Q4 2019 Earnings Call
Yes.
[music].
[noise] good afternoon, ladies and gentlemen, and welcome to the Turtle Beach fourth quarter and full year 2019.
The conference call at this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session to ask a question on necessity, we need to press star one on your telephone.
Please be advised to this conference call is being recorded.
Before we get started it will be referring to this press release file today that each of the company's fourth.
Quarter and full year 2019 results, which can be downloaded from the Investor Relations Page Corp that turtle Beach dotcom.
What do you also find the latest earnings presentation that supplement the information discussed on today's call.
Finally, a recording of the call would be available on Investor Relations section of the company's website later this evening.
Please be aware, there's 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 contain words, such as May will could believe expect anticipate and similar expressions constitute forward looking statements.
These statements involve risk and uncertainties.
Regarding the company's operations and future results that could cause turtle beach corporations results to differ materially from management's current expectations.
The company encourage you to review the Safe Harbor statements and risk factors contained in today's press release and in their filings with the Securities Exchange Commission, including without limitation their most recent quarterly reports once.
Form 10-Q annual report on form 10-K, and other periodic reports, which identifies specific risk factors that also may cause actual results or even to differ materially from those described are forward looking statements.
The company does not undertake to publicly update or revise any forward looking statements. After this conference call.
The company also note that on this call they won't be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or gap you could finally, we conciliation other metrics to their report gap results in there could be conciliation table provided in.
These earnings release and presentation and now I'll turn the call over to Juergen Stark, the company's chairman and Chief Executive Officer Juergen.
Good afternoon, everyone and thank you for joining us.
We're coming off a year that was the second best in the company's history.
We continue to lead the council headset.
Market and more broadly are among the leaders in the exciting gaming accessory market with a profitable cash flow positive business.
Today I will focus in my remarks on how we see the headset market evolving this year, our success in that market and our progress in growing our overall portfolio and position.
In the global gaming accessories market, but for some brief comments on 2019.
Driven by the massive influx of new wouldn't be invigorated gamers drawn to battle Royale games like Ford Nitin pub GE revenues in 2018, nearly doubled the 287 million.
Because we have years.
Is that experience modeling the consumer behavior of headset users, we anticipated that total market for council headsets in 2019 would be down around 20% and that's roughly what transpired the market and our own sales performed remarkably close to the forecast we provided.
This time last year.
While the North American Council headset market was down in 2819 compared to 2018, it was still 34% higher than 2017. According to NPD supporting our belief that the total user base is now considerably higher than it.
It was two years ago.
Our own council headset sales were down about 25% last year, but we're still 38% higher than 2017.
Also accounted for in our 2019 guidance was a slight loss of market share because of how much higher our share was in the entry level.
Price categories, and because we believe we get a better job than competitors at keeping our retailers in stock during the spike in demand.
Our market share in 2019 exceeded 43% according to NPD, which was more than the market share of the next three biggest players combined.
This March 10 straight years with market share over 40%, an unprecedented accomplishment and one that speaks loudly to our reputation for innovation.
Company doesn't hold 40% market share for a decade unless consumers realize that the products are highly differentiated.
Good and the brand is something they seek out year after year.
Our retail partners know this well and appreciate how our product strength is complemented by great execution across every aspect of our business with them.
Of course are more than 150 issued patents and gaming.
Accessories with many more on the way also speak to our continued innovation and differentiation.
Our market share strength is built wide and deep according to NPD U.S. data in 2019, we had all three of the top three best selling models in terms of revenue.
Six of the 10 best selling models and 13 of the top 20 models in December we were even more dominant with all six of the top six best selling models and seven of the top 10.
Looking at various price points, we had the number one position in virtually every price segment below one.
50.
What are the most important accomplishments in 2019 was our successful expansion into the broader PC accessories market with the acquisition of rocket.
We now have a good baseline of keyboard mice in headset products for PC gamers to be sold under the rocket.
This is a large and growing market and we are gaining share more on that later.
With this growing position in PC accessories, and our long established leadership in Council headsets, We're now a leader top four by our estimates in the $4.1 billion global market for gaming headsets.
Keyboards and mice.
I'm now going to turn it over to John to review the fourth quarter financial results and I will come back with comments about how we see 2020, playing out as well as review of our strategy to accelerate our growth in the global gaming accessories market John.
Hey, Thanks, you're gonna and good afternoon.
Afternoon, everyone. Most of my comments today will focus on our results for the fourth quarter net revenue was $101.8 million or $102.1 million on a constant currency basis compared to 111.3 million in a year ago quarter well.
Firmer demand remains above historic levels. This decrease was the result of the expected decline from the record levels of demand in the prior year driven by new headset users buying their first headset for Battle Royale teams.
Gross margin in the fourth quarter was 35.1 per cent compared.
