Cricut Inc

NASDAQ:CRCT

Earnings Call Analysis

Financial Performance and Market Conditions

The company has demonstrated resilience in a challenging environment, achieving its seventh consecutive year of positive net income at $53.6 million, even after accounting for significant inventory reserves and asset impairment charges. Despite operating in a dynamic consumer discretionary environment, the company managed a 49% operating income increase in Q4 year-over-year. However, they faced an 18% and 14% decline in quarterly and annual sales, prompting plans to elevate marketing strategies to bolster customer interest in the following year.

User Growth and Engagement

The user base grew by 13%, reaching over 8.9 million, which aligned with expectations, signifying the potential for further monetization. Moreover, festive campaign effectiveness was indicated by higher project initiation rates and sighted user engagement uptick during promotional efforts, although engagement saw a slight 2% increase. This suggests that content and project quality can drive engagement but further efforts may be needed to maintain and enhance user interaction.

Product Categories Analysis

A sharp 28% year-on-year decline in Q4 for Accessories and Materials sales underlines the competitive pressures and shifts in consumer spending patterns. The focus on affordability is a pivotal strategy to navigate this part, as competition intensifies and the importance of maintaining market share without compromising on cost-efficiency becomes evident.

Revenue Insights and Outlook

The company reported a revenue of $231.2 million, an 18% decrease from the previous year, and a marginal 4% net income increase, suggesting efficiency in cost management despite revenue challenges. Quarterly Connected Machines and Accessories and Materials sales significantly declined. Meanwhile, Subscription revenue increased, reflecting successful expansion efforts. However, due to retailer stock limitations and cautious inventory management, machine sales and associated product sales witnessed a setback.

Future Expectations and Strategic Direction

In 2024, marketing and promotional strategies will intensify to drive customer interest. The possibility of seeing a decline in full-year revenue is acknowledged, with expectations of minor subscriber and subscription revenue growth. Operating expenses will see a modest rise due to marketing initiatives aiming to rekindle interest in the product category, yet the company still anticipates generating significant positive cash flow.

Long-Term Financial Health

The focus remains on maintaining profitability each quarter and producing notable cash flow, with the long-term financial model targeting operating margins between 15% to 19%. Even with potential revenue and margin pressures, the company reiterates its commitment to this financial threshold, which signals confidence in their ability to weather temporary recessions and achieve long-term goals.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to Cricut Inc.'s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Jim Suva, Senior Vice President of Finance. Please go ahead.

[Jim Suva, executive]

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Fourth Quarter 2023 Earnings Call. Please note that today's call is being webcast and recorded 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, 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; and Kimball Shill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host live Q&A.

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 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-K or Form 10-Q that we have filed with the Securities and Exchange Commission. Actual events or results could differ materially. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, March 5, 2024.

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

[Ashish Arora, executive]

Thank you, Jim. We moved through 2023 focus on profitability even as we navigated a dynamic consumer discretionary environment. 2023 was our seventh consecutive year of positive net income. We generated $53.6 million of net income, even with the $45.9 million of excess obsolete inventory reserves and fixed asset impairment charges. We are encouraged by our 49% operating income increase in Q4 year-over-year and the positive uplift from our promotions in Q4. However, we were disappointed that sales fell in the quarter and full year by 18% and 14%, respectively.

Our promotions uplift was smaller than we expected and is attributable in part to lower retail inventory. But in hindsight, we could have conducted more aggressive marketing and promotions. We intend to boost our marketing efforts in spending in 2024 to generate more interest and demand throughout the funnel. We will continue our deeper promotional strategy while focusing on maintaining great pricing discipline. We will keep concentrating on acquiring new users and enhancing that engagement and revenue generation.

I would like to look back in 2023 on what went well and what we could do better. The areas where we could do better are straightforward. We need to attract more new users to buy our connected machines. We need to reverse weakening engagement trends and reinject enthusiasm among our users. We need to be more effective competitors in accessories and materials. Much of our discussion today will focus on these priorities. In 2023, our total user base increased 13% to over 8.9 million users, paid subscribers increased 6% to $2.77 million and engage users in the last 90 days decreased 3% to $3.9 million.

Now looking at Q4. We saw a positive uplift from our deeper promotions in Q4, although it was smaller than expected. In hindsight, we could have given more discounts and advertise more aggressively to address consumer affordability concerns. These weaknesses were worsened by lower retailer inventory. We saw several retailers miss out on significant Q4 sales due to insufficient channel inventory for our machines. While we are working with those retailers to restart to more adequate inventory levels, and we have seen some improvement thus far in Q1, we expect some retailers to continue to be conservative on inventory commitments. In addition, addressing consumer affordability and making the overall making experience more accessible are significant opportunities for us.

