Cricut Stock

Hi, everyone, and welcome to the Cricut Fireside Chat at the Goldman Sachs Communacopia + Technology Conference. I have the privilege of hosting Kimball Shill, CFO, and Chris Belfiore, Head of IR, here at our conference. We have about 35 minutes today, and we'll open it up to Q&A if there's any. But my name is Kat Murphy, and I cover Cricut and the hardware sector here at Goldman Sachs. It's a privilege to have you both here.

Thank you, Kat. We're excited to be here.

Yes. To start it off, over the last several quarters, you've focused on a few key initiatives around investing in new products, simplifying the user experience, broadening brand awareness, and introducing some new ways to monetize the Cricut platform. As you look across those various initiatives, what are two or three milestones that would tell you that this strategy is translating into sustainable, profitable growth?

So there's four things I'll highlight. First is consistent platform growth. So we have grown every single quarter, I think since 2021. We expect to grow every quarter this year. And so we're very pleased with our platform business. And it's worth highlighting that it represents 80% of our profitability, and it's the part of the flywheel that lets us monetize the users that we bring into our ecosystem. Second really is the green shoots of improvement we're seeing in engagement. So engagement's been a bit of a headwind for us for the last couple of years.

And this last quarter, we saw active users, which are users who have engaged in the last 365 days, increase on a year-over-year basis, and that's the first time in a while. We also have a shorter term engagement metric for 90-day engaged users, so that's somebody who's made a project in the last quarter, and we held that, while that's been under pressure, we saw that hold flat. And so, really kind of green shoots of engagement -- in the engagement area.

And then we've had a number of new product launches this year. We just last week announced the launch of our new Maker 5, which is our flagship cutting machine. We launched two machines earlier in the year with Joy 2 and Explore 5 in Q1. And then we've also introduced a number of heat press products. And so really, the refresh of the product portfolio that we continue to execute on. And then even despite some of the headwinds seen in the platform side of the business, the sustained profitability that we've been able to drive in the business. So really kind of those four things.

Great. You made reference to the sustained platform growth, and you've talked about expectations for that to carry on into the back half of the year, also expecting to see growth in the product part of the business in the back half of calendar 2026. What's driving your confidence in that outlook for both segments? And I'm sure we'll go into each segment in more detail. But what are some key drivers investors should be watching for as we work through the back half of calendar 2026?

So on the platform side of the business, we've been very consistent in being able to drive incremental growth. There's an element of price leverage that we're able to pull at this point, that we've been experimenting with. And let me kind of break some of those down now and go into detail in a minute. But we're having price increases not across the board, but capturing more area into the curve. A couple of examples I'll break down. So a portion of our subscriptions come through the iOS App Store. And as we were able to introduce a Cricut Pay option within the App Store, we saw a number of probably the majority of people go towards that, because it kept the same legacy pricing. But we also made available continue with Apple Pay, but you paid a marginally higher price. And we see a number of people just choosing the convenience of the Apple Pay. The good news is we haven't seen any drop-off of subscriptions in that channel as we've introduced a new higher price with Apple Pay. So that told us there's some room for pricing actions.

The second thing that we've introduced this year is a new premium monthly plan. So our standard pricing plan is $9.99 a month, $99 on an annual basis, we introduced a premium plan that is $14.99 a month, and we're seeing a significant portion of our subscribers choose for that better plan. The key differentiator there is the number of AI credits and some shop benefits, but it's a couple of examples where we're seeing an opportunity to pull the pricing lever where customers are willing to pay for that.

That's very helpful. And we can definitely dig into it more. But first I do want to talk about the launch of the Cricut Maker 5 last week. As you mentioned, your flagship program or flagship platform, it's also coming in at a lower price point relative to history. How are you thinking about managing the mix of some of these new product introductions with the impacts that it could lead to on the profitability perspective, the appropriate marketing behind putting some of these new platforms out, and what are some considerations on platform mix that inform both the revenue and margin outlook for that segment?

So a couple of things I want to highlight. One, again, 80% of our profitability comes from our subscriptions business. The flywheel starts for us when someone buys a connected machine and that gives us the opportunity to monetize them through subscriptions and accessories and materials. And so when we talk about our cutting machines, it's really about having the balanced portfolio. So we have an entry price point of $99 for our smallest machine, and we introduced the newest incarnation of that in Q1, that's Joy 2. We have kind of a mid-price point with our Joy Xtra, which we introduced, that was a couple of years old.

We haven't refreshed that one yet.

But then we also have our Explore 5 and then our Maker 5. And so we have price points based on what consumers want to do. And the other thing that is new this year is our bundle-only strategy. So in history, you would buy a bare machine, and then the consumer would have to figure out what bundle of materials and tools I need to buy in addition to be able to go make projects. And as we've launched our next generation of machines, we only sell them packaged with bundles. And we have five different configuration bundles for each machine type. So that lets us have a compelling opening price point as well as high value in the box for the larger bundles. And so it depends on what the consumer is looking for, how much they have to spend and what they're looking for and so it's really about having that balanced portfolio and letting consumers select and then once they are inside the wall we have the opportunity then to monetize them through accessories, materials.

Correct me if I get these numbers wrong, but $350 for the entry-level Maker 5 bundle, and then starting price for Maker 4 at the time was initially $400. How are you driving cost out of the appliance and still able to capture value with these bundles? What's happening inside the business that is allowing you to do that?

So we've done an excellent job in re-engineering these products. So the prior generation Explore 4 and Maker 4 that we launched a year ago in Q1 was just kind of a refresh of the existing architecture. The Explore 5, Maker 5 is the first time we've fundamentally reengineered the architecture since 2014. In that reengineering, we were able to drive significant cost out of the manufacturing cost of the product. It has half as many parts and still produces a better result than prior generation machines. So we're really excited about that. What that enabled us to do is without sacrificing margins, put a lot more value in the box for consumers.

And that's important for us because we know through our research that affordability is the single biggest objection that consumers have. We're in a discretionary product, we know we're an expensive discretionary product, and most of our consumers are in the $100,000 or less consumer households. Those are consumers that have been under pressure for a number of years now. And so we're focused on affordability, even as we've navigated tariffs over the last 18 months, you haven't seen us raising our prices, right? We've been focused on that affordability. And so we're really excited about the value we're able to put in the box, and make it compelling. So either same or lower price points of prior generation machines with a lot more value in the box with these bundles.

That's very helpful. You talked about the hardware appliances being the introduction, or the cutting machine being the introduction to the flywheel that you're then monetizing through the subscription offering, through the accessories and materials business. But one of the ways you're looking to drive user acquisition is through your rebranded Think It, Make It, Cricut campaign. Can you talk about some of the early learnings of that campaign and what success you're seeing in expanding the aperture of the type of customer who engages with your platform?

No, very good. So let me talk about the genesis of Think It, Make It, Cricut. Because we've been spending a lot of money in the last couple of years as we've accelerated marketing to drive awareness. And last year we learned we were doing a good job of filling the top of the funnel. We weren't doing -- we need to do a better job of pulling people through the funnel and help them understand how we drive conversion. And as we understood how consumers think about the brand, people were aware of Cricut, but they also had a view that, oh, it's for my really crafty friend, it's not for someone like me. And yet there's lots of capabilities that are available through our creative platform and you can make with our machines that many people do. And so the intent behind the new Think It, Make It, Cricut branding, is to expand the prism through which people view Cricut and, oh, it is for something like me because it does something that I'm interested in doing already.

How are you measuring the success of these marketing campaigns and ensuring that you're attracting high-quality users who may be sticky long-term users of the platform as opposed to anyone benefiting necessarily from promotions or any short-term pull forward in demand?

So it goes back to the funnel I talked about, where we were doing a great job of bringing -- of making people aware, but we weren't doing a great job of pulling people through. And so part of it is getting people to actually get to it, purchase decision, and convert. And then in terms of the overall quality of user, we are looking for, a broader set of users that come in. And one of the things that we've learned with our research on consumers is -- and this has been kind of a change that we've seen over the last few years. Before COVID and during COVID, you had people that had a lot of time. They were focused on doing crafting. They were hardcore crafters, and they would spend a lot of time doing it, and they were willing to go through the time investment required to learn a fairly complicated software experience, but it was very powerful and let them make what they want to make.

As we have started to go to a broader more casual consumer, it's much more focused on time efficiency. I don't have two hours that I want to spend making something. I want to do something in 20 minutes. So a theme that we've talked about throughout different parts of our business is, how do we remove friction? How do we make it simpler? And how do we make it approachable so that new people who come into the brand, who have who have an interest in doing something related to the many things that you can do, it's easy for them to get up to speed and do it.

Can you talk more about that guided flow investment that you're making that you alluded to in making easier the use of the platform for customers and that resonating both with the existing customer base and keeping them engaged or re-engaging existing customers or is this primarily to make easier that first project and the initial engagement of a new user?

It's really both. And so, you know, kind of break it down for you. Is -- when we researched with our -- when we interviewed our consumers who hadn't engaged in a while. We'd ask them, why haven't you engaged? And we got kind of three answers back. It's -- well, I couldn't think of anything to make, so no inspiration. I didn't have a reason to make, right? Oftentimes people engage around a birthday, an anniversary, a holiday, right? And so there wasn't that motivation and then it was life got in the way. And when we drill down and what does life gotten the way mean, It's that I don't have an afternoon to spend, I have 20 minutes to spend and how can I make something in 20 minutes? And so it was probably a year and a half, two years of investment that really came to fruition as we closed out '25, where we were able to launch a dramatically simplified user experience in the platform. And that's the guided flows that you're talking about.

So we took the most popular use cases, right? And this is all data-driven decisions because we have the connected platform lets us see what kind of projects are cutting, what materials are doing, the types of projects. And so we took the most popular use cases and dramatically simplified them. And then we leveraged AI throughout that making process with instructions and guided steps all the way through. The way that synchronizes with what we're doing this year with new products is with our bundle-only strategy, we're putting the materials and the hand tools in the box that sync with the guided flows that new users are seeing. So I get my new machine. I'm excited to do something. I can find the instruction and the guided step-by-step flow in the software, and it correlates with everything I have out of the box in my experience.

And so it's kind of an integrated way we're trying to remove friction for consumers and make it simpler. Why does that matter? We see that the way someone socializes with their platform in the very early days is predictive of how they've socialized with it over time. So if someone comes in and has a good experience, and they make a couple of projects successfully, that builds their confidence. And they're going to be more active over time, if someone comes in and they couldn't figure out how to connect the machine or they couldn't figure out how to make the project, they couldn't figure out how to cut it or design it or then assemble the project they get frustrated and they may just put the machine back in the closet, not get it out again. So we believe this ultimately gives us a more productive consumer by making it simpler for them.

It's very helpful. You talked about this investment that you were making over a year or two in simplifying these guided flows. You also talked about reengineering the newest generation of platforms to pull out costs. Should we think about the expense related with those investments as one that should be ongoing on a go-forward basis or is the majority of that OpEx step-up now behind us? Is there more room to go to make more efficient both the platform and the hardware appliances?

So we continue to accelerate investment in hardware investments -- in hardware development. We have a long roadmap that we're working against. We just announced the Maker 5 launch. We have more to come that will happen this year before holiday. I won't talk any more about it other than to say there's more to come. And there's more to come in the quarters ahead that we're working on. And so we continue to drive innovation in the business and even as we are looking at adjacent spaces beyond just our traditional cutting machines. And so -- yes that's something that folks can look for in the coming quarters, not all necessarily this year.

And then, we continue to invest heavily in the platform. We're constantly evolving the experience and to make it better. And that's one of the reasons that I think we've been so successful in driving consistent growth in the platform is making sure that we have the right value proposition for consumers and it's an improving value proposition over time.

That's very helpful. You mentioned monetizing opportunities outside of just the traditional cutting machines. Publicly, you have talked about offerings like direct-to-film and patterns as being new ways in which you're looking to engage with and monetize the customer outside of necessarily just that engagement on the cutting machine. What success are you seeing there? And maybe at a high level, could you talk to the types of characteristics of what some of these adjacent opportunities could look like that you would deem as successful or adjacent to the core kind of crafting motion?

So on the services and just the content play that you talked about. I mean, it's a small team, small investment, really some tests that we're doing. The primary goal there is to keep engaged subscribers more engaged, right? We know that our users do other things and have other creative outlets than just making something on their cutting machine. And we want to become the platform of choice. And so with crochet patterns, with paint by number, with coloring pages, and some of those things that you mentioned, we're giving an opportunity to do things they're going to go find -- they're already finding how to do those things other places. We want to bring more value to our subscription and keep them engaged, right?

The single biggest reason people stop subscribing is they're not seeing the value in that subscription. So we're looking at bringing the value in the subscription. The dollars we've invested so far, are very small as we test this and figure out how we want to scale it. Ultimately, we think it becomes an opportunity to bring creative people into our platform that may not have a cutting machine or may not be interested in that, but they're interested in some of these other things that we offer. So we'll learn with that over time. But today, it's small. The early data suggests that our subscribers who use it, use it on a repeated basis and they see value there. And so we're encouraged by that.

You mentioned earlier the three reasons why customers were not engaging as often, being no inspiration, no reason or life got in the way. Does that adjacent opportunity that you just talked about address the no inspiration and finding more reasons for a customer to stay engaged with the platform? Or are there other ways in which you're looking to help customers find more use cases for your products?

There are a number of ways that we're helping people find that inspiration and become engaged, right? Yes, some of these services offerings is part of that. But also, even within our platform, we have millions of images that are optimized for high quality cutting to be used in projects. It can be really difficult to sort through a couple of million images and figure out what do I want to put in my project. And so we have AI in our search algorithms to help understand user intent, user interest, and we're serving up images that they would be interested in. So that's part of the inspiration.

We also have generative AI. So if I don't find an image I want, I can use text prompts and I can generate an image. And then and then more recently we've introduced Project Designer that where it will not just give you an image that you then put in -- think of an image as an ingredient in a recipe and a project is your complete recipe. And so we can generate just that one ingredient for you or we can generate the whole project for you including all your instructions and how to finish the -- give you a finished design tell you how to cut it out, give you instructions on how to assemble it. And so there's a range of things that help the consumers find what they're looking for.

You mentioned the premium tier of the subscription is one that makes more AI credits available to your customer. And it sounds like those are three potential ways in which a customer could spend their AI credits through the -- maybe to through the image generation and then through the project designer.

So Project Designer, image generation, and patterns, paint by numbers, all of the Cricut Labs type of things use AI credits.

And are you finding that the customers who understand or see value in the AI Lab or AI credits are highly -- tend to be more highly engaged customers with the profile of a customer who wants to engage with Cricut in that way?