38.5% in the fourth quarter of 2018. This expected decrease was primarily due to a more normal level of promotional activity compared to 2018, when less promotional effort was necessary in the record setting battle, while boom as well as increased tariff costs.
Cost and product mix, which was partially offset by lower standard freight costs.
Operating expenses in the fourth quarter of 2019 were 22.3 million compared to 17.4 million in the same quarter of 2018. This was primarily due to the addition of the rocket.
Operating costs.
Net income in the fourth quarter of 2019 was 20.4 million compared to 24.6 million in the year ago quarter, reflecting the commentary I just covered.
Net income in the fourth quarter of 2019 included a 7.4 million.
Millions benefit from the release of the valuation allowances on deferred tax assets.
Net income per share in the fourth quarter of 2019 was one dollar and 29 cents on 15.7 million weighted average diluted shares outstanding.
Compared to one dollar.
33 on 16.2 million weighted average diluted shares outstanding in the year ago quarter.
Adjusted net income for the fourth quarter of 2019, which excludes transaction and integration costs incurred related to the acquisition of rocket as well as the release of the valuation allowance.
Was 13 million or 83 cents per diluted share compared to 21.5 million or $1.33 per diluted share in the 2018 period.
Adjusted EBITDA in the fourth quarter of 2019 was 16.6 million compared to 25 million in the year ago quarter.
Cash provided from operations during the full year 2019 was 39.4 million down modestly from 42.2 million. In 2018. This continued strong cash flow allowed borrowing against our revolver to remain historically low.
Throughout the year Inspite of the cash outlay for the rocket acquisition, reducing our cash interest expense.
Now turning to the balance sheet at December 31, 2019 at $8.2 million of cash and cash equivalents with 15.7 million of outstanding.
Debt under our revolving credit line. This compares to 7.1 billion of cash and cash equivalents and 37.4 million of outstanding debt under our revolving credit facility at December 31, 2018.
Inventories at December 31, too.
Thousand 19 declined to 45.7 million compared to 49.5 million at December 30, Onest last year. The decrease was driven by the lower level of revenue offset by the addition of inventory from the rocket acquisition.
We did bring in a bit more inventory to mitigate the impact.
Pack of tariffs and we believe both our inventory and channel inventory of our products are on balance at appropriate levels.
During the quarter, we continued our share repurchases acquiring 65500 shares at an average price of $8, a 91 cents since our share repurchase program.
It was announced on April 10, 2009 team, we have repurchased 271300 shares for $2.5 million or an average of $9 in 30 cents per share.
The timing of our buyback activity will of course be subject to regulatory parameters market conditions and our CFO.
Cash flow and we will continue to prioritize investing in growth and business development.
Now I'll turn the call back over to Europe and for some additional comments you are going.
Thanks, John as I said earlier, the integration of rocket into our existing business transforms our company from a leader in council headsets into a leader.
In gaming accessories more broadly this has been a goal of ours for many years and it's very gratifying to be able to partly our success in the council market into a strong foothold in the large PC accessories market.
While we knew at the outset of 2019 that council headset sales were likely to decline from the battle Doral driven.
Boom of 2018, one of the unique dynamics. This past holiday was that both Sony and Microsoft had already announced their next Gen councils expected to launch later this year.
In the past the hardware leaders wait until well into the year of the launch and importantly, after the holiday season to.
Formally announce the upcoming launches the market data shows that these earlier than normal announcements of incoming new X. box and Playstation councils has disrupted the council market overall as well as the market for council accessories, particularly after the holidays.
According to NPD total U.S. video games.
Sales in January 2020 were down 26% compared to 2019.
Just a video game hardware sales were down 35% in video game accessories endgame cards were down 11%.
These figures are up against some pretty good results from January 2019, but still they show that some.
Mers are holding back.
Because of the council headset market is largely driven by upgrade and replacements, rather than new council buyers the impact of the pre announcement of the councils affected sales of X. box and Playstation councils more than it did for accessories for those councils, but it's still.
No significant you can see this impact in the NPD data, which shows new X. box and Playstation Council sales in the US are down nearly 50% in January it does help that the current council headsets are expected to work on the next generation councils, but some consumers may still wait on purchasing or upgrading.
Counsel accessories to try to match their new X. box or Playstation with a new headset and or to save some of their gaming budget to be able to get that new council when they launch.
According to a survey by new Zoo gamers that are most likely to upgrade their councils also intend to upgrade their.
Gaming headsets.
This is what tends to drive an uptick in sales once new councils are launched.
As a result of all these dynamics, we expect the council headset market to decline about 11% for the full year, reflecting a deeper decline until the new councils launch partially.
Offset by year over year growth in Q4, once the new councils have launched.
History tells us that the launch of new councils triggers the sustained increase in spending on accessories for several years. So the anticipated launches this year should kick off the new growth cycle in council accessories as a.
