.4% year-over-year driven by growth across all three categories: connected machines, subscriptions, and accessories and materials. We delivered an EBITDA margin of just over 16.4% while at the same time increased investments in connected software, subscriptions, new product developments, and international expansion. We remain focused on our mission to help people lead creative lives. Our user base grew to over 5.7 million users at the end of the third quarter, up 56% year-over-year. Over 2 million of these users were acquired over the last 12 months. One thing I love is that our corporate cohort of users is engaging very similarly to our pre-COVID cohort of users. This means that we have an opportunity to fuel our viral marketing engine as these 2 million new users make and share projects. Our job is to continue to provide a superior experience and drive engagement from existing and new users. Of the 5.7 million users, 3.2 million used their connected machines within the last 90 days, an increase of 37% from the same quarter last year. One of the many ways we monetize this engagement is through our subscription service, Cricut Access. The number of subscribers and subscription ARPU over time are important indicators of our success. We ended the third quarter with over 1.8 million paid subscribers or an attach rate of 32%, consistent with the accelerated attach rate seen last year due to the pandemic. Since 2018, attach rates have grown nearly 10 percentage points, a testament to the success of our investments and in driving increased user monetization over time. As we expand the use cases of our connected platform, we expand our potential user base or serviceable addressable market. For example, the launch of Cricut Joy last year enabled us to reach a more mainstream user base like small business owners and teachers. The Cricut Joy gave us an opportunity to expand our retail partnerships with mass merchant retailers like Target, Walmart and specialty retailers such as The Container Store. We also expanded into new verticals such as office supply and consumer electronics retailers around the world. These users may start off using our platform for one or two use cases such as label-making and reorganization, but we have a significant opportunity to expand their level of engagement over time. We continue to aggressively add content to Cricut Access, now with over 200,000 images up from 175,000 images at the end of Q2. We added new genres, projects for new use cases, relevant content for international markets and more. We also continue to improve the user experience adding new features and functionality exclusive to Cricut Access members. For example, in October, we launched a feature called Automatic Background Remover, eliminating the need to manually clean and upload an image. Our passionate community of users provides a flywheel. The more they create, the more Cricut benefits from the network effects that drive new user acquisition and engagement. These communities around the world are organic by nature and serve as a competitive moat for us. Our users are at the center of everything we do, and we take great pride in fostering these communities. By aligning our value with those of our users, great things can happen. Through our Make It Forward program, we partner with organizations to help inspire and spread joy to others. Most recently, we partnered with the Birthday Party Project, challenging users within our community to make 5,000 projects in five weeks for donation to help underprivileged kids celebrate their birthdays. Projects included cards, water bottles, banners, T-shirts, puzzles, stickers, and coloring pages for kids to receive on their birthday. I’m proud to say that we exceeded expectations with over 11,000 projects made and donated. There is no doubt that our community continues to deliver above and beyond. Our users inspire us every day to do our best for them so they can do their very best. This summer, we also saw amazing projects for outdoor events such as weddings, vacations, family reunions, baby events, and, of course, back-to-school. As we head into the fourth quarter, our seasonally strongest quarter, we are already seeing inspirational projects focused on holiday decor and gifts from our growing user base. As I mentioned earlier, over 40% of new customers first hear about Cricut through word of mouth, providing a powerful and cost-effective marketing engine for new user acquisition. We now have over 5.3 million social media followers and 2.8 billion views on #Cricut on TikTok, which are almost entirely organic. We will continue to foster these communities, amplify their voices and share their amazing work. In addition, we’ve created an expanded suite of tutorial videos, how-to guides, live online classes, and inspirational ideas for projects and use cases to help drive engagement. For example, our back-to-school classroom organization how-to provides a list of ideas to beginner-level users. We include a list of materials and supplies needed and step-by-step instructions for each project. Earlier this year, we launched our live online classes. And to date, more than 20,000 users have already participated with very high satisfaction rates. More recently, in October, we launched Cricut Learn, a comprehensive resource featuring short expert-led video education as well as live interactive virtual classes. We are very excited about this new tool to help onboard users and drive engagement. Revenue from international markets continues to outpace revenue growth from North America, growing approximately 110% year-over-year in the third quarter. I’m excited to have officially entered the Middle East and Hong Kong markets. We also made significant investments expanding our international retailer footprint. We entered partnerships in newer markets such as Germany, the Nordics, Benelux, Spain, Mexico, South Africa, and Singapore. In more mature markets such as the U.K., Australia, and France, we continue to diversify retail relationships, allowing us to reach new audiences and use cases in these markets. In Q2, we rolled out our e-commerce site in the U.K. In Q3, we expanded the strategy, bringing a direct-to-consumer branded experience to users in Ireland, France, and Germany. We are really excited about our international opportunity. Our observation is that the motivations and behaviors driving international growth are very similar to those that have driven growth in North America since 2014. The proven Cricut playbook invest in delivering great experiences to users that they will show and tell to others can be executed across the globe. With this large opportunity in front of us and our momentum to date, we plan to increase investment to accelerate our international expansion. We also continue to invest heavily in our platform, including new features and functionality within our design apps. For example, our new Restore Brush feature enables users to selectively restore any part of an image that may have been accidentally removed. We have also introduced a featured images ribbon on the home screen of design space that highlights our freshest and best content. Coupled with the new ability to bookmark images, we are focused on providing increased visibility and easy access to our ever-growing library of images. We have made major strides in improving our mobile apps with ongoing work to migrate both our iOS and Android apps to all new technology stacks that will provide the foundation for richer design experiences. They are currently in public beta with our new iOS app and will be launched broadly in the coming weeks with the new Android version coming soon. We continue to accelerate investments in our software platform, mobile experiences, and data to drive the best user experience possible. Before I conclude my remarks, I want to highlight the incredible work from our operations and product teams who have worked tirelessly to help mitigate supply chain risks. Their work to secure components in advance and rewritten firmware to accommodate real-time component substitutions were necessary. These teams have delivered their Cricut values, always finding a way to serve our customers. Overall, I’m very pleased with the quarter and the momentum of the business. We continue to add users onto the platform. We are investing in new products, improving the user experience, and growing the number of engaged users. Cricut is gaining worldwide visibility in new retailers and markets, and I couldn't be more thrilled about the opportunities in front of us. We continue to invest, drive growth, deliver profits, and delight users around the world. I will now turn the call over to Marty for more details on the financials.

