Corsair Gaming Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to the Corsair Gaming 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. On your telephone keypad.

Operator

With that, I would now like to turn the call over to Ronald Van Veen, Coursera's Vice President of Finance and Investor Relations. Thank you, sir. Please begin.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining us for Coursera's financial results conference for the Q3 ended September 30, 2023. On the call today, we have 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.

Speaker 1

Before we begin, allow me to provide a disclaimer regarding forward looking statements. This call, including the Q and 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. Actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and Please note 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.

Speaker 1

Additional information, including reconciliation between non GAAP financial information The GAAP financial information is provided in the press release we issued after the market closed today. With that, I'll now turn the call over to Andy.

Speaker 2

Thank you, Ronald, and welcome everyone to our earnings call. The key takeaways for Q3 are: 1st, 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. 2nd, 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 and more normal promotional practices across the industry. 3rd, the full slate of major new titles being released continues to drive new demand from gamers for both our peripherals and systems.

Speaker 2

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 The 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.

Speaker 2

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, we plan to either build or buy new PCs over the next 24 months. Disagrees with our observations. We believe that the pandemic added a significant number of gamers who started to 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, I will turn to a healthier entry level and more normal promotional practices across the industry.

Speaker 2

Gross margins this quarter were 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 K79 to use our own switches and also released high performance wireless and wired headsets. Our new H80 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.

Speaker 2

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.

Speaker 2

This marketplace allows our growing installed base of Stream Deck users to buy apps and plug ins 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 the unit sales and installed 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 El Gallo Facecam 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.

Speaker 2

Priced at $2.79 this product was also sold out in the 1st 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 entering 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 CorSo 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.

Speaker 2

Michael, please go ahead.

Speaker 3

Thanks, Andy, and good afternoon, everyone. Our strong Q3 results reflect a 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 reduced 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 $363,200,000 compared to $311,800,000 in Q3 2022.

Speaker 3

For the 1st 9 months of 2023, net revenue increased 6 0.8 percent to $1,442,600,000 from $976,400,000 in the year ago period. European markets continue to be softer than Americas, but did show signs of improvement and contributed about 36 0.5% of our revenues, which is an increase from 32.3% in Q2 2023. Turning now to our segments. The gamer and creator peripheral segment contributed $90,400,000 of net revenue during the Q3 compared to $96,800,000 in Q3 2022. For the 1st 9 months of 2023, to the Gaming Components and Systems segment contributed $272,800,000 of net revenue during the quarter, an increase of 26.9 percent from $214,900,000 in Q3 2022.

Speaker 3

Memory Products contributed $131,700,000 in 3Q 2023 compared to $115,200,000 in 3Q 2022. For the 1st 9 months of 2023, Gaming Components and Systems segment revenue increased to $784,500,000 from 656 Overall gross profit in the 3rd quarter was $89,400,000 compared to $71,600,000 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 IQ Link products and the latest stream deck to name a few. Overall gross profit increased to 257 point for the 1st 9 months of 2023 compared to $198,800,000 in the 1st 9 months of 2022.

Speaker 3

The Gaming Components and Systems segment gross profit was $59,400,000 an increase of 49.4% from $39,800,000 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 3rd quarter compared to 14.4 percent in Q3 2022. 3rd quarter SG and A expenses were $74,000,000 A 10.6% increase compared to $66,900,000 in Q3 2022, reflecting the operating leverage in our business given the faster rate we grew revenue at. 3rd quarter R and D expenses for $16,100,000 up 3% compared to Q3 2022 as we continue to prioritize our investments in new products.

Speaker 3

GAAP operating loss in the Q3 of 2023 was $758,000 compared to a GAAP operating loss of $11,000,000 in Q3 2022. 3rd quarter adjusted operating income was again a bright spot for us, increasing to $19,600,000 compared to $5,900,000 in Q3 2022. Adjusted operating income increased to $53,600,000 for the 1st 9 months of 2023 from $5,000,000 in the 1st 9 months of 2022. 3rd quarter net loss attributable to common shareholders was $3,100,000 or $0.03 per diluted share as compared to a net loss of $8,900,000 or a loss of $0.09 per diluted share in Q3 3, 2022. On an adjusted basis, 3rd quarter net income improved to $13,400,000 or $0.13 per diluted share compared to $7,600,000 or $0.08 per share in Q3 2022.