As a category leader, we are significantly increasing our marketing spend, both in media coverage and expanding the size of our marketing talent and team. Our goal is to reaccelerate consumer excitement for the brand and category. Now on to an update on our priorities. Recall that we have 4 priorities: new user acquisition, user engagement, subscriptions and accessories and materials. I will briefly review these items and provide some detailed commentary on our new platform innovations.

We ended the quarter with over 8.9 million total users, up 13% year-on-year and approximately in line with our expectations. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drive our monetization flywheel. We have previously shared that our funnel is healthy and more recent data supports their conclusion. While our platform and products have universal appeal to creative of all ages and demographics, we are particularly focused on women 25 to 44 years old.

After several years of reduction in marketing spend, we accelerated our investment as we prepared for the holiday season. Our plan is to further increase marketing efforts and investment in 2024 to drive full-funnel excitement. Influencer marketing plays an important role in our strategy. We accelerated the onboarding of new influencers in the back half of the year and increased the number of influencers by more than 4-fold from adding 57 new influencers in the front half 2023 to adding 247 in the back half.

We also expanded our reach to increase work on organic and paid social content on Pinterest, TikTok, Beta and YouTube. Finally, our investment in media relations paid off with a total potential reach of $555 million to broadcast segments and $651 million through gift guides and product reviews. During the holidays, our partnership in the Kelly Clarkson Show holiday giveaway segment also drove excitement and interest in our brand and category.

As planned, we were more promotional in Q4 compared to the rest of the year. The promotions were supported by integrated marketing plans, including retailer programs and content marketing strategies, incorporating influencers, social editorial and deals coverage. While we did see an uplift, it did not meet our expectations. As we enter 2024, we continue to focus on driving bad awareness and pulling people through the funnel. Our plans include accelerated investment in digital marketing, influencer marketing and focus on lifestyle and product coverage.

In addition, we are expanding our messaging through marketing campaigns that focus on the role Cricut machines can play in different life stages. One example is our partnership with Pinterest around this year's wedding trend, which will be supported by content on and off the Pinterest platform. Our marketing programs also include integrated plans for key moments throughout the year, where there is higher motivation to personalizer make things.

We introduced the Cricut Make Their Day Valentines event, which was held February 4 through 10 in North America and serves as an example of how we plan to leverage promotions throughout 2024. We saw a meaningful uplift in sales and excitement compared to prior weeks from consumers and retailers. As we move through the year, we expect to instill confidence in our retailers to better partner with us and carry more inventory to leverage these integrated marketing and promotional opportunities.

We ended 2023 with 5.93 million users who made a project using their cutting machine in the past 365 days, up 2% from the end of 2022. Engage users at the end of 2023, defined as users who made at least one project in the last 90 days declined year-on-year to $3.93 million, 3% below a year ago. Our focus remains to maximize engagement of our most impactful cohorts, which are new users' onboarding onto the platform or on-boarders and access subscribers.

As we look to our engagement priority for 2024, our focus remains on enabling our users to discover, make and share projects easily as well as expanding our marketing capabilities to reach members on an outside design space to stimulate them to return to our platform. We want to increase the breadth and depth of content, make it easier to find that content and inspire action through great visualization. Let me first talk about how we increase depth and breadth. We think of content as growth projects and images. You can think of them as recipes and ingredients.

Over the holidays, we showcase holiday projects that have better photos of the finished projects, how to instructions and our design layout. When a user initiated a new project based on one of those holiday projects, we saw a higher likelihood to cut relative to a project that did not have good instructions, photos and layout help. In addition, continuing to grow our library of images remains a priority. A wide choice of images is one of the main benefits our subscribers seek.

In Q4, we surpassed 750,000 images in our Cricut Access Library with the majority of these now coming from a Contributing Artist Program. As we mentioned before, search personalization is important to us. As our library grows, so has our search and image navigation capabilities. For example, we are testing personalized search ribbons that show images and projects based on user history. We see a higher click rate when showing personalize results. We also measure the success in the quantity of our library by tracking the share of projects made with images from our library versus uploaded images, and this ratio is increasing favorably year-on-year.

Now let me briefly comment on visualization. We also launched a redesigned visualization experience that allows members to mockup any image on a series of blanks such as a T-shirt, cap, or a tote bag to inspire action. Paid Subscribers were in line with our expectations and increased 161,000 year-on-year and increased $71,000 sequentially in Q4, ending with 2.77 million Paid Subscribers. Our subscription efforts continue to bear fruit in terms of converting purchases of new machines into subscribers.