Thank you, Ashish, and good afternoon, everyone. Our third quarter's performance was driven by strong fundamentals in the business, a diversified revenue stream, and our powerful community of users. To understand the health and trajectory of the business, we focus on annual trends, which normalize for seasonality. Normalizing for the effects of the pandemic, we believe looking at financial performance on a two-year stacked basis is helpful. Revenue in the quarter was $260.1 million, an increase of 24.4% over Q3 last year, and 131% since Q3 2019, a solid performance off a tough comp last year and a continuation of our long history of consistent revenue growth. Revenue from Connected Machines grew 35.7% over Q3 last year. As a reminder, the gross profit from Connected Machine purchases mostly covers our customer acquisition cost. The purchase then triggers a flywheel of engagement which in turn drives ongoing revenue from our higher margin categories of Subscriptions and Accessories and Materials. Strong machine sales and healthy attach rates from our growing base of users helped drive 70.8% revenue growth in Subscriptions in the quarter. Accessories and Materials revenue grew 2% over a tough comp last year when engagement on the platform was quickly rising due to the pandemic and stay-at-home orders at the time. In terms of geographic breakdown, international revenue growth continued to outpace growth in North America, increasing 109.7% in the third quarter over the same quarter in 2020. We’ve made significant investments to grow our opportunity and foster a global community of users. As a percentage of total revenue, international represented 12% in the third quarter, up from 7.1% in Q3 2020. As Ashish mentioned, we continued to rapidly grow our user base. As of the end of the third quarter, we have added 1.4 million users in 2021, bringing the total users on our platform to 5.7 million. In the third quarter, the number of users engaged on our platform for the prior 90 days increased by almost 900,000, up 37.4% over the same period last year. As a percentage of total users, however, user engagement was 56%, down from a COVID-aided 63% in Q3 2020. As we said last quarter, we anticipated engagement on the platform to be softer than normal and to last longer than normal as people spend more time out of the home. Since late September, we have seen user engagement levels trending up. Ending paid subscribers kept pace with user growth, growing to more than 1.8 million, up 55.8% over the third quarter 2020. This equates to an attach rate of 32%, up slightly from Q3 2020 and up significantly from pre-pandemic levels, and is a result of the investments we’ve made in subscription services to further monetize our growing user base. We measure user monetization through ARPU 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 third quarter remained healthy at $9.60, up from $8.97 in Q3 2020, and reflected the relatively high attach rates I just mentioned. ARPU from Accessories and Materials in the third quarter was $18.79. This compares to Q3 2020 ARPU of $29.41, which benefited from higher-than-normal engagement levels related to the pandemic and some catch-up on channel inventory in 2020. Accessories and Materials ARPU closely relates to engagement. As expected, the number of engaged users increased in the quarter, but the general project activity was lower than normal, putting some downward pressure on Accessories & Materials ARPU. We expect engagement and ARPU to improve sequentially, especially around the holidays at year-end. Moving onto gross margin. Total gross margin in the third quarter was 39.2%, down from an unusually high 42.8% in the third quarter of 2020. The decrease was primarily due to higher freight costs and significantly lower promotional activity in 2020 associated with lower inventory levels from the pandemic surge in demand. In Q3 2021, we returned to a more normal promotional cadence given that we were able to reestablish healthy inventory positions. We also benefited this quarter from the highest proportion of subscription revenue in our history, which commands high margins. We expect gross margin in Q4 to come down on a sequential basis, which is typical due to more promotional activities with the holiday season. I want to take a moment and talk about the tremendous progress we have made to enhance our supply chain. We are subject to the same dynamics that are affecting companies all over the world. As Ashish mentioned, in the face of these global challenges, our teams have worked hard to strengthen our inventory positions and helped mitigate future risks. Over a year ago, we began making key investments to accelerate the purchase of long lead time components, including chips. We also increased inventory levels in