So on the Cricut Lab side, remember, it's set up as a test. So not -- the whole world isn't seeing it. It tends to be a subset of users, the ones that engage with it come back and engage on a repeated basis, right? But I mean at this point we're talking in the hundreds of thousands of uses, not in the millions of uses yet on that, where we have users doing hundreds of millions of projects a year, right? And so that's kind of a tiny piece that we're learning with. But we do see it very promising on the engagement front because we see repeated use of it and people coming back. And for example, on coloring pages, a significant number of the -- where I take a photo and I upload it and I say, give me a coloring page that I can give it to my kids, the large majority of people who do it are downloading that page, they're printing that page to use it. So they're finding value in that.

Got you. Platform gross margins have consistently remained in the 80% range, even after all of these investments that are being made in the platform as well as these incremental investments in AI credits, which we've talked about a lot in this conference, can be very volatile and can cost a lot depending on usage. How should we think about these new platform services, AI usage, as factoring into your medium and long-term outlook for platform segment gross margins?

So we would expect as AI utilization increases that it would put some pressure on platform margins. I don't expect that to be -- I mean that's maybe a point or two. I don't expect it to be a significant headwind. So far, where we've seen AI utilization, it's driven more new subscribers than it's cost us to provide those AI credits. So it's been accretive at this point. But at some point, I think there'll be broader adoption, broader usage and ultimately, we'll see that as a good thing, because again, we're trying to drive value in that subscription so that the subscribers want to continue subscribing.

We talked at the top of the conversation around some of the experimentation you've been doing with price, both in the App Store and the payment methods, as well as with the premium -- introducing the new premium tier. What are you seeing as opportunity to take price further and introduce other monetization mechanisms, maybe a purchase by AI token or purchase by AI credit type model that would enable you to extract even more value while you're offering more services to these customers?

So what we haven't done yet is just across the board price increase, right? So we're still at our legacy price. And we've talked about -- we've talked before that we would want to see engagement solidly up and to the right before we considered something like that. And so we've been selective where we pull that price lever. We are -- today the premium price plan that I talked about is available only in the U.S. We're rolling that out in international markets, so that's an opportunity for us. We're also experimenting in some of the international markets with lower price plans that are priced in line with what GDP and consumer spend is in those categories. Those are just tests. We'll understand what that helps us drive in terms of penetration and subscriber growth as well as overall revenue growth of the platform.

Can you talk more about your strategy to go after international markets? North America is your leading location today, but you do have a presence in several other major countries. How are you going after that opportunity? What does that sales motion look like? And how much of an investment do you need to make in go-to-market in order to build a meaningful presence there?

So we're active in 50 countries around the world today. And the largest markets outside of the U.S. are U.K., France, Germany, Australia, New Zealand. And we've been in those markets for quite some time. What we've talked a number of times about over the last couple of quarters is we're seeing very strong growth in Latin America. We're seeing very strong growth in Asia, particularly Philippines. And then also in our Middle East, Turkey, Africa region. And that one's been a little more bumpy with what's been going on in the Middle East this year, but we see very promising shoots of growth in all those markets. It's worth calling out that in the developing world, we see where in North America and Western Europe, it's primarily a hobby use case. I want to be creative. I want to have a hobby. In developing world, it tends to be a prosumer first use case where I'm looking for a way to have a home-based or small business and provide income for my family.

That's very helpful. On the hobby front, especially in your legacy North America business or not legacy, but your core North American business, you've benefited historically from word of mouth and virality in that way, which has limited what you needed to spend on marketing dollars in the past. Is that viral sales motion to build an initial customer base still apply for the prosumer type opportunity? Or how are you targeting the prosumer use case in some of the emerging markets?

So the playbook as we go into a new market is very similar, and it's proved very durable over time. And it takes a while to develop because we go in, and it's social media based, it's local ambassador influencer based. And -- but very quickly, that helped us build. I mean, it may take a couple of years to get to critical mass, but we've seen that work very consistently over time. Word of mouth continues to be an important avenue for us. And the reason that's important is this can be a complicated product to learn and understand, and we find that people want to either touch it and feel it or know someone who's touched it and feel it and talk about it, right? So it's that and then social media.

On the training side, it's a lot of YouTube. It's a lot of coming to Cricut.com to understand the product and how to use it before someone makes a purchase decision. We asked earlier the question of, how are we gauging the success of our marketing expense? One of the things that we look at is driving traffic to Cricut.com, not because we're trying to monetize them through our own direct-to-consumer channel, but because of that research function. They're coming to our website to learn about, which machine is right for them and how to use it. And so we have seen a significant uptick in traffic since we've launched that campaign back in June.

Helpful. I want to go back to the new opportunity you've talked to or the new focus that you've alluded to around going forward with a bundle-first sales motion. Why is this bundle-first sales motion important to address some of the headwinds in the accessory and materials market, and how does that change some of the unit economics that have impacted that segment historically or that subsegment historically?

So the primary motivation of doing the bundle is the user experience, the out of box, giving people up to speed quickly. It's also around addressing affordability. So how do we get people into our ecosystem and have them start making things and making things successfully? Because if that happens, over time they'll make more things. In the past when we'd sell a bare machine, they may buy Cricut materials, but they may buy competing materials. In all of our major retailers, there are white label brands that we're competing against. In our online marketplaces, there's lots of no-name brands. I mean, there's a low barrier to entry for the commodity side of this business for the materials.

And so, this gives us an opportunity to introduce them to Cricut materials out of the box and from the start. And so when it's time to make that replenishment decision, hopefully that helps them choose Cricut. So there is an element of it lets us capture more of the purchase basket upfront. There is a significant discount that we're giving, but we're paying for that by what we engineered out of our product. So that doesn't really harm our margins overall from a platform -- from a physical product standpoint. But we think it's a better overall experience and helps us bring those consumers in more effectively.

You've also introduced a broader range of price points within the materials business. How does that help also address the affordability question?

So that's really about having the right price point and the right configuration for the right channel, right? If I rewind the clock a few years, we were selling the same SKU in Walmart, that we were selling in Michaels, that we were selling in Target, that we're selling on Amazon and everywhere else. And that created channel conflict. And so as we re-engineered our materials to drive cost out, we introduced a value line that was engineered to compete specifically in online marketplaces, right? It had to have the -- if someone's buying a $5 roll of vinyl on Amazon and that's all they're ordering, Amazon's losing money on every order. That doesn't work for Amazon. Work great for our consumers, right? And so we wanted to make sure we had the right products and the right channels so that consumers could find what they wanted. It would make it easy for them to make and make sure that they were having a good experience. While at the same time making sure that our channels could be competitive and excited about our products also.

I want to ask one on capital allocation, debt-free balance sheet, you generate substantial cash on the balance of the year. What are the company's capital allocation priorities as we look forward over the next several years, and where do you see the highest return opportunities for shareholder value?

So first is to make sure we have the right product portfolio and adequate inventory. But as we've already talked about, we will continue investing in driving hardware innovation because that's what brings people into our ecosystem today. We will continue to be investing in platform because, again, 80% of our profitability comes from platform and keeping people engaged and being subscribers. And so it's important for us to continue to drive that. And then we have an opportunity to drive much greater awareness of our product. In our core markets, get deeper penetration, but especially in international markets around the world, right? We have much less awareness as I look at international markets.

And there's no reason that international can't be equal to the North American business in a few years.

And so that's an important vector of growth that we continue to invest in. After that, we do look at, strategic M&A that might accelerate a priority. We'll never be a bolt-on M&A shop, but if we see something that will accelerate something that we're focused on in a way that is accretive to the business, we will pursue that through M&A. But after that, we don't believe in holding excess cash. And so then how do we efficiently return capital to shareholders? So there's three tools that we've used in the past. We have an active stock buyback program. We're in our third incarnation of that. And we have a semi-annual recurring dividend $0.10 and usually that pays -- well, not usually, that pays in July and January, tick-tock, tick-tock.

And then from time to time, as we have excess cash, beyond that, we've employed special dividends. Our preference would be to do everything through stock buyback, but we also are cognizant that we have limited float and we don't want to strain that.

In our last minute and a half here, if you look three to five years out, what do you think investors are most misunderstanding about Cricut's opportunity in the long-term story, and where are you personally most excited?

So we are working to get our business back to sustainable growth, right? We've highlighted that we expect to grow in the back half of this year. We didn't expect to grow in the first half, for a number of reasons we talked about on our last call. Largely related to a pull forward of demand we had related to tariffs in Q2 last year. But those headwinds are behind us. We have the new products we've announced so far, the Maker 5 that we've talked about today, more stuff that's coming. So we're excited that we'll get physical products back to growth in the back half of the year. And also we've publicly stated that we expect to continue to grow subscriptions.

I think the thing that is least understood about our business when we talk to consumers is the durability of the platform and the profitability that it drives. And we need the hardware component because that's what brings people into the flywheel and continues to feed the flywheel. So we're focused on bringing millions of new users into the platform and then being able to monetize them. And then, as I've mentioned, some of our investments are focused on new categories of stuff. So even as we continue to refresh and maintain our core cutting machine business that we've had for decades at this point, we're looking at what other things can we do with our creative platform that will help us expand our TAM and bring more consumers to us.

Okay. Kimball, Chris, thank you very much for both being here.

Thank you.

Thank you. Good day and thank you for standing by. Welcome to the Cricut Q2 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star-1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-1-1 again.

Please be advised that today's conference is being recorded. I would now like to hand it over to your first speaker today, Chris Bell Fiore, Director of Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on Cricut's second quarter 2026 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 a supplemental data sheet, have been posted to the Investor Relations section of the company's website, investor.cricket.com. Joining me on the call today are Ashish Arora, Chief Executive Officer, and Kimball Schill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host a 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, tariffs, capital allocation, and results of operations in response to your questions. These statements do not guarantee future performance 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 risk and uncertainties, including those identified in the risk factor section of CRICOT'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, August 4, 2026. Cricut assumes no obligation to update any forward-looking projection that may be made in today's release or call.

We'll now turn the call over to Ashish. Thank you, Chris. In Q2, we continue to see benefits from our platform-first strategy, aimed at creating a simpler, more compelling user experience. As highlighted last quarter, broadening awareness and relevance among new consumers is a critical driver of new user acquisition. This is the foundation of our new brand Anthem. Think it, make it, Cricut. We saw double digit cutting machine sellout growth in the quarter. Positive trends in user engagement and subscriptions were just over 3.1 million. During Q2, we continued to see strong profitability driven by continued strength in our platform business and some unique items like WPA tariff refunds.

Platform revenue grew just over 5% in the quarter to $85 million. Overall, company sales declined approximately 9% in the quarter. Recall, it was against a difficult year-over-year calm, where we benefited from the pull forward in Q2 2025 related to potential tariff impacts. The foundational work to create a more compelling mass market experience is in place. And we are focused on translating that investment into stronger execution. We remain committed to increasing the pace of innovation by accelerating our development cycles, expanding awareness of our platform, and strengthening our competitive position. As we execute these priorities, we expect to deliver a more compelling experience for our customers while positioning the business for stronger long-term growth.

We are increasingly positioned to deliver the right message to the right consumer about the right product at the right price. Today, I will share the progress we've made to strengthen the business, encouraging science from the first half of 2026, and how this reinforces our confidence in building on this momentum through the second half. Kimball will then cover the financial details and our outlook for the remainder of 2026. We remain focused on acquiring new users and increasing engagement across our platform, which together drive a modernization flywheel of subscriptions and accessories and materials. We believe the investments we are making today position cricket for a return to sustainable, profitable growth. Let me talk about our priorities. In Q2, we launched our global marketing campaign, Think It, Make It, Cricket.

The message is simple. Cricket is for anyone who wants to create. The campaign highlights how our platform, powered by Design Space, helps people easily turn ideas into meaningful, personalized projects. Our aim is to expand our base beyond identified crafters. Early results show a meaningful increase in traffic to Quicker.com compared with prior campaigns, as more consumers engage with the brand and learn about our platform. The campaign will continue rolling out globally and is being integrated across key marketing touchpoints, including our website, user-generated content, and influencer partnerships. Connected machine unit sales were strong in the first half, boosted by the success of the new JOY-2 and Xplore-5 bundles, with year-to-date connected machine sales in units up double digits. Connected machine sellout performance is also strong, up double digits, benefiting from an earlier prime day.

Sales out is a key measure of consumer demand and our marketing success. Joy to NX Pro 5 bundles were key drivers of this growth, giving us confidence that our bundle-only strategy is appealing for consumers. We also made important progress and innovation in the first half. Since launch in Q1, our next generation cutting machines, Cricut Joy 2 and Cricut Explore 5 have performed well. Our direct-to-film or DTS service is still in its infancy, but reinforces the opportunity to expand Cricket beyond hardware into value-added services, Deepening engagement with our most loyal users. Given that most orders come from existing subscribers, we believe the service is enhancing the value of our ecosystem. While still in early stages, we are excited about the long-term opportunity and will continue experimenting and investing to expand the platform's capabilities and support the growth of a services business.

We continue to make meaningful progress in stabilizing engagement across our platform. Active users grew 1% year over year and remained flat sequentially, marking the first time this KPI has stabilized in a second quarter since 2022. Recall, we have a seasonal business and engagement tends to be softer in summer months. 90 day engaged users were also stable year over year. Another important milestone that reflects the progress we are making. We believe these results are driven in part by the cumulative impact of our efforts to simplify the user experience, improve onboarding, and strengthen new user acquisition. Improving onboarding remains one of our highest priorities. We know the earliest experiences on our platform have an outsized impact on long-term engagement.

We're also making design space faster, simpler, and more intuitive for our returning users, reducing friction throughout the creative process So users can spend more time making and less time navigating the platform. AI continues to be an important differentiator for Cricut. During the quarter, we introduced new agentic AI features, purpose-built for creating with Cricut. By understanding our machines, materials, and project workflows, Our AI helps users create designs that are more likely to translate successfully into physical projects. As we enter the second half of 2026, we are encouraged by the stabilization and improving trajectory across our engagement metrics. While there is still work to do, we believe our continued investments in simplifying the user experience, strengthening onboarding, and embedding AI throughout our platform are building a stronger foundation for sustainable engagement and long-term growth. Our platform business continued to perform well in the second quarter.

Paid subscribers increased by 93,000 or more than 3% year-over-year to just over 3.1 million, contributing to just over 5% growth in platform revenue to $85 million. Consequently, we added 25,000 paid subscribers during the quarter. As we continue to enhance the value of our subscriptions offering through new AI-powered capabilities, communication of subscriber benefits and targeted promotional offers. We also made meaningful progress expanding our premium subscriptions tier. Following successful initial testing, we saw strong adoption of our premium plan, which starts from $14.99 per month among new subscribers. The offering is now available across both our desktop and mobile applications, and we will continue expanding availability across our purchase channels throughout the year. We also continue to test new plan formats and pricing tiers on an ongoing basis.

