Good afternoon, guys. Day three of the Morgan Stanley TMT Conference. I appreciate you guys joining us. My name is Eric Woodring. I lead the USIT hardware coverage here. I'm pleased to be joined by Cricket, Kimball Schill, CFO, Jim Suva, Treasurer, SVP of Finance and IR. Welcome to the conference, guys. Thank you for joining us. Before we get started, we've got to do these little disclaimers. disclaimer. So for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com slash research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative and then jump from your side, please.

And I would refer you to the Cricket Investor Relations website where we have our safe harbor statements. And I refer you to our most recently published 10Q and 10K for our risks uncertainty statements and with that Eric let's get things going.

Perfect let's get going so first of all thank you guys for joining us a lot to talk about quick turnover from last night where you reported earnings and that's probably the best place to stop for us so I imagine a lot of people listening were here at the conference can you maybe just touch on the most important and salient points from the report last night and help the audience better understand the high level message for 2026 Yeah, Eric, thanks for hosting us, by the way.

There are a handful of things I'd highlight. First is when we were talking a year ago, we talked about we were going to fundamentally simplify our user experience, and that was our commitment for 25, and we delivered on that commitment as we launched our guided user flows. And we launched six of them, but a couple examples are a guided flow for doing T-shirts or folded cards or stickers. And it fundamentally simplifies the user experience, especially for new or non-expert users coming into our platform. So we're really excited about that. The second thing we highlighted is really what we've referred to as a new era for Cricut, where as we're launching our next generation machines, we're coming with our bundle-first strategy. And that's really about two key points, ease of use for users and affordability. Why ease of use? So as users come into our ecosystem, they buy a connected machine. This is a new activity forum, and they don't all know what they need. And so everything they have now in these bundles that they get with us are tightly integrated consumer experience with everything they need out of the box that coordinates with the guided flow. So if I want to make a T-shirt, I've got all the materials I need to make that T-shirt. If I'm going to make a card, I've got the paper and everything else. I've got the tools, and it just makes for a better out-of-box experience and keeps them engaged, right? A little bit about why that's important is because our data shows us that how consumers engage with our ecosystem initially is also very particular of how they engage over time. And so we want them to have a great experience, and we think this is the most integrated, best experience we've ever provided consumers both from and out of experience with the materials that they need to be successful with a tightly integrated software journey. So it's an entirely new user experience. And then affordability. We know that our consumers are concerned about the cost of taking on this activity. And it's the single biggest objection that we see with consumers when we research with them is that they're worried about what is it going to cost me to take on this crafting hobby. And so as we've launched these next-generation machines, we've done a great job of driving cost out of those machines while also making them more capable. And so what that has enabled us to do is put a lot more stuff in the box with these integrated bundles I'm talking about. And so we have compelling open price points. We also have larger bundles that have a very compelling value proposition for consumers so we can meet consumers wherever they are, but everyone's set up to have a successful experience. And then another thing that we highlighted is we talked about our direct-to-film service that we're just launching. We're really excited about this because we've been investing in our platform for the last couple of years as we work to build these guided flows that built infrastructure that we're now able to leverage in other ways. So, for example, I talked about T-shirts. The new direct-to-film service uses the exact guided flow that we created for T-shirts that a user can use to make a T-shirt on their Cricut machine, or they can choose to upload their image to our service and get a full-color printout that they can then apply to a T-shirt or a substrate, a bag, any other substrate they want. And so we're really excited about it. It's also an example of other ways we're thinking about monetizing the platform outside of just traditional cutting machines. We're also very pleased with our increase in profitability. We were up 22% year over year. We had our fourth consecutive year of subscriber growth. And so we've continued to grow subscribers on a year-over-year basis ever since coming public. And so we're excited about that. And then we're also really excited about machine sellout being up. We were out for the full year. We saw that trend strengthen in the last few months of the year. And as we've moved through Q1 quarter to date, we've seen that accelerate. So at this point, we're up 10% year-over-year on sell-out of machines. Why is that important to us? That is the beginning of our flywheel. Someone purchases a connected machine, and then that gives us the opportunity to monetize them through subscriptions and accessories and materials. And so, you know, we've talked about the investment we've been making in marketing, and the primary metric that we track on that is what's happening with selling machines. So we're very pleased with that.

