Corsair Gaming Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 10 speakers on the call.

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 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 and thank you for joining us for Corsair's financial results conference call for the Q2 ended June 30, 2023. On the call today, we have our Corsair's CEO, participation in the company's financial results are being recorded. Andy Paul and CFO, Michael Butler. Andy will review highlights from the quarter.

Speaker 1

Michael will then review the financials and our outlook. Will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward looking statements. Participation in 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. Please note forward looking statements are subject to are described in our earnings release and other SEC filings.

Speaker 1

Note that until our 10 Q has been filed, these numbers are preliminary. Participants will also include references to non GAAP financial measures. Additional information, including reconciliation between non GAAP financial information So the GAAP financial information is provided in the press release 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 Q2 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 2nd, gross margins showed strong growth with healthy inventory profiles and reduced freight costs. 3rd, we're now active again in M and A, which is a key component of our growth strategy.

Speaker 2

Our strong cash balance and low leverage is now allowing us to pursue M and A participation is with the latest announcement made in July that we agreed to purchase Drop Incorporated. Taken together, we expect the gaming market will 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'm very pleased to report that our results for the Q2 exceeded our original expectations.

Speaker 2

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 20 20 participation will be recorded. For 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 stay at home behavior, based on everything we're seeing and hearing, We believe this increased activity is coming from the surge of new gaming hardware buyers who entered the market during 2020 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 has approximately 5% to 6% for PC platform building and 12% to 13% for gaming peripherals.

Speaker 2

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. 2nd, margins continue to improve in all categories. In our components category, we gained significant market share in 2022 and that on top of a healthy market meant that we were running short of inventory in many of our top SKUs, requiring us to airfreight in products to our hubs. We largely caught up with inventory needs by Q1 'twenty three.

Speaker 2

And so in Q2, we had the benefit of lower freight costs 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. Participants decided to hold back from matching their high levels of discounting. Both of these things combined to cause us to lose the market share over the near term, But competitors discounting has now largely calmed down. For example, we noted during Prime Day that while we had price is at reduced levels of discounts compared to previous Prime Days, we actually outperformed compared to the total category sales of Amazon in almost every one of the categories that we track.

Speaker 2

So we saw that in Q2, while our gaming peripheral revenue was less than expected, By the end of the quarter, we're experiencing much improved margins and much better sales momentum going into and coming out of Primeday 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 participation in the quarter. We're now active again on the M and A front as we benefit from our strong cash balance and low leverage. There are a lot of M and A opportunities out there and we have been disciplined in evaluating companies. We have acquired 6 companies to date and have a very good track record.

Speaker 2

Our latest announcement was in July that we agreed to acquire Drop, and many other enthusiastic audiophile products. Personalized keyboards that can be modified by the consumer is 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 battle stations. Jop has proven to be one of the leaders in this space. And with CorSo's global footprint, We expect to significantly grow the Jop brand worldwide.

Speaker 2

We expect some significant opportunities and synergies here Our target is for this to mirror the success we have had with Elgato. As a reminder, we acquired Elgato about 5 years ago. We've increased the revenue by more than 3 times and we've expanded the brand into other totally new revenue areas including microphones, cameras and lights. We also just did a soft launch of a marketplace a few weeks ago and expect this to grow over time. The new Stream Deck marketplace will allow 3rd party plug ins and applications that run on our world famous Stream Deck to be sold to Our content created is directly from the Elgato website.

Speaker 2

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 will dramatically increase our installed base of Stream Deck users and open a significant new revenue stream for us and expect a further improvement in the second half of twenty twenty three. We expect the gaming market to continue to be healthy for the balance of the year and we fully expect to build on our leading market share in the categories we serve. Let me now turn the call over to our CFO, Michael Potter, details on the financials. Michael, please go ahead.