Enhancing the value of Cricut subscriptions remains a strategic priority. During the quarter, we introduced several AI-powered Cricut Creative Labs experiences that enable subscribers to transform personal photos into personalized projects, including coloring pages and photo art. Early engagement with these new experiences is encouraging and reinforces the opportunity to deliver value across a wide range of creative interests. Looking ahead, we see significant opportunity to further differentiate our subscriptions offering by combining AI innovation with our growing library of curated content. Our accessories and materials business remains a challenge. We continue to work our plan to strengthen our product portfolio and improve our competitive position. While the category remains highly competitive, we continue to gain share in some major categories, including printables and Cricut accessories.

During the first half of the year, we introduced new SKUs in conjunction with major retailer resets, significantly expanding our assortment with a focus on innovation. value and better meeting the needs of both new and existing Cricut users. We are particularly encouraged by the early consumer response to these new products. Printables are our fastest-growing materials category, as consumers increasingly personalize stickers, labels, photos, and GIFs. We also refreshed our hand tools portfolio with new configurations and differentiated designs with additional innovation plan for the second half of the year. These launches and our bundle-only strategy on new machines, where users start with our high-quality tools, accessories, and materials, reinforce our confidence that product innovation remains a key driver of user engagement. In July, we launched the next generation of our large format heat press, AutoPress, engineered to address a large market with a compelling price point. We will continue to innovate in this market.

While the performance of our products business disappointed in Q2, encouraged by the broader progress we are making. We are expanding awareness of the cricket brand, making our platform easier and more intuitive to use, and continuing to build a stronger foundation for long-term growth. While there is still work ahead, the improvements we are seeing in new user acquisition, engagement, subscriptions, and underlying consumer demand reinforce our confidence that our strategy is gaining traction. We believe this strategy positions Cricket to deliver sustainable, profitable growth and create long-term value for our shareholders. With that, I will turn the call over to Kimball. Thank you, Ashish, and welcome everyone. In the second quarter, we delivered revenue of $156.3 million, down approximately 9% compared to the prior year.

Year-on-year comparisons reflect the impact of the prior year pull forward, which we highlighted a year ago. We generated $39.1 million in net income, or 25% of total sales in Q2. Breaking revenue down further, Q2 2026 revenue from platform was $85 million, up just over 5% year-over-year. year. ARPU increased 5% to $56.37 from $53.84 a year ago. Platform revenue was up primarily due to the year-over-year increase in paid subscribers at foreign exchange. Q2 revenue from products was $71.3 million, down 22% year-over-year. Product revenue was down primarily due to lower volumes and promotional pricing.

Recall that during Q2 2025, we benefited from revenue pull forward amid tariff-related supply chain uncertainty. As Ashish mentioned, global machine sellout units grew at double digit rates, with JOY-2 and Explorify bundles as key drivers of this growth, and also benefiting from an earlier prime day. As a reminder, we don't have perfect coverage for sellout data in all channels, so treat this as directional. International sales were $35.9 million, down 1% year-over-year compared to Q2 2025. In Europe, a distribution change in one channel created a temporary sales timing impact as we worked through inventory and represented the headwind in the quarter. That transition is largely complete. International revenue represented 23% of total revenue in Q2 2026, up from 21% in the prior year. Foreign exchange provided a 2.6% benefit to international sales during the quarter.

We are beginning to see encouraging results from our focused investments in key emerging markets with significant year-over-year connected machine sellout growth in Asia. Meta, and LATAM. While these markets remain a relatively small portion of our total business, they are contributing positively across several key operating metrics and continue to represent attractive long-term growth opportunities. Looking ahead, we plan to continue investing in international markets with a focus on increasing brand awareness, expanding our reach, and driving member acquisition throughout 2026. As Ashish mentioned, we ended the quarter with just over 3.1 million paid subscribers. Recall, normal seasonality could still see flat to declining quarter-on-quarter subscriber growth rates. We've remained focused on driving growth for the full year, supported by new product introductions, improved onboarding, ongoing investments and engagement, and promotional support. Moving to gross margin, total gross margin in Q2 was 74.5%, which was up over 14% year on year due to some unique items.

During the quarter, we settled an outstanding legal claim related to a royalty dispute that allowed us to release accrued reserves of $6.4 million across platform and products. In addition, there was a $17.9 million benefit to gross margin due to IEPA tariff refunds. Breaking gross margin down further, gross margin from platform in Q2 was 93%, an increase compared to 89.1% a year ago. This increase was driven by the non-recurring royalty settlement. As we've mentioned previously, we are excited about our AI investments, and there may be some gross margin pressure as we continue to ramp AI features. Gross margin from products was 52.4% compared to 32.4% in Q2 a year ago. Increasing gross margins for Q2 was primarily driven by non-recurring IEPA tariff refunds and the royalty settlement.

Total operating expenses for the quarter were $69 million and included $5.5 million in stock-based compensation. Total operating expenses decreased by about 3% from $71.4 million in Q2 2025. As Ashish mentioned, we are focused on increasing our speed of execution and our accelerating investments across our business that will help drive future revenue growth. Operating income for the quarter was $47.4 million, or 30.3% of revenue, compared to $30.1 million or 17.5% of revenue in Q2 last year. This increase reflects the non-recurring items we just talked about. The effective tax rate was 22.4% for Q2 2026 compared to 27.6% in 2025. The tax rate declined this year primarily due to higher R&D tax credits from increased investments and an increase to foreign-derived deduction-eligible income.

For the quarter, net income was $39.1 million, or 19 cents per diluted share, compared to $24.5 million, or 11 cents per diluted share, in Q2 2025. Turning now to balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds our inventory needs and investments for long-term growth. In Q2 2026, we generated $50.4 million in cash from operations compared to $36.2 million in Q2 2025. We ended Q2 2026 with cashless. cash and cash equivalents of $286 million. We remained debt-free. Inventory decreased by $19 million year over year to $106 million, reflecting improved inventory management and normalization as we exited end-of-life machines. During Q2, we used $7.5 million of cash to repurchase 1.7 million shares of our stock.

As a result, $21.6 million remain in our approved $50 million stock repurchase program. After the quarter, we paid a recurring semiannual dividend of $0.10 per share on July 21, 2026 to shareholders of record as of July 7th. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for the remainder of 2026. We are focused on bringing excitement to our category. We are doing this by accelerating our investments in R&D, new product launches and marketing, including international markets, and continuing our promotional strategies to drive affordability. Through our new brand anthem, Think It, Make It, Cricket, we are investing to broaden awareness and relevance among new consumers new user acquisition. We remain optimistic about the year overall, despite a disappointing first half, with improving engagement metrics reinforcing our optimism.

We expect platform revenue to grow each quarter, while subscriber trends follow their typical seasonal pattern with softness in Q3. With a strong roadmap ahead, we project growth in the second half on products and platform. We have received IEPA tariff refunds. However, existing tariffs remain a headwind and given ongoing uncertainty, we are not providing any guidance on margin impact. We expect to be profitable each quarter and generate cash flow from operations for full year 2026. Subject to stock price, we also expect to be active with our authorized $50 million stock repurchase program. While tariff uncertainty remains a reality, we are also navigating broader cost pressures, including input costs, supply chain dynamics, and a more cautious consumer environment in certain markets.

Our Our team continues to operate proactively and with discipline, adjusting for need while maintaining our focus on strategic investments to position the company for growth. With that, I'll turn the call over to the operator for questions.

Thank you. At this time we will conduct the question and answer session. As a reminder, to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Eric Woodring of Morgan Stanley. Your line is now open.

Hi, thank you. This is Maya. I'm for Eric. You know, it's good to see the stabilization and engagement this quarter. Maybe just a question on international demand for me. You know, I understand there was some changes with a distributor you mentioned. You know, if we were to exclude the change in distribution and the benefit from foreign exchange, you know, is there any way you can share kind of how demand or revenue trended in the past? internationally. Would it have grown year over year if we kind of exclude those two factors? Just any color you can share there and on your strategy in those markets looking forward. Thank you.

Thanks for the question. So there was always a story about a channel shift in Europe with one of the largest retailers and we changed the way that we supply them. So just the timing of inventory and invoice mechanics meant that we weren't selling in to comp the sell out, which then created an air bubble for the quarter. We've largely worked through that, and so we don't expect that to be a headwind in the revenue as we move through Q3. I think it is fair to call out that we would have grown in Q2 even without the benefit of foreign exchange, but for that air bubble. And then on our new markets, we continue to see strong performance. So I'm talking met. to LATAM in Asia. And it's just, you know, they're small enough that they don't overcome the pressure we saw in the larger market.

So it was really a story about that distribution change in Europe. Okay.

Am I just adding on to that? I think as we kind of commented on in our remarks, sell-through, we are pretty pleased with the sell-through across the board, especially in terms of machines.

Yes, we were up on sellout machines, double digits as we said in our prepared remarks, and we actually saw sell-in units up double digits on a global basis.

Got it. Very helpful. Thank you. Thank you.

Our next question comes from the line of Angus Gehler of Barclays. Your line is now open.

Hi, this is Angus Kelleher on for Adrian Yee. Thanks for taking our question. I think I'll start things off with one for Ashish. Last quarter you highlighted Direct-to-Film as a new monetization lever beyond machines and subscriptions. any update on adoption since launch and is DTF or any new monetization lever contributing meaningfully to platform ARPU today? And then just more broadly on that point, how should we think about the opportunity to monetize the platform beyond subscriptions? Thank you.

Thanks Angus for the question. You know, it's still kind of really early to talk about it because we just launched ETF in North America. and we haven't launched it internationally. We have not fully started marketing it, but we're generally pleased with the launch. We also added more services under the umbrella of Creative Labs where we offer more AI tools that people can use as part of their subscription. We just actually, I think just yesterday, a couple of days ago, announced a Cricket patterns, which is to go after the varied hobbies of our existing users. So the strategy is to drive engagement, get better value from our subscriptions for people who are subscribing, as well as monetize these services. We would say we are still in the very early days, and we have primarily focused on user experience, but we believe that over time that strategy will pay off. But at this point, it's not meaningful.

Yes, and I guess I would just add, most of the users we see engaging with directed film are existing subscribers, and many of those.

So we see it as adding value to our subscriptions offering today. As we, you know, it's again early days, so it's not necessarily bringing in new, broader users, but it's deepening the engagement of existing users and subscribers. I think in the second half of the year, we'll ramp up our marketing. You know, as I said, we wanted to upgrade.

iron out all the kinks and focus on the user experience. And we're pleased with the people that are coming and the satisfaction they're getting from that. So I will continue to invest in all of those areas.

Got you great thank you and then I'm I'm going to circle back on something you Yes, sorry in advance, Kimball, since I know you covered it, but there's just a big delta between... product revenue and the machine sell in and sell out. Can you help us understand or quantify how much of the disconnect versus product revenue is retailer dynamics versus pricing versus A&M pressure versus the one-time items, which are lapping. Just any more color you could provide there would be great. Thank you.

Yes, so we were down $20 million year over year in the quarter, about 22%. And we didn't expect to grow in the first half, as we called out, and that played out much to our expectations. The majority of that was really the tariff pull forward in the accessories materials from a year ago that set up that really tough comp. We did continue to see some erosion in the traditional accessories materials business with decreases in volumes and pricing as we were chasing affordability for consumers in that pressure that continued to see some sorry, in that segment, the contingency pressure in the market. And then on the machine side of the business, As Ashish mentioned, we're pleased with the sellout increase we saw and also the sell-in in units. But there's a mix of machines that we launched this year versus machines that we lost, ah, excuse me, that we launched last year. So, we were comping with this year, we launched Joy 2 and Explorer 5, and a year ago we launched Explorer 4 and Maker 5.

So on average, a higher price per machine a year ago than what we launched this year, and so just the mix created some challenge on the revenue side, and we're still We knew that, we talked about that in Q1. On our continuing products, so on Maker 4 and Joy Extra, This year we have more promotionality comping less promotionality from a year ago. So both of those represented headwind to revenue in the first half. As we move to the back half of the year, we have additional launches coming that we think will reverse this trend. Actually, we're confident we'll reverse this trend. trend. And it's also worth pointing out that platform revenue will grow each quarter. So, it's grown each quarter this year.

We expect it to grow in Q3 and in Q4. If you want me to take you through the other reduce and the callback, I can talk through the impact of tariff refunds and what that looks like in margin pressure. You know, we received $20.3 million of IEPA tariff refunds in the quarter, $17.9 million of that benefited gross margin. while the balance was on the balance sheet and will flow through with inventories as we end up selling that inventory out. We also had a favorable legal settlement related to a royalty dispute that we've been litigating over the last few years. And with the favorable outcome, we were able to release a reserve of $6.4 million. Then that benefit was split between platform and products. And so, without those one-time items, you know, Gross margin for the quarter would have been about 58.9%, so about flat to last quarter.

And similar on physical products, gross margins would have been about flat. operating margin would have been 14.7% as opposed to the 30% that we reported. And then just flowing it through to operating income, it would have been about 23 million instead of 47 million. So still very profitable and solid performance even in declining revenue, but just wanted to highlight the benefit of those one-time items.

That's great, Keller. Thank you so much. Just one quick clarifier. Is that all of the IEPA refunds you expect to receive, or is there maybe still some outstanding?.

There are still some that were working, but that is the large majority of it. So, again, we received $20.3 million in the quarter. There's still some that are working, and there's about $1.7 million of it still that we received in this quarter that will flow through the P&L as we sell out the inventory that that's tied to. Okay.

Got you. Okay, great. That makes a lot of sense. Thank you. I'll pass it on. Thank you.

I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good day, and thank you for standing by. Welcome to the Cricut First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand over the conference to your first speaker today, Michael Hoade, Vice President of Finance. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's First Quarter 2026 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 a 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 a 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, tariffs, capital allocation 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, May 5, 2026. 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.

Thank you, Michael. In Q1, we began to see the early benefits of our platform-first strategy with guided onboarding, bundles, guided flows in Design Space and services working together for a simpler, more compelling user experience. We successfully introduced our newest machines and launched Cricut's first service offering. Both reflect the strength of our platform in delivering a guided experience that helps users make what they want more easily. We're also encouraged by the positive response to the added value in our new machine bundles, which reinforces our strategy.

We are pleased to see growth in active users year-on-year. Simplifying the user experience remains a key focus to drive engagement. We are pleased with profitability, growth in platform revenue and growth in global machine sell-out units. However, those gains did not yet translate into total company sales growth, which declined less than 2% year-over-year in Q1. We are moving with urgency to create a more compelling mass market experience, accelerate our development cycles and compete more effectively. Today, I will discuss what went well in Q1 2026, where we can improve and our priorities for the year. Kimball will then cover the financial details and our outlook for 2026.

