Turtle Beach Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Turtle Beach Second Quarter 20 24 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the prepared remarks presentation.

Operator

As a reminder, the conference is being recorded. I'll now turn the call over to Joss Cornett from Investor Relations team. Joss, you may begin.

Speaker 1

Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon that details the company's Q2 2024 results, which is available on the Investor Relations page at www.turtlebeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the Events and Presentations 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, similar expressions constitute forward looking statements.

Speaker 1

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 ks 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, it will be discussing non GAAP financial information.

Speaker 1

The company is providing that information as a supplement to information prepared in accordance with 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 and the reconciliation tables provided in today's earnings release and presentation. Hosting the call today are Chris Kern, Chief Executive Officer and John Hansen, Chief Financial Officer. With that, I'll turn the call over to Chris. Chris?

Speaker 2

Thanks, Jacques. Good afternoon, everyone, and welcome to our Q2 2024 earnings call. Before we get into the financial results, I'd like to take a moment to acknowledge an important milestone. You've all seen the announcement today that our esteemed Chief Financial Officer, John Hansen, has informed us of his intent to retire. John has been an integral part of our leadership team and his contributions have been invaluable to our success.

Speaker 2

I personally have enjoyed a tremendous partnership with John and we wish him all the best in retirement. Turning to results. I'm pleased to share that the continued momentum in our business drove very strong second quarter results that reflect the ongoing success of our portfolio and cost optimization initiatives combined with our transformational acquisition of PDP. As a newly combined company, we are in the early stages of gaining scale diversification advantages that enable us to expand our leadership position across categories. Our unwavering commitment to innovation, world class execution and sustained growth sets us apart in a highly competitive gaming accessories market.

Speaker 2

Our Q2 results reflect this commitment. Robust revenue growth for the quarter was driven by higher demand for our leading products even as we reduced promotional spending as planned. To that end, 2nd quarter revenue was $76,500,000 up roughly 59% year over year, which included our 1st full quarter of PDP contribution. Even excluding PDP contributions, revenues were up 15% compared to last year. Turning to the performance of the gaming markets driving the revenue growth.

Speaker 2

We see that gaming accessory markets have outperformed the low single digit growth for the overall U. S. Gaming industry so far in 2024. According to Sukana, the overall U. S.

Speaker 2

Gaming accessories market value is up approximately 5% for the first half of twenty twenty four compared to the first half of twenty twenty three. U. S. Gaming headsets and third party controller markets are exceeding overall accessory growth year to date, up approximately 12% 15%, respectively. We believe this growth is due to the start of pandemic era replacements along with upgrade purchases for new models and features.

Speaker 2

We expect both factors to drive continued gaming accessories growth in the foreseeable future. As a leader in these categories, we continue to contribute to driving market growth with our newly launched wireless headsets, premium controllers and PC peripherals across Turtle Beach and PDP. For example, in their 1st full month of sales after launch, the Turtle Beach Stealth 500 for Xbox and the Stealth 600 Gen 3 for Xbox were the number 2 and number 4 best selling headsets in the U. S. For June.

Speaker 2

Both new models have received an abundance of praise from fans and reviewers alike with each named as best wireless gaming headsets by IGN and other notable games industry and tech review publications. We also debuted the highly lauded Atlas Air as the industry's first wireless open back gaming headset, which IGN gave a 9 out of 10 review score and added to their best gaming headsets for PC list calling it one of the most unique headsets out there. Additionally, PDP's RiffMaster wireless guitar controller launched in April coinciding with Epic's Fortnite Festival Season 3 instrument compatibility update and has quickly become the industry's best selling music controller in the U. S. As reported by Surcona.

Speaker 2

In May, we also introduced a full line of Turtle Beach branded PC gaming gear, furthering our reach into the massive $3,900,000,000 PC peripherals market. Our latest PC products introduced groundbreaking features in their respective categories and are headlined by the highly responsive and customizable Vulcan 2 TKL Pro Keyboard, the incredibly lightweight Burst 2 Air mouse and our ergonomic masterpiece Cone2 mice. We continue to make excellent progress in operational efficiencies across all aspects of our business as we delivered substantially improved profitability in the quarter, including a significant 540 basis point gross margin expansion compared to the same quarter in 2023. Adjusted EBITDA was $3,000,000 during the quarter, an improvement of 8 point $7,000,000 compared to the same quarter last year. With our enhanced profitability in the first half of the year, we are raising our full year 20 24 adjusted EBITDA guidance to a range of $53,000,000 to $56,000,000 John will provide additional details on our financial results.