Well, we expect mid to high single digit growth in council gaming accessories market for 2021 and 2022.
Even with the disruption of the pending hardware launches counsel video gaming remains a thriving and exciting category.
Hey, the disruption caused by consumers holding back is.
Itself, a sign of strong future demand and game publishers continued to evolve to produce games at Invigorates the market.
For example, just today Activision released call of duty or zone a.
A cross platform free to play Battle Royale game, which incorporate some of the best elements.
We have other call of duty games as well as innovations featured in other popular games from other publishers.
Innovations in gaming like this keep veteran players coming back and the free to play model has proven to be very effective and enticing new players into the market.
We've also mentioned that Sony has emphasized.
Three D. audio is a key upgrade on their new Playstation.
And not surprisingly recent news seems to indicate that Microsoft is going to do the same on their new X. box.
Better audio makes better headsets more appealing and more valuable to gamers and better headsets are a core competence.
For us.
That of course is just the council headset part of our business at 1.4 billion in global sales console headsets represent an enormous market, but it's less than half of the 4.1 billion global gaming accessory market. We now play in.
The market for PC headsets is.
Almost as large as the council gaming headset market and the global market for gaming mice and keyboards is even larger than the market for council headsets, Here's the point.
We are just getting started in a $2.7 billion market for PC gaming accessories that market is expected to grow.
Well over 20% between 2019 and 2021 according to news EU, it's a large growing market for us to pursue and we're making good progress.
Our sales a PC accessories in 2019 were more than two and half times greater than in 2018. This includes.
The revenue from rocket products as well as the Atlas headsets, we had already developed before buying rocket.
In Germany, a market that we viewed and continue to view as a key leading indicator of what is possible with the rocket brand portfolio and team we grew our year over year PC sell.
True in euros by double digits and outpaced the market growth by nearly three times.
You asked market last year, we outgrew the market in dollar sell through for PC gaming headsets keyboards, and mice by over two times and we're really just getting started in that market.
Let me say a bit more regarding rocket and our growth plans, we acquired rocket to get a good base portfolio of gaming keyboards, and mice and more importantly to get the capabilities and experience in designing and developing innovative high quality PC gaming accessories in particular.
Words in mice, which are very different from gaming headsets, where we already have world class capabilities with the rocket acquisition. We fully achieved this goal and I feel extremely good about the talent capabilities innovations and core portfolio we acquired.
In the past nine months.
We have successfully successfully integrated the teams processes and capabilities into the company.
We also undertook an extensive multiyear product and brand planning effort with the goal of becoming a leader in the PC gaming accessories markets, we are targeting in the coming years.
That process led to.
The decision to utilize the rocket brand for our PC accessories, including future PC headsets.
The process also led to a decision to phase out certain products that don't fit with our long term plans, which by the way has some short term impact on our revenues in the PC market this year and the.
Process led to an aggressive two year product development plan to fill out our PC accessories portfolio with new innovative prospects in each of the price tiers, we want to target.
For competitive reasons, we aren't going to share details, but suffice it to say that we are excited about the plans and the level of innovation and.
Nine in our upcoming PC products.
And so far the reaction from key retailers on our rocket brand and the peek into our portfolio plans that we shared has been very encouraging.
As we articulated success with those brand and product plans should allow us to attack and grow.
In a market segment that is more than two times the size of the council headset segment.
And the fact that we've held a number one market share position by far in council headset business and be extremely strong relationships and track record we have with major retailers gives us confidence in our ability to replicate that success.
In the PC category overtime. It doesn't mean, it's going to be easy or quick, but then either is maintaining 40 plus percent market share for the past decade in council gaming headsets, we're going to follow the same principles, we followed for years deliver high quality product with innovation.
For all level of gamers and execute well with our retail partners and operationally.
We're going to invest to accomplish the mission of putting ourselves in a position to lead in the attractive growing 2.7 billion dollar market for PC gaming headsets keyboards and mice.
To.
Give you some sense of what invest means the two year expansion of our PC product portfolio. The continued development of our rocket brand the expansion into new geographies and the team and talent to do all that represents a roughly 9 million dollar investment this year.
And the brand marketing portion of those.
These investments will continue next year as we support the multitude of product launches in 2021.
Our expectation is that the investments this year and next will put us on track to continued double digit growth in our PC accessories sales for the coming years and given our expectation that.
Console gaming headset market should grow mid to high single digit percentages in 2021, and 2022, we should be in a position to sustainably grow revenues and earnings in 2021 and beyond that is our long term goal tend to 20% growth in revenues and 15 to 30.
Percent growth in EBITDA.
Given that I frequently get asked about share repurchases and the fact that we announced a $15 million share repurchase program last year I'd like to comment on how we make capital allocation decisions.