We delivered solid Q1 profitability despite early headwinds. Platform revenue increased nearly 6% and strong machine sell-out units gave us a solid start to the year. During the quarter, we launched 2 new cutting machines, Joy 2 and Explore 5, offered exclusively in bundled options designed to improve user onboarding while delivering compelling price points and value. We also launched the next generation of our handheld heat presses, EasyPress SE in the popular 9x9 and 12x10 sizes. To support these launches, we introduced several new materials and accessories and continue to improve our software platform, including new AI capabilities and easy-to-use guided project flows.

We are encouraged by the initial results and user feedback. We are proud to be the recipient of Michaels' Best New Product Launch Award. Michaels is the world's largest craft retailer and an important partner for Cricut. We're also focused on increasing our speed of execution and are accelerating investments in hardware development, materials and engagement to support future growth. You can already see the early results of those investments in our 2026 launches so far. We plan to maintain a marketing and promotional cadence similar to last year, and we are excited about the road map ahead. We remain focused on acquiring new users and increasing engagement across our platform, which together drive our monetization flywheel of subscription and accessories and materials. We believe Cricut is a growth business, and we are intent on improving it.

Let me talk about our priorities. At the top of the funnel, our goal is to broaden awareness and bring new consumers into the brand. Our research tells us that to do that successfully, Cricut has to feel relevant and approachable. Put simply, we need more consumers to believe that Cricut is for someone like me. That is the core objective of our influencer strategy today, and it will also be a central message in the broader marketing campaign we are preparing to launch this summer. As consumers move from awareness into consideration, we see 2 barriers that matter most. They need to believe that Cricut is easy to use and affordable.

Our strategy is designed to address both. We are continuing to invest in onboarding, guided flows, software and platform improvements and bundle-only offerings. Together, these efforts help simplify the learning curve, improve affordability and perceived value and make it easier for new users to get started and succeed early in their journey with Cricut. We saw encouraging signs of progress in Q1. We continue to invest in marketing to expand our audience and deepen engagement with the brand. We gained momentum across key channels, driven in part by strong results from our influencer activations, along with continued improvement in overall digital marketing performance. These efforts were further supported by the halo effect of our late Q4 campaigns and promotional activity. Altogether, that contributed to strength in connected machine sell-out in Q1 with particularly strong consumer demand early in the quarter.

While we did not grow products revenue in Q1, we did continue to see global machine sell-out increase year-over-year and quarter-to-date trends remain positive. At the same time, we are building the experience in a way that supports stronger adoption over the long term. In 2026, we are leaning into a bundle-only consumer experience as we launch the next generation of our cutting machines. These new bundles combine the machine, tools and materials with tightly integrated guided software flows to create a more cohesive out-of-box experience and help users succeed from their very first project. In Q1, we began to see early benefits from this approach, which I'll speak to more when I get to engagement.

We also made important progress in innovation during the quarter. We introduced 2 next-generation cutting machines built on all new architectures, Cricut Joy 2 and Cricut Explore 5. We launched our direct-to-film service, Cricut's first service offering, which is another strong example of how we are reducing complexity for consumers. It combines the power of our creative platform with the simplicity of guided flows, enabling users to create vibrant full-color designs that are delivered directly to their doors. We believe this is the beginning of a new era for Cricut, one where we expand the top of the funnel, remove barriers to adoption and deliver a more seamless end-to-end experience that helps more users create with confidence from day 1.

We continue to make progress stabilizing engagement trends, ending the quarter with active users up 1% and 90-day engaged users down 1%, representing improvements year-on-year and sequentially. We are encouraged by the early response to the initiatives we launched in late Q4 and into Q1, including guided flows for full-color stickers and insert cards, expanded vinyl decal use cases, our AI-assisted project designer tool and improved project preview visualization. We now have 6 guided flows, which cover our most popular use cases and dramatically simplify the user experience.

In addition, we began rolling out AI Project Designer, which allows users to design and make a project through a conversational interface. Taken together, these launches reflect how our platform is evolving to become simpler, more intuitive and more compelling for a broader set of consumers. A key leading indicator of future growth is how effectively we engage new users. In Q1, cut intensity among our 2026 onboarder cohort in their first few weeks reached its highest level for a Q1 in the past 2 years. Users onboarding with our newly launched Joy 2 and Explore 5 machines are now guided through a broader range of projects that utilize a full set of materials included in their bundles. We also introduced additional improvements late in the quarter to further reduce friction and drive repeat engagement. These include enhanced educational content within guided flows, improved accuracy of our AI assistant chatbot and gamification designed to encourage exploration of machine capabilities and repeat visits.

Among returning members, we are seeing early signs of progress as well. Members who joined in recent years and returned to create projects in Q1 demonstrated higher cut intensity compared to prior year. At the same time, as the large 2020 and 2021 cohorts continue to decline as a percentage of our active user base, we are seeing a moderation in overall engagement erosion. Our engagement marketing efforts, which focus on bringing users back into our platform are also becoming more effective and efficient. For example, using AI to generate and personalize life cycle campaign messaging has consistently improved click-through rates. The product improvements experienced by returning users in Design Space are positively impacting perception among both members and independent influencers. Looking ahead, we are excited about our upcoming platform innovations, which we believe will continue to make the creative experience faster, more intuitive and more delightful.

In Q1, paid subscribers increased 104,000 or over 3% year-on-year to almost 3.08 million as we saw platform revenue increase nearly 6% to almost $84.8 million year-on-year. We did see a drop of 13,000 subscribers sequentially from Q4 2025, reflecting lower promotional activity in Q1 as we emphasize revenue growth in the quarter. As discussed in earlier calls, there is some natural subscriber attrition. So subscriber growth may be challenging until we increase the pace of machine sales and new user acquisition. We saw some of this pressure manifest in Q1. That said, we continue to see healthy sign-up rates from our new members and are achieving a higher revenue growth rate. Additionally, at the end of Q1, we started testing new subscription plans and pricing tiers on new sign-ups, using AI credits and shop benefits as differentiators. Early conversion signals and higher tier adoption are encouraging, but it is still early. We will continue to test new plans and price points as we add more value and benefits for our subscribers.

Earlier, we also rolled out a price increase on new subscribers through the iOS App Store, while simultaneously offering alternative payment options to purchase via Cricut at the lower legacy price. We have been watching this test and have seen positive results in shifting users to the Cricut payment options or a higher price purchase via the App Store without significant impact to overall expected sign-ups. We have a rich road map to continually increase the value proposition for subscribers. Our goal is to make it incredibly compelling to be a subscriber to leverage our content, software tools and services. This remains a highly competitive category, particularly in material types with low barriers to entry, where we continue to see pressure from private label offerings at retail as well as new entrants across online marketplaces and store shelves.

We are not satisfied with our position in part of this category, and we are moving aggressively to refresh the portfolio, improve value and sharpen our channel execution. Those efforts produced mixed results in Q1, but there were encouraging signs. We saw double-digit growth in value materials online, and we made share gains in iron-on, vinyl and cutting mats. At the same time, share in heat presses was pressured as we move through product line transitions. Overall, our view is clear. When we bring the right combination of innovation, quality and affordability to market, we can improve our share position while enhancing the making experience for our users. Innovation remains central to that effort. For example, with the launch of Joy 2 and Explore 5, we introduced omni pen, our new universal pen system, which has been well received for its performance and compatibility.

Across Q1 and Q2, we are expanding the portfolio with more than 200 new SKUs and executing a meaningful retail refresh with key partners. We're also continuing to invest in core categories such as Smart Iron-on and Vinyl, with new colors, finishes and a broader assortment. At the same time, we are advancing our full-color strategy through continued innovation and printables across inkjet and sublimation along with refreshed tools and accessories. In heat presses, we are broadening our lineup to address more price points and use cases. EasyPress Mini LT, which we launched in Q4, is helping address affordability and early results suggest much of that demand has been incremental. In Q1, we also launched EasyPress SE in the popular 9x9 and 12x10 sizes, which expands our ability to compete more effectively across markets with a professional quality, easy-to-use heat transfer solution.

We also launched Cricut's first service offering with our Direct-to-Film or DTF service, which leverages our creative platform content and new guided flows. Customers create vibrant full-color designs that we print and deliver to them, which they can then press on to fabric or other substrates. While still a small experiment, this service is an important example of how we can monetize our creative platform beyond cutting machines. Early response has been encouraging. So far, over 80% of orders are coming from subscribers and around 1/3 of orders have already come from repeat customers.

Over time, we believe this can deepen engagement and further increase the value of our subscription offering. Stepping back, we are moving with urgency on both innovation and cost discipline. We have more product innovation ahead. We are equally focused on execution, improving the end-to-end customer experience and driving greater efficiency across the business. Our conviction remains the same. When we make it easier and more affordable for people to create, we increase engagement, materials usage and long-term value creation.

With that, I will turn the call over to Kimball.

Thank you, Ashish, and welcome, everyone. In the first quarter, we delivered revenue of $159.5 million, a 2% decline compared to the prior year. We generated $20.3 million in net income or 12.7% of total sales in Q1. Breaking revenue down further, Q1 2026 revenue from platform was $84.8 million, up nearly 6% year-over-year. ARPU increased 4.8% to $55.65 from $53.10 a year ago. Platform revenue was up primarily due to the year-over-year increase in paid subscribers and foreign exchange.

As mentioned in our last call, as we shift to our bundle-only strategy where we will only sell next-generation connected machines bundled with materials, we will no longer provide the supplemental revenue breakdown of connected machines and accessories and materials in our SEC filings and data sheet. We will continue to report platform and products revenues and costs as we currently do in our consolidated statement of operations and comprehensive income.

Q1 revenue from products was $74.7 million, down 9.6% year-over-year. Product revenue was down primarily due to the lower average selling prices from increased promotional activity and mix as we cleared out end-of-life inventory in preparation for our Q1 product launches. As Ashish mentioned, global machine sell-out units were positive in Q1 year-over-year. As a reminder, we don't have perfect coverage for sell-out data in all channels, so treat this as directional. In terms of geographic breakdown, international sales grew over 16% year-on-year to $40.9 million. International revenue represented 26% of total revenue in Q1 2026, up from 22% in the prior year, reflecting continued progress in expanding our global footprint. Foreign exchange benefited international sales in Q1 by 10.3%.

Our targeted pricing and marketing investments in Europe and Australia drove solid results, delivering year-over-year growth across these regions. We also saw strong momentum in our emerging markets with our early-stage investments in Asia and Lat Am driving strong year-over-year growth. In contrast, we experienced a challenging quarter in our META region, which declined year-over-year, partly due to the ongoing geopolitical pressures. Importantly, our exposure to this region remains limited. Looking ahead, we plan to accelerate our investments in our international markets with a focus on increasing brand awareness and driving member acquisition throughout 2026.

As Ashish mentioned, we ended the quarter with just under 3.08 million paid subscribers. We expect to see seasonal pressure on subscription rates in Q2 and Q3, which could result in flat to declining quarter-on-quarter subscriber growth rates. We remain focused on driving growth for the full year, supported by new product introductions, improved onboarding, ongoing investments in engagement and promotional support. Regarding engagement, in our published data sheet, Q3 and Q4 2025 active users, 90-day engaged users and platform ARPU were updated post earnings to reflect immaterial corrections.

Moving to gross margin. Total gross margin in Q1 was 58.1%, which was down 2.4% year-on-year. Breaking gross margin down further, gross margin from platform in Q1 was 89%, a decrease compared to 89.2% a year ago. As we've mentioned previously, we are excited about our AI investments, and there may be some gross margin pressure as we continue to ramp AI features. Gross margin from products was 23.1% compared to 32.7% in Q1 a year ago. The decrease in gross margin for Q1 was primarily driven by inventory write-downs from end-of-life programs, lower monetization of previously reserved inventory, tariffs and increased promotional activity.

Total operating expenses for the quarter were $69.8 million and included $6.3 million in stock-based compensation. Total operating expenses increased just over 1% from $69 million in Q1 2025. As Ashish mentioned, we are focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth for hardware product development, materials, engagement and marketing. So we expect to see greater increases in year-on-year operating expenses. Operating income for the quarter was $22.9 million or 14.4% of revenue compared to $29.3 million or 18% of revenue in Q1 last year. The Q1 2026 tax rate declined to 19% from 26.7% last year, primarily due to higher R&D tax credits from increased investments. For the quarter, net income was $20.3 million or $0.10 per diluted share compared to $23.9 million or $0.11 per diluted share in Q1 2025.

Turning now to balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds our inventory needs and investments for long-term growth. In Q1 2026, we generated $26.9 million in cash from operations compared to $61.2 million in Q1 2025. We ended Q1 2026 with cash and cash equivalents of $256 million. We remain debt-free. Inventory decreased by $8 million year-over-year to $106 million, reflecting improved inventory management and normalization as we exited end-of-life machines. As discussed on prior calls, inventory is now at levels that generally support the business with normal fluctuations as products transition. Accordingly, we typically use cash in the first half and into Q3 to build holiday inventory, then generate cash in Q4.

During Q1, we used $12.2 million of cash to repurchase 2.8 million shares of our stock. As a result, $29.1 million remain on our approved $50 million stock repurchase program. During the quarter, we paid approximately $21 million for the declared $0.10 per share semiannual dividend on January 20, 2026. The Board also approved a recurring semiannual dividend of $0.10 per share, supported primarily by our profitable operations. The dividend will be payable on July 21, 2026, to shareholders of record as of July 7, 2026. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2026.

We are focused on bringing excitement to our category. We are doing this by accelerating our investments in R&D, new product launches and marketing, including international markets and continuing our promotional strategy to drive affordability. We remain optimistic about the year overall despite a more challenging first half. In Q2, we do not expect total company revenue to grow year-over-year, primarily due to a difficult comparison against Q2 2025, which benefited from revenue pull-forward amid tariff-related supply chain uncertainty. That said, we expect platform revenue to grow each quarter, while subscriber trends follow their typical seasonal pattern with softness in Q2 and Q3. With a strong road map ahead, we remain confident for growth in the second half.

Previously, we talked about the headwinds that tariffs presented to our business. Given the recent Supreme Court ruling overturning IEEPA tariffs and associated dynamics, we are not providing any guidance on margin impact. We expect to be profitable each quarter and generate cash flow from operations for full year 2026. We also expect to continue to be active with our authorized $50 million stock repurchase program, which has $29.1 million remaining, and the Board approved a recurring semiannual dividend of $0.10 per share, payable on July 21, 2026, to shareholders of record July 7. While tariff uncertainty remains a reality, we are also navigating broader cost pressures, including input costs, supply chain dynamics and a more cautious consumer environment in certain markets. Our team continues to operate proactively and with discipline, adjusting where needed while maintaining our focus on strategic investments to position the company for growth.

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

[Operator Instructions] Our first question comes from the line of Erik Woodring with Morgan Stanley.

