Corsair Gaming, Inc. (NASDAQ:CRSR) Q2 2023 Earnings Call Transcript

Corsair Gaming, Inc. (NASDAQ:CRSR) Q2 2023 Earnings Call Transcript August 3, 2023

Corsair Gaming, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.1.

Operator: Good afternoon. And welcome to the Corsair Gaming’s Second Quarter 2023 Earnings Conference Call. As a reminder, today’s call is being recorded and your participation implies consent to such recording. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] With that, I would now like to turn the call over to Ronald Van Veen, Corsair’s Vice President of Finance and Investor Relations. Thank you. Sir, please begin.

Ronald Van Veen: Thank you. Good afternoon, everyone. And thank you for joining us for Corsair’s financial results conference call for the second quarter ended June 30, 2023. On the call today, we have our Corsair’s CEO; Andy Paul; and CFO, Michael Potter. Andy will review highlights from the quarter. Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are, therefore, forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties.

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The risks and uncertainties and forward-looking statements are subject to are described in our earnings release and on our SEC filings. Note that until our 10-Q has been filed, these numbers are preliminary. Today’s remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release we issued after the market close today. With that, I will now turn the call over to Andy.

Andy Paul: Thank you, Ronald, and welcome everyone to our earnings call. The key takeaways for Q2 are; first, our revenue exceeded expectations for Q2, growing nearly 15% on a year-over-year basis. Consumer spending on gaming hardware is holding at significantly higher levels than pre-pandemic. We believe that even with a challenging macro level environments, we are seeing increased activity due to new gamers that came into the mix in 2020, now starting to refresh and upgrade their gear. Second, gross margins showed strong growth with healthy inventory profiles and reduced freight costs. Third, we are now active again in M&A, which is a key component of our growth strategy. Our strong cash balance and low leverage is now allowing us to pursue M&A opportunities with the latest announcement made in July that we agreed to purchase Drop Incorporated.

Taken together, we expect gaming market to continue to be healthy for the balance of the year, with new game titles and lower cost GPU cards in the market, and we expect to continue to take market share with our continued new product rollouts. Let me take a few minutes to expand on these points. So, first, I am very pleased to report that our results for the second quarter exceeded our original expectations. The gaming hardware market is healthy and appears resilient to macroeconomic effects, driven by new games and new graphics cards launching. For components used for building gaming PCs, depending on region, we see a 24% to 28% increase from Q2 2019 to Q2 2023. The gaming peripherals, we see an overall increase of 57% to 63% this year compared to pre-pandemic.

Now it’s reasonable to consider current consumer activity as a post-pandemic baseline since there’s no evidence of increased current activity due to COVID-related behavior. Based on everything we are seeing and hearing, we believe this increased activity is coming from the surge of new gaming hardware buyers who entered the market during 2020 and 2021, which we now refer to as the COVID bulge. Since this comparison is now over 4 years, that would lead to a net CAGR from pre-pandemic to post-pandemic as approximately 5% to 6% of PC platform building and 12% to 13% for gaming peripherals. This is roughly in line with what we shared with investors over the years as expected growth rates for these categories and we think it’s reasonable to expect that this will continue over the next few years.

Second, margins continued to improve in all categories. In our components category, we gained significant market share in 2022 and that on top of the healthy market, meant that we were running short of inventory in many of our top SKUs, requires us to airfreight in products or our hubs. We largely caught up with inventory needs by Q1 2023 and so in Q2, we had the benefit of lower freight cost and healthy inventory positions, thus driving up gross margins. In gaming peripheral categories, we have had some delays in getting our new flagship products out. We also noted in previous earnings reports that we appeared to clear up our excess channel inventory faster than our competitors and so we decided to hold back from matching their high levels of discounting.

Both of these things combined to the causes to lose some market share over the near-term, but competitors discounting has now largely calm down. For example, we noted during Prime Day that while we had prices at reduced levels of discounts compared to biggest Prime Days, we actually outperformed compared to the total category sales of Amazon in almost every one of the categories that we track. So we saw that in Q2, while our gaming peripheral revenue was less expected, by the end of the quarter, we are experiencing much improved margins and much better sales momentum going into and coming out of Prime Day and Prime Week. As our latest new flagship products get launched during the second half of this year and into early next year, we would expect to continue to gain market share and increase margins further.

We are now active again on the M&A front as we benefit from our strong cash balance and low leverage. So a lot of M&A opportunities out there and we have been disciplined in evaluating companies. We have acquired six companies to-date and have a very good track record. Our latest announcement was in July that we agreed to acquire Drop, formerly known as Massdrop, a community-based e-commerce company specializing in customized DIY keyboards and key caps and many other enthusiast and audio for products. Personalized keyboards that be modified by the consumer is one of the fastest growing trends in the gaming peripheral space. Drop is actively engaged with millions of enthusiasts to support its products and build and showcase gaming stations. Drop has proven to be one of the leaders in this space, and with, of course, a global footprint, we expect to significantly grow the Drop brand worldwide.