At the other end, our subscription attrition curve had remained steady despite declines in engagement. Alas, lower new user adds compared to prior year puts pressure on our subscriber growth and attach rates and create some quarterly fluctuations in 2023 that will likely repeat in 2024. Here at rich roadmap to continually increase the value proposition for subscribers including an ever-growing suite of premium design tools, along with the content strategies described above.

In January, we like Create Sticker, which dramatically simplifies the process of turning a raw image into a finished sicker in a few easy steps. Our goal is to make it incredibly compelling to sign up as a subscriber to leverage our software and services. As our engagement efforts bear fruit, we expect to see a boost to subscriptions. Accessories and Materials sales declined 28% year-on-year in Q4. Affordability plays a key role in materials and given current consumer sentiment, consumers are buying less materials overall and engaging less as a result.

In addition, we face the stiffest competition in this part of our business with lower barriers to entry than cutting machines in our digital platform. This puts continued pressure on our business. Even so, we feel our share of the materials market has not changed significantly over the past year. We are relentlessly focused on driving costs out of this business. So Cricut materials are the obvious choice when users want to make. We will ultimately accomplish this through reengineered product, reengineered packaging and improving supply chain efficiencies.

We have been incrementally capturing cost reductions in our materials with more to come over the coming quarters. It will take us some time to work through current inventory as we roll new products in, but expect to achieve margin improvements in this business over time while still creating a differentiated offering that works seamlessly with our machines and platform. We expect to provide more details on progress in this area as we move through 2024.

Growth in this segment should move as we're successful in driving new customer acquisition at a higher rate and our engagement efforts begin to bear fruit. Consistent with prior comments, we will continue our promotional cadence in this category to remain price competitive for consumers with a focus on winning share. We see that when we are in the price range of our competitors, we get our fair share. We are intensely focused on the overall customer experience, and we're motivated to work with those retailers that help us create a great experience both on the shop and for actual use of our ecosystem.

It's our fundamental belief that when we give people more reasons and inspiration to make things that are appealing to them and we make it easier to make things affordably, we will see a lift to materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current discipline.

I will now transition the call to Kimball.

[Kimball Shill, executive]

Thank you, Ashish, and welcome, everyone. In the fourth quarter, we delivered revenue of $231.2 million, an 18% decline compared to the prior year and below our expectations for the fourth quarter. We generated $11.3 million in net income, a 4% year-over-year increase in our 20th consecutive quarter of positive net income as we continue to invest in our key priorities. Full year 2020 fee revenue was $765.1 million, a 14% decline over 2022 as retailers took an even more measured approach to inventory commitments and higher average selling prices for machines dampened consumer sales.

We experienced higher average selling prices as our newer, more expensive machines became a larger part of the mix. Also, retailers were unable to fully leverage promotions we offered because of lighter inventory positions. So we spent fewer promotional dollars driving sales than we had planned. Breaking revenue down further, Q4 2023 revenue from connected machines was $77.4 million, down 24% over Q4 2022 and full year revenue decreased 21% year-over-year.

Retailer commitments were below demand, causing stock out of some retailers, which negatively impacted our sales. Remember, when retailers miss out selling machines to consumers, they also miss out on selling the initial basket of accessories and materials that go along with the machine sale. We are working with retailers to restock to more adequate inventory levels as we continue our strategy of deeper promotions in 2024 and our expanded marketing efforts to generate excitement.

Revenue from Accenture and Materials for the quarter was $77.3 million, down 28% over Q4 2022. For the full year, Accessories and Materials revenues decreased 27%. Subscription revenue for the quarter was $76.5 million, an 8% increase over Q4 2022, reflecting targeted investments in Cricut Access and the expansive improvements made over the last several quarters. For the full year, subscription revenues increased 12% in 2023 compared to 2022.

In terms of geographic breakdown, international revenue was $51.5 million or down 5% compared to $53.9 million in Q4 2022. The year-over-year decline in Q4 was due to a slowdown in the U.K., Australia and Meta, which we define as Middle East, Turkey and Africa. As a percentage of total revenue, international was 22% in Q4 2023 compared to 19% of total revenue in Q4 2022. For the full year 2023, international revenue increased 9% and represented 20% of total company revenues.

Turning to users and engagement. We ended the quarter with over 8.9 million total users or 13% growth compared to Q4 2022. We ended the quarter with over 3.9 million engaged users, which was a 3% decline from Q4 last year. On a full year basis, we had 66% total users engaged during 2023 compared to 74% in 2022. To some extent, this reflects the limitations of our total user metric. It is account of users acquired since the launch of Explorer in 2014, some of whom have not cut in years. We ended the quarter with 2.77 million paid subscribers, up 6% from Q4 2022 and up 71,000 sequentially.