It's Dylan Liu on for Erik Woodring. So first, 90 days ago, you did mention a difficult comp, as you mentioned in the prepared remarks, for product in the first half of this year. So you posted 10% of product revenue decline for the first quarter. And how did that compare with your expectations? And as we are now 2/3 of the first half, has the first half headwind tracking better or worse than you had anticipated and why? And also, I'm curious about why you're confident that the second half will be better.

Dylan, this is Kimball. Thanks for the question. So the story in the first half really is a story about average selling price declines on a year-over-year basis, and let me break that down for you in a second. But first, I want to highlight that we talked about machine sell-out units continue to be up year-over-year. And that I'll add that sell-in units are also up double digit in the first quarter. And why that's important is that's the start of our flywheel. So a consumer buys our connected machine, and then that gives us the opportunity to monetize them through subscriptions and accessories and materials. And so we're very pleased with those results.

And it really is a story about lower selling prices this year versus last year and as we launched 2 new machines. So we launched this year Joy 2 and Explore 5. And last Q1, we launched Explore 4 and Maker 4. And the average selling price last year was much higher. So our Joy our Joy 2 machine has an entry point for U.S. consumers of $99 to $129. And that is comping against Maker 4 that had an entry price point of about $399 last year. And so part of it is we're just selling less expensive machines in the first half than we did in the first half of last year. Our continuing products in the market. So Maker 4, for example, continues forward in the market. And last year, when it was first launched, there was no promotionality. And as we move through the natural product life cycle, we are exercising promotion on that machine, but that also puts further pressure on the margins. And then we also saw some continued erosion in our accessories and materials business.

Now as we move forward with our new bundle-only strategy on next-generation machines, there was some offsetting goodness that came from that where there's materials bundled with each machine in this next generation, but it wasn't enough to fully offset that trend. And then looking to Q2, we expect to see these trends continue. In addition, we also talked about our difficult comp in Q2 set up by last year where we had a pull-in related to tariff uncertainty, and we had retail partners asking for support, and we saw an opportunity to accelerate revenue last year that does set up that difficult comp. And so we don't expect to grow in the first half.

That said, as we move to the back half, we expect to reverse that trend, right? We have more new products to come. We're excited about those products. We're confident in our road map. And so while I'm not prepared to give more detail than that, we do have more confidence in the back half, and we do expect to grow platform revenue each quarter as we move through the year.

And Dylan, this is Ashish. Let me kind of reinforce a couple of things that Kimball mentioned. First of all, I think the thing that we feel really pleased about is the continued sell-out of machines, and that's a leading indicator. It's up to us of how we monetize that, but we believe that, that creates a healthy trend for our business. And as we said, we've seen that in Q1, and we continue to see that in Q2.

The areas that we're going to lean in on -- I mean international is clearly one of them. We're going to continue to -- we have continued to lean in on international, continue to make marketing investments and other personnel investments, and we expect that to be a tailwind for the second half of the year. I also think that -- and we've talked about this for some time now. We've been working very hard for the last several quarters on driving innovation and new product introductions. So you'll see the impact of that in the second half.

We are focusing on a new brand campaign of really addressing -- while we are addressing ease of use and affordability, we also want to make Cricut feel like that is for someone like them. So we -- hopefully that, that marketing campaign will deliver. And finally, as we go through the year, I think the availability of our higher-priced bundles will also have a positive impact. So we think that it's the year of the 2 halves. The first half had some headwinds as long as we continue to execute and we will see second half to have some tailwinds behind us.

Got it. Just one follow-up, if I may. So on gross margins. So product gross margins recovered almost 5 points sequentially to 23%. What is your product gross margin outlook for the year? I do notice that at least for the international market, there are quite some -- there were quite some tailwind from FX side in the first quarter. With that in mind, how should we think about 2026 product gross margins?

Dylan, thanks for the question. So gross margins are falling in line with expectations and consistent with what we talked about last quarter. And just breaking it down, I mean I think if you look at year '24 gross margins, on average, that kind of sets where you expect. But let me kind of break it down into pieces because we do expect lower gross margins this year than last year, right? And we are down as we have kind of 3 factors going.

One, we have some E&O impairments related to end-of-life machines as we transition from old generation to next generation. There is less monetization of existing excess and obsolete inventory this year than last year, and that's consistent with the expectations we've talked about before. And there continues to be tariff pressures on margins. And that kind of breaks down into 2 pieces. We have IEEPA tariffs that a lot of the inventory we brought in have those built into our COGS and that continues to throw P&L -- flow through the P&L. We have applied for tariff refunds. And so if and when those happen, we'll take credit for them kind of in a one-time accounting entry, but there's no adjustments so far in that.

And then even though the IEEPA tariffs have been overturned, the administration immediately put an additional 10% tariffs on everything. And so the way I think about that flowing through our business is 25% of our business roughly is international, not subject to tariffs. A little over half of the business this last quarter was platform. That's not subject to tariffs. But for the balance, it's subject to tariffs, and we had guided last time to about an average tariff impact of 20% going forward. That's closer to a 10% once we get through the noise of the IEEPA tariffs. And so tariffs will continue to be a bit of a headwind.

On your question on international, we are excited about the continued growth in international. It was 16% for the quarter and about 10 points, as you called out, was related to foreign exchange. It's worth calling out that the benefit from foreign exchange started in Q2 last year in June. And so we'll lap that pretty soon. But even with that, we continue to have organic growth across our international segments. And we called out in the prepared remarks, solid growth in Europe and Australia and New Zealand and strong growth in some of our more nascent markets in Latin America and Asia.

Let me add one more thing. So we talked about average selling prices in my last answer. That's really a story about revenue. We haven't seen the lower average selling prices pressuring margins. And that's because we've largely offset the lower prices on machines and materials with supply chain efficiencies and cost-out in reengineering. And so it's those 3 factors I talked about pressuring gross margins, not the fact that we're selling different units at lower prices as we move to next-generation products.

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

This is Angus Kelleher on for Adrienne Yih. I wanted to ask about retailers and your retail partners. Just given the recent uptick in energy prices and broader consumer pressure, are you seeing any change in retailer ordering behavior or demand signals either in terms of caution on forward buys or shifts in mix toward lower-priced offerings?

Angus, this is Ashish. So I think overall, and just as I speak globally, right, I would say the headline is that our retailers are very excited about the road maps, the innovation that Cricut is driving. And I would say, across the board, there's general enthusiasm for driving innovation in the category. That's kind of the overriding theme. The second is we -- obviously, we changed our strategy from a stand-alone machine to bundles and primarily all our retailers today worldwide carry the bundles. And our goal in offering the bundles was to address ease of use so that people have everything that they need in the bundle as well as affordability.

Those are the 2 things that -- and the retailers have been very pleased. As we said, Michaels gave us the new product launch award for the launch of Joy 2 and Explore 5. So today, that's what we hear from our retailers, is general enthusiasm for the category and general reception to the launch of bundles. They also see the platform improvements that we are making. I mean I would say, for the most part, we don't see a significant retailer shift in buying -- at least in their buying behavior from -- based on the economy or based on consumer sentiment today. Kimball, I don't know if you want to add anything to that, but that's -- I wanted to give a broader -- what are we hearing from retailers and today's enthusiasm...

I agree. Retailers is enthusiastic. As we did mention in the prepared remarks, I mean we have seen some consumer caution, but that's primarily in Europe. We haven't seen a pullback in U.S. even as we're all watching oil prices and seeing how that evolves.

That's great. I would say, if anything, even though it hasn't manifested itself, if this was to continue, we could see disruptions in supply chain or cost of plastics or shortage of certain things. But today...

Well, so let me add to Ashish's comments. So on the supply side, anything that is oil stock related, we've seen some runs on that material, but we have been locking in our supply to make sure that we have continuity of supply. And so we're managing that risk proactively.

Great. That's great color. And then I just kind of have 2 housekeeping items. First, on the App Store dynamics, how meaningful has the shift toward Cricut direct payments been for subscriber economics so far? And then second, on the IEEPA-related tariff refunds, can you update us on the expected like magnitude of those? And I ask that because we've seen some of our branded peers monetize those receivables, but it sounds like you have not sold your receivables there.

Yes. So let me take those down. So we actually have seen -- as we launched the parallel path on the iOS App Store, we have seen a majority of consumers choose the Cricut payment option and -- where they're able to access the legacy price. That said, there's still a significant minority choosing Apple Pay. And the good news across both is we haven't seen a significant impact to overall expected sign-up rates. And so we've learned that some consumers are willing to pay more for our offering without it really affecting sign-up rates.

And I'll just add to that. At the very end of the quarter, we started some other tests not related to the iOS store, where we're testing new plans and higher pricing across multiple tiers. And so there's multiple tests that we're doing where we're learning more about consumer behavior and pricing relative to our subscription offering and largely differentiated by quantity of AI credits and some shop benefits. But it lets us learn on that without putting our entire installed base at risk with an across-the-board price increase. So we're pretty excited about that.

And then on the IEEPA tariffs, we aren't sharing the number. We have applied for refunds. We had an ongoing duty drawback program, and so it was ordinary course for us to apply for those refunds. I will say it is material for us. We're not monetizing or factoring them because at this point, we have $256 million in cash. We have no debt. And so we can be patient to get that money back when we get it. But when we get it, we will make an accounting entry that credits COGS at the time and then keep moving forward. But at this point, we're just -- we're waiting to see how that process plays out.

Thank you. This concludes the question-and-answer session, and thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Good afternoon, guys, day 3 of the Morgan Stanley TMT Conference. I appreciate you guys joining us. My name is Erik Woodring. I lead the U.S. IT hardware coverage here.

I'm pleased to be joined by Cricut, Kimball Shill, CFO; Jim Suva, Treasurer, SVP of Finance and IR. Welcome to the conference guys. Thank you for joining us.

Before we get started, we got to do this little disclaimer. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And then Jim from your side, please?

And I would refer you to the Cricut Investor Relations website where we have our safe harbor statements, and I refer you to our most recently published 10-Q and 10-K for our risks and uncertainty statements. And with that, Erik, 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 start 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?

Yes, Erik, 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 6 of them. But a couple of 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 nonexpert users coming into our platform. And so we're really excited about that.

The second thing we highlighted is really what we 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 2 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 for them 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 pretty to 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 an out-of-box experience with the materials that they need to be successful with a tightly integrated software journey. So it's a new -- 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 opening 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 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 you can -- 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 print out that they can then apply to a T-shirt or a substrate 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, right? We're 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 sell-out being up, right? We were out -- we were -- 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 materials. And so 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 sellout machines. So we're very pleased with that.

Okay. 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 2 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. No, absolutely. And so as I mentioned, these next-generation machines is an all-new architecture. So if you go back to our Explore 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 6 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 Erik, 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 Cricut for 3 years. The product road map, 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 3 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.

Yes. 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 3 points. First is bundles are really important in our strategy, right? Again, it starts with the user experience, and it's everything -- sorry, everything the user needs to get started. So when 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 in 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.

Okay. So let's maybe take a bigger step back and the world is still kind of a wash and 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 Cricut about the balance between new machine unit growth and kind of the monetization of the existing installed 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 -- sorry, with the retailers across the category, we see our marketing having -- 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 road map 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, the 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.

Yes. So promotions really do 2 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 haven't talked -- you haven't heard us talk about raising our prices. You've heard us talk about driving cost 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.

Okay. 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-to-Film, but can you maybe just elaborate a little bit wider on each of those initiatives?

Yes, 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 Erik, 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 to 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.

Okay. We're really excited about our international business. And we just finished our seventh consecutive quarter of growth of that. Our main markets outside of the U.S. and Canada are U.K., France, Germany, Spain, Australia and New Zealand. And then we're in over 50 countries around the world. Areas where we're doing particularly well are in Latin America right now. We're growing 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.

Perfect. 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 we may have talked a few years ago about we weren't sort of 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, 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. We're very pleased with that. And then we also were able to turn the corner in Australia. You may recall, and we've 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 in 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 3 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 search algorithm. So if you take our over 1.5 million images, we are taking into account users' preferences and interest 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 or we also have a generative AI solution that is optimized for cut ready images, so that'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 see -- as we continue that investment and we see AI adoption pick up, we would expect it to -- it doesn't come for free. We'd 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, right?

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, just we're doing a better job of talking about our subscription capability, right? 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 and 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 the 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.

Yes. No, very fair. Very fair. If we maybe take away the focus just from the top line side of things. And a question on margins, which is kind of with elevated promotional activity, 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?

Yes, Erik, I'll take that one. So it's important to take our model and break it down into the 2 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 2 reporting segments, which is platform and products. And Erik, if I could take those each individually.

First, on platform. 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 at the end user will see as well as behind the scenes for the image generation and things like that. That doesn't come free. There may be a little bit of pressure on gross margins on profits on 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 10-K, 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, Erik, would be to either average product gross margins for the year 2025 and '24 but you could also look at the year 2023, which didn't have a lot of unique onetime items. Again, because in 2025, we did benefit by about $24 million of less reserves plus being able to monetize E&O, which is an acronym for excess and obsolescence but we're very confident. 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 2 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 sit 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 semiregular -- semiannual 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.

Yes. 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 #1 item for the company.

Number two, would be M&A. And since Kimball has 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 imminent. 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 and 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 semiannual dividend and that has been historically paid every January and every July and each of those payments has been $0.10 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, Erik, and investors should kind of hold us to that.

Okay. 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, there are some newer things that came up, say, when we went IPO, which was 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 looking at everything that seems like a positive return on investment or a positive ROAS to see if that makes sense.

For example, Amazon TV. If my wife was searching for Cricut products and she's also streaming Amazon, she may get an over-the-top direct commercial that is pinpointed to her while someone else who is just 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. Lots of 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 flow, all of that good stuff over the next 3 to 5 years?

So I'll start and then Jim can follow up. So first of all, machine sell-out and I've mentioned this a couple of times. That's really the start of the flywheel where consumer engages with us. And so I would look at how are we doing in driving growth in machine sell-out because then we have an opportunity to monetize those customers through accessory 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, right? 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 GAAP profitability, not adjusted EBITDA profitability and lots of adjustments to exclude stock or exclude onetime items for 9 consecutive years, which is quite impressive of GAAP 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, taking 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?

Okay. 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 allows us to continue to invest and drive the other parts of our business. I'm excited about our product road map, 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 some 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 an acceleration of demand as some of our retail partners were uncertain about their supply chains, right? 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 I don't mean the category just of Direct-to-Film. I mean an opportunity to monetize our platform outside of 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 3 of those vectors of growth.

And Erik, 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 has been doing with the platform side and the infrastructure the Direct-to-Film and future things down the road map 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, we'll 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 of time. So Kimball, Jim, thank you very much for spending time with us today.

Erik, thank you.

Thank you.

Good day, everyone, and welcome to Cricut Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

Now, it's my pleasure to turn the call over to the Senior Vice President and Head of Investor Relations, Jim Suva. Please proceed.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Fourth Quarter 2025 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 a 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, tariffs, capital allocation 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 3, 2026. 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.