We expect some significant opportunities and synergies here, both by offering cost conversions of our products on the Drop side, as well as introducing some of their popular products into our worldwide channel. Our target is for this to mirror the success we have had with Elgato. As a reminder, we acquired Elgato about five years ago. We have increased the revenue by more than 3 times and we have expanded the brand into the totally new revenue areas, including microphones, cameras and lights. We also just did a soft launch of our marketplace a few weeks ago and expect this to grow over time. The new Stream Deck marketplace will allow third-party plug-ins and applications that run on our world frame stream deck to be sold to our content creators directly from the Elgato website.

Developers will now be able to easily access Elgato’s large and rapidly growing Stream Deck installed base. We believe that these added plug-ins and applications dramatically increase our installed base of Stream Deck users and opened a significant new revenue stream for us as we make Stream Deck an even more useful tool. Overall, we are off to a strong first half and expect a further improvement in the second half of 2023. We expect the gaming market to continue healthy for the balance of the year and we fully expect to build a leading market share in the categories we serve. Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead.

Michael Potter: Thanks, Andy, and good afternoon, everyone. We are pleased with the substantial financial improvement in Q2, led by revenue growth, steadily improving adjusted EBITDA and a more balanced inventory. We exceeded our near-term expectations for gross margins and we continue to be operational cash flow positive, while investing modestly in inventory to support the expected stronger second half of 2023. In terms of the specifics, Q2 2023 net revenue was $325.4 million, compared to $283.9 million in Q2 2022. For the first six months of 2023, net revenue increased 2.2% to $679.4 million from $664.6 million in the year ago period. European markets continue to be softer than Americas, but are improving and contributed about 32.3% of our revenues, which is an increase from 32% in Q1 2023.

Turning now to our segments. The gamer and creator peripheral segment contributed $78.8 million of net revenue during the second quarter, compared to $89 million in Q2 2022. For the first six months of 2023, gamer and creator peripheral segment revenue was $167.7 million, compared to $223.1 million for the first six months of 2022. The gaming components and systems segment contributed $246.7 million of net revenue during the quarter, an increase of 26.6% from $194.9 million in Q2 2022. Memory products contributed $108.9 million in Q2 2023, compared to $99.1 million in Q2 2022. For the first six months of 2023, gaming components and systems segment revenue increased to $511.7 million from $441.5 million in the first six months of 2022, with revenue from memory products increasing to $240.2 million from $231.3 million.

Overall gross profit in the second quarter was $82.8 million, compared to $36.5 million in Q2 2022, which had lower revenue and an excess inventory reserve. Gross margin increased 25.5%, compared to 19.7% in Q2 2022 without the effect of the excess inventory reserve. Ongoing improvements in freight costs, as well as new product introductions were the main reasons for the improvement. Overall gross profit increased to $168.2 million for the first six months of 2023, compared to $127.2 million in the first six months of 2022. The gamer and creator peripheral segment gross profit was $25.5 million, compared to $10.6 million in Q2 2022. Gross margin was 32.4%, compared to 11.9% in Q2 2022. We benefited from a further reduction in excess promotions by some leading competitors on gaming peripherals in Q2, which we continue to believe will lead to further improvements in margins later in the second half of 2023.

The gaming components and systems segment gross profit was $57.3 million, an increase of 121.3% from $25.9 million in Q2 2022. Gross margin was 23.2%, compared to 13.3% in Q2 2022. Our memory products gross margins in this segment were 14.6% for the second quarter, compared to 9% in Q2 2022. Second quarter SG&A expenses were $70 million, a 4.7% decrease, compared to $73.4 million in Q2 2022, driven in part by reduced freight rates. This reflects the impact of some prior 2022 headcount reductions, along with our continued close management of all expenses as we support revenue generating areas. Second quarter R&D expenses were $15.6 million, down about 13.5% compared to Q2 2022 as we continue to prioritize our investments in our new products.

GAAP operating loss in the second quarter of 2023 were $2.7 million, compared to a GAAP operating loss of $55 million in Q2 2022. As noted earlier, the year ago period included the impact of the excess inventory charge. Second quarter adjusted operating income was again a bright spot for us, increasing to $15.9 million, compared to an adjusted operating loss of $14.2 million in Q2 2022. Adjusted operating income increased to $34 million for the first half of 2023 from a loss of $0.9 million in the first half of 2022. Second quarter net income attributable to common shareholders was $1.1 million or $0.01 per diluted share, as compared to net loss of $59.4 million or a loss of $0.62 per diluted share in Q2 2022. On an adjusted basis, second quarter net income improved to $9.8 million or $0.09 per diluted share, compared to an adjusted net loss of $19 million or a loss of $0.20 per share in Q2 2022.

For the first six months of 2023, adjusted net income improved to $21.8 million or $0.20 per diluted share from a loss of $9.8 million or a loss of $0.10 per share in the first six months of 2022. Finally, we increased the second quarter adjusted EBITDA to $17.8 million, compared to an adjusted loss of $11 million for Q2 2022. For the first six months of 2023, adjusted EBITDA increased to $38.3 million from $4.4 million in the year ago period. Turning now to our balance sheet. We ended Q2 with a cash balance of $184 million. Shortly after quarter end, we invested in growth via our acquisition of Drop, which Andy provided details on earlier. This will be reflected in Q3 that the acquisition cost was not significant and was in the low double digits of millions of dollars.