Speaker 2

Since acquiring PDP in March, we've made rapid progress on integration, which we are continuing to execute ahead of schedule. Feedback from retail customers and other industry partners of the high potential for our combined company has been overwhelmingly positive, and we're already realizing synergies and expanding market opportunities. In addition to the clear benefits from our PDP acquisition, we are continuing to drive margin expansion from our previously communicated initiatives of SKU rationalization, portfolio optimization and our platformed next generation product launches. These improvements have all accelerated our ability to generate strong cash flow from operations. Given the strength of the balance sheet, our outlook and our view that our share price offers a compelling value, we repurchased approximately $15,000,000 of our stock during the Q2.

Speaker 2

This is the largest repurchase in our history and underscores both our confidence in Turtle Beach's trajectory and our commitment to enhancing shareholder value. We believe in our vision and we are putting our resources behind it. John will now take

Speaker 3

us through the financials in more detail. John? Hey, thanks, Chris, and good afternoon to everyone. Hey, before I begin with the financials, let me say how enjoyable it has been for the last 11 years to have the pleasure of being part of the thankful to the thousands of employees, customers and shareholders who helped make this company the success that it is today. And a very special thanks to my co executive officers and Chris as well as our entire global leadership team and Board.

Speaker 3

The partnership we have developed has been extraordinary. As evident in our results, the organization is executing very well and it is an opportune time for me to transition to this next phase. Now, on to the quarter we go. As Chris mentioned, revenue in the 2nd quarter grew 59% year over year to $76,500,000 As a reminder, the 2nd quarter is the very first full year or full quarter with PDP results. The 59% increase in revenue was primarily driven by PDP and our non PDP revenue grew a very healthy 15% year over year.

Speaker 3

The organic non PDP growth was driven by increased sales of our controller and headset products. As a reminder, in the Q1 headset revenue was down year over year as we deliberately reduced channel inventory levels ahead of the launch of our new wireless headsets and rebranded PC accessories. In Q2, that trend turned as we anticipated and we experienced a positive impact from the launch of these products. Gross margin in the second quarter was 30.2% compared to 24.7% last year. That equates to a 540 basis point improvement.

Speaker 3

The margin improvement is being driven by lower product costs from our product platforming and optimization initiatives, lower freight costs and more efficient promotional spend. As we stated on the last earnings call, we expect to begin realizing lower product costs with the launch of the new wireless products and PC accessories rebranding in Q2. This improvement in margins is expected to continue going forward as the mix shifts to the new products. Operating expenses in the Q2 were $27,200,000 compared to $27,700,000 a year ago. This year, the quarter included $1,400,000 in costs related to the PDP acquisition.

Speaker 3

Excluding these non recurring acquisition related costs, 2nd quarter operating expenses declined approximately 7% year over year. On a relative basis, operating expenses excluding the acquisition related and non recurring costs were approximately 33% of revenue, which is an improvement from 49% in the prior year. This change is primarily driven by our ongoing proactive efforts to achieve a better balance between revenue enhancing initiatives with our expense management goals. The result of higher revenues combined with greater efficiencies on costs and expenses is that 2nd quarter adjusted EBITDA improved by $8,700,000 to a positive $3,000,000 versus an adjusted EBITDA loss of $5,700,000 in the year ago period. On an LTM basis, adjusted EBITDA is approximately $20,000,000 Turning to the balance sheet.

Speaker 3

At quarter end, we had net debt of $61,200,000 comprised of $73,600,000 of outstanding debt and $12,500,000 of cash. The debt balance is comprised of $24,000,000 outstanding under our revolving credit line and $49,600,000 outstanding on the term loan we used for the PDP acquisition. Inventories at quarter end were $73,300,000 compared to $67,800,000 a year ago. PDP added $23,800,000 to inventory and this addition was partially offset by our continued reduction initiatives in non PDP product inventory. As Chris touched on, during the quarter, we repurchased approximately $15,200,000 of our shares.

Speaker 3

This was the largest repurchase of our shares we've made in our history. We bought just shy of 1,000,000 shares at an average price of $15.97 per share. Looking forward, as the business continues to generate cash, the Board is focused on evaluating all options for redeploying capital, including additional share repurchases. As we always have, we will continue to invest in our existing business. In addition, we remain committed to returning excess cash to shareholders through share repurchases.

Speaker 3

To that end, to provide additional flexibility for repurchases going forward, we have successfully negotiated amendments to our credit agreements that allow for the establishment and implementation of a Rule 10b5-1 plan. This plan provides us with a formulaic share

Speaker 2

repurchase option.