That's a perfect place to start. And you mentioned machines. That's a perfect way to kind of segue into the next question. At the heart of Cricut are your products. and you most recently launched two new products, the Joy 2, the Explore 5. Can you just describe to the audience kind of the most important upgrades behind these products and maybe within that just touch on, I know it's only early, but early retailer response and reception to those products.

Okay, absolutely. And so as I mentioned, these next-generation machines is an all-new architecture. So if you go back to our Explorer machine, we've essentially been on the same architecture since we launched that machine in 2014. This is a from ground up new architecture for that machine. For Joy 2, our Joy was a little bit newer. It's only six years old. But again, all new architecture, dramatically lower cost to produce, but still a more capable machine than its predecessor. and it enables us to execute on a bundle first strategy and still maintain compelling price points and give really strong value propositions to our consumers. And so that's where we're really most excited about it. We also talked about some new product launches in our heat press lines where that also helps us improve margins and be competitive and it's an area where we've talked about fighting to regain share over the last 18, 24 months And we see ourselves making progress on that in 25 and continuing that progress as we move through 26.

And, Eric, you can hear from the conference call, both Ashish and Kimball mentioned about a reinvigoration for innovation and new products. And you correctly stated, I've been at Cricket for three years. The product roadmap, which we are not going to get into details of because it's too forward-looking, but it's the most exciting since I've been there in three years. And now since we've been on stage with you for a couple of years back to back, you can start to see these products coming out and this innovation really start to come out, and it's quite exciting.

Yeah, no, that's perfect. And I don't want to kind of focus the innovation only on connected machines. On the accessories and materials side, you're also focused on releasing new products. At the same time, there's competition from, as you label them, white label competitors. So what are you doing to make sure that these new accessories, materials you're bringing to market are differentiated? Historically, we've talked about the Cricut IP that you've embedded in them. So what are you doing to kind of not only play defense, but also play offense? And kind of what role does engagement play in this accessories and materials business?

No, thanks for the question. So three points. First is bundles are really important in our strategy, right? Again, it starts with the user experience, and it's everything the user needs to get started. So what she wants to make, everything is there. She doesn't have to think about it and go figure out what are the things I need to purchase to be successful. The second piece is we're making sure we have the right products and the right channels. And we've talked for a few quarters about our value line of materials that we engineered specifically to compete well in online marketplaces. We continue to see that accelerate globally, and so that's something we got right, and it's helping us win share in online marketplaces everywhere we have that offered. And then we talked a little bit about the new range of heat press products in our extension lineup so that we can be more competitive. So in parts of the accessories and materials business, there's not really IP that we can bring to bear there, but what we are doing is being competitive in a commodity market, and we have competitive pricing, and we have competitive costing that lets us win.

So let's maybe take a bigger step back. And, you know, the world is still kind of awash in uncertainty. There's clearly geopolitics coming into the fold this week. And consumer trends have kind of been uneven, let's call them. And so how do we think for Cricket about the balance between new machine unit growth and kind of the monetization of the existing stalled base as we think about 2026?

We're still focused on both, right? And as I already mentioned, we're really excited about our sellout performance, right? We were up all year. We saw that trend accelerate in the last few months of the year, and we've seen it accelerate even further as we've moved through Q1. And so as we've invested more in marketing and reinvigorating enthusiasm with our consumers and the category, with the retailers across the category, we see our marketing getting traction, right? And we also see retailers getting behind us with their marketing. And so we're excited about that, and we expect that momentum to continue with this. And Jim mentioned the product roadmap that we still have more to come, and we're excited about that, and we think that continues to build on itself. And then I would highlight, though, that subscribers continues to be up year on year, right? And we've been consistent in being able to grow our subscription business.