We ended Q2 with a $220 million of debt at face value and our $100 million working capital revolver remains undrawn and fully available. Overall, we expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves. We are pleased that the first half performed slightly above our expectations and we believe that we are well positioned for the second half. Both channel and our inventory are in a healthy state. Although we are closely monitoring this because of economic headwinds from high interest rates and inflation affecting consumer confidence, we continue to believe that we have substantial white space to sell into and room to recapture market share as excess discounting and gaming peripherals eases and as new products continue to be introduced.

In terms of the full year 2023, we are reiterating our previous outlook of flat to up revenue. We continue to expect total revenue in the range of $1.35 billion to $1.55 billion, adjusted operating income in the range of $75 million to $95 million and adjusted EBITDA in the range of $90 million to $110 million. With that, we are now happy to open the call for questions. Operator, will you please open the call for Q&A?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Aaron Lee with Macquarie. Please go ahead.

Aaron Lee: Hi. Good afternoon. Thanks for taking my question. I wanted to start with the guidance range, which you obviously noted in the release incorporates a softer macro. It seems like there’s greater confidence out there that the U.S. will avoid a hard landing. So could you just talk about the degree to which a stronger than expected macro environment would impact where you land in your guidance range versus some of the things that you can control?

Andy Paul: Well, let’s be clear. If the economy improves, obviously, our revenue will go up and vice versa. So I think that the — since we had at the beginning of the year, which was that the market would be roughly flat is what we think about today. So that hasn’t really changed. I think the sense is that the market was slightly down, the consumer market in general and you have seen that across different industries, a lot of parts are down, some are flat. But certainly a little further down than we thought and we think the second half will be a little further up. So I think it’s going to end up, the full year is probably going to be flat as we expected.

Michael Potter: That’s the…

Aaron Lee: Okay.

Michael Potter: …overall market. The range has a decent possibility of growing year-over-year for us.

Andy Paul: Yeah.

Aaron Lee: Yeah. Understood. Fair enough. As a quick follow-up, you guys have done a great job expanding the Corsair ecosystem like with iCUE LINK recently, and obviously, you had the acquisition of Drop. As you think about your peripheral ecosystem, can you talk about any white spaces that are left?

Andy Paul: Yeah. There’s quite a few actually. A couple of things we are pretty interested in. One is mobile gaming, and at the moment, mobile gaming is largely done on the phones. I mean that’s the attraction of it, because no approval is needed. But there is a growing opportunity for wraparound controllers, you can put a phone or an iPad in. It’s a relatively small market now, but we are watching that carefully to see how that evolves, especially with Game Pass, which allows you to play on the same game and different platforms. So that’s one. We are very interested in sim racing. We see that as a — and this is a full simulator that used to potentially have one driver. That has grown significantly in that market, especially in the U.S. after Drive to Survive came out, which has got everybody interested to hear in F1.

It’s already pretty big in Europe. But that is starting to expand. And that’s a nice market for us to move into, because you not only need a system, but you need a whole bunch of peripherals, a cage and a seat and pedals and wheels and that sort of thing. So we are pretty interested in that market. And obviously, we have always been looking at VR goggles. Now at the moment, we don’t think there’s a big opportunity to make money on VR headsets, still a very early in the market, but we are watching that space carefully as well.

Aaron Lee: Fantastic. Thanks for the color.

Andy Paul: Thanks.

Operator: Your next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Unidentified Analyst: Hi, guys. This is Lina [ph] on for Eric. Thanks for taking my questions. So I just had a few on the Drop acquisition. First, could you just speak to what the deciding factors where that led you to acquire Drop? And then how should we be thinking about the timing in terms of integration and the synergies that you see? Thanks.

Andy Paul: Yeah. So the main reason we bought Drop was that, as you possibly or probably noticed, most of the acquisitions we do are direct-to-consumer and Drop is no exception. So it’s all direct-to-consumer, and that’s because over time, we want to expand our direct connection with consumers so that we can sell them multiple items. Most of the products that we sell to consumers through the channel is one at a time, and obviously, in a gaming platform, on a gaming PC, there’s five or 10 different things that you can sell to somebody. So that’s the first thing. There is a strong e-commerce platform. The second thing is it was a community-based enthusiast e-commerce player. And so a lot of the things that they were selling were being sold to very similar customers that we already have, but slightly outside the traditional people building gaming PC.

So it kind of expands our market but in the same genre. And thirdly, they have done a really good job with mechanical, what we call DIY keyboards. So this is a growing trend among enthusiasts and actually some people that would never even think about gaming or building a gaming platform, but just like to have something different on their desk. And these are keyboards that you can have a variety of different key switches, key caps and then you can change them like clothes every few months. So when we looked at that, the overall package, it was pretty interesting and that leads us into the synergy aspect. Obviously, we have an enormous footprint throughout the world, mostly in the channel. So what we want to do there is take a lot of the key SKUs that they have got and put them into the channel with the expectation that we can then continue to sell things like different key caps to those customers directly.