Our subscription attach rate declined to 31% in Q4 2023 from 33% last year. As discussed in earlier calls, there is some natural subscriber attrition. So subscriber growth will be muted until we increase the pace of machine sales and new user acquisition. Moving to gross margin. Total gross margin in the fourth quarter was 42%, an improvement compared to the 29.8% in Q4 2022. The improvement reflects a higher amount of subscription revenue as a percentage of total revenue and higher machine margins. Breaking gross margin down further.

Gross margin from connected machines was 17.2% compared to 2.8% in Q4 a year ago. On a full year basis, connected machine gross margins increased to 13% from 3.3%. The increase in gross margins was primarily due to a favorable product mix compared to Q4 2022 as legacy machines continue to represent a smaller percentage of machine sales, coupled with higher average selling prices compared to a year ago.

Also selling fewer-than-expected units on promotions in Q4 benefited margins as retailers did not fully utilize the promotional spending we had planned. Subscriptions gross margin for the quarter was 88.7% compared to Q4 2022 of 89.5%. On a full year basis, subscriptions gross margins decreased 90 basis points. The decline in subscription gross margins, both for Q4 and 2023 was primarily related to higher amortization of capitalized software costs, which we expect to continue. Fourth quarter gross margins for Accessories and Materials was 20.6%, which compares to 15.9% in Q4 2022.

The Q4 increase in margins was driven primarily by improved cost per unit and lower freight costs. These more than offset some impairments. Recall, we had some larger impairments in this segment throughout the year, which pressured margins, resulting in full year 2023 gross margins for accessories and materials to decrease to 17.5% compared to 26.5% in 2022. We Full year Accessories and Materials margins were in line with expectations.

Total operating expenses for the quarter were $80.5 million and included $12.1 million in stock-based compensation. Total operating expenses increased 11% from $72.5 million in Q4 2022. The $8 million increase in total operating expenses was largely due to higher stock-based compensation expense and an impairment of unused equipment and capitalized costs as we further focus our development efforts on connected machines, a careful assessment of our future product road map resulted in a decision to terminate certain new machine projects to focus our efforts on more impactful opportunities.

In Q4, we wrote off $12.6 million of capitalized development from the discontinued projects. Full year 2023 operating expenses increased 1% compared to 2022. Operating income for the quarter was $16.5 million or 7.1% of revenue compared to $11.1 million or 4% of revenue in Q4 last year. This was a 49% increase in operating income, which we are encouraged with despite the decline in sales and the reserves and impairments that Ashish referenced. For full year 2023, operating income as a percent of sales was 9.1% compared to 9% in 2022.

Excluding the impairments of unused equipment, operating income would have been $29.1 million for the quarter. Our tax rate of 38.9% was higher than normal compared to 13.6% in Q4 last year. In 2023, the full year tax rate was 32.8% compared to 26% in 2022. The higher tax rate was due mainly to lower R&D credits in Q4 2023 and an increase in uncertain tax positions. We delivered our 20th consecutive quarter of positive net income. Net income was $11.3 million or $0.05 per diluted share compared to $10.9 million or $0.05 per diluted share in Q4 2022.

For the full year, we generated $53.6 million of net income and diluted earnings per share of $0.24, down from $60.7 million in net income and $0.28 diluted earnings per share in 2022. Turning now to balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds inventory needs and investments for long-term growth. In 2023, we generated $288 million in cash from operations compared to $118 million in 2022. We ended 2023 with a cash and cash equivalents balance of $245 million.

We remain debt-free. Recall, we are generating higher levels of cash as we work to bring inventory more in line with pre-pandemic norms. Accordingly, inventory decreased by $107 million from a year ago to $244 million at the end of the year. During Q4, we used $15.7 million of cash to repurchase 2.1 million shares of our stock. After the end of the quarter and through March 1, we used $10.8 million of cash to repurchase 1.7 million additional shares of our stock, which effectively completes our $50 million approved stock repurchase program that was authorized in August 2022.

Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2024. We are focused on bringing excitement to our category. We are doing this through an increased focus on marketing and continuing our strategy of deeper promotions on cutting machines and a continued cadence on Accessories and Materials to drive affordability. During the first few weeks of the quarter, we saw sales below expectations.

In our first deeper promotion combined with integrated marketing, we saw a positive uplift in consumer demand, even topping year-over-year machine sales for the promo week. Unfortunately, we saw several retailers with inadequate on-hand inventory that missed out on significant Q1 demand. Accordingly, we do not expect positive Q1 revenue growth year-over-year. We will continue to accelerate marketing to generate consumer excitement. But given ongoing retailer conservatism and only one major sales event under our belt, it is too soon to call an inflection point, hence, we may even see a decline for the full year.