Speaker 3

For the 1st 9 months of 2023, adjusted net income improved to $35,100,000 or $0.33 per diluted share from an adjusted net loss of $2,200,000 or a loss of $0.02 per diluted share in the 1st 9 months of 2022. Finally, we increased Q3 adjusted EBITDA to $23,000,000 compared to $10,100,000 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 $1,000,000 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 to consumer channel. For the 1st 9 months of 2023, adjusted EBITDA increased to $61,300,000 to $14,500,000 in the year ago period. Turning now to our balance sheet.

Speaker 3

We ended Q3 in a strong financial position with a cash balance including restricted cash of $147,800,000 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 $223,800,000 of debt at face value and our $100,000,000 working capital revolver remains undrawn and fully available. We further reduced debt in Q3 and plan on reducing it again in Q4. Overall, we expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves. M and 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.

Speaker 3

In terms of the full year 2023, we are adjusting our previous outlook. We now expect Total revenue in the range of $1,400,000,000 to $1,500,000,000 Adjusted operating income is now expected to be in the range of 80 to $90,000,000 and adjusted EBITDA in the range of $95,000,000 to $105,000,000 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 what has been a tough economic backdrop.

Speaker 3

The investment in new products during the downturn last year has allowed us to have a robust with 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 So far the year has 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 for the normal promotional environment at the beginning of the year. The company has demonstrated that we generate ample cash to carry at both M and A and reduce our debt and our net debt remains low.

Speaker 3

With that, we're now happy to open the call for questions. Operator, will you please open the call for Q and A?

Operator

We will now begin the question and answer session. Our first question will come from George Wang with Barclays. You may now go

Speaker 4

ahead. Hey, guys. Thanks for taking my questions. Yes, just firstly, Can you kind of give more color in terms of the drop in integration and synergies? You guys alluded to generating positive EBITDA in calendar 2024.

Speaker 4

Just curious if you can double click on the revenue and the cost synergies going forward?

Speaker 5

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.

Speaker 5

It was slightly negative EBITDA, when we bought them, we expect to be able to move that fairly quickly in 'twenty four to a slightly positive EBITDA. And I would say it's not so much cost as most of the synergies are 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.

Speaker 4

Okay, great. I just have a quick follow-up. As we head into 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 3rd quarter versus kind of first half of this year.

Speaker 4

But kind of where we stand today, just any kind of thoughts on the overall retail environment as it relates the kind of high end of your guidance.

Speaker 5

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 U. S. And And Europe is about 3% down. So that's for Q3.

Speaker 5

So we're tracking to basically be on par with last year, and 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

Speaker 4

soon as

Speaker 5

the last year.

Speaker 4

Okay, great. Thank you.

Operator

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

Speaker 6

Hi, good afternoon. Thanks for taking my questions and nice result with that revenue growth. I 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.

Speaker 6

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.

Speaker 5

Well, I think the comments we made were more about the fact we bought our products that hit the marks in terms of price and performance. And so we had 2 products that we launched that were pretty significant. 1 was the HS80, HS80 Max Headset line, which is doing very well. In fact, we're sold out at the moment, so we're having to airfreight 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 and that is using our own switches.

Speaker 5

We've now brought out Of course, that's which is both in mechanical, optical and magnetic. So that's a new thing for us. Those were some of the main things. I think we also alluded to some of the Elgato products that were launched. Teleprompter was sold out 1st 3 days.

Speaker 5

We launched the SCUF controller, especially the PC enthusiasts that was sold out in the 1st day. So I think we typically get about one new product out week on average, and we'd expect to do the same or more next year. And but we've had a lot of products recently that have just really hit their marks or have been in new segments like the PC controller and the teleprompter. Obviously, those are not refreshes. Those are brand new segments.

Speaker 6

Got you. Perfect. That's helpful. And then on the Elgato marketplace, which you've recently launched, and I know it's only been a month, but Anything you can share on the early days on the uptake and the usage of it? And how you plan to ramp this up in 2024?