connected machines and accessories and materials and positioned onshore inventory to mitigate shipping delays. We’re in a strong inventory position today, particularly as we head into the holiday season. And as discussed previously, we’ll continue to carry higher inventory levels into 2022 until we are comfortable that supply chain risks have improved. On the cost side, we are experiencing inflationary pressure just like other importers. To offset these costs, we will continue to take a proactive approach in managing margins, including possible price increases. Moving on to operating expenses. Total operating expenses in the third quarter were $64.3 million and included $8.1 million in stock-based compensation. This was an increase over Q3 2020 of $32.5 million when spending was unusually low or paused as we navigated the uncertainties of the pandemic. Total operating expenses as a percentage of revenue were 24.7%. This is higher than the prior year figure of 15.2%, reflecting increased investments in sales and marketing and R&D to help build out the platform and drive future growth, including international growth. About one-third of the overall increase was attributed to personnel, a little more than half of which was in the form of stock-based compensation, which increased as a result of our IPO in March with the balance coming from adding to our talent pool, especially in R&D. Roughly one-fourth of our total operating expense increase came from advertising and marketing, where we leaned into international expansion and continued to foster influencer relationships. Most of the balance was catching up to unusually low spending across all categories during the pandemic. We delivered our 11th consecutive quarter of positive net income. Net income in the third quarter was $30 million, down 33.6% from the same period last year, in part due to the increased investments I just mentioned. Diluted earnings per share was $0.13. Note that Cricut did not have a comparable EPS history prior to the reorganization at the time of the IPO. Turning to EBITDA, which includes $8.1 million of stock-based compensation expense, we delivered EBITDA of $42.7 million or 16.4% margin in the third quarter just shy of our long-term annual EBITDA target of 17% to 20%. Q3 2020 EBITDA margin of 29.2% was unusually high, benefiting from strong pandemic dynamics. On a two-year stack basis, EBITDA has grown 256% over 2019. Turning now to the balance sheet and cash flow. We ended the quarter with $224 million in cash and cash equivalents. Our credit line of $150 million remains untapped. Cash used in operations for the nine months ended September was $130.8 million, reflecting payments for building inventory reserves to help mitigate the supply chain risk mentioned earlier. Overall, we’re pleased with the quarter and our progress to date. With our base of over 5.7 million users, we have a large market opportunity in front of us. We have taken a long-term approach to our growth strategy and are choosing not to give short-term guidance. However, I would like to provide some color as we head into Q4 and our typically strong holiday season. For the full year 2021, we are now increasing our expectations to add approximately 2 million new users, up from 1.8 million new users added in 2020. We have already added 1.4 million in the first nine months. This foundation of new users acquired through connected machine purchases fuels further growth and profitability. Most importantly, engagement from the users we’ve acquired during COVID remains very similar to the engagement patterns of users acquired pre-COVID. With the upcoming holidays approaching, we are seeing increased engagement across our platform, up from the trough we saw in late September. For the fourth quarter, we expect the number of engaged users to increase year-over-year, but the percentage of users engaged to be down from the tough year-over-year comp. On a sequential basis, accessories and materials ARPU will likely increase from Q3. However, on a year-over-year basis, we expect accessories and materials ARPU to decline significantly. Last year, we benefited from strong engagement related to the holiday season and significantly higher sell-in from replenishing depleted channel inventories. Subscription ARPU in Q4 will likely remain relatively consistent with Q3. Our EBITDA margins are on pace to fall within our long-term EBITDA target range of 17% to 20% for the full year 2021. The fundamentals of our business remain sound. We continue to drive new users and healthy engagement. We have a durable business model with a seven-year track record of driving both revenue and profits and remain focused on running our business for the long-term. With that, I’ll now turn the call over to the operator for questions.