We expect paid subscriber count and subscription revenue to grow slightly and become a larger portion of total company sales and profits. Lower new user growth rates will put pressure on our subscriber growth and attach rates following a similar pattern to 2023 and could result in a seasonal pattern of paid subscriber growth in Q1 and Q4, but flat to declining in Q2 and Q3. Our connected machine revenues will see pressure as we are more promotional with lower average selling prices in 2024 compared to 2023 to address consumer affordability concerns.

Our Accessories and Material sales will see pressure in 2024 due to lower engagement and machine sales following a weaker-than-expected 2023 and Q1 2024. We expect to see incremental improvement in Accessories and Materials margins for 2024. We Typical revenue seasonality is 40% in the first half and 60% in the second half of the year. However, we anticipate 2024 seasonality will look a lot like 2023, where revenues were distributed 47% in the first half and 53% in the second half. In terms of new user growth, we expect to add fewer new users in 2024 than we did last year, given 2023 holiday performance and a slower-than-expected start to Q1 2024.

In 2024, our operating expenses will increase modestly as we increase our marketing spend to reinvigorate excitement in the category. We expect total operating margins to be about flat year-over-year. We expect to be profitable each quarter and generate significant positive cash flow during 2024. Our long-term financial model remains unchanged with operating margin targets of 15% to 19%. Our approved model has demonstrated that when we operate at scale, which we define as revenue above $1 billion and drive top line growth, these margins are achievable.

Cricut has been a public company for almost 3 years. During 2020 and preparing to go public, we developed a package of quarterly information to provide meaningful transparency for investors, including our reporting segments and KPIs. After 3 years of business evolution, we are planning to redesign aspects of our quarterly information package for 2024. We increasingly view Cricut as a platform business with physical products. Going forward, we are changing the way we report our segments to be platform and products. We will also update our public KPIs to focus on the most meaningful indicators for our current and future operations.

With that, I'll turn the call over to the operator for questions.

[Operator]

Our first question comes from the line of Adrienne Yih from Barclays.

[Angus Kelleher-Ferguson, analyst]

This is Angus Kelleher on for Adrian. Could you provide some color on the hard goods segment regarding the quantity of the impact, if any, that you have factored into your outlook due to the going concern status of one of your specialized craft retail partners? And then I have a follow-up.

[Kimball Shill, executive]

Angus, thanks for the question. So I would just say that the retailer you're talking about is a very important part to us. It has been and continues to be. There's a dynamic situation that we're following closely, and we have adequate reserves that in an eventually, we don't expect a material impact to our financials.

[Jim Suva, executive]

Do you want to also talk a little bit about Ashish, like how about our diversification looks like and all retailers are less than 10%.

[Ashish Arora, executive]

Yes, a good point. And I'd just call it, Angus, we don't have any retailers that represent more than 10% of our business in terms of revenue.

[Angus Kelleher-Ferguson, analyst]

Okay. And for my follow-up, how do you balance your plans to invest behind marketing against the fact that it appears to be one of the line items with the furthest to go against your long-term goals? What do the leverage opportunities look like there for fiscal '24 and beyond? And how might the influencer forward marketing affect that?

[Kimball Shill, executive]

So I mean when we look -- with 2020 hindsight, I think marketing is an area where we have pulled back a little bit too much. And by that, I mean discretionary marketing. So if you look at our total sales and marketing bucket in the P&L, there's lots of stuff in there, including bank charges for all our subscriptions, those kind of things. But discretionary marketing discretionary marketing is area where we think we pulled back too much. We think we have an opportunity as a category leader to generate enthusiasm in the category and reinvigorate consumers and in turn, our retailers. And so it's an area where we expect to lean in to do precisely that.

[Ashish Arora, executive]

So let me add to that. So our conviction and our research continues to show that the opportunity is very large for us globally. So basically, we think there's a large market. We've talked about the funnel being healthy. Now obviously, in Q4, what we learned from that is that as we're kind of ramping up marketing towards the end of the year, plus our Q4 promotion, we had an uplift but didn't deliver the uplift that we needed.

Now in Q1, as we continue to ramp our marketing as well as combine that for a major sales like and had promotions, especially during Valentine's week, we saw a pretty significant uplift, and we're very pleased with that data. So as we go into Easter Mother Day and throughout the rest of the year, including back-to-school and some other moments, I think marketing is the area that we want to lever. So our strategy, as we kind of shared in our prepared remarks, which is continue to ramp up marketing and we have a lot of -- we're basically deploying different types of vehicles.

I think we're doing more marketing than we've ever done in our history. I think it's the right investment because we see the funnel being full. We want to pull people through the funnel. That coupled with a more frequent and deeper promotional strategy, we think, is going to help drive growth in the next 6 to 9 months. But we're really excited about marketing. We have double -- we actually tripled the basically added significantly to the team. Our goal is to continue to ramp that up and just do different kinds of marketing and we conclude some of those details and color in our prepared remarks. I'll be excited about it.