Speaker 3

Thanks, Andy, and good afternoon, everyone. And we continue to be operational cash flow positive, while investing modestly in inventory to support the expected is $325,400,000 compared to $283,900,000 in Q2 2022. For the 1st 6 months of 2023, net revenue increased 2.2% to $679,400,000 participation from $664,600,000 in the year ago period. European markets continue to be softer than Americas, but are improving and contributed about 32.3 percent of our revenues, which is an increase from 32% in Q1 2023. Turning now to our segments.

Speaker 3

The gamer and creator peripheral segment contributed $78,800,000 of net revenue during the 2nd quarter is compared to $89,000,000 in Q2 2022. For the 1st 6 months of 2023, Gamer and Creator Peripheral segment revenue was $167,700,000 compared to $223,100,000 for the 1st 6 months of 2022. The Gaming Components and Systems segment contributed $246,700,000 of net revenue during the quarter, an increase of 26.6 percent from $194,900,000 in Q2 2022. Memory products contributed $108,900,000 in Q2 2023 compared to $99,100,000 participation in Q2 2022. For the 1st 6 months of 2023, Gaming Components and Systems segment revenue increased to $511,700,000 from $441,500,000 in the 1st 6 months of 2022, With revenue from memory products increasing to $240,200,000 from $231,300,000 Overall gross profit in the 2nd quarter was $82,800,000 compared to $36,500,000 in Q2 participants are in 2020 2, which had lower revenue and an excess inventory reserve.

Speaker 3

Gross margin increased 25.5% Compared to 19.7 percent 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 $168,200,000 for the 1st 6 months of 2023 compared to $127,200,000 in the 1st 6 months of 2022. Participation in the future. The gamer and creator peripheral segment gross profit was $25,500,000 compared to $10,600,000 in Q2 2022.

Speaker 3

Participants are participating in the Q2, which we continue to believe will lead to further improvements in margins later in the second half of in 2020 3. The Gaming Components and Systems segment gross profit was $57,300,000 an increase of 121.3 percent from $25,900,000 in Q2 2022. Gross margin was 23.2 percent compared to 13.3% in Q2 2022. Our memory products gross margins in this segment were 14.6% for the 2nd quarter compared to 9% in Q2 2022. 2nd quarter SG and A expenses were $70,000,000 a 4.7% decrease Compared to $73,400,000 in Q2 2022, driven in part by reduced freight rates.

Speaker 3

Participation in the quarter. 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. 2nd quarter R and D expenses were $15,600,000 Down about 13.5% compared to Q2 2022 as we continue to prioritize our investments in our new products. GAAP operating loss in the Q2 of 2023 was $2,700,000 compared to a GAAP Operating loss of $55,000,000 in Q2 2022. As noted earlier, the year ago period included the impact of the excess inventory charge.

Speaker 3

2nd quarter adjusted operating income was again a bright spot for us, increasing to $15,900,000 Compared to an adjusted operating loss of $14,200,000 in Q2 twenty twenty two. Adjusted operating income increased 2nd quarter net income attributable to common shareholders was $1,100,000 or $0.01 per diluted share as compared to a net loss of $59,400,000 or a loss of $0.62 per diluted share in Q2 2022. On an adjusted basis, 2nd quarter net income improved to $9,800,000 or $0.09 per diluted share for the 1st 6 months of 2023, adjusted net income improved to $21,800,000 participation in the Q1 of 2019, we expect to be in the Q1 of 2019.

Speaker 4

We expect to

Speaker 3

be in the Q1 of 2019 to be in the Q1 of 2019. For the 1st 6 months of 2023, adjusted EBITDA increased to $38,300,000 from $4,400,000 in the year ago period. Turning now to our balance sheet. We ended Q2 with a cash balance of $184,000,000 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, but the acquisition cost was not significant was in the low double digits of 1,000,000 of dollars.

Speaker 3

We ended Q2 with a $228,000,000 of debt at face value and our $100,000,000 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're 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.

