Corsair Gaming, Inc. (NASDAQ:CRSR) Q3 2023 Earnings Call Transcript

Corsair Gaming, Inc. (NASDAQ:CRSR) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good afternoon, and welcome to the Corsair Gaming’s Third 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 third quarter ended September 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.

The risks and uncertainties and forward-looking statements are subject to are described in our earnings release and other SEC filings. 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 Q3 are; first, we achieved strong revenue and profit growth with Q3 revenue growth of 16.5%, and adjusted net income growth of 75.7% on a year-on-year basis. Second, we continue to drive gross margin expansion. We’re seeing an uplift in ASP and margin from new products, along with a return to healthier inventory level of more normal promotional practices across the industry. Third, the full slate of major new titles being released continues to drive new demand from gamers for both our peripheral systems. New popular releases like Starfield, Diablo IV, Baldur’s Gate and Cyberpunk serve as positive catalysts given the increased hardware requirements needed to run these games at maximum settings.

Overall, we’re pleased with our progress and the momentum we’re building. Now, let me take a few minutes to expand on these points. First, our strong growth in Q3. While we’re seeing that consumer markets in general are softer in 2023, we can see that gaming hardware and spending is close to 2022 and far elevated compared to pre-pandemic periods, in fact, roughly 50% higher for both gaming peripherals and components compared to 2019. At this point, we are beating the market with growth and that reflects the momentum we are getting from our new product launches. A recent survey from DFC Intelligence found that 84% of PC enthusiasts and gamers who built PC systems in 2020 within the high-speed segment plan to either build or buy new PCs over the next 24 months.

This agrees with our observations. We believe that the pandemic added a significant number of gamers who started to spend on competitive hardware to enhance their game play. We believe that these new competitive gamers and hardware enthusiasts will continue to spend over the next decade. Secondly, we continue to drive gross margin expansion led by an uplift in ASP and margin from new products, a return to a healthier entry level and more normal promotional practices across the industry. First margin this quarter was 24.6% compared to 23% in Q3 last year. Thirdly, we’ve been very active on the new product front over the past few months. We recently launched several new keyboards in our K70 line that use our own switches and also released high-performance wireless and wired headsets.

Our new HS80 Max headset features more radios to connect to more devices and our new wired Virtuoso Pro open back headset has been well received for its excellent sound characteristics. And we recently brought to market our new PC controller, the Scuf Envision. This is a console style controller with thumbsticks organized in a PS5 arrangement, but with significant enhancements designed for PC players. While many PC gamers like to use console controllers for certain games, they do not then have the same number of inputs available using a keyboard and mouse. With the Scuf Envision, we have added 11 additional inputs which are fully programmable. This is a game changer for PC gamers and we were sold out immediately on launch day We’re also very excited about the recent launch of our Elgato Marketplace.

This marketplace allows our growing installed base of Stream Deck users to buy apps and plugins from not only our in-house creators, but from over 200 third-party programmers and creators who have partnered with us. We believe this will enrich the experience for Stream Deck users, which will in turn help to accelerate unit sales and install base of Stream Deck hardware. This also drives a completely new revenue stream for us. We also recently launched our Elgato teleprompter which comes complete with a display and a two-way mirror behind which you can mount either an Elgato face cam or any DLSR camera. This allows streamers or anyone doing a video call to maintain eye contact with people while looking at content or a script. Priced at $279, this product was also sold out in the first few days of launch.

With regard to Q3 inventory, we have a healthy level of inventory in the channel at this point and feel good about our position entry in Q4. We expect all aspects of the gaming hardware market to resume growth again on top of the elevated level of activity that we’re now seeing compared to pre-pandemic. We will start to take our new drop products to the Corsair channel in 2024. And we expect that our new recent product launches will have a positive effect on market share in Q4 of this year, as well as in 2024. 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. Our strong Q3 results reflect the continuation of the substantial year-over-year financial improvement that started in the first half of the year. Revenue, gross margin, and adjusted EBITDA all improved over the prior year, with very encouraging gross margin recovery in our core peripherals products. We further reduce debt in Q3 and we continue to expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves. In terms of the specifics, Q3 2023 net revenue was $363.2 million compared to $311.8 million in Q3 2022. For the first 9 months of 2023, net revenue increased 6.8% to $1,042.6 million from $976.4 million in the year ago period.