[Kimball Shill, executive]

I just want to clarify, Ashish calling an inflection point of 6 to 9 months, right? I mean it may be a few quarters, but we are focused on investing for the long term and how do we drive that excitement Ashish talked about.

[Operator]

[Operator Instructions] Our next question comes from the line of Eric Woodring from Morgan Stanley.

[Unknown Analyst]

This is [ Ann ] on for Eric. So the percentage of engaged users dropped to a December quarter low 44% and remains near all-time lows. Where do you think engagement bottoms out? And could you help us understand when your engagement efforts will start to move higher?

[Ashish Arora, executive]

Thank you for the question. So as we've kind of pointed out before, engagement is one of the top priorities of the company. We have leadership that has a lot of credibility, and we're going to continue to ramp those efforts. In Q1 -- sorry, in Q4, our engagement numbers, and this is the actual number of users declined by 3%. So let me kind of give you some color on what some of the headwinds and tailwinds were.

Now in 2020 and '21, we acquired a massive cohort of people. And as those people are going through a typical graduation curve, and that curve stabilizes over time, we see those -- as those people graduate as the engagement levels come down to more normal levels, we see that as a headwind. Now on the flip side, as we continue to onboard people as we acquire people, that creates a tailwind. So those users are much, much more engaged, but not in -- we are not acquiring enough users to offset the people that are graduating.

But then the question is how can we improve engagement overall, which is where our efforts have been more focused. And so the good news there is that when we ask people, people who have not come on to the platform for the last 3 to 6 months, over 80% of them basically tell us that they really want to use the Cricut platform. And the reasons they cite are, hey, I just ran out of time. I couldn't find the right reason or the right inspiration. And those, we think, are controllable factors. Right? So our goal is to make the product easier to use, make it more reliable, gave people a lot of inspiration that we can actually spend proactively to them.

So in our prepared remarks, we talked about expanding the inspirational content, making it easy for people to search that content and actually making it much, much more personalized. So again, very -- even though we will continue to see headwinds because of the 2020/'21 cohort, I have strong confidence in the team that this will some at some point worse over time. So we just got to stay focused on and keep driving it.

[Operator]

And our next question comes from the line of Asiya Merchant from Citigroup.

[Asiya Merchant, analyst]

The margins have been masked by significant write-downs and impairments, et cetera. So if you wouldn't mind like walking us through '24 expectations, are we -- is this an end to all these kind of write-offs and margins? And then I have a follow-up.

[Kimball Shill, executive]

Thanks for the question. I mean write-downs were an important part of our story in 2023, and we end up having total write-downs of $45.9 million. And -- but for that, for those write-downs, we would have operating income of $116 million. So very profitable business, and we're proud of that. The write-down is really going to break down into 2 buckets. The asset impairments that both Ashish referenced and I did in my prepared comments that represents about 40% of that overall bucket for the year.

And that's really, as we've become more focused on our hardware platform on the most impactful opportunities around cutting machines. We've had to make some hard decisions to cut some projects, and that resulted in the impairment. But ultimately, I think that's going to be the right thing for our business as we're going to be more focused on what could be most impactful. The second piece of that really is around excess inventory on finished goods inventory across most of the Accessories and Materials segments of the business.

And if you look back in 2021 and early '22, when we're ordering most of these materials, we had a much higher run rate business, we had higher expectations. And GAAP requires that we do the fair look back and say, what is our current velocity versus how much we have on hand? And so that required us to take some adjustments this year -- as we adjusted inventory on the balance sheet. But also, we're going through the process of rationalizing our consumables portfolio, where we've had historically as many as 2,500 active SKUs, we're going to be focused on fewer high-volume SKUs than we have in the past with a much smaller -- with a much smaller tail, which will reduce our risk.

So as we launch new products, there's always going to be some bets we get right, some of them get wrong. So there will always be some, but you can expect it to be less impactful as we go forward than it has been this year.

[Asiya Merchant, analyst]

Great. And then if I may, one for Ashish. Ashish you guys are reiterating your long-term model in your prepared remarks in your presentation as well. I don't think you're a little bit tough in fiscal '24 because you guys are guiding for some revenue pressures and margin impact. But can you walk us through kind of the line of sight as you see maybe the exit rate that you're expecting for fiscal '24. This sort of gives you the confidence that, let's say, over a medium-term model, which my model is over 3 years, if you can walk towards your margin guidance that you guys reiterate sort of the medium to long term?