Speaker 3

Lastly, over the long term, we also believe that the right acquisitions remain a component of our capital allocation strategy as long as they make sense strategically and are immediately accretive to earnings and generate value for our shareholders. Now turning to guidance. We continue to expect full year revenue to be between $370,000,000 $380,000,000 which equates to a 45% growth compared to 2023. With a strong first half of the year behind us and the PDP integration underway, we are raising our full year adjusted EBITDA guidance for 2024. We expect full year adjusted EBITDA to be between $53,000,000 $56,000,000 which increases the midpoint to 54,500,000 up $2,000,000 from our prior guidance.

Speaker 3

As a reminder, our 2024 guidance includes contributions from PDP beginning on March 13, 2024 when we closed the transaction. And now I'll turn the call back over to Chris for additional comments. Chris?

Speaker 2

Thanks, John. In summary, we're pleased with our strategic progress and results for the first half of the year and remain optimistic that we will continue to realize additional benefits and synergies with our recently combined teams. We continue to prioritize value creation for our shareholders and best in class products for gamers everywhere. Looking ahead, we're excited about our upcoming product launches, continued gains and strategic advantages from the PDP integration and our ongoing efforts to maximize profitability and cash flow. I want to express my gratitude to our amazing team members who worked tirelessly to achieve our strategic goals.

Speaker 2

We've had a great first half of the year and the hard work and passion of every one of our team is instrumental in our success. And to our investors, thank you once again for your trust and support. With that, operator, we can open the line for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Sean McGowan of ROTH. Your line is now open.

Speaker 4

Thank you. Thanks everyone. Before I get to the questions, I just wanted to say, John, it's been an absolute pleasure working with you in multiple capacities over the years. And while I'll be sorry to see you go, I'll be happy to see you whistling with the pigs. So

Speaker 3

congratulations. Thanks, Sean. Couple of

Speaker 4

questions. Yes. Would you say Chris, would you say that the retail inventory now is balanced? Or could we see some additional inventory kind of restock flowing into the Q3 as well?

Speaker 2

Yes. Great question, Sean. We see what you did there, by the way. Great comment for John. So, yes, the retail channel right now is in really healthy shape.

Speaker 2

We've had the transitions in Q2 where we pretty much strained the channel and then reloaded it with wireless and the new PC products. We're pleased with how our RiffMaster inventory is looking in the channel. That's coming back up. So it's really balanced right now out there at retail globally. So we're through sort of all of the unwinding that we've had over the past few years and some of the pandemic impacts.

Speaker 2

So I think that when we think about channel inventory, we feel like it's at the right level right now and that retailers are feeling good about the levels that they're carrying at the moment.

Speaker 4

Okay. But not increasing their appetite necessarily relative to sales?

Speaker 2

That will come in the end of Q3 and as you get into Q4. This is where it will be interesting to see what happens this year. Historically, the last couple of years, the holiday has pushed later. As you know, the last 2 weeks of the year last year were really strong. So it will be interesting to see how retailers react to that.

Speaker 2

We always see some revenue move around between Q3 and Q4. I think we could see that again this year as retailers have kind of waited and consumers have kind of waited to purchase more than historical. So that'll be interesting, but we're ready to go for the back half.

Speaker 4

Okay. John, a couple of kind of detailed financial questions. So how much additional transaction expense and additional inventory step up is left to kind of flush through the P and L for the balance of the year?

Speaker 3

So relative to the PDP inventory step up, it's detailed in the Q. But in the quarter, it was $1,200,000 $1,300,000 actually rounded up $1,251,000 was the step up in Q2. And for the balance of the year, it's probably in the $900,000 to $1,000,000 range.

Speaker 4

Okay. So it's mostly done. Yes. Okay. And is the queue out today?

Speaker 4

It wasn't out a little while ago.

Speaker 3

It should be out unless the SEC is behind, but it was filed. So look, our gross margins excluding the PDP step up for the quarter were 31.8%. But what you'll see in Q is that in addition, we did book an inventory reserve in the 2nd quarter, for the ROCCAT for inventory an inventory reserve for the ROCCAT rebranding that totaled approximately $1,600,000 So when you take and adjust out those two nonrecurring items, our gross margins were 34% for the quarter. And so as we've said, as we get to the next generation through our product platform and our margins, we're going to be getting back into the mid-30s. So when you adjust for these two items, we're at 34% for Q2 and we only had a portion of the quarter with the lower cost products associated with the wireless launch, which happened late in the quarter.

Speaker 3

So we feel that we're very well positioned from a margin perspective.

Speaker 4

And I'm glad you brought up that adjustment of the 34%. So if you look at that number as kind of what it would look like without those adjustments, would you say that PDP was accretive to the overall margin? Or did it bring it down? Or was it neutral?