Thank you, Jim. While we are pleased with the increased profitability and growth in paid subscribers and global machine sell-out units, we are disappointed in the lack of total company sales growth for both Q4 and 2025. We are working with tremendous urgency and focus to drive a mass market experience, accelerate our development cycles and compete better.

I would like to look back on 2025 on what went well, what we could do better and our priorities for 2026. Kimball will go through much of the financial details and how we look at 2026.

We are pleased with our increased profitability and the over 4% increase in paid subscribers in 2025, along with positive machine sell-out units. This was our ninth consecutive year of positive net income as we generated $76.7 million of net income, which increased 22% or $13.9 million compared to 2024.

In 2025, we launched 2 new cutting machines, a new mini heat press, several new materials, including greatly enhancing our Cricut value line and significant improvements in our software platform that includes compelling AI offerings and easy-to-use project guided flows.

We are disappointed we did not post positive full year revenue growth. Total company sales decreased less than 1% for the full year and decreased 3% year-over-year in Q4. We believe Cricut is a growth business, and we are intent on proving it.

Last year, I mentioned, we were fundamentally simplifying our user experience. We are delivering on this commitment with our new project guided flows, which are in the process of being rolled out to our entire user base. While it is still early, we are pleased with the initial results and feedback.

We are relentlessly focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth. These accelerated investments are in hardware product development, materials and engagement.

You can see the early fruits of these efforts from our 2025 launches that I summarized above. Thus far, in 2026, we have already launched 2 next-generation cutting machines, new heat presses, a new Direct-to-Film or DTF service, and I'm excited about our future road map. We will continue a similar cadence of marketing and promotional spend as the prior year.

We are focused on 4 main priorities: new user acquisition, user engagement, subscriptions and accessories and materials. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drives our monetization flywheel.

In Q4, we amplified our marketing reach by strengthening our visibility during this key shopping period. We continued with increased marketing investment and activated several high-profile partnerships, alongside new advertising opportunities. These efforts led to increased marketing engagement and an increase in Google searches for "What is Cricut," which we have historically watched as a leading indicator. We believe these efforts will continue to bear fruit in 2026.

While we did not grow revenue in the quarter, we did see a continued improvement in sell-out of connected machines, which we believe is a result of our ongoing marketing efforts. Quarter-to-date in 2026, we continue to see positive connected machine sellout.

In 2026, we are leaning even more into our bundle first strategy, with a cohesive out-of-box experience that includes tools and materials with the machine, along with a tightly integrated guided software flow.

With that, we are excited to announce the introduction of 2 next-generation cutting machines, with all new architectures, Cricut Joy 2 and Cricut Explore 5. The overall consumer experience embedded in these new machine bundles represent the start of a new era at Cricut.

Recall last year, I mentioned we would fundamentally simplify our user experience. We delivered on this commitment as we introduced guided project flows for our most popular use cases. These include Vinyl Decals, Iron-On T-Shirts, Folded Cards, Cardstock Cutouts, Insert Cards, and Stickers and Labels.

While it is too early to see a material change in engagement from these improvements as they were only recently rolled out, we are pleased with early feedback, especially for onboarders.

Engagement erosion continues to moderate as we held active users about flat for the year at just under 5.9 million active users. 90-day engaged users who cut during the quarter declined 3% year-on-year.

Our ability to hold active users about flat is a result of multiple efforts. The performance and reliability of our platform continued to increase, which made this holiday making season a more frictionless experience for our users. We've introduced several improvements to the core functionality of our design experience.

Our AI-driven features, both user-facing such as Create AI or behind the scenes such as search algorithms continue to drive positive impact. For example, Create AI lets users take their personal images, easily add complementary text and choose an output style to create unique designs ready to cut, draw or print. This dramatically improves the likelihood of user success.

Create AI lets users generate ready to make images using credits as part of their subscription plan and is an acquisition driver to attract non-subscribers to sign-up for Cricut Access. We see the use of AI-assisted images and project creation as complementary to our growing image library from a contributing artist program, and our curated guided flows and associated templates for the most common project types.

Beyond these continued improvements within our app, we have continued to improve our engagement marketing efforts to drive returning visits to design space. As a result of all our efforts, we have seen our Net Promoter Score improve meaningfully in the past 12 months.

Despite the continued pressure on our engagement metrics, we are confident in our efforts to simplify our design experience by assisting users based on their project intent, selling more of our connected machines in bundles configured to work seamlessly with these new guided flows and continuing to grow the number of images, fonts, editable templates and AI features available to users.

We look forward to 2026, which will be the first year of our cohesive consumer experience that integrates our bundle for strategy, coupled with our new simplified project workflows that leverage AI throughout the making experience.

In Q4, our paid subscribers increased by over 4% year-on-year to just over 3.09 million. Paid subscribers continue to be a big positive for us and increased 132,000 year-on-year in Q4. We are also seeing positive trends on win-backs, where our promotional offers are driving increased sign-ups from prior subscribers.

We believe our new platform enhancements, including new project guided flows, templates and Create AI enhancements will continue to provide benefits and value to our subscribers.

We have a rich road map to continually increase the value proposition for subscribers. As I previously mentioned, we launched Create AI for our Cricut Access Subscribers, and we will continue to introduce more AI-driven features. Our goal is to make it incredibly compelling to be a subscriber to leverage our content and software tools.

Accessories and Materials sales decreased 13% year-on-year in Q4 and declined 9% for the full year. We realized that over the last several years, we have lost ground in competition in material types where there are low barriers to entry. We continue to see competitive pressure increase, manifesting in white label brands and retailers as well as new entrants in online marketplaces and in retail.

We have embraced the challenge of providing refreshed and cost-competitive materials and accessories offerings. As these offerings continue to rule out, we intend to reclaim market share and by doing so, enhance the making experience of our users.

I'm pleased to report that, we have seen share improvements globally within online channels and at select large retailers across the category. For example, we see our Value line continue to accelerate in online marketplaces. We continue to regain share in heat presses, and we continue to make progress with driving costs out of our supply chain as we fight to counteract tariffs and address affordability for our consumers.

In Q4, we launched a new EasyPress Mini LT that addresses affordability concern and is available in 4 attractive colors. During Q1, we launched our new heat press, Cricut EasyPress SE, which comes in 2 sizes and a variety of colors. These machines provide a professional quality heat transfer experience without the complexity or large size of an industrial press. They support a wide range of materials, including iron-on, Infusible Ink, sublimation and DTF.

I am also excited to share that in Q1, we launched a DTF service. DTF lets users create in Design Space vibrant, full-color, personalized artwork that is printed onto a special film, coated with adhesive powder, and then pressed onto fabric or other substrates.

DTF gives us the opportunity to leverage our Design Space platform and guided flows that we have been investing in over the past year. This is an example of new opportunities we are exploring to monetize our platform and content beyond cutting machines.

As you can see, our team has been very busy with R&D, innovation and new products. We are not done, and we have a great line of new products on our future roadmap. We also continue in our relentless focus to drive costs out of this business. We are intensely focused on the overall customer experience. It's our fundamental belief that when we give people more reasons and inspiration to make things easily and affordably, we will see a lift in materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current discipline.

With that, I will turn the call over to Kimball.

Thank you, Ashish, and welcome everyone. In the fourth quarter, we delivered revenue of $203.6 million, a 3% decline compared to the prior year. Full year 2025 revenue was $708.8 million, less than a 1% decline from 2024. We generated $7.8 million in net income or 3.8% of total sales in Q4, and $76.7 million or 10.8% of total sales for the year.

Breaking revenue down further, Q4 2025 revenue from Platform was $83.9 million, up 6% year-on-year. We ended the year with just over 3.09 million paid subscribers, which is up 132,000 or more than 4% year-on-year and up 87,000 or 3% from Q3.

For the full year, Platform revenue was up 5% and ARPU increased 5% to $55.77 from $53.12 a year ago. Platform revenue was up slightly more than paid subscribers primarily due to the benefit of foreign exchange.

Q4 revenue from Products was $119.7 million, down 8% year-on-year. Connected machines revenue decreased 4% year-on-year in Q4, driven primarily by lower average selling prices as we were more promotional preparing for new product launches in Q1.

Accessories and Materials decreased 13% in Q4. For the full year, revenue from Products decreased 5%, driven mostly by the 9% decrease in accessories and materials while connected machines revenue was about flat.

As Ashish mentioned, machine sell-out units were positive for the year and continue to be up quarter to date. As a reminder, we don't have perfect coverage for sell-out data in all channels, so treat this as directional.

As we shift to our bundle-first strategy, where we will only sell next-generation connected machines bundled with materials, we will no longer provide the supplemental revenue breakdown of Connected Machines and Accessories and materials in our SEC filings and data sheet. We will continue to report Platform and Products revenues and costs as we currently do in our consolidated statement of operations and comprehensive income.

In terms of geographic breakdown, international sales were positive at $57.8 million, an increase of 9%, compared to Q4 2024. As a percentage of total revenue, international was 28% in Q4 2025, compared with 25% of total revenue in Q4 2024.

For the full year, 2025 international sales increased 8% and represented 24% of total company revenues compared to 22% in 2024. Foreign exchange benefited international sales by 6% for Q4 and by 4% for the full year.

Our Australian business stabilized through enhanced pricing and marketing programs in the second half. Europe showed solid growth, thanks to increased marketing investment and store expansion for the peak season. Our emerging markets also demonstrated strong performance, especially in our fledgling Japan and India markets.

We continue to make progress in increasing brand awareness in international markets, which we expect to have a positive impact on member acquisition in 2026.

We ended the quarter with just over 3.09 million paid subscribers, up over 4% from Q4 2024 and up sequentially. This continues to be a bright spot for us, and Ashish detailed our efforts that are getting traction in this area. But I do want to mention, as discussed in earlier calls, there is some natural subscriber attrition, so subscriber growth may be challenging until we increase the pace of machine sales and new user acquisition. Recall, this could result in a seasonal pattern of quarter-on-quarter paid subscriber growth in Q1 and Q4, but flat to declining quarter-on-quarter subscriber growth rates in Q2 and Q3.

Moving to gross margin. Total gross margin in Q4 was 47.4%, an increase from 44.9% in Q4 2024. For the full year, total gross margin was 55.1%, also an increase compared to 49.5% for 2024. The full year improvement reflects higher product gross margins and a higher amount of subscription revenue as a percentage of total revenue.

Breaking gross margin down further, gross margin from platform in Q4 was 88.6%, an increase compared to 87.9% a year ago. For the full year, gross margin from platform was 89%, which increased from 88.1% in 2024. The increase in platform gross margin for the quarter and full year was primarily related to lower amortization of software development costs. We are excited about our AI investments. Recall, as we previously mentioned, there may be some gross margin pressure as we continue to ramp our AI features.

Gross margin from products was 18.4% compared to 18.7% in Q4 a year ago. For the full year, products gross margin was 26% in 2025, which increased from 19.3% in 2024. The increase in gross margin for the full year was primarily due to selling previously reserved inventory and reduction in inventory impairments.

Total operating expenses for the quarter were $82.5 million and included $7 million in stock-based compensation. Total operating expenses increased less than 3% from $80.1 million in Q4 2024.

For the full year, total operating expenses in 2025 of $294.4 million increased just over 6% from 2024. As Ashish mentioned, we are focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth for hardware product development, materials, engagement and marketing.

Operating income for the quarter was $13.9 million or 6.8% of revenue compared to $13.9 million or 6.6% of revenue in Q4 last year. For the full year, operating income increased to $96 million, up 26% compared to $76.1 million in 2024. As a percentage of sales, full year operating income was 13.5% in 2025 compared to 10.7% in 2024.

Our tax rate in Q4 2025 was 51% due to the full year true-up associated with our higher profitability, bringing the full year tax rate to 28.9%, in line with our expectations.

For the quarter, net income was $7.8 million or $0.04 per diluted share compared to $11.9 million or $0.06 per diluted share in Q4 2024. For the full year, we generated $76.7 million of net income and diluted earnings per share of $0.35, up from $62.8 million in net income and $0.29 diluted earnings per share in 2024.

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 2025, we generated $200 million in cash from operations compared to $265 million in 2024. We ended 2025 with cash and cash equivalents of $276 million. We remain debt-free. Inventory decreased by $13 million from a year ago to $103 million at the end of the year.

During Q4, we used $5.6 million of cash to repurchase 1.1 million shares of our stock. For the full year, we used $24.6 million to repurchase approximately 4.6 million shares. As a result, $41.3 million remain in our approved $50 million stock repurchase program, which the Board replenished in May 2025.

During the year, we paid $202.1 million in dividends. After the close of Q4, we paid approximately $21 million for the declared $0.10 per share semiannual dividend on January 20, 2026. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2026.

We are focused on bringing excitement to our category. We are doing this by accelerating our investments in R&D, new product launches and marketing, including international markets and continuing our promotional strategy to drive affordability.

Thus far in 2026, we have already launched 2 next-generation cutting machines, 2 new heat presses and a Direct-to-Film service, but these have only been available a short time. We expect to see the benefit in 2026 and beyond.

Previously, we talked about the headwinds that tariffs presented to our business. Given the recent Supreme Court ruling overturning IEEPA tariffs and associated dynamics, we are not providing any guidance on margin impact.

We expect to be profitable each quarter and generate cash flow from operations for full year 2026. We also expect to continue to be active with our authorized $50 million stock repurchase program, which has $41.3 million remaining. While tariff uncertainty is a reality of today's world, our team continues to be proactive and nimble with how we execute our strategy as we continue our investments to position the company for growth.

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

[Operator Instructions] It comes from Erik Woodring with Morgan Stanley.

I have 2, if I may. Just first, Ashish, if we look back on 2025, if we exclude accessories and materials, the business grew year-over-year, revenue grew year-over-year. And then if I go back to the last time you shared connected machine versus accessories and materials gross margins, they were relatively similar margin rates.

And so my question is, strategically, given the challenges that face the accessories and materials market, why do you need that business? I'd just love your thoughts on how it is value enhancing for you and how you see it going forward? And then a quick follow-up, please.

Erik, thanks for the question. So I think, first of all, as we recently announced, we've launched our bundle strategy, which really simplifies the experience for the user, right, where they have all the materials that they need on day 1 to start the project. We also believe that, while we have competition and some copycats from various brands, including private brands, our machines ultimately have to satisfy the overall holistic experience.

So I think it's important from an experience standpoint that we offer these materials, test the compatibility, take control of any -- whenever a customer uses our materials, we see from our research that they have peace of mind. They know it just works. It's high quality. So I think just from an overall experience, it's really important -- it's an important business to us.