Perfect. All right. Something you've alluded to for a few quarters now is leaning into promotions. And I'd love if you could kind of walk us through the strategy there and what you intend to accomplish with maintaining kind of an elevated level of promotional activity there.

Yeah, so promotions really do two things. They drive excitement, right? And some of our channels have everyday low price, but others are high-low. And so promotions are an important part of that strategy. And we see consumers getting excited about the promotional opportunity and getting the deal. And so that is a very important part of our strategy of continuing to drive excitement that I talked about. Secondly, it's about driving affordability for our consumers, right? And I mentioned that a little bit earlier, that the single biggest objection we get from consumers is we're worried about the cost of this hobby, of this activity. And so that's one of the ways that we drive affordability to make sure that our products are affordable for consumers, especially as we move through the uncertainty of tariffs and how that's affecting consumers. You know, you haven't heard us talk about raising our prices. You've heard us talk about driving costs out of our supply chain. You've heard us talk about potential impact to our margins. But if you look at our average consumer, she looks a lot like the average American household. And those households that are under $100,000 in household income really are stretched. And so we are focused on how we keep our products affordable for that consumer, and promotions is key to executing on that strategy.

Something Ashish mentioned at earnings last night that kind of caught my ear was you're leaning into new services in existing categories and then new products in new categories. We kind of touched on direct film, but can you maybe just elaborate a little bit wider on each of those initiatives?

Yeah, absolutely. So our users, we have millions of users, and they have lots of hobbies that are in the creative space that don't necessarily involve a cutting machine. And so we're looking for ways that we can monetize those customers in a way that we already have their eyeballs, we already have the interest, and how do we give them more of what they're looking for beyond cutting machines? And so, again, this is enabled by all the infrastructure that we've been building in the platform over the last few quarters, and these guided flows are an example of that infrastructure that allow us to leverage that capability and point it in different directions than just a cutting machine. And so direct-to-film is the first example. Over time, you'll see others. And today, we're focused on, today it's just available on our desktop app, and it's only available in North America. You will see us expand the platform and the geography as we learn and experiment with this. But we're really excited in this direction of how do we monetize our platform beyond just traditional cutting machines.

And Eric, you just got to realize, Kimball's statement about the investment in the infrastructure is so important for us to leverage that platform going forward. and you just got an early look with the DTF or direct-to-film. And so you should expect more of leveraging that infrastructure and that platform, and that's quite exciting.

Okay, good. Let's talk about what's going on in international markets. So it's a big source of investment for the company. It's a big focus for the company. It's a source of new users, and it is broadly growing for you guys. So maybe first, what are your core international markets versus some of the emerging, but let's call them like promising markets, and then I'll follow up with one after that.

You know, we're really excited about our international business, and we just finished our seventh consecutive quarter of growth with that. Our main markets outside of the U.S. and Canada are U.K., France, Germany, Spain, Australia, and New Zealand. And then, you know, we're in over 50 countries around the world. Areas where we're doing particularly well are in Latin America right now. We're going very strongly. We've had a lot of success in our meta-region, Middle East, Turkey, Africa. And then we're particularly excited about some of the more fledgling markets like India and Japan, where it's still very early days for us, but we're seeing good signs.

And the follow-up to that is, what are you learning about these new users in these international markets and your ability to acquire those new users?

So we're actually finding the use cases are very similar as we go into any new market. It's the same motivations. And, you know, we may have talked a few years ago about we weren't sure the thesis would hold as we went around the world. But as we've entered these markets around the world, we see the same thesis hold. All right. The only difference that we would see is maybe in developing world, it's more of a prosumer first opportunity. So it's someone buying a machine to drive income for their family, and then the hobby also evolves from that. But the motivation is to be able to make things, right? And so we're very excited about the success. We were up 8% for the year. International now represents, on an annual basis, 24% of the whole business. We saw solid growth in Europe, and especially we got additional seasonal placement for the holidays. So we're very pleased with that. And then we also were able to turn the corner of Australia. You may recall we talked for several quarters about the struggles we had, and we were able to implement a new pricing and promotional strategy there that really turned the corner of the second half. And so we're really pleased with that side of our business.