Speaker 5

Yes. Well, it's been a couple of years of bringing this thing to market. It is quite complicated. But We did we were happy to launch with over 240 third party providers or creators. There's a huge number of apps.

Speaker 5

It is, as you say, very early days. The interesting thing we've seen so far is that the ASP or the spend per person or per order is pretty high. So we've got people spending $100 on plug ins. And that the ASP is not on average, but up to $100 So that was higher than we thought. What we don't know yet is how to model the amount of dollars that the average Stream Deck user is going to pay per year.

Speaker 5

We don't know whether that's $5 or $100 or $1,000 I mean, we just don't know what that is yet until we get some more data. So we'll keep you appraised as we go through Q4. I think by early next year, we'll have a good sense of what the model looks like in terms of how many people that Owned Streamdex are jumping on this marketplace and also how the marketplace affects the sell through of Streamdex hardware.

Speaker 6

Okay, perfect. Thanks. Looking forward to it.

Operator

Our next question will come from Drew Crum with Stifel. You may now go ahead.

Speaker 7

Hi, it's David on for Drew. Thanks for the question. Can you provide the puts and takes on the implied 4Q revenue outlook?

Speaker 5

You mean, what does the top end of the range mean compared to the bottom end of the range in terms of market conditions? Is that? Yes. Yes. Well, I think it's all down to How strong the holiday season is, as we get closer to it, these days, the holiday season, I mean, Black Friday It's not just on Friday, people start promoting earlier.

Speaker 5

So we'll get to see that. And as people get more and more confident of spending, then they're going to load up more. But I think at the moment, we're pretty comfortable with what we're seeing and pretty comfortable with the range we've given out.

Speaker 7

Okay. And You touched on this a little bit, but I was hoping to get a little bit more color or detail around the Prime Day. What did you learn in terms of the health of the consumer or consumer demand coming out of Prime Day?

Speaker 5

Well, it's a bit complicated, right? I think the net of it is that the Spending this year is similar to last year. Unfortunately, what's starting to happen with some of these holidays, now we get so many of them, is that you get People stop buying a few days before, then you get a spike and then no one buys the day after. So you end up with almost a neutral number. But the key thing is that we can see the interest level for consumers, and that seems to be, let's say, on par with last year.

Speaker 7

Got it. Thank you.

Operator

Our next question will come from Doug Creutz with Cowen. You may now go ahead.

Speaker 3

Hey, thanks. As you noted, this year has gone pretty much according to what you expected. You're headed towards the middle of your sort of initial guidance range, which suggests that your ability to forecast is sort of back to normal levels after several years where things were disrupted. Given that, as you sort of think about next year, do you think the industry is going to be headed back to its sort of Historical long term growth trajectory that you had talked about at your Analyst Day? And if not, what do you still see out there that you think could hinder that?

Speaker 3

Thank you.

Speaker 5

Yes, that's a great question because we're just starting off planning for next year, so right in the thick of that. So we assume that eventually growth rates will get back to where they were. What gives us some positive feelings is that We referenced this survey that just came out from DFC, which is confirmation Of what we thought would happen is, in other words, there would be an echo of the COVID bulge one refresh cycle later. And one refresh cycle later, which Trust is about 3 to 4 years is 'twenty three and 'twenty four. So we do expect a bulge.

Speaker 5

I think what's happening at the moment is a lot of the new gamers or gamers for the first time were buying hardware during Lockdown, there's an increased number of those and they're starting to refresh and rebuy. And that may be offsetting perhaps some softness in the overall market. And the net of that means that we end up with a market today that's pretty flat. We would hope that this bulge will continue into next year and we'll start to see some growth. So I think we're modeling Still not a lot of growth in the first half, but we'd expect it to pick up.

Speaker 5

And I'm hoping by 2025 and 26, we get back to the traditional 15% plus growth for gaming peripherals and 5% to 10% for components. So that's as best as we can forecast it at the moment. Thank you.

Operator

Our next question will come from Colin Sebastian with Baird. You may now go ahead.