Speaker 3

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 $1,350,000,000 to $1,550,000,000 adjusted operating income in the range of is now open. $75,000,000 to $95,000,000 and adjusted EBITDA in the range of $90,000,000 to $110,000,000 With that, we're now happy to open the call for questions. Operator, will you please open the call for Q and A?

Operator

Participation will be recorded. Your Your first question comes from Aaron Lee with Macquarie. Please go ahead.

Speaker 5

Hi, good afternoon. Thanks for taking my question. 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.

Speaker 5

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?

Speaker 2

Well, let's be clear. If the economy improves, obviously, our revenue will go up and vice versa. So I think that the sense we had at the beginning of the year, which was that the market would be roughly flat, 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've seen that across different industries. A lot of parts are down, some are flat.

Speaker 2

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 Yes. The full year is probably going to be flat as we expected.

Speaker 3

Okay. That's the overall market. The range has A decent possibility of growing year over year for us.

Speaker 5

Yes. Understood. Fair enough. As a quick follow-up, you guys have done a great job participation is expanding the Corsair ecosystem, like with IQ 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?

Speaker 2

Yes. There's quite a few actually. Couple of things we're pretty interested in. One is mobile gaming. And at the moment, mobile gaming Is largely done on the phones.

Speaker 2

I mean, that's the attraction of it because no approvals needed. But there is a growing opportunity for Wraparound controllers, you can put a phone or an iPad in. It's is a relatively small market now, but we're watching that carefully to see how that evolves, especially with Game Pass, which allows you to play So that's one. We're very interested in sim racing. We see that as a This is a full simulator that you used to pretend you're an F1 driver.

Speaker 2

That has grown significantly in that market, especially in the U. S. After Drive to Survive came out, which has got everybody interested here in F1. It's already pretty big in Europe. But that is starting to expand.

Speaker 2

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 like Cage and a seat and pedals and wheels and that sort of thing. So we're pretty interested in that market. And obviously, we've 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 market, But we're watching that space carefully as well.

Speaker 5

Fantastic. Thanks for the color.

Operator

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

Speaker 4

Hi, guys. This is Laine on for Eric. Thanks for taking my question. So I just had a few on the Drop acquisition. First, Could you just speak to what the deciding factors were that led you to acquire DROP?

Speaker 4

And then how should we be thinking about the timing in terms of integration and dis synergies that you see. Thanks.

Speaker 2

Yes. So the main reason we bought Drop was that As you possibly have probably noticed, most of the acquisitions we do are direct to consumer, and Dropp is no exception. So it's all direct to consumer. And that's because over time, we want to participation in 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 1 at a time.

Speaker 2

And obviously, in a gaming platform, like a gaming PC, purchase There's 5 or 10 different things that you can sell somebody. So that's the first thing. It was 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 that are building gaming PCs.

Speaker 2

So it kind of expands our market, but in the same genre. And thirdly, they've 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 packages, it was pretty interesting.

Speaker 2

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've got and put them into the channel with the expectation that we can then continue to sell things like different keycaps to those customers directly. And then we'll take some of our products that are difficult to sell through the channel In terms of acquisition, we've got a probably a 6 month Scheduled out integration where we'll be largely trying to combine activities, save some OpEx. The revenue synergy, which I'm more excited about, It's going to be ongoing.

Speaker 2

We're starting that immediately. So we're looking at SKUs now that we can put into the channel. Some of that takes some time. If you want to put a product into Best Buy, The next window is probably Q1. So that will happen over the next year or 2.

Speaker 4

Okay, great. Thank you.

Operator

Your next question comes from Drew Crum with Stifel. Please go ahead.

Speaker 6

Okay, thanks. Hey, guys. Good afternoon. On your peripherals business, Can you comment on your retail inventory position heading into the second half and the conversations you're having with retail partners and their willingness Restock inventory levels going into the holidays. And then I have a follow-up.