Cool. I'd be remiss if we didn't talk about the platform business. There has been, in-platform, very consistent growth in margins. what are you doing to kind of improve that subscription offering and kind of take the momentum that you've had in the subscription business and elevate it just to ensure kind of the consistency that you've had there either sustains or accelerates?

So we're constantly investing in our subscription business to make sure that we're driving a value proposition. So there's really three things I would highlight there. First is AI, right? We view AI as very complementary to our content strategy. Content is important because it's the single most important reason that users cite when they subscribe to our platform and continue subscribing is for that content. And so we leverage AI in a couple of ways. One is in our searcher algorithm. So if you take our over a million and a half images, we are taking into account users' preferences and interests and skill capabilities so that we're serving up the right content for something they want to see. And when they can't find something they want, we also have a generative AI solution that is optimized for cut-ready images so that it's ready to make on their machines. And so they can even bring in their own image or photograph of something, use AI to prompt or modify it, and give them a cut-ready project. And so AI is a very important part of that project. As we continue that investment and we see AI adoption pick up, we would expect it to, it doesn't come for free, we would expect it to pressure margins over time, but not necessarily in a dramatic way. But that's something that we watch and we're understanding. But our early data also reinforces that it's an important acquisition tool for new subscriptions. Second major point that is, I talked about these guided flows. That's a major investment in our platform that just drives ease of use and, again, makes it more compelling for people to want to be subscribers. And then finally, we're doing a better job of talking about our subscription capability. We have our engagement platform, marketing platform, where we are bringing people from other social media platforms through deep links back in design space to inspire them. We're doing a better job inside of design space talking about the capabilities of the platform and the new features and functions so that we're getting a better job with getting people who may have been former subscribers or maybe been on a platform for years and never subscribed to actually try a subscription. And so even as we haven't grown top line and machine acquisition as fast as we would like, we have been consistent in growing our subscription business. Yep.

Nope. Very fair. Very fair. If we maybe take away the focus just from the top line side of things and question on margins, which is kind of with elevated promotional activity, you know, how do we think about the gross margin progression from here, especially as we think about mix between kind of hardware and recurring revenue, the platform business?

Yeah, Eric, I'll take that one. So it's important to take our model and break it down into the two reporting segments. And unfortunately, a lot of investors just look at top-line sales and bottom-line profitability. But it's very important to break it down into the two reporting segments, which is platform and products. And Eric, if I could take those each individually. First on platform, you know, that's the majority of our profitability. And the gross margins have been extremely consistent and very impressive at the high 80%. We see no reason why they won't continue to remain in the 80% range. Now, Kimball mentioned some additional AI efforts we're doing, both that the end user will see, as well as behind the scenes for the image generation and things like that. You know, that doesn't come free. There may be a little bit of pressure on gross margins on profits on a platform, but you should expect to see gross margins on platform remain very healthy, high 80s. So that's a lot easier to model that part. The second part is the products. And let me take that down. So in the year 2025, which we just closed, and specifically if you look at footnote 5 in our 10K, which we published last night, you'll see that we are able to release some reserves to the tune of about $20 million. And we are also able to have less reserves in 2025 versus 2024. And if you add those together, it's about $24 million or so of benefit, $24 million of benefit to 2025 product margins that we don't anticipate going forward because those are pretty unique items. A good way to think about modeling long-term, Eric, would be to either average product gross margins for the year 2025 with 24, but you could also look at the year 2023, which didn't have a lot of unique one-time items. Again, because in 2025, we did benefit by about 24 million of less reserves, plus being able to monetize ENO, which is an acronym for excess and obsolescence. But we're very confident. You know, Kimball and Ashish have been on record saying we are running a growth company and we are going to be profitable. And in fact, Kimball went as far as last night to say we expect to be profitable every quarter. And so that's a pretty firm statement by him.