The second is we believe that as we are successful on our engagement initiatives, while we want to be cost competitive, while we want to compete in this, it's still a very lucrative business. And we believe that with the Value line, with EasyPress, we are on the path of execution, and we think we'll be able to turn this corner and turn the business around.

But you're absolutely right. If you look at the high-quality aspects, if you look at connected machines and sell-through, you look at subscriptions, those are the leading indicators, and it's our job to then monetize that flywheel, with accessories and materials and subscriptions. So we think that it's an execution opportunity and an overall opportunity to provide a better experience to our members.

Okay. Very fair. I appreciate the cadence. And then just as a quick follow-up. Just as we think about either 1Q or 2026, are there any guardrails that you guys can provide behind even directionally user growth, revenue growth, margins, operating expenses, anything that just helps us understand how you're thinking about the year? Is this -- just maybe I'll leave it at that. Would love any color that you can maybe provide and help us with.

Yes, Erik, this is Kimball. Thanks for the question. We're really optimistic about the year overall, even as we see some challenges in the first half. So let me kind of break that down a little bit. We're very confident in platform growth for the year, even as we expect some seasonal softness in Q2 and Q3 as we highlighted in our prepared remarks and as we've seen in the last couple of years. But overall, we're confident that we'll grow platform for full year.

When it comes to products, there are some challenges in first half because remember, last year, we had some opportunity to pull forward some accessories and materials demand, especially in Q2 around uncertainty related to tariffs, and that sets up kind of a difficult comp. We've also launched some new machines this Q1 that are lapping cutting machines that we launched a year ago.

But the year ago machines had generally higher prices than the machines that we're launching this Q1. And so that presents a little bit of a challenge. But that said, we're really excited about our road map. We've been investing heavily, and there's more goodness to come in the quarters ahead. And so as we look to the back half of the year, in particular, we think we will hit our stride, and we're really optimistic for full year.

And Erik, let me just add to that. So I think about a few quarters ago, we talked about how we are accelerating our innovation across the board. So first and foremost, we just launched 2 new machines just a few days ago. We're very pleased with the launches. They are part of our holistic bundle strategy, coupled with the platform. So we will continue to launch new products in our existing category.

The second thing I'll mention is that leveraging the platform, we also plan to launch new services in our existing category. And this is where the true benefits of the platform come to life. And finally, new products in new categories. So I think you'll start to see that materialize as we go through the year and into next year, all the engineering and innovation efforts that we've been investing in will come to bear. And I think this is -- underlies what Kimball shared in his comments overall.

Our next question comes from Adrienne Yih with Barclays.

This is Angus Kelleher on for Adrienne Yih. With the shift toward bundles, are retailers needing to make any changes to shelf space or in-store merchandising? And I guess just more broadly, how are retailers responding to your bundle offering?

Angus, thanks for the question. Okay. Angus, thanks for the question. We're really excited about this bundle-first strategy. And it really is, as Ashish mentioned in his prepared remarks, a new era for Cricut users. And it kind of breaks down into 2 pieces. One is let's talk about ease of use for consumers, right? Because with these new bundles, we're going to have a tightly integrated user experience, and that starts with the new guided user flows that we've talked about and that we've spent the last couple of years investing in and creating. And so it makes it simpler, faster, easier for users to make what they want to make.

And these new bundles are designed to match those guided flows. So the out-of-box experience, a new user has everything she needs to succeed at the start. And then on the affordability side, we know that affordability has been one of the biggest concerns that someone researching the brand has is what is this activity going to cost them when they take it on. And so as we move into this next generation of machines, everything will come in a bundle.

Now, we'll have a range of bundle sizes so that we can have compelling opening price points, but also larger overall bundles that drive more value for consumers, but each of these bundles will provide that much better experience for consumers in a cohesive, integrated way that they haven't had in the past. And so we're really excited about it.

Our retail partners understand the strategy, and we get positive feedback from them on it as well. And so -- and the guided flows have only been available for a short time as we've been rolling them out. But initial results that we've seen this year, especially with onboarders, is very positive response.

And I'll just add specifically just to further embellish what Kimball said from a retailer standpoint. We haven't seen any big impact of our bundles on the placement strategy or whether they've reduced our shelf space or things like that.

If anything, as we have shared and demonstrated with our retailers, what -- these are not just like random materials that are thrown into the bundle, right? They're very -- over the last 12 months, we've done a number of user studies, carefully curated and orchestrated these materials to give that out-of-the-box experience.

And so I think it's -- I would say, without kind of speaking on their behalf, as they've seen our research, as they've listened to the user feedback, we believe that a good out-of-the-box experience will ultimately drive higher engagement, more trips back to the store and ultimately, people buy more materials. So I think overall, both consumers and retailers have received this positively. We have not seen any impact to their merchandising or shelf strategy.

And it's -- as we said, our initial feedback from the guided flows has been positive. And even as we launch these 2 new products, we've gotten a lot of positive feedback on how many things we are including and how well orchestrated those things are. So we're pretty pleased with it overall.

Great. Great. And then just one quick follow-up on DTF. It feels like a new monetization lever beyond your kind of classic offering or kind of adjacent to your classic offering. How should we think about its role longer term? Is it primarily incremental usage from existing users? Or is it a way to attract new consumers to the platform?

Angus, thanks for the follow-up. So we're excited about our directed film offering, and it's really enabled by the infrastructure we've built around the guided flows, as Ashish mentioned in his earlier comments. And it's an example of where we're experimenting with ways to monetize our platform without the need to use a cutting machine.

And so today, it's focused on our existing users as we learn and primarily focused in North America to start. And today is only available on desktop. But as we learn, we'll expand the audience and we'll expand the geography over time. And you'll see other things like this where we are looking for opportunities to monetize the platform outside of just our traditional cutting machines.

Yes. So again, just reinforcing the point that Kimball made, we -- this is -- initially, we've launched this product for our existing members. So as they come into design space, as they want to do these full color fidelity, high fidelity projects, this is a way to monetize that user need.

Second, just double-click on what Kimball said, this is a really good example where we have leveraged our T-shirt guided flow that we had already built for our machines to basically provide another use case, right?

So the same guided flow that we use for making a T-shirt with a Cricut is the guided flow that was used as a basis to create a T-shirt flow. And you'll see -- you'll continue to see us expand into those types of services. We've just started rolling out. It's still only on desktop. So I think it's too early to tell, but we are pretty excited about it, and we feel that we'll continue to invest in the service.

Our next question comes from the line of Eric Sheridan with Goldman Sachs.

This is Emma Huang on for Eric Sheridan. Just on the topic of your product road map and kind of AI offerings. Can you talk about some of the key learnings so far as you continue to roll out these AI-driven features and products and how they're kind of informing your priorities for go-to-market strategy?

Yes. So we're really excited about AI. We think it fits very well with our content strategy and is very complementary to it. And just a reminder that one of the primary reasons subscribers subscribe is for the content that it brings to their projects. And so while we have a large image library and we use -- we leverage AI to drive search algorithms to serve that content, we also have a generative AI offering that we call Create AI, which if a user can't find something that she wants to make already in the existing library, she can easily generate an image and then modify it quickly into a project that she wants to make.

And so we continue to invest heavily in that over time and expect that to continue. We also expect as we drive adoption over time that, that might introduce some pressure in platform margins. But we also see with the early data that it also is a great acquisition tool for attracting new subscribers. And so we see it as an important aspect of continuing to improve our overall customer experience, but very complementary to what we're doing today.

And this concludes the Q&A session. I will turn it back to Cricut for final comments.

Thank you, operator. We will be meeting with investors at the Morgan Stanley Technology, Media and Telecom Conference tomorrow, Wednesday, March 4, 2026, in San Francisco, California, and we hope to see you there. If you have additional questions, please e-mail me at [email protected].

This now concludes this earnings call, and you may now disconnect. Thank you.

This concludes our conference. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Cricut Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Jim Suva, Senior Vice President of Finance, Treasurer and Investor Relations.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's Third Quarter 2025 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 a 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, tariffs, capital allocation 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, November 4, 2025. 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.

Thank you, Jim.

We posted solid results in Q3. Sales grew 2%, operating income grew 114%, EPS grew 100% and paid subscribers grew 6% year-on-year. While we are proud of our Q3 results, which represented our second consecutive quarter of positive year-on-year sales growth, we have more work to do, especially on engagement, international sales and accessories and materials.

As I mentioned previously, we are relentlessly focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth. We are continuing to lean into these investments even as we navigate the uncertainty introduced by tariffs and their potential impact on consumer discretionary spending. These accelerated investments include hardware product development, materials, engagement and marketing, including increased awareness in our international markets. Thus far in 2025, we have launched 2 new cutting machines, more Cricut Value materials and several improved engagement experiences, which also include AI.

We need to continue growing our top line to satisfy the expectations of our team and our shareholders. We have conviction in what we need to do to return to sustainable growth. We are focused on attracting more new users to buy our connected machines by addressing affordability and ease of use while also increasing marketing and awareness. We must ultimately reverse weakening engagement trends and reinject enthusiasm among our users by enhancing and simplifying the making process. We are committed to taking back our share in accessories and materials.

I will now talk about 4 priorities: new user acquisition, user engagement, subscriptions and accessories and materials. We continue to focus on new user acquisition and engagement growth on our platform, which ultimately drives our monetization flywheel. In Q3, we made 2 adjustments to our marketing strategy that are yielding good results. First, target expansion. We strategically broadened our target audience to reach users with greater disposable income and time, 2 of our major purchase barriers. We are seeing a significantly higher engagement rate with our ads from this new expanded group.

Second, increased marketing investment. We directed increased spend into the channels that consistently deliver high engagement and high ROI for the brand, and we are seeing a more than 20% increase in overall marketing engagement year-over-year. These efforts are leading to an increase in searches for What is Cricut on Google, which we have historically watched as a leading indicator.

Our sell out units continue to be encouraging with sell out units up in North America and globally in Q3 and year-to-date. Sell out units were also up year-over-year in the recent October Amazon Prime Day. Engagement erosion continues to moderate as we held active users about flat for the year. In Q3, we ended with just under 5.9 million active users, about flat compared to Q3 2024. 90-day engaged users who cut during the quarter declined 3% year-on-year. We are on track to meet our goal of dramatically simplifying the user experience by the end of 2025 for our most popular project types or use cases.

The use cases we are developing this year cover a large portion of project types cut each year. For each use case, we guide users by first having them choose what they want to make, for example, an iron-on T-shirt. Our platform uses AI image selection, templates and guided step-by-step flows. The simplified interface exposes only relevant tools and automates complex manual decisions such as image sizing and placement on a youth medium T-shirt.

In July, we launched in beta guided flows for vinyl decals and iron-on T-shirts, 2 of our most popular use cases. We have since released them into production during Q3 and their reception has been positive. At the end of Q3, we launched our next 2 most popular use cases of folded cards and cardstock cut-outs for beta testing. We continued our AI investments in Q3 by moving the Create AI feature from beta to production for Cricut Access subscribers with positive early results. A major advantage of this feature is that the generated images are ready to cut, which is not necessarily the case with images sourced elsewhere, thus dramatically improving the likelihood of user success.

Finally, we brought in more visitors to Design Space via our engagement marketing campaign in Q3 than in any prior quarter. Despite the continued pressure on our engagement metrics, we are confident in our efforts to simplify our design experience by assisting users based on their project intent, continuing to grow the number of images, fonts and editable templates available to users, most notably for Cricut Access subscribers and improving our capabilities to bring users back to the platform to start or resume a project.

In Q3, our paid subscribers increased 6% year-over-year to just over 3 million. Paid subscribers continue to be a big positive for us and increased 166,000 year-on-year in Q3. We are also seeing positive trends on win-backs, where our promotional offers are driving increased sign-ups from prior subscribers. We have a rich road map to continually increase the value proposition for subscribers. As I previously mentioned, we launched Create AI for our Cricut Access subscribers, and we will continue to introduce more AI-driven features. Our goal is to make it incredibly compelling to become and remain a subscriber to leverage our content and software tools.

Accessories and materials sales decreased 17% year-on-year in Q3. Over the last several years, we have lost ground to competition and material types where there are low barriers to entry. We continue to see this competitive pressure increase, manifesting in white label brands and retailers as well as new entrants in online marketplaces and in retail. We have embraced the challenge of providing refreshed and cost-competitive materials and accessories offerings. As these offerings continue to roll out over the coming months, we intend to reclaim market share and by doing so, enhance the making experience of our users.

We are focused on having the right product configurations in the appropriate channels, so Cricut materials are the obvious choice when users want to make. In Q3, we launched several new project materials, including printable temporary tattoos and magnet sheets. In addition to printables, we also added new finishes and types of iron-on, including flocked, color pop, 3D and puff. We also continue in our relentless focus to drive cost out of this business, including optimizing country of origin by material type.

While we have diversified most of our finished goods supply base, largely outside of China over the last several years, we continue to manufacture in several countries in Asia. We believe we have a competitive advantage in the diversity of our supply chain configuration relative to the competition. We remain nimble as we navigate unprecedented tariff uncertainty.

Recall in first half 2024, we launched the Cricut Value line of materials. We continue to accelerate this business, launching additional SKUs and material types. We continue to be optimistic about this product line as we see it perform well, but it is still a small portion of our portfolio. We have additional innovation, products and cost reductions coming in the quarters ahead. Our teams did a great job executing during the October Amazon Prime Day, where we saw positive year-on-year growth for accessories and materials. 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 are intensely focused on the overall customer experience. It's our fundamental belief that when we give people more reasons and inspiration to make things easily and affordably, we will see a lift in materials consumption. We are driven to continue to innovate while exhibiting both long-term focus and current discipline.

With that, I will turn the call over to Kimball.

Thank you, Ashish, and welcome, everyone.

In the third quarter, we delivered revenue of $170.4 million, a 2% increase compared to the prior year. We generated $20.5 million in net income or 12% of total sales in Q3. Breaking revenue down further, Q3 2025 revenue from platform was $82.8 million, up 7% year-on-year. We ended Q3 with just over 3 million paid subscribers, up 6% year-on-year. We continue to expect paid subscribers to be up in Q4 and for the full year. Platform revenue growth was primarily driven by higher paid subscribers year-on-year. ARPU increased 4% to $54.96 from $52.86 a year ago.

Q3 revenue from products was $87.7 million, down 3% year-on-year. Connected machines revenue increased 12% due to both higher machine unit sales and higher average selling prices, helped by our newer machine launches and fewer legacy machines. As Ashish mentioned, machine sell out units in North America and globally were up in Q3 and continue to be positive year-to-date. We don't have perfect coverage for sell out data in all channels, so treat this as directional.

