Turtle Beach Corporation (NASDAQ:HEAR) Q1 2023 Earnings Call Transcript May 4, 2023

Turtle Beach Corporation beats earnings expectations. Reported EPS is $-0.27, expectations were $-0.4.

Operator: Welcome to the Turtle Beach First Quarter 2023 Conference Call. My name is Latif and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. Delivering today’s prepared remarks are non-Executive Chairman of the Board, Terry Jimenez; Chief Executive Officer, Juergen Stark; and Chief Financial Officer, John Hanson. Following their prepared remarks, the management team will open the call for any questions. As a reminder, the conference is being recorded. I will now turn the call over to Alex Thompson from Investor Relations. Alex, you may begin.

Alex Thompson: Thank you, operator. On today’s call we will be referring to the press release filed this afternoon that details the company’s first quarter 2023, which can be downloaded from the Investor Relations page at corp.turtlebeach.com, where you’ll also find the latest earnings presentation and supplements the information discussed on today’s call. Finally, a recording of the call will be available on the Investors section of the company’s website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the Federal Securities Laws. Statements about the company’s beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements.

These statements involve risks and uncertainties regarding the company’s operations and future results that could cause Turtle Beach Corporation’s results to differ materially from management’s current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the Safe Harbor statements and Risk Factors contained in today’s press release and in its filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially, from those described in our forward-looking statements.

The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call they will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States, or GAAP. You can find a reconciliation of these metrics to the company’s reported GAAP results in the reconciliation tables provided in today’s earnings release and presentation. The company, its directors and certain of its executive officers are participants in the solicitation of proxies from the company’s shareholders in connection with its 2023 Annual Meeting.

The company intends to file a definitive proxy statement and a white proxy card with the SEC in connection with any such facilitation of proxies. Shareholders are strongly encouraged to read the proxy statement accompanying proxy card, and all the other documents filed with the SEC carefully and in their entirety when they become available, as they will contain important information including information regarding the identity of the participants in the association and their direct and indirect interest by security holdings or otherwise. Next, we’ll get a statement from Terry Jimenez, the Company’s non-Executive Chairman of the Board of Directors.

Terry Jimenez : Thanks, Alex, and good afternoon, everyone. I’m pleased to make a statement on the call this afternoon to briefly cover our CEO transition plan and governance actions, all of which was announced in a press release earlier this week on Monday, May 1, the board has taken a series of actions consistent with its commitment to acting in the best interest of the shareholders in ensuring best in class governance practices. From this, the board has implemented a CEO succession plan with the transition date of June 30, 2023. We separated the chairman and CEO roles going forward. I was elected at the new independent chairman, accepted the decision by two long tenure directors. Juergen Stark and William Keitel did not stand for reelection at the 2023 Annual Stockholder Meeting.

The board intends to appoint a shareholder representative in Mr. Keitel’s place to be nominated for election at the 2023 Annual Meeting. The board reorganized the composition of the board committees, including new committee chairs, notably all whom are women, and importantly, the board continues to be focused on value enhancing or strategic actions that would be in the interest of all shareholders. Further details of our announcement can be found in our separate release referenced earlier. On behalf of the board of directors, I want to thank Juergen for his leadership over the past 10 years. He’s overseeing the company’s transformation into a leading accessory maker POIs for growth across valuable gaming categories. I also want to thank Bill Keitel for as many years of service and contributions as a director.

Finally, I am honored to take on the role of board chair and to continue working closely with my fellow board members and management to engage with and enhanced value for all Turtle Beach shareholders. I believe there is significant value in upside for the company and in shareholders, and I look forward to working with the team and the board to unlock that upside value. With that, I will pass it over to Juergen to cover the first quarter’s results.

Juergen Stark : Good afternoon, everyone, and thank you for joining us. I’m pleased to discuss our first quarter 2023 results, which came in above expectations and provide the context for our increased 2023 outlook. During the first quarter, we delivered net revenues of 51.4 million and an adjusted EBITDA loss of 2.3 million. Year over year revenues are up 10% consistent with the growth prospects, strong strategic positioning and progressive recovery of the great gaming market that I articulated in March. Adjusted EBITDA has improved consistent with our expectation to return to positive adjusted EBITDA after last year’s market-wide challenges. After all, this business generated 190 million in adjusted EBITDA in the five years from 2017 through 2021.

I’ll start with some observations on the state of the market in our business through the first three months of the year. Both the gaming market and operating environment have improved compared to last year. When the industry and economy face significant macroeconomic challenges, some headwinds still remain such as higher than normal promotional activity and discretionary spending caution among consumers given the economic issues at hand, including inflation, rising interest rates, and the continued threat of recession. However, we are encouraged by the latest industry data as gaming accessory sales benefited from a strong tailwind in council sales. In fact, Sony reported that PlayStation 5 shipments in Q1 were the highest of any council in gaming history up over 4 million units compared to the year ago period.