European markets continue to be softer than America’s but did show signs of improvement and contributed about 36.5% of our revenues, which is an increase from 32.3% in Q2 ’23. Turning now to our segments. The gamer and creator peripheral segment contributed $90.4 million of net revenue during the third quarter compared to $96.8 million in Q3 2022. For the first 9 months of 2023, gamer and creator peripheral segment revenue was $258.1 million compared to $320 million for the first 9 months of 2022. The gaming components and systems segment contributed $272.8 million of net revenue during the quarter, an increase of 26.9% from $214.9 million in Q3 2022. Memory products contributed $131.7 million in 3Q 2023 compared to $115.2 million in 3Q 2022.

For the first 9 months of 2023, gaming components and system segment revenue increased to $784.5 million from $656.4 million in the first 9 months of 2022, with revenue from memory products increasing to $371.9 million from $346.5 million. Overall gross profit in the third quarter was $89.4 million, compared to $71.6 million in Q3, 2022, reflecting the higher revenue in the current quarter. Gross margin increased to 24.6%, compared to 23% in Q3, 2022. We continue to benefit from improvements in freight costs as well as new product introductions, with an uplift from our iCUE LINK products and the latest Stream Deck to name a few. Overall gross profit increased to $257.6 million for the first nine months of 2023, compared to $198.8 million in the first nine months of 2022.

The Gaming Components and Systems segment gross profit was $59.4 million, an increase of 49.4% from $39.8 million in Q3, 2022. Gross margin was 21.8%, compared to 18.5% in Q3, 2022. Our memory products gross margins in this segment were 16% for the third quarter compared to 14.4% in Q3, 2022. Third quarter SG&A expenses were $74 million, a 10.6% increase, compared to $66.9 million in Q3, 2022, reflecting the operating leverage in our business given the faster rate we grew revenue at. Third quarter R&D expenses were $16.1 million, up 3%, compared to Q3, 2022 as we continue to prioritize our investments in new products. GAAP operating loss in the third quarter of 2023 was $758,000, compared to a GAAP operating loss of $11 million in Q3, 2022.

Third quarter adjusted operating income was again a bright spot for us, increasing to $19.6 million, compared to $5.9 million in Q3, 2022. Adjusted operating income increased to $53.6 million for the first nine months of 2023, from $5 million in the first nine months of 2022. Third quarter net loss attributable to common shareholders was $3.1 million, or $0.03 per diluted share, as compared to a net loss of $8.9 million or a loss of $0.09 per diluted share in Q3, 2022. On an adjusted basis, third quarter net income improved to $13.4 million or $0.13 per diluted share, compared to $7.6 million or $0.08 per share in Q3, 2022. For the first nine months of 2023, adjusted net income improved to $35.1 million or $0.33 per diluted share from an adjusted net loss of $2.2 million or a loss of $0.02 per diluted share in the first nine months of 2022.

Finally, we increased third quarter adjusted EBITDA to $23 million, compared to $10.1 million for Q3, 2022. Our Q3 results include the impact of the recently acquired Drop, which resulted in a net decrease of adjusted EBITDA of approximately $1 million. We expect this to turn positive next year as we are excited about the revenue and cross-selling opportunities our Drop acquisition provides and will continue to help grow our direct consumer channel. For the first nine months of 2023, adjusted EBITDA increased to $61.3 million to $14.5 million in the year ago period. Turning now to our balance sheet. We ended Q3 in a strong financial position with a cash balance including restricted cash of $147.8 million. This reflects our acquisition of Drop after the close of Q2, which was an all, cash transaction and not material, as well as an investment in inventory ahead of Q4, seasonally our largest quarter.