So I want to, there's kind of two questions on cash. I want to touch on free cash flow first, and then we can do kind of capital return, shareholder return. So, again, to your credit and what you just mentioned, Jim, free cash flow has been very strong. You've worked down inventory balances materially. Are we at a point where inventory starts to kind of track sales? And how do we think about free cash flow margins or conversion for this business in 26?

Eric, that's a very insightful question. You're right. And for those who are newer to the story, during COVID, when we ordered a lot of inventory, lead times were very, very long. And we wanted to make sure we had product on the shelf. So we put in orders. Now, of course, the world is somewhat more normalized post-COVID. And we were able to work down our inventory for the past several years. And our inventory is just above $100 million now. At our current run rate, our sales growth and inventory, we feel like we're at adequate levels. That being said, Kimball mentioned of his optimism. And with that, with increasing sales, you would expect inventory to grow to be able to support those inventories. So specifically to answer your question, and we can talk about cash return to shareholders in your subsequent questions, but we do believe today as we set our inventory levels are at appropriate levels.

Okay. And so the follow-up to that is very strong cash position, very strong free cash generation. You've leaned into shareholder returns via special dividends. You have a semi-annual regular dividend. I think you have just over $40 million remaining on your share repurchase authorization. So help us understand looking forward kind of the priorities as you think about capital deployment around shareholder returns, product innovation, potential M&A, just maybe ring fence all of those for us in terms of priorities going forward.

Yeah, our company, we have a lot of discipline, and none of this should be a surprise to investors because we stick to this discipline of first use of cash is for organic growth, to fund the business, to fund future growth, to fund R&D, marketing, and investments. That is the sole number one item for the company. Number two would be M&A. And since Kimball's been CFO, we haven't done any M&A, not to say we're against it, but we haven't really found anything that fits in well to accelerate our growth or accelerate engagement. So I would say there's nothing intimate. There's nothing that we're tying our tongues on. There just historically hasn't been anything really there on the M&A front. So aside from organic growth, number one in M&A. Then number three is we return cash to shareholders, and we do that in several methods. Number one is we have announced a semi-annual dividend, and that has been historically paid every January and every July, and each of those payments has been 10 cents per share. That is being funded by organic profitability of our company. That's the way we view that. Then we've had special dividends from time to time. And that has mostly been funded from excess cash driven by unique things. For example, working down inventory primarily from the pre-COVID days and the long lead times. That has allowed our cash balance to grow. And we saw an opportunity to announce special dividends in past years. I did announce that we expect to see our inventory levels to be at an appropriate level at these points, so it doesn't seem like that card is necessarily a top priority, but I would mention also our stock buyback. We're in our third authorization of stock buyback for $50 million, and we are not shy at buying back stock. We believe our stock is very undervalued at these levels to the point where Kimball went on record last night of saying we expect to be active in our stock buyback going forward. So that's the framework that we use. We're very disciplined with it, Eric, and investors should kind of hold us to that.

Before we get into maybe a wrap-up question or two, when you mentioned M&A, we touched on engagement, and I want to touch on engagement. And the question is, how do you think about the opportunity to partner with other brands to drive stronger user growth or increase customer engagement? Like, are there certain characteristics that you look for in terms of, like, brand partnership that you can lean into to complement what you guys are doing kind of organically that we talked about at the top of the conversation with partnerships?

So we're very active on social media platforms, and we talked about our partnership with Pinterest in some specific trends, right? And so we continue down those avenues, and we're very active in that.