[Ashish Arora, executive]

Asiya, let me start, and then I'd love for Kimball jump in. So I think, again, I want to reiterate that we've continued to do a lot of diligence around the market size. We continue to see and believe in that there's a huge market for our product and our category. And we've done more segmentation research, and we believe that the opportunity is global for us. So we are very excited about the business.

Now there's a couple of things that internally when I talk about what does it take for us to go after that mass market. So we talked a little bit about focusing on the 25- to 44-year-old segment. Having said that, the product compete is pretty universal, right, across many demographics, et cetera. So the areas of focus, and then Kimball talk about the long-term model is we want to drive for affordability, right? We want to make sure the -- not only is it affordable to buy the initial machine to get started, but also the ongoing usage of the machine is affordable, right? So our materials, our content and all of those things.

The second is, which I think is really the thing that we have to drive most aggressively is the ease of use of the platform. We have to make it incredibly easy to use. We've made significant progress, but I think there's a lot more to be done. So that's where the team is focused on, and that's what leads us to believe that while the path to get there is a bit longer than we had expected, we think that there's a long-term model is valid.

I'll let Kimball talk about from the financial piece.

[Kimball Shill, executive]

Yes. And so 15% to 19% is our goal, but I'll call out in our prepared remarks, we mentioned that we think operating income is going to be about flat for the year as a percent of revenue. We expect to be below that this year. And really, that's our target when we are operating at scale. But that means we need to be $1 billion plus in revenue which we weren't last year. And given where we are on Q1 sales being softer, we're not calling for that this year.

Again, we just want to call out that's where we think we get to as we get our business back to growth and scale, but we need to be growing and operating about $1 billion to hit those kind of operating margins.

[Ashish Arora, executive]

And I'll add just one last comment, right? I think in 2023, we had a strong focus on operating income. And we basically -- as we look at the state of mind of the consumer, as we look at where trends were hindsight 2020, but we were focusing on maximizing and making sure that we run a very profitable model. I think we are definitely leaning into more promotion than more marketing this year. But to Kimball's point, as the business gets back to growth and as we drive in full scale, that when we start to see some of those margins -- we approach closer to those margins that we talked about our long-term model.

[Asiya Merchant, analyst]

Okay. Great. And if I can squeeze in one more. It's just with your capital allocation. I think you mentioned that you've now completed what was authorized. So what -- how should one think about further shares impact and buybacks to offset any dilution.

[Kimball Shill, executive]

So ultimately, those are decisions that obviously management plays an important role in how we think about that. So -- but let me talk about kind of our framework and how we do think about it. I mean first, we want to make sure we have sufficient inventory to operate the business. After that, we're making sure that we're making the right investments for the medium and long term so that we have growth opportunities. And that includes both our hardware product road map as well as our platform, which we're in the very early days of continuing to invest in that platform.

We also would consider acquisition opportunities as a means of growth, especially as it would accelerate strategic initiatives. But beyond that, we do look for efficient ways to return capital to shareholders. And as you've seen in the last year, we've used both special dividends as well as share repurchase programs. And so all those tools are in our portfolio. But again, the timing and deployment is up to the board.

[Operator]

And our next question comes from the line of Eric Sheridan from Goldman Sachs.

[Eric Sheridan, analyst]

Maybe 2, if I could. One more short term. You called out marketing had an improved output of yield in Q1 relative to what you saw in Q4. I know you're not guiding to Q1, but is there really a quantification of that or a little more qualitative color you can give on what that step-up might be in terms of return on marketing spend in Q1 versus Q4. That's the shorter-term one.

And longer term, coming to get to some of the topics we've talked about already. But if you think about influencer marketing more broadly, how should we think about efforts spend on influential marketing today that might yield a higher ROI longer term as maybe you're able to build more LTV on the back of influencer marketing efforts that have some duration around them rather than quarter-to-quarter annualized performance marketing spend.

[Kimball Shill, executive]

Yes. So thanks for the question. I mean we had -- the single commercial event that we talked about around Valentine's Day, where we actually saw a year-over-year comp of machine units to sales. Now that was -- and we got the uplift that we're expecting in that, and we found that encouraging.

But kind of one data point against kind of a lower baseline of demand as we entered the year. So if I can just kind of point back to some of our Q3 comments, and then how we saw consumers behaving in Q4. Demand was a little bit softer than we expected. We haven't seen a real change in our consumers thus far in the quarter outside of promotional events. And so we do have a number of those that we planned throughout the year, but we are encouraged by kind of that single data point that we have at this point.

[Ashish Arora, executive]

And let me talk to the second part of your question, which is around marketing. And we think it's a very astute observation and a question. So let me take a couple -- let me just say a couple of minutes on it. So we actually agree with you that there's a lot of leverage that we have, especially in deploying marketing such as influencer marketing, some of the stuff that we talked about in our partnership with Pinterest, PR, social media, our category itself and our product lends itself very well to word of mouth and network of effects, right?