We ended Q3 with $223.8 million of debt at base value, and our $100 million working capital revolver remains undrawn and fully available. We further reduce debt in Q3 and plan on reducing it again in Q4. Overall, we expect liquidity remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves. M&A remains a priority for use of cash, but our expected strong cash generation will allow us to continue to reduce outstanding debt on a regular basis. In terms of the full year 2023, we’re adjusting our previous outlook. We now expect total revenue in the range of $1.4 billion to $1.5 billion. Adjusted operating income is now expected to be in the range of $80 million to $90 million and adjusted EBITDA in the range of $95 million to $105 million.

Outlook includes Drop, which we expect to generate a small EBITDA loss in 2023, as we integrate our systems, people, and supply chains. We expect this to quickly turn positive in 2024 as we realize the cost savings from this year and generate revenue synergies as well. We believe that we’re well positioned for Q4 and for the year beyond. We have been able to execute well on our plans for 2023, including growing at what has been a tough economic backdrop. The investment in new products during the downturn last year, has allowed us to have a robust new product release schedule this year. These recent releases have both opened up new markets for us and rounded out our existing product lines for our core peripherals market. So far, the year is inferred in the middle of our expectations.

Even at the lower end of our current annual guidance, we’re more than doubling our adjusted EBITDA over last year and delivering revenue growth. Gross margins have steadily improved, through the year even with a tougher than normal promotional environment at the beginning of the year. The company has demonstrated that we generate ample cash, to carry out both M&A and reduce our debt, and our net debt remains low. With that, we’re 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: [Operator Instructions] Our first question will come from George Wang with Barclays. You may now go head.

George Wang: Hi guys. Thanks for taking my questions. Yes, just firstly, can you kind of give more color in terms of the Drop integration and synergies you guys alluded to, generating positive EBITDA in calendar 2024? So just curious if you can double click on the revenue and the cost synergies going forward?

Michael Potter: Well, firstly, George, nice to meet you. We haven’t spoken yet. So great to have you on board. So, we’re not really giving out too many details on Drop. It was obviously a small acquisition. It was slightly negative EBITDA when we bought them. We expect to be able to move that fairly quickly in ’24 to a slightly positive EBITDA. And I would say it’s not so much cost as most of the synergy is going to come from revenue expansion. So both selling our products on the Drop platform and selling some of Drop’s products in our channel.

George Wang: Okay, great. I just have a quick follow-up. As we’re heading to the holiday season, can you comment on the retail channel restocking any sort of update on the promotional environment? It’s encouraging to see the promo environment has normalized in the third quarter versus the first half of this year. But kind of – where we stand today, just any kind of thoughts on the overall retail environment as it relates to the kind of higher end of your guidance?

Andy Paul: Well, I would say that at this point, we’re pretty positive on what we’re hearing. I put a chart in the deck this time to show that the growth or softness in gaming hardware for all the inputs that we get, mostly the U.S. and Europe, is about 3% down. So that’s for Q3. So, we’re tracking to basically be on par with last year. We think Q4 is going to follow the same pattern. There was a little Prime Day – October Prime Day that Amazon had. And we noticed the gaming hardware was roughly the same as last year, maybe a little bit stronger. So at the moment, the channel is stocking up in anticipation for a pretty good holiday season. Certainly similar to last year.

George Wang: Okay. Great. Thank you.

Operator: Our next question will come from Aaron Lee with Macquarie. You may now go ahead.

Aaron Lee: Hi, good afternoon. Thanks for taking my questions and nice result with the revenue growth. We wanted to touch on your product launches. So obviously, you’ve launched a bunch of new products this year. I’m curious, how should we think about the cadence of product launches for 2024? Was this year unusual at all in terms of the number of new product introductions? Or could you maintain that cadence next year or even increase? Thanks.

Andy Paul: Well, I think the comments we made were more about the fact we brought out products that you know hit the marks in terms of price and performance. And so we had two products that we launched that were pretty significant. One was the HS80, HS80 Max headset line, which are doing very well. In fact, we’re sold out at the moment, so we’re having to air freight them in. And the other one is a product called K70 CORE, which is a full feature mechanical keyboard, which is being retailed for $99. And so that is using our own switches. We’ve now bought out Corsair switches both in mechanical, optical, and magnetic. So that’s a new thing for us. So, those were some of the main things. I think we also alluded to some of the Elgato products that were launched.