Your first question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Hi, thanks for taking my question. This is Bala on for Rod. Ashish, I want to start with the engagement rate metric? So, it’s down again materially this quarter, and it sounds like it is somewhat worse than what you had expected. But then it is good to hear that from September, it sounds like engagement metric – our engagement rate is improving. So, I just want to understand how you’re thinking about the December quarter. I know holiday season is really late November and into the month of December, so you’re not probably seeing the full extent of trends. But any initial thoughts on how you’re thinking about the December quarter and I got a follow-up.

Yes. So, thanks, Bala. I know the question was on engagement, so let me just start off by first addressing acquisition because I think that’s the pool of people that we use to engage. So, as we said, we’ve added 1.4 million users through the end of Q3 and expect to add up to 2 million users this year, which is up from 1.8 million that we had said previously. So that’s a good starting point for us to drive more engagement. The second thing, one of the things that we focus on is looking at the total number of engaged users and how that number is increasing year-over-year. And that number, we saw increased 37%, which, again, is a very positive sign. From a standpoint of engagement as we look forward, I want to highlight a few things. One is that we’ve acquired a very high-quality customer during COVID. The 2020 cohort was very similar to the pre-2020 cohort, which means that we have an opportunity to engage them as activity levels pick up. The second is that the trends, including personalization that drove people to the Cricut platform prior to the pandemic, are still intact. Even though we saw an exaggerated summer where people doubled down on things that they hadn’t done for 2020, we see that number increasing and the engagement increasing. Like we said, we’ve already seen engagement rise since the end of September. And when they come back, people will always want to create and do projects, similar to what they wanted to do before the pandemic. Our job is to continue to drive that engagement and create more projects. We are really taking a very holistic long-term approach, and we think that there are lots of positive things that were in place leading up to the pandemic that still exist, and we have a good opportunity to attract those users.

That’s helpful. On the picking up in this engagement rate, any color on maybe user behavior in different cohorts or different use cases such as maybe in education or holiday or events-related, et cetera? Any color there, Ashish?

Yes. So, I think there are a couple of things that we mentioned in our remarks. One is that, as I said, the cohorts are behaving very similarly in terms of engagement. Another thing that we mentioned was that engagement was not only down in the number of people, but also the total engagement was somewhat lower across the board. But we had a great run-up to Halloween. People are making the same kinds of things. We believe that with all the efforts we are putting in place, the typical holiday behaviors of making gifts, making projects that are in the holiday spirit should bring positive engagement this quarter, and we are very excited about some of the new apps and new functionality we’ve created. So no, I don’t think there’s anything unusual that I want to highlight.

Just one clarification. Ashish said that the number of users engaged was down. He’s actually referring to the percentage of total users that engage. The actual number of engaged users is up quarter or year-over-year by about 900,000 or 37%. Just wanted to make that clarification.

Thanks for clarifying that, Marty.

Got it, Marty. And one follow-up, if I may. The ARPU here for the access and materials is down significantly even if I adjusted the lower engagement rate. On the other hand, subscription attached rate is still very strong. I guess my question is, how do you juxtapose those two metrics? So, it sounds like more people do want to keep subscribed whereas they’re engaging lower. I guess I just wanted to understand better how you are juxtaposing those metrics. Is there anything to read there, or how you’re thinking?