Speaker 2

Yes. I mean, Q2, the time we got 1 into Q2 is pretty neutral. I think we've in terms of our sales in versus sales out, I think we've I said on previous calls that we largely cleared up our channel inventory last year, overall to the tune of about $100,000,000 Which we thought was in excess. And so this year has been generally neutral, obviously, depends on category. But yes, I wouldn't say we're concerned about having too much inventory in the channel at this point.

Speaker 6

Okay. And then Andy, just a follow-up on the Drop acquisition. I think there was a comment in your preamble suggesting that you hope to replicate your experience here with similar to Elgato. Is that more of a qualitative comment or would you aspire to grow sales 3 times as you have with The Elgato asset. Thanks.

Speaker 2

Well, both. I mean, we're not obviously including that in any kind of guidance because we've Been together for 5 minutes, but I think there's a big opportunity. I don't know how big that is yet, because The DIY keyboard market is very new, and there's lots of small players. So it is similar to when we bought Elgato in that the streaming market was then very small. And we're anticipating that this market will grow At a fair crack, but it's very it's too early to say whether this is something we could double sales or triple or but we obviously believe we can make some significant impacts.

Speaker 6

Okay, got it. Thanks guys.

Operator

Your next question comes from Colin Sebastian with Baird. Please go ahead.

Speaker 7

Yes, good afternoon. This is Risa on for Colin. Hey, Michael and Andy. I guess we have two questions. One would be, Could you maybe just talk about the keys to success that worked with Elgato and the products there?

Speaker 7

Maybe some Some of the things you did more on the internal side that wouldn't be as present to investors that you could maybe replicate with DROP. And Maybe just looking at the guidance, what is looking at the environment today, what is required to kind of maybe get to the Operator, the guidance range or what does the environment need to look like for that to happen? Thanks.

Speaker 2

All right. Well, let's hit So what we did with Elgato was fairly straightforward and it's actually typical to most of the startups. So let me back up a second. So most of the small companies we buy, and I'm talking about sub-fifty million companies, participants spend half their life battling cash flow. The significant amount of their overhead Is in G and A.

Speaker 2

And so we're just not able to focus on purely bringing products to market. And that's no different than drop. It's been a bit of a struggle for that company over the last few years to be cash flow positive, so they spend a lot of their time trying to raise money and that sort of thing. So all that goes away, allowing them to completely focus On said products we're bringing to market, that was very similar to Elgato. When we did the Elgato carve out, We left behind the G and A because it was a company with 2 divisions.

Speaker 2

We bought one of them. So that's the first thing, it's focused. The second thing is We took a lot of their key products into a much wider channel. So with El Gallo, within about 3 months, we had some of their key products in every single Best Buy store. And we're obviously going to try and replicate the same thing with Jot.

Speaker 2

It's just that you never know how fast this stuff can roll out. We're a bit too late now to sort of get into pre-twenty 23 holiday situations. Those things are usually planned out in advance. So yes, we're going to try and do exactly the same thing. It's just a question of how big the market is and how fast the market grows.

Speaker 2

Now the second thing was the second question was on guidance and what's got to happen in the environment So hit the high end of our guidance. And I'd say it's what we were talking about earlier. We're looking to see how much the market Sort of a covers how much it grows. As I said earlier, it's significantly above pre pandemic levels. And it feels like we're sort of getting to a point where in Generally, the economy is looking at a soft landing, and I'm already seeing pretty good results from Prime Day, both at Amazon Total and our results at Amazon.

Speaker 2

So it does feel to me as though the market started off being a little underwater From last year, the beginning of the year and now it's much more neutral. Now if that continues to go positive and goes positive in a And we do what we're supposed to do and gain market share and continue to bring our products. And I'm sure we'll be at the higher end. If the market is much flatter, Then that becomes more difficult.

Speaker 7

Yes, yes, got it. And maybe just as a follow-up to that, can you maybe just provide some color on where the promotional environment stands with your competitors in the channel and what you're seeing there. Thanks.