U.S. Circana, formerly known as NPD, reported U.S. Council headset sell through increased over 7%. Additionally, U.S. channel inventory improved in Q1. Our inventory levels are at the lowest since the pandemic surge. The PC gaming market recovery is trailing council with heavy discounting levels, but we expect this to subside as we progress through the year. We’re encouraged by the improvements we are seeing in the gaming market. Looking at our performance across respective gaming accessory categories, we continue to lead the council headset category by far as Turtle Beach Council Headset brand outperformed the broader headset markets growth based on U.S. Circana data. Our highly acclaimed wireless stealth 600 headset continued to be the best-selling headset series by revenue in the quarter, and the Recon 50X and 50P headsets were the best-selling models by units.

I mentioned our exciting product plans on our call in March, and we’ve recently launched our ultra-premium stealth pro multi-platform gaming headset, which brings gamers the absolute pinnacle of gaming audio, and quality and comfort. At 329, 99 MSRP, the Stealth Pro continues to collect praise from gaming review outlets. Games Radar gave it a 5 of 5 rating along with their Editor’s Choice award and called it quote, a masterpiece of an all-in-one multipurpose gaming headset. Importantly, this headset line is multi-platform working perfectly across Xbox and PlayStation Councils, as well as PC and for mobile gamers. While still very early in the launch, we are extremely pleased with the response from consumers and resulting early sales, which were coming in above our expectations.

Looking at our PC accessories category, the market recovery is lagging Council headsets with U.S. Circana reporting, PC gaming headset, keyboard, and mice sales down approximately 13% year-over-year for Q1. Despite this, our rocket brand products have posted year-over-year sales growth in all three categories. We continue to launch compelling new PC gaming products. We released the Magma Mini 60% gaming keyboard, which has a smaller footprint that is perfect for PC gamers with large mouse movements and is fully illuminated with five programmable zones showcasing rockets, stunning Amo, RGB lighting. We have exciting plans for our PC category ahead and look forward to continuing our progress. Our flight simulation and game pad controller products performed well during the quarter and we are proud to have our first flight simulation product.

Velocity 1 flight launched late 2021, continue to post the number 1 sales position in the U.S. for flight simulation products. The U.S. game gamepad controller market was down roughly 13% year-over-year in Q1, but sales of our products grew over 25%. We have more exciting product launches in these categories as well. Our long-term strategy of becoming a top provider of gaming accessories across multiple categories and on all platforms is tracking well as shown by the above highlights and our outperformance of the market this quarter. Our strong brand, innovative high-quality products and operational execution allows us to capitalize on the additional opportunities created during a market improvement. This is reflected not only in our first quarter results, but also in our increased outlook of 10% to 12% revenue growth, as I’ll discuss shortly.

I’ll now pass it over to John to cover the financials, after which I’ll provide additional comments on the quarter and outlook. John?

John Hanson: Thanks, Juergen, and good afternoon to everyone. For the first quarter, we reported revenue of $51.4 million, a 10% year-over-year growth compared to $46.7 million a year ago, reflecting a stronger U.S. console gaming headset market, increased consumer demand and strong product performance. The double-digit year-over-year increase is a good start towards the 2023 revenue growth guidance of 10% annual growth we provided in March. Gross margin in the first quarter was 27.5% compared to 30.1% in the year ago period, reflecting higher promotional spend in light of continued competitive discounting, which was partially offset by lower freight and logistics costs. The higher competitive discounting really started in Q2 last year.

And while it’s improving, it was a headwind in Q1, as we expected. As mentioned previously, freight costs continued to decline and we have already started seeing the benefit in this quarter with higher sales accelerating the inventory pace to lower rates and actual rates tracking a bit lower-than-expected. Operating expenses in the first quarter were $20.6 million, compared to $22.3 million in the year ago period. First quarter recurring operating expenses declined nearly 13% year-over-year, which was primarily driven by the expense management initiatives we undertook in 2022 as well as lower marketing spend to align with our product launch and sales plans. Our first quarter adjusted EBITDA loss was $2.3 million compared to a loss of $5.7 million in the year ago period.

The year-over-year improvement is primarily driven by higher revenue as well as the operating expense management initiatives we implemented last year. We are on plan to generate adjusted EBITDA improvements throughout the year. Non-GAAP net loss for the first quarter was $4.4 million or $0.27 per diluted share, compared to non-GAAP net loss of $6.3 million or $0.39 diluted share in the year ago period. We expect our effective tax rate for the full year to be approximately 20%. Turning to the balance sheet. At March 31, 2023, we had $20.6 million of cash and no outstanding borrowings on our revolving credit line. Inventory at March 31, 2023 were $65.2 million compared to $117.4 million at March 31, 2022. Worth noting, and as Juergen mentioned, our inventory levels at quarter end are at their lowest levels since the pandemic surge.

Cash flow from operations was $28.8 million in the quarter, which was an improvement of $42 million year over year. And now I’ll turn the call back over to Juergen for additional comments. Juergen?