Speaker 2

I think it's relatively neutral. You look at it's relatively neutral. The categories we plan, a lot of similarities. That's been part of the reason that we've been able to really realize more quickly than we anticipated. Some of the integration work has been completed and some of those synergies have come in.

Speaker 2

Very similar categories, very similar kind of operations. Really appreciate the PDP team and their efforts coming in here. It's been a

Speaker 3

very positive

Speaker 2

experience and they've done a great job. So I think the how similar the businesses were prior to the

Operator

acquisition, we're kind of seeing that

Speaker 2

flowing through on the

Speaker 4

earlier question, should we be looking for additional transaction expenses to be run through the P and L from this point forward?

Speaker 3

That will be integration related. But yes, that work is ongoing. As we've stated in the past, right, that integration work will be ongoing throughout the year 2024. So there will be some additional there will be additional expenses as we sort out real estate and other things.

Speaker 4

My last question for you, Chris, is should we read anything into the fact that the average price paid for the shares repurchased in the quarter was higher than the upper end of the previously announced Dutch tender range?

Speaker 2

I think it's a function of timing. We had we were purchasing in the available open window for the company. And so and we want to continue to make those purchases as we've said in the comments. So no, I don't know that I would read anything into it. I think that we feel good about where the stock price will be and we have high confidence in our ability to execute against that.

Speaker 2

So particularly where we are today, we think there's a ton of value to be had and that's why we're looking to continue to be opportunistic about repurchases.

Speaker 4

Great. Thank you very much. Appreciate it. And again, congrats, John.

Speaker 3

Yes. Thank you, Sean.

Speaker 2

Thanks, John.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Drew Grom of Stifel. Your line is now open.

Speaker 5

Thanks. Hey guys, good afternoon. And John, congratulations and best of luck to you. I think you mentioned the integration of PDP on a couple of occasions is ahead of schedule. Any specifics you can provide?

Speaker 5

And is this in any way influencing your guidance upgrade for EBITDA? And related to PDP, the hardware sales for Nintendo have been pretty weak year to date and we typically see consumption weighing at the end of a hardware cycle. I'm curious if you're seeing anything in the PDP business as we go into the second half. Is it languishing? Is the demand still there?

Speaker 5

Any color there would be helpful. Thanks.

Speaker 2

Sure. Great questions. When you look at the integration work so far with PDP, as I mentioned, it's been a really collaborative effort with the teams, which we totally appreciate from a management perspective. We've been able to complete a lot of the system integration work, a lot of the negotiations that we've had with our retailers and our distribution partners and the end to end portfolio work. We've talked a lot about portfolio optimization.

Speaker 2

We've gone through that with the Turtle Beach and Rocket Business over the last year. We're through a good portion of that already with the PDP business. And part of that spend the great participation and work between the teams here to really come to those conclusions, make decisions quickly on how to move forward with the combined portfolio. So that's really what's running ahead of schedule for us. We didn't anticipate we'd be as far along that path as we are as we see it here today.

Speaker 2

So and we think that that does open up for us some potential future upsides there as we really dive into the business and look for those costs and those revenue synergies. So

Speaker 4

that's sort

Speaker 2

of related to that. And as far as influencing the guide, there's a portion of that in there, right, that we were able to realize some of those a bit sooner than we thought. That's contributing to the raise here for Q2. On the second question around Nintendo, you're right, anytime we've seen this in every hardware cycle. As you get closer and gamers are out there anticipating the next hardware showing up, and Nintendo is going through that right now, the underlying strength of that Nintendo business is still very strong.

Speaker 2

But you're going to see a dip more than likely on some of the businesses as it gets closer. Fortunately, PDP's business is very well diversified across all of the platforms and we're seeing some really strong progress from the controller side of things on the premium controller front, the new RiffMaster. There's multiple products, including Son and some of the other platforms that are allowing the PDP business to track as we'd hoped it would. But there likely will be a little bit of a dip on the Nintendo side as people wait to see what that new hardware looks like and what the timing looks like. But that's already built into the guidance for the year.

Speaker 5

Got it. Okay. Very helpful. Thanks guys.

Speaker 2

Thanks Drew.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Alicia Reece of Wedbush Securities. Your line is now open.

Speaker 6

Hey, guys. Congrats, John, and nice quarter, everyone. I wanted to see if we could get a little bit more color on the different segments on a qualitative basis. I'm just seeing what you're thinking about the headset. I know there's a little information in the deck on the market share, but if you could just talk about the market in general and your market share position within each category, including the SIMs that would be really appreciated?