And if you think about it, as people make a project, which is why I think engagement plays such a critical role even in acquisition, that as those 3-plus million people or close to 4 million people engaged with our platform, they make projects, and they tend to share that on social media. They tend to feel really good about it, right? And we've made a lot of -- we're building a lot of capabilities in our platform itself to drive and to share some of that inspiration, et cetera.

Last year, I would say we heavily leaned in on performance advertising. And to some degree, there's not too much scale in that. And where we actually cut down, which we have now revamped in a very significant way are things like influencer marketing, right? So as we partner with influencers, we are focusing on demographic, if you think about the 25- to 44-year-old target segment that we have, that particular demographic specifically looks at all the social platforms, right? The way they shop, the way they share messages, the way they communicate with brands, we think influencer marketing plays a really good role.

The second asset, which you kind of briefly alluded to, right, which is that arise tells us that as you think about life stages, like things like getting married, having a baby, buying their first home, all of those things play a huge role and a kind of a point in time where people make the decision around personalization, right? If you think about the amount of money that is spent on a wedding or getting married is not just about the wedding. It's all the life -- it's all the things that lead up to the web, right? There's 4 to 6, 7 events. And it's not just the brightest several people involved from price pass to bash read parties to mother laws or moms.

So I think us leaning in heavily on the 25 to 44, coming up with the right brand messaging and basically helping drive network effects. I think those are the things that we will see. I'm actually, again, I'll reinforce really excited about the creativity in our marketing team, some of the things that we are looking at in PR, social media, and I think you'll again, very optimistic about what role marketing will play in acquisition going forward.

[Operator]

Our next question is a follow-up from the line of Erik Woodring from Morgan Stanley.

[Unknown Analyst]

About that. International was down around 5% year-over-year. Can you help us understand kind of how international has been trending Q1 to date? I know you called out a little bit of a weaker U.K. And I know that it's been a big driver of growth for you guys over the past few years. So how are you thinking about the international segment as we look into 2024?

[Kimball Shill, executive]

No -- thanks for the follow-up. And then as you correctly pointed out, Q4 was down 5% year-over-year. We were up 9% for the full year. And let me kind of break that down a little bit. So in some of our larger markets like U.K., we've seen the same consumer pressure and concern around affordability as we've been experiencing in the U.S. And so that was clearly a factor. In Australia and our Meta region, which, again, is Middle East, Turkey and Africa for us, there was kind of a situation where it's more difficult comps, where in Q2 -- sorry, Q4 of '22, there were some large channel fill orders related to new distribution in those markets that didn't have simile comps.

And so that kind of put pressure on Q4 this year. That said, we think we have a huge opportunity for us in our international growth vector over time, and we're really excited about it. We've seen, again, some softness again in the larger markets in Q4, similar to what we've already talked about in our U.S. market. So that piece of it hasn't turned around. But we are excited about the medium and long-term prospects of international for growth.

[Ashish Arora, executive]

Yes. And I'll just add to that. I'm actually just about a week, 1.5 weeks away from heading to Europe. We have a large event going on in Germany, and then we have several meetings lined up in rest of Europe, including Netherlands. We think the opportunity, as Kimball said, is global. The 2 factors that, again, I'll reinforce, right, affordability was a factor. It affected most of our markets. We are obviously earlier on in the cycle, but affordability was a challenge for that consumer. It's actually something more pronounced in some parts of the world, especially in Europe. So I think we've got some work to do to resolve that.

The second is awareness and acquisition, right? So the same thing that we talked about that we are driving in North America, we're going to ramp up. In fact, we are ramping up our efforts in marketing. And again, these events that I'm going to in Germany has tons and tons of Cricut users or other people who want to buy a Cricut and I'll be on stage, and I'll be talking to them. And again, I think you will see some of the benefits of the investment that we're making. So again, I think we're in the very early stages of our global platform.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jim Suva for any further remarks.

[Jim Suva, executive]

Thank you, everyone, for joining us this afternoon. We have a large opportunity over the long term to drive new user growth and increase engagement. The Cricut platform continues to not only strengthen but also provide increased value to our users. We will continue to manage the business for sustainable, profitable growth and generate healthy cash flows. I'm excited about the future opportunity ahead of us.

We will be at the Morgan Stanley Technology, Media and Telecom Conference tomorrow, Wednesday, March 6 in San Francisco, California and the ROTH MKM Conference, Monday, March 18 in Laguna Nagal California. If you have additional questions, please e-mail me at [e-mail]. This now concludes this earnings call, and you may now disconnect. Thank you.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.