Juergen Stark : Thanks, John. As I said, we’re pleased to deliver first quarter results above our expectations, particularly given the still challenging environment, which demonstrates our team’s commitment to executing well on our strategy in an improving gaming market. On our March call, I discussed the positive underlying trends in gaming. I’ll reiterate a few. According to Newzoo, the number of global gamers is expected to grow by 335 million through 225. Gamers are also spending more on gaming hardware with annual spend per gamer up over 20% since 2020, even in last year’s slump, consumer spending on video game hardware, content and accessories all continue to trail and dwell above pre pandemic levels throughout the year.

We also remain encouraged by the higher quality slate of AAA games with several setting franchise records and the strong outlook for games this year. We continue to expect new generation Xbox and PlayStation supply to significantly improve with DFC forecasting a 60% increase in PlayStation five sales for 2023 versus 2022. Sony setting an all-time shipment record versus all councils in Q1 is a great start. As we communicated on our last call, we continue to expect a progressive improvement in our financial performance in light of a healthier gaming market and strong portfolio of existing and new products. Given our performance in Q1 and positive outlook for the year, we are increasing our revenue outlook to a range of 265 million to 270 million, which would reflect growth of 10% to 12%.

This is mainly driven by our expected outperformance of gaming markets in specific categories. The share gains in the first quarter provided a good start on that, and the phenomenal launch of our ultra-premium stealth pro multi-platform headset as well as the exciting launches yet to come are expected to contribute. We are increasing our adjusted EBITDA guidance to a range of 6 million to 8 million, driven by an increase in expected revenues and continued tight cost management. As we’ve noted, this still includes significant headwinds, which we expect will abate as we progress through the year, and therefore provide for a much better level of profitability in 2024. For Q2, we expect a similar level of revenues as Q1 and somewhat higher marketing spend to support the recently launched Stealth Pro Line.

As I said, I’m pleased with the strong execution we displayed in the first three months of the year and the positive momentum that has created for the balance of the year. As we say every quarter, gaming is a great market to be a leader in, and we continue to position ourselves to capitalize on the additional opportunities as the market recovers. The key pillars of our strategy remain intact. First, continue to lead in the $1.4 billion council gaming headset market where we have maintained leadership by far for over 13 consecutive years. In addition to the recent Stealth Pro launch, we have a very strong portfolio plan through 2024 to expand our market leadership position. Second, continue to expand our PC gaming portfolio of headsets, keyboards, and mice, and grow our share in the $3.2 billion PC accessories market.

As multi-platform gaming trends continue to rise, we feel we’re in a good position to offer gamers the portfolio of accessories for all platform experiences. While the PC accessories market was very challenged for all participants this past year, we were encouraged by our share gains this year and have exciting plans for this category well into 2024. Third, drive continued expansion and growth in our gamepad controller and simulation products that we successfully entered in 2021. These adjacent gaming accessory categories allow us to leverage the core competencies of Turtle Beach and expand the markets we can generate revenues from. And fourth, continue to identify and selectively evaluate other growth opportunities to increase our addressable markets, including new product categories and expansion in target geographies as we have with Korea and Japan.

As I said on our March — call in March, this strategy has and will continue to enable us to take full advantage of the compelling long-term trends in the global gaming market and fulfill our objective to drive a profitable growth. Our goal is to continue to create shareholder value by executing on our strategy and delivering on our long-term targets of 10% plus annual growth at 10% plus adjusted EBITDA margins. Given that I will be stepping down on June 30th, this will be my last Turtle Beach earnings call. I’d like to first thank Bill Keitel for his valuable contributions over the past nine years. I still recall being told we’d quote, never be able to get him onto our board, given his stature as one of the most highly regarded CFOs in the country.

Thank you, Bill. Thank you as well to an amazing team here at Turtle Beach. It’s been an honor to lead the company for over 10 years with the excellent team in place here. This is a good time for me and a good time for the company to make a transition. In the past 10 years, we’ve worked ourselves out of a debt laden balance sheet and managed through multiple years with challenging market conditions, including 2022. We’ve executed well through, as the OpCo Analyst put it, quote, violent demand supply swings, including significantly outperforming the market in the 2018 Fortnite and 2020 pandemic driven surges. This team has led our continued dominance in council headsets while diversifying into adjacent gaming categories to enable our long-term growth.

Our current business and portfolio plans through 2024 are the most exciting we’ve ever had. I’m confident the business is well positioned for success and in good hands to drive value creation going forward for all of our stakeholders. While I’m excited to have time to spend on other activities, I will really miss the team and the company. With that, let’s turn to our Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Mark Argento of Lake Street.

Operator: Next question comes from the line of Martin Yang from OpCo.

Operator: Our next question comes from the line of Sean McGowan of Roth/MKM.

Operator: Thank you. Our next question comes from the line of Drew Crum of Stifel.

Operator: [Operator Instructions] Our next question comes from the line of Jack Codera of Maxim Group.

Operator: Thank you. We have no further questions at this time. Now I’ll turn the call back over to Juergen start for closing remarks. Juergen?

Juergen Stark : Thank you. It’s been a pleasure hosting these calls. I’ll miss the team and the analysts, and doing these calls with John. And thank you again for your participation and interest in our company.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.