I would also add, you know, there's some newer things that came up. Say, you know, when we went IPO, which was, you know, March of 2021, TikTok really wasn't a big deal. Now today you'll see us on TikTok. You'll see us also partnering with very affluent influential influencers. You'll also see us as far as products and going forward of, you know, looking at everything that seems like a positive return on investment or a positive ROAS to see if that makes sense. You know, for example, Amazon TV, if my wife was searching for cricket products and she's also streaming Amazon, she may get a over-the-top direct commercial that is pinpointed to her, while someone else who is just, you know, a fanatic on sports wouldn't get that. So we are looking at things and not just doing broad partnerships and broad marketing and Super Bowls and stuff like that, but today's advertising and partnerships can be very specific, and we've seen great success and returns on that.

Okay, good. Last two questions here. So first, long-term financial model, what are the key variables investors should focus on to kind of underwrite sustainable revenue growth, operating leverage, earnings growth, profitability, free cash, all of that good stuff over the next three to five years?

So I'll start and then Jim can follow up. So first of all, machine sellout. And I've mentioned this a couple times. That's really the start of the flywheel where a consumer engages with us. And so I would look at how are we doing in driving growth in machine sellout, because then we have an opportunity to monetize those customers through accessories materials and to sell subscriptions. And then watch our platform growth, right? We've had consistent, continued platform growth year after year, ever since going public. We're confident in our platform growth for 2026, even though we may see some seasonal softness in Q2 and Q3, So our platform business has a natural buyer rhythm to it where there's higher growth in Q1 and Q4 and sometimes a little bit softer in the middle of the year. But we're very confident in our platform growth overall, but that's what I think investors should continue to watch.

And I would add the DNA of the company is to run a profitable business. We have reported gap profitability, not adjusted EBITDA profitability and lots of adjustments to exclude stock or exclude one-time items. for nine consecutive years, which is quite impressive at profitability. So in our DNA is to run a profitable company, and you should expect that to continue.

Okay. Last question. I want to maybe give you guys the chance to finish up. And the question is, take it however you want, what is most exciting about the story for you guys as you look forward? What is most underappreciated? What is most misunderstood about the business? And importantly, what are you guys doing to work to try to change that perception?

I'm excited about a lot of things about our business, but I think the thing that is most understood is a lot of people look at us as a hardware company, and we really are a platform company. And I keep talking about the consistency of our platform growth and the percentage of revenue and profitability that that drives, and that it allows us to continue to invest and drive the other parts of our business. I'm excited about our product roadmap, right? We've been investing heavily to bring some of these products to life that we've already announced. There's more goodness to come in 26 and beyond. And so I'm really optimistic about this year, but I'm also optimistic about our future going forward, right? I think we're very confident in growing platform for the year. We're confident in products for the full year We've got a little bit of a headwind in the first half Driven primarily by we had an opportunity during Tariff uncertainty in Q2 last year to do Acceleration of demand as some of retail partners Run certain about their supply chains That sets up a little bit of a hard comp in the first half But if I look at total year, we're very confident in that growth And then I'm really excited about the opportunity that direct-to-film represents as a category because it's an opportunity I don't mean a category just of direct-to-film I mean an opportunity to monetize our platform outside of a traditional cutting machine so that's a new avenue of thinking that our platform investment is unlocking and we will try other things as we move along but I'm really excited about all three of those vectors of growth and Eric I would add in exactly what Kimball said is on the platform growth.

A lot of people pull open a screen and shows our sales have been under pressure and declined. And they don't double click on that and realize without accessories and materials, we're a growing company. And they don't double click and look at the profitability of our platform side. And so when you think about all the investments that Kimball's been doing with the platform side and the infrastructure, the direct-to-film and future things down the roadmap are very exciting to us. But I really think people simply view us as a hardware company, unfortunately, and not so much as a platform company. And hopefully the comments that Kimball has given you today about our investments in platform, the ability to open up and unlock that more, our direct-to-film offering that we just announced, and more to come, hopefully will start to be viewed a little bit more of a platform company rather than simply a hardware company.

Listen, I appreciate that candidness. We're just about out of time. So Kimball, Jim, thank you very much for spending time with us today. Eric, thank you.