Yes. So, let’s take the accessories and materials ARPU question first. So, Ashish touched on an important link that we need to identify as we talk about this answer, and that’s the link between Accessories and Materials business measured in this case by ARPU and engagement. When people are engaging, they’re making projects, and when they make projects, they use accessories and materials. So, the fluctuation in engagement generally correlates with the fluctuation in Accessories and Materials ARPU. Now, you correctly identified that ARPU is a little bit further down than the percent engaged. And where that comes from is while the percentage of our total users engaged is down to 56%, those who were engaged were less active, meaning they were making fewer projects. As we entered the summer, we saw exaggerated softness. We also experienced a seasonal downturn in winter and summer is typically softer. So, we think that explains both the engagement and Accessories ARPU. Now you also asked about subscriptions. Subscriptions are not a seasonal metric like the other two are. And the reasons are their sticky nature by design. While we experience a bump in subscription ARPU at the beginning of the pandemic, it's held pretty strong. This is because we began adding dramatically to the content, quality, quantity, and relevancy of the subscriptions. So, we think that this additional effort has helped keep that ARPU up. We’re still watching for normalization, but we haven’t seen that yet.

And I’ll just make one quick point. The fact that subscriptions are staying flat and the Accessories and Materials ARPU is down indicates that customers preparing for the holidays will come back to craft and engage more. We believe subscriptions are indicative of future engagement since users are designing projects and wanting to cut their designs.

Great. Good afternoon. Thanks for taking my question. Maybe just sticking with the Accessories and Materials ARPU for a moment. Understanding that there are some exaggerated seasonality this year, I was hoping you could give us a better sense of the level of acceleration you’re seeing quarter-to-date or that you expect to see in Q4. I guess I’m trying to get a better sense of what normalization might look like post-COVID and perhaps this fall, and these last couple of months is the first kind of clean look we’ve had at that. So just any more color you can share there would be helpful.

Yes. In the prepared remarks, we talked about the fact that we expect ARPU to increase sequentially in Q4. However, last year had very strong metrics. We do expect that the metrics in Q4 will be down from last year as we were benefiting from strong engagement related to the holiday season.

Okay. That’s helpful, Marty. A separate topic, I was hoping you could speak a bit about the pricing strategy and assortment strategy with the machine portfolio. You rolled out the upgraded machines earlier this year, but a lot of the prior models are still quite prevalent on both your site and your retail partners at lower prices. I guess what have been the learnings here thus far as you’ve had the new models and the older models coexisting in the marketplace? And how should we think about maybe the gross margin progression as those older machines sell through in the coming months? Thank you.

Yes. I’ll let Marty comment on the gross margin, but let me just talk a little bit about the high-level strategy. One of the things that we wanted to do is ensure we had enough overlap between our existing models and the new models because supply chain was in such flux. Part of it was something that we do every time, and some of it was pretty characteristic for this year. Our goal is to continue to carry most of the models. Our goal is to phase out one of them, and also use the other as we diversify and broaden our channel base. We can put the right product in the right channel, so we’re not worried about the overlap. Marty will comment on gross margin.

One point to note is that when we went into COVID, we retained some of our older products a little longer in the market due to supply chain challenges. So today, we have more products coexisting than we normally would have. Each of our products has a life cycle in terms of promotional cadence, and the older machines typically carry deeper discounts from MSRP than the newer machines. As a result, there could be some pressure on margins due to that mix and our decision to retain some older machines longer.

So, Mark, just to recap a couple of points: Of the five models, four will continue while one will be phased out. Unlike disconnected or non-connected machines that don’t last years, our machines can be differentiated by new software features. We assure that we can sustain old models while we diversify channels.

That’s great, and best of luck over holiday.

Thank you so much. And I think you all know as well as investors that I'm quite a crafty person, and I was actually making some custom mugs for my kids' school teachers and some neighbors and stuff. But then I noticed on your website, a lot of the mugs were sold out and supplies were sold out. So, I wanted to talk to you a little bit about supply chain management. And is there a bit of restocking that's about to come in front of the holidays? Because otherwise, it seems like T-shirt blanks, a lot of them were sold out, mugs are sold out, supplies are sold out and accessories because I know demand is really going to be high here in the next 60 days or so. So, can you talk about supply chain and maybe it's just simply coming in from the boat in L.A. or San Francisco and about to be restocked? But I was kind of surprised that I couldn't order more mugs and T-shirts?