Accessories and materials revenue decreased 17% year-on-year. Recall, last quarter, we had the opportunity to accelerate shipments of accessories and materials, resulting in 12% year-on-year revenue growth in Q2. If you average these, normalized accessories and materials revenue continued to decline. In terms of geographic breakdown, international revenue for the quarter was $40.5 million, an increase of 5% compared to Q3 2024 and included about 4% of foreign exchange benefit with platform up and products down, similar to last quarter. As a percentage of total revenue, international revenue was 24% for Q3 2025 compared with 23% of total revenue in Q3 2024.

We see positive momentum in our U.K. and Western European businesses where we continue to invest in sales and marketing, which sets us up well for peak holiday season. We are also starting to see green shoots in our nascent India and Japan regions with expanding distribution and demand. We are also pleased that Australia is stabilizing in the second half of the year through increased promotions and demand generation. We are increasing sales and marketing resources to further fuel momentum in our international markets.

We ended the quarter with over 3 million paid subscribers, up 6% or 166,000 from Q3 2024 and down 6,000 or less than 1% sequentially, partially due to seasonality and the introduction of a new POS feature where we don't count paid subscribers in the metric. Recall, we have highlighted previously that Q3 paid subscribers could be flat to down. Platform continues to be a bright spot for us, and Ashish detailed our efforts that are gaining traction in this area.

Moving to gross margin. Total gross margin in Q3 was 55.2%, an increase from 46.1% in Q3 2024. The improvement reflects higher product gross margins and a higher amount of subscription revenue as a percentage of total revenue with higher platform margins. Breaking gross margin down further, gross margin from platform in Q3 was 89.2% compared to 87.1% a year ago. The increase in platform gross margin for the quarter was primarily related to lower amortization of software development costs.

Gross margin from products was 23.1% compared to 10.7% in Q3 a year ago. The increase in gross margin for the quarter was primarily due to less reserves compared to last year, the selling of previously reserved excess and obsolete products and a more favorable mix toward newer products. The uplift from these items more than offset our promotional activities.

Total operating expenses for the quarter were $71.4 million and included $7.1 million in stock-based compensation. Total operating expenses increased 7% from $66.8 million in Q3 2024. Recall, we increased our marketing efforts during 2024 by $20 million and continued at a similar rate through Q3. We will continue to be data-driven in our future marketing spend and expect to lean in through the holiday season even as we navigate the uncertainty from tariffs and potential impact on consumer spending. We will continue our physical products and platform investments to drive future growth as we manage our business through a long-term lens.

Operating income for the quarter was $22.7 million or 13.3% of revenue compared to $10.6 million or 6.3% of revenue in Q3 last year and benefited from the mix of higher sales from platform and higher product margins, which we previously mentioned. The tax rate in Q3 2025 of 20% was slightly higher than the 18.9% in Q3 2024, primarily due to the difference from a decrease in stock-based compensation attributable to a lower stock price upon vesting. For the quarter, net income was $20.5 million or $0.10 per diluted share compared to $11.5 million or $0.05 per diluted share in Q3 2024.

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 Q3, we generated $20 million of cash from operations compared to $70 million a year ago. We ended Q3 with cash and cash equivalents of $207 million and remained debt-free. During Q3, we used $2.3 million of cash to repurchase 441,000 shares of our stock, resulting in $46.9 million remaining on our $50 million authorized stock repurchase program, which the Board replenished in May.

In July, we paid approximately $181 million in dividends with a special dividend of $0.75 per share plus a recurring semiannual dividend of $0.10 per share. The Board of Directors recently authorized a recurring semiannual dividend of $0.10 per share for shareholders of record on January 6, 2026, and payable on January 20, 2026.

Now on to our outlook. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook. We continue to expect platform sales to increase sequentially year-on-year in Q4 and for the full year on paid subscriber growth. In Q4, higher tariff costs will have a negative impact on margins, and this headwind will accelerate in 2026. Also recall, Q4 is our most promotional quarter of the year. We expect to be profitable in Q4 and generate significant positive cash flow for the year. While tariffs are the reality of today's world, our teams continue to be proactive and nimble with how we execute our strategy as we continue our investments to position the company for growth.

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

[Operator Instructions] Our first question today is from Erik Woodring from Morgan Stanley.

Ashish, I appreciate all the commentary you provided on the different ways you're trying to improve engagement, reaccelerate sell-through in parts of your business, et cetera. If you take a step back, what do the kind of spending trends in your business in 3Q tell you about the health of spending kind of across the different parts of the category you play in? And how does that inform your view on revenue seasonality for 4Q when we think about historically revenues up about 40% sequentially in 4Q? Are those spending trends conducive of growth better than that, worse than that? Would love if you could just put that all kind of into context and any quantification would be helpful.

Thanks, Erik, for the question. Let me -- I think there are 2 parts to your question. So let me kind of address the first one, and then I'll let Kimball talk to some of the other aspects of your question. So I think overall, from an innovation standpoint and across the 3 -- across various categories, as we've indicated, we will continue -- in fact, we have ramped up innovation in products, which includes hardware in existing and some new categories. And that -- we expect that investment to continue as we go through the next 12 to 18 months and even longer for that matter.

The second is on materials. So again, we will see -- we've taken a very proactive stance on that, and you'll see a tremendous amount of innovation, cost reductions and excitement there. And most of all, on the platform side, which basically is fuels engagement and our subscriptions offering, we will see we've had a higher level of investment, and we see that investment sustained over a period of time.

And the last area I would highlight is -- the last 2 areas are international and marketing. Both of them basically are -- were a big focus this year and they will continue to be our focus. All of this is with the lens of we are a growth company. While the last couple of years have been tough, we're very excited about the business, and we think that there's a tremendous amount of innovation to be done and to further penetrate our SAM. So we expect that as we said, with a longer-term lens as we reposition and drive the company back for growth.

Kimball, you may want to add more color to that.

Yes. So Erik, thanks for the question. I would point out that our sell out of machines continues to be up in North America and internationally for the quarter and year-to-date. So we look to that as evidence that our marketing efforts are working and engaging consumers. We do acknowledge we still have pressure in our accessories and materials business. There was a little bit of noise because we had an opportunity in Q2 to accelerate some demand. But if you average Q2 and Q3, that business remained under pressure.

As Ashish mentioned, I think the teams have done a great job of driving cost out of that business and introducing new products. We talked about our value line materials, for example, that compete well specifically in online marketplaces. And I think we have more opportunity there, as Ashish mentioned. There is an element of engagement with consumers that we ultimately need to get more consumers in the door and we need to get them cutting more frequently to also help turn the tide on overall engagement. And Ashish talked about some of the things that we're doing in that area.

In terms of holiday and how we see consumers showing up, we're pretty encouraged by what we saw with October Prime Day and some parallel channel promotions that we had where we saw pickup in units and in revenue across those promotions. I would add one cautionary note is we do regular consumer surveys. And for the first time in our internal surveys, we're seeing our consumers express concern about how tariffs may impact their family household spending. So we think we're in a good position for holiday. We've got great marketing in place. We have a great promotional calendar lined up. we're excited about it, and we think we've got appropriate channel inventory across the board, but we are waiting to see how consumers show up in the back half of the quarter.

And let me just kind of add just a slightly macro level picture to that, right? As we've continued to research, we have a strong conviction that our market is significantly more than we penetrated it. The macro -- the secular trends have not changed. Users -- people -- consumers want to personalize. They want to be creative. And if you look at Google trends on what is Cricut, we see significant interest in the brand year-on-year, especially with all the efforts of marketing.

And finally, we believe that a lot of our investments that we are making, both from an innovation perspective and from a platform perspective, we believe that, that opportunity is in making the platform and the product incredibly simple and how do we reduce friction. And that's what the team has been actively focused on. And again, we're very excited and convinced that we are working on the right things.

And then I'll just add one more comment relative to Q4. Recall that there's some seasonality to engagement and Q4 tends to be the highest engagement quarter. We're also, as I mentioned, seeing year-to-date sales out continue to be up. We think that bodes well for subscriber growth in Q4 and in Q1 as we look forward to that.

Okay. Perfect. I think I got all of that. And then maybe, Kimball, obviously, here at the end of your prepared remarks, you alluded to higher tariff costs negatively impacting margins that will accelerate in 4Q in 2026. Can you unpack exactly what that means? And any financial framework you can help us with? I'm just going back to your comments last quarter where you materially outperformed margins this quarter. So just trying to get a financial framework for how to think about gross margins. Is that up or down year-over-year? Just anything that can help us kind of narrow the range of where we should be?

Yes. Thanks, Erik. So let me break my answer in 2 parts. First, I'll talk about some unique helps to margin this year that don't necessarily carry over into next year, and then I'll address your question on tariffs. So there's a number of things where this year, for example, there's an absence of reserves on excess inventory that was a big part of the story last year. And so that helps the comparison. And in conjunction with that, we've also done a good job of monetizing excess inventory this year and some of the easier chunks of that inventory to monetize will be exhausted as we kind of exit Q4. And so that won't necessarily help as we move through next year.

And then there has been a mix shift towards newer products, which has also benefited margins this year. So there have been some things that have really helped margin. And then as we look to next year, as I mentioned in my comments, we're seeing some of that impact in Q4. We'll see that accelerate next year. And it's still a bit of a dynamic situation. If you recall, we started seeing incremental tariffs in April, then they picked up in August and they're changing with announcement as late as last week. So a bit of a moving target. But in terms of a framework, the way we think about it is a significant portion of our revenue and profit comes from platform. Platform is not impacted by tariffs at all.

And then if you look at our trailing 12 months of cost of goods sold, about 1/4 of that is international. That's not impacted by tariffs, but 75% of that is. And we've got exposure to 4 Asian countries primarily: Malaysia, South Korea, Thailand and some finished goods still from China. So if you think about an average tariff rate of around 20% and how you apply that across that subset of cost of goods sold I mentioned. And then think about the timing of inventory turns. So even though we've been importing all along throughout the year, getting ready for holiday and building inventory at this point for next year, we pay those tariffs as it comes in, but it takes time for those tariffs to flow through the P&L, which is why we're just seeing really impact starting in Q4 and accelerating through '26.

Okay. I appreciate all that color. And maybe just one quick clarification, Kimball, on that. The average tariff rate of 20%, that just takes into account the decrease in IEEPA tariff in China last week. I just want to make sure that just confirm that.

Yes. I mean that's our best estimate based on what's changing because South Korea got an announcement next week as well as China. So we haven't seen anything official other than what in the press.

Our next call is from Michael Cadiz with Citi.

This is Mike Cadiz for Asiya Merchant at Citi. Your Create AI offering is very interesting. Would you mind helping us understand your current AI strategy? And when [indiscernible] would be -- it may be challenging, I think, in gaining paid subscribers because what if those users can then get those AI images for free. So if you can help me bridge that gap, that will be great.

Mike, thanks for the question. So we're actually pretty excited about AI. We believe it's complementary to our content strategy overall. And I'll give you a couple of examples. And you called out Create AI, which is our generative AI offering that we had in beta in Q2 and has since moved into production. And it's optimized to produce images that are ready to cut. And so as you call out, consumers can go and generate images elsewhere, which may work well on a printer because they're bitmap, but they're not -- we need them in vector form for a consumer to be able to cut them and use and make a project effectively.

And so we do think we have an advantage there. We have seen in limited data at this point that it actually is helping us bring in new subscribers. But it's not the only where we're using AI in our platform. We also have embedded in our search algorithm so that we have our large library of images, and we're using that to help serve content to users that match their interest, their skill set and their project type. And we continue to learn and get better, leveraging AI in there. We also are using AI to accelerate efficiency and speed in our software development.

I think it is worth calling out that as we see adoption pick up, especially in the generative AI part of the platform that over time, we could see some pressure on platform margins.

Yes. So Michael, this is Ashish. Let me just add a little bit more color and reinforce a couple of points that Kimball has made. So one is we term Create AI as a user-facing feature. And as Kimball pointed out, what we specialize in is vector-based images as opposed to raster images that are optimized for cutting, right? So Create AI is a tool that we offer to consumers that basically allows them to generate specifically those types of images that are optimized for vector graphics and cutting.

The second is in addition to those tools that are to generate images, we have a lot of complementary tools like [indiscernible] and Google, et cetera, that do require subscription today. And then on top of that, we are using AI to help users discover content based on the images they put, how do you find them complementary images. So AI is being basically leveraged across many, many parts of our system, including from search technologies to find similar or complementary images to how AI is supplementing how people work with fonts and all of that stuff. So we think AI is definitely -- it's a very rapidly evolving market. We are embracing that, and we think it's ultimately a net positive for us as ultimately, we want to be the platform where people come to exercise their creativity. So we're really excited about what the team is doing across the board and AI.

And our next question comes from Adrienne Yih with Barclays.

This is Angus Kelleher on for Adrienne Yih. I have a couple of quick questions regarding retailer partners. So my first question is about channel inventory. Does it feel balanced going into holiday? And what steps are you taking to avoid channel stuffing or demand pull forward after Q2? And has that Q2 pull-in been fully absorbed? And then I have a quick follow-up.

Angus, thanks for the question. We actually feel like we're in a pretty good position overall from channel inventory going into holiday. I think there are pockets where we'd love to see more. But in terms of the new normal that has evolved post-COVID, I think we're well positioned. I would call out relative to the pull-in demand we saw in Q2, and that was specifically around accessories and materials that if you look at -- I mean, we were down in the quarter in Q3 on that. So if you average Q2 and Q3, that's still down. At the end of the day, I think it varies a little bit by channel. But I think overall, we're in a very good position. We see enthusiasm with our retail partners. I've already expressed the one concern we have of seeing how tariffs may impact consumers. But early signs based on Prime Day and parallel promotion we can in channel, we're optimistic about Q4, waiting to see how consumers show up for the rest of holiday.

Great. Second question, do you think you could share any early thoughts on margins for 2026? It's sort of a follow-up to Erik's question, but anything directional you could share related to and beyond tariffs and pricing strategy, maybe just how you're looking at marketing investment and how it all comes together to affect operating margins in 2026?

So I'm going to be careful on forward-looking commentary because with tariffs, it is a bit of a moving target, but let me share kind of how we're thinking about it. We do expect margin pressure next year because of tariffs. And really how we think about dealing with that from a consumer affordability standpoint is we will continue to manage the mix of price and promotional strategies so that we can try to do as much as we can to maintain affordability for our consumers. We will continue to drive cost out of the supply chain, including getting participation from our supply partners to help us offset some of these tariff impacts. But at the end of the day, there will be some absorption to gross margin as we move through '26 on tariffs.

I'm showing no further questions at this time. So I'd now like to turn it back to Jim Suva for closing remarks.

Thank you, Therese, and thank you, everyone, for joining us this afternoon.

We will be meeting with investors at the Barclays Investor Conference on Thursday, December 4 in New York City and the ROTH MKM Investor Conference, Thursday, December 11 in Deer Valley, Utah. We hope to see you there. If you have additional questions, please e-mail me at [email protected].

This now concludes this earnings call, and you may now disconnect. Thank you.