Speaker 2

Yes. So I mean on In peripherals where that's a bit more seasonal and a bit more of a spike you tend to get on Prime Day and Black Friday and that sort of thing, There was much less discounting going on with our main competitors than previously. And so we actually found that with less discounting, we did a lot better than last year. So that meant that the lower discounts were much more attractive compared to people offering things at half off, etcetera. So I presume that happened because our competitors were largely Taking care of the inventory bubble that they had and they were getting to the point where they didn't see the need to run clearance all the time.

Speaker 5

Thank you.

Speaker 4

Goodbye.

Operator

Your next question comes from Doug Creutz with TD Cowen. Please go ahead.

Speaker 8

Hey, there was a pretty big industry release late in Q2 and I just wondered if you could comment to any games that you think might have helped Push either PC builds or peripheral sales. And then just looking ahead to Q3, I think Starfield is coming out, which is probably a big PC title and Just your view on whether that could be an important game in driving PC builds. Thanks.

Speaker 2

Yes. I think the one that everybody was talking about really was Diablo 4 Over the last quarter, we think helped. I put in the deck, I don't know if you've seen that yet, the deck is on our IR Web There's about 8 new games that we've listed. And I think there's a new record of Call of Duty coming out at the end of the year, Which will be pretty big. Cyberpunk is releasing something in September.

Speaker 2

Yes, Starfield in September. Counter Strike 2 is listed as summer of 'twenty three. That would be huge. So yes, there's a lot of games. I think first half probably Diablo was the biggest one.

Speaker 2

And I suspect Call of Duty and Counter Strike for second half.

Speaker 3

I think the most interesting thing is if you look at the required specs for the new games coming up, They're much higher than they've been. If you want to get all the eye candy and the extra features, they're really targeting a much higher spec PC, More memory and much higher end video card, which means more power requirements. So it fits pretty well into the suite of products that we do.

Operator

Your next question comes from Mario Lou with Barclays. Please go ahead.

Speaker 9

Great. Hi. This is Jack Butler on for Mario. Thanks for taking my questions. I was just wondering whether you could talk

Speaker 6

a bit more about some of

Speaker 9

the partnerships you now have in place with content creators a couple of quarters ago. You announced the Nick Merck's partnership. Now we get, Courage JD. I'm just curious maybe what sort of participants have you seen from the gaming community specifically, like if there's any indicators you're seeing that these partnerships are working and then Maybe how that initiative has evolved or will continue to evolve, if there's any update to how you're thinking about partnerships? Yes.

Speaker 2

I'd say well, firstly, I mean, we've got a lot of different partnerships. I mean, these are 2 pretty big names. We've been with Nick Merckx On the scuff side for some time, courage is new, but it's too early to draw any conclusions from How that works? You don't see a big spike immediately for many of these things. So Yes.

Speaker 2

I think you have to wait until next earnings or later in the year before we can give you any meaningful data from that.

Operator

There are no further questions at this time. I will now turn the call over to Andy Paul.

Speaker 2

Okay. Well, thank you everybody for joining us on the call today and thanks for the continued support. 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

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Key Takeaways

  • Revenue in Q2 grew nearly 15% year-over-year, reflecting a resilient gaming hardware market that remains significantly above pre-pandemic levels due to new game titles and graphics card launches.
  • Gross margins improved across both components and peripherals, driven by healthy inventory positions and reduced freight costs, with component margins rising to 23.2% from 13.3% a year ago.
  • Corsair has resumed strategic M&A by acquiring Drop Inc. to enter the enthusiast DIY keyboard market and plans to leverage its global channel footprint for growth synergies similar to those achieved with Elgato.
  • Management reiterated full-year 2023 guidance of $1.35–$1.55 billion in revenue (flat to up) and adjusted operating income of $75–95 million, expecting continued market health and share gains in the second half.
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Earnings Conference Call
Corsair Gaming Q2 2023
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