Thanks, Jim, but I'm really happy that you're excited about our mug press and making custom mugs for the holidays. There are many people like you doing the same. You’re absolutely right. The mug press has exceeded our expectations. The attach rate of mugs to the mugs presents is also very high because when we launched this product, we indeed focused on redefining the gift market and making it easier for people to create affordable gifts. Yes, demand has been high, impacting supply chain significantly, but we are mindful of the situation and are working to bring in more supplies. I also want to share that we are looking to expand the portfolio of mugs and overall, feel confident about our inventory situation overall.

Yes. We feel like our inventory situation is good. Obviously, there are pockets of products that weren't as strong as we'd otherwise want to be. The mug press is one of those, with extremely strong demand making it hard to keep in stock. Overall, our teams have managed to accelerate purchases of long lead time components and reposition inventory to mitigate shipping delays. We feel pretty good about our overall inventory.

Hey guys, thanks for taking my question. First, relative to what we were expecting. We were expecting the step-up in expenses; looks like sales and marketing has increased more than we had previously expected, and there's a little bit of a step-down in R&D. Just first, on the sales and marketing, can you talk about how the results you're seeing give you confidence to step up that spend and how you're allocating that between adding new users to the platform and driving engagement?

Yes. That's a really good question. As you pointed out, our sales and marketing for this quarter was 11.6%. Last quarter, it was about 6.5%. Part of it was that it was unusually low due to the pandemic and supply chain challenges. Fundamentally, our marketing approach has changed. We benefit from strong network effects. Over 40% of our customers first hear about Cricut through word of mouth and the gross profits cover acquisition costs. As we’ve been leveraging this playbook since 2014, I think we will continue to create great experiences for our users. As we continue to scale internationally, we will have to make investments in key sales and marketing personnel and some upfront marketing investments. You’ll see some pressure on sales and marketing spend as we add more countries faster, but our overall approach hasn’t changed.

Just one thing to note regarding overall operating expenses: all categories, including R&D, are up due to the need to catch up from the low spending experienced during the pandemic. Thus, we are investing in growth in various areas, including R&D.

Okay. Thanks. Just my follow-up: Can you talk about the inventory levels and your end channel partners? Are we at normal levels yet with your partners on both machines and accessories?

Given the market supply constraints and increased global supply lead times, we’ve seen what we would characterize as some defensive buying by a few of our retail partners, but not across the board. Just a few. So, we believe channel inventory may be a little heavy, which makes it difficult to provide specifics. However, we’ve been awarded incremental shelf space by some retailers who knew we could fill it. Thus, we want to keep shelves full and ensure we’re on the side of the equation that has inventory, avoiding losing shelf space to other competitors.

Paul, I want to add that in response to Jim’s earlier question. We prioritize keeping our retail partners stocked up before fulfilling orders on our site. Because of that strategy, some inventory availability may not reflect accurately on Cricut.com, but it is our priority.

Hey good evening, guys. Thank you for taking my call. Maybe to follow up on that question, just can you quantify what, if any, channel connected machine channel inventory fill there was in the third quarter? And then just going back to your earlier comment, Marty, is it safe to say or is it fair to say there's a greater mix of legacy products in the channel today than normal just because of the product cadence you've had over the last 12 months? And then I have a follow-up. Thanks.

On your first question regarding channel fill in Q3, we were supply-constrained in almost all of our products, particularly accessories and materials, thus starting to catch up with channel fill. As we’ve been able to catch up on materials in Q4, machines are still light. For all of 2020, at least the second half, I wouldn't characterize the machine channel fill as much of a factor. For your second question, yes, it’s fair to say there is a greater mix of legacy products today.

Just to clarify a previous comment, emphasizing they are not legacy products, but platforms that continue to be valuable. New models differentiate via software features, so we can retain older machines longer.

Yes. Definitely. Thank you, Ashish, and then maybe you mentioned an uptick in user engagement at the end of September. Just curious how does that compare to normal seasonality? I mean is that similar to past years? Are you seeing an uptick in engagement in September?

When we say normal seasonality, we started tracking engagement in mid-2019. However, we know that users are generally more active in Q4 than in other quarters. While we expect engagement in Q4 to be higher than Q3, Q4 last year was extraordinarily high due to pandemic dynamics; therefore, we will likely fall significantly below that.

I am showing no further questions at this time. This concludes today's conference call. Thank you all for your participation. You may now disconnect.