Speaker 8

Good afternoon, Andy and Michael. It's Reese on for Colin. I guess the first one would be, could you guys provide an update on D2C revenues and the overall mix of the company, especially given how that might change with drop next year, presumably it's going higher. And then I guess second, maybe more around The state of the consumer and what you guys are seeing, I guess it sounds like things are going well around the gaming launches and things like that. But maybe more specifically, have you seen changes in behavior from gaming launch to gaming launch?

Speaker 8

If you were to take A game that launched this year versus a game that launched last year, are you seeing a difference in consumer behavior from that end? Thanks.

Speaker 2

Okay. So, 2 different

Speaker 5

questions. So, the first one in D2C percentage, D2C percentage is actually maintained about the same as it was last year. We obviously are hoping for some growth with Drop. Jop is not a big acquisition or a big revenue number, so it will not be hugely significant. We're running right now, I think about 10% overall is direct to consumer.

Speaker 5

And obviously, We've got goals of raising that up to 15 plus and drop will have a small positive effect on that. The second question was more around what are we seeing related to some of these launches. We haven't seen anything from an individual game. In other words, not like when Fortnite launched and everyone was rushing out to buy headsets. But what we have seen is a lot of engagement.

Speaker 5

So I think Starfield is probably the one that's had the most number of hours. Baldur's Gate, I think, was the biggest surprise in terms of number of players that jumped in. And I think all of these things help with hardware. All the new games have got requirements that need more memory. So there's a lot of push right now for 32 gigs of DRAM, which is helpful for us because the data we've seen from Steam What people's configuration is, is that 80% of people have 16 gig or less.

Speaker 5

So we are in the cycle of people upgrading. And I think the other part of it is people building new machines using the latest graphics. So All these games help, but I wouldn't say that there's one in particular that's outstanding, that's driven. It's just that we've had a lot of games between Borders Gates, Starfield, Cyberpunk, there's a lot of new games have come out That's been pretty high level.

Speaker 8

Got it. All right. Thank you.

Operator

Our next question will come from a follow-up from Aaron Lee with Macquarie. You may now go ahead.

Speaker 6

Hi. Just a quick follow-up. I wanted to touch on the survey you highlighted about the refresh cycle. In your experience, is there a difference in the refresh cycle between components and peripherals? Or do you find that people generally refresh refreshing one kind of leads to refreshing the other?

Speaker 5

No, they're not coupled. Typically, we've seen 3 to 5 years for systems. In other words, if people have spent $2,000 on a gaming system, anywhere from 3 to 5 is when they upgrade. For peripherals, it's more like a 3 year cycle and some being much faster. So we've In some cases, especially at the lower end of the entry level of headsets, people tend to sit on them and break them.

Speaker 5

So this can be as low as 18 months, but 3 to 4 years for peripherals and 3 to 5 years for components is usually the way we model it.

Speaker 6

Got you. Thanks. Perfect.

Operator

Our next question will be a follow-up from George Wang with Barclays. You may now go ahead.

Speaker 2

Hey, just I have a

Speaker 4

quick follow-up. Just in terms of the So the new product categories into next year and just curious any more wide space in terms of the peripherals? Obviously, you guys Launched quite a bit of new products. Just curious kind of high level over the next couple of Which sort of a gap or kind of you guys can potentially fill if you were to launch new products kind of to compete with the competitor in terms of any additional white space you guys may potentially be targeting.

Speaker 5

Yes, I think we've talked about this before. The two areas that we're looking at that will probably be the next product

Speaker 3

And I think you could see from the Envision controller that we just did from Scuf, I mean when Coursera does something, we do something better than what the market is used A lot of people's PC controllers are just copy of a console controller, but we added a lot of extra functionality into ours that made it really a good controller for PC games. That's the type of stuff that we're good at is that when we do come out with a product like that, we really hit what the market needs And add some innovation to it.

Speaker 4

Okay, great. Sounds good. Thank you.

Operator

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.

Speaker 5

Well, thank you everyone for joining the call today and for continued support. If you have any follow-up questions, please contact our Investor Relations department, and we look forward to updating you next quarter. Thank you, and have a good evening.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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