Speaker 2

Sure. Thanks for the question Alicia. So when you look across the different categories, headsets continue to be sort of our strongest contributor to revenue, But controllers are certainly growing within that mix. When we kind of look ahead, if you recall in the

Speaker 3

past, we've talked about like an

Speaker 2

eightytwenty split between our core headset business and everything else. That's certainly shifted with the acquisition and with some of our expansion in the other categories. It's much more where you're going to be somewhere in the 50% to 55% range for our core business with nearly half of the business coming from other categories. So we feel really good about that diversification and that's one part of the benefits of combined company now with PDP. Looking at those categories, accessories are definitely performing stronger than the broader gaming segment.

Speaker 2

The broader gaming segment is having some challenges on hardware, as you know, this year. It's still up. The segment's up low single digits, but accessories are up about 5% and this is U. S. Data, which is a pretty good proxy, I would say, for the rest of the business.

Speaker 2

And headsets are exceeding that growth. They're up 12%. Our shares dipped slightly on headsets in the first half of the year as we knew it would, as we essentially drained the channel for several months there and we're replenishing. We're really happy to see what happened in June. We were back to positive share growth in June as we launched new products, as I mentioned with the 50,600 getting out there.

Speaker 2

So that segment is doing extremely well for us. And as we head into the back half with these new products, we're feeling really good about our positioning there. Controllers, next biggest segment for us, all performing very well in that segment and driving growth and driving share growth for us. 3rd party controllers are up 15% for the first half year over year. That's one of the strongest segments and we're driving a good portion of that growth.

Speaker 2

So we're gaining share there. We're well up over, I think, it's over 300 basis points of share growth in the first half. So those are the 2 primary categories for us. You look at PC, we're holding pretty steady on the PC front and we're growing on the headset side. We've launched new PC headsets.

Speaker 2

We've got good placements of those products. We do anticipate to see some growth there in the back half along with our new mice and keyboard products. And then finally, I think you asked about simulation. We've had some growth in the flight from a share perspective in both categories. On the flight sim side, we're up, it's roughly 20% to 25% share in that range for the U.

Speaker 2

S. And we still have the number one SKU in that category. And then we just recently entered the racing category, single SKU, very early days for racing for us, and we'll continue to build that category out.

Speaker 6

Thanks. I appreciate all that color. And one other, if I may. Regionally, if you can talk as well about the uptick in North America versus EMEA holding relatively flat year over year and then some declines in Asia. We've seen some declines throughout Asia from all your competitors as well, so that's no surprise.

Speaker 6

But if you could talk about the uptick in North America in terms of the different categories, particularly how much at least qualitatively was from PDP, we'd appreciate that as well.

Speaker 2

Sure. Yes, great question. And it's something we keep a close eye there on what's happening regionally. For us, we have very little exposure to Asia. Our revenues are up slightly in Asia year over year, but it's low single digit percentages of our total business.

Speaker 2

So that hasn't really impacted us on the slowness there. For the Americas, with the acquisition of PDP, it has become a slightly higher portion of our business, anywhere from 70% to 75% depending on timing of the business flowing through the Americas and then roughly 25% or so through Europe. So that's a rough breakdown. But we're seeing strength in the U. S.

Speaker 2

Market for gaming. And so with our high concentration of business there, that's playing well for

Speaker 6

us. Excellent. Thanks so much.

Speaker 2

Thank you, Alicia.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Andrew Northcott of Oppenheimer and Co. Your line is now open.

Speaker 2

Hi, guys. This is Andrew on for Bard. Thanks for taking the question. Just one quick one from me. You guys have made pretty good progress on your kind of ongoing proactive expense management.

Speaker 2

So how should we think about the runaway from here for incremental expenses going forward? Thanks. Sure. Great question. It's something we're going to continue to focus on.

Speaker 2

This is an ongoing process for us. We've made some great progress there and a lot of that is around the portfolio and our cost of goods looking through our end to end supply chain, and then also focusing on OpEx, right? And we think on top of all of that, we've got synergies that we're working on the integration. So we'll continue to realize those savings. We believe that there's more opportunities there.

Speaker 2

We've got some great operational efficiencies going and we've actually introduced some new tools and technologies to help the teams perform better. And we believe that all of those are going to continue to yield results for us and drive that cost structure and keep it low.

Operator

Thank you.

Speaker 2

Thanks, Andrew.

Speaker 3

Yes. Thanks, Andrew.

Operator

I'm showing no further questions at this time. I'd now like to turn it back to Chris Curran for closing remarks.

Speaker 2

Thank you, operator, and thank you everyone for joining us. Have a great day.

Speaker 6

Thank you

Operator

for your participation in today's conference. This does conclude program. You may now disconnect.

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Turtle Beach Q2 2024
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