We are well aware that the stock price reflects a low earnings.
Comparable I.
I purchased nearly $750000 worth the stock myself over the years and my beneficial ownership is now over 5%.
So I am fully aligned with shareholders and the desire to create value over time. So are the management team and the rest of the board we.
All shareholders, we obviously view of the stock as an attractive opportunity, which is why we announced the plan last year and made over $2.5 million in share repurchases. However, we firmly believe that the best way to increase shareholder value is to put the company in a position to achieve sustained growth.
You can see from 2018 financials that growth in the topline rapidly gross earnings and cash flow.
In other words of investing approximately 9 million can put us in a position to enable long term growth. It's a higher priority use of capital than the modest reduction in shares that that same.
Would result in.
It's about focusing on increasing the earnings multiple significantly not modest modestly increasing EPS that doesn't mean that we won't continue to opportunistically evaluate share repurchases. It just means that we are taking a long term view and prioritizing investing in growth.
Both rather than reducing share count because we feel this is the best approach to creating shareholder value over time.
Before I turn to our outlook and wrap up let me make a few comments about the impact of Corona virus on our business.
So far the supply chain disruptions have been manageable.
The seasonal nature of our business means that this is a relatively slow period for production and are on hand inventory has a step enabled us to manage these past few months without any major issues our partner factories in China have made good and steady progress scaling their production they have communicated.
That they expect that progress to continue at a rate that will enable them to meet our supply needs.
And other than a few pockets of issues they have committed to our supply needs for 2020.
We also have non China based production up and running and we'll have a significant portion.
Of our products manufactured outside of China. This year in accordance with the plans we started implementing back in 2018.
So while we may have a few issues to manage as long as there is no drastic change we don't expect a significant impact at this time.
We will of course continue to monitor.
Over the situation very closely and take prudent necessary steps to protect our employees as long as the virus remains a concern.
Turning now to or to the specifics of our outlook for 2020.
For the first quarter of 2020, we expect revenues to be in a range of 29 to 31 million.
Reflecting a council gaming headset market decline ahead of New Council launches, partially offset by continued growth in our other gaming accessory revenues, we expect adjusted EBITDA to be in the range of negative 6.5 million to negative 7.5 million.
We expect the loss per diluted share.
Year to be in the range of negative 73 cents and negative 81 cents and the adjusted loss per diluted share.
Fully diluted share to be between 72 cents and 80 cents.
For the full year 2020, we expect revenue to be in the range. It.
214 million.
224 million, reflecting a council gaming headset market decline ahead of the New Council launches, partially offset by the continued growth in our PC and other gaming accessory revenues.
We expect adjusted EBITDA B to B in the range of 510 million, reflecting the investments in future growth.
I covered earlier, plus a small buffer for anticipated expediting costs due to Corona virus, we expect net loss per diluted share to be in the range of 13 to 46 cents and we expect adjusted loss per diluted share to be in the range of 12 to 45 cents.
Despite.
Adding a pre tax loss for the year, we do expect to show modest provision for income taxes because of various taxes in certain jurisdictions.
So to summarize our goals for 2020.
Number one continue to lead and counsel gaming headsets as we prepare.
For the transition to new councils with a great portfolio products for existing councils and the upcoming launches.
Number two drive growth in PC accessories, including making significant investments in brand and portfolio. This year and next to put ourselves in a position to lead that market overtime.
Number three maintain healthy balance sheet and prudently manage our capital to create long term shareholder value.
We have a terrific position in a great market, we have a strong brand and a leadership position and counsel gaming headsets and are committed to and investing in extending that leadership more broadly to the four point.
The $1 billion gaming accessories market and frankly I have strong faith in the great team, we have here a turtle beach.
We positioned ourselves well to drive future growth with a long term target of 10% to 20% per year in revenue and 15% to 30% per year in EBITDA.
Finally.
A big Thank you to the fantastic team a colleagues across the company for the great work, they do and their dedication to delivering the best gaming products for all our customers Im grateful to be working with all of you and appreciate all that you do.
Operator, we're now ready to take questions.
Thank you Sir.
As a reminder to ask a question you need to press star one on your telecom to withdraw your question. Please press the pound King.
Please standby what impact you any roster.
Our first question comes from Thomas Forte of D.A. Davidson Your line is open.
Great question on thrown a virus.
The first question.
I had was.
Between the terror and the krona virus, how should we think about the role of China in the long term as it pertains to your supply chain and then I think you commented on the supply chain elements as far as near term disruption. So we also assume that there has not been any near term disruption from a sales or demand.
Standpoint, thank you.
Sure So on China long term role for us. So we as I mentioned were fully up and running now on non China production and we will actually this you already have a substantial portion of our resident of our supply coming from non China countries.
That's.
As an initiative we started in 2018 and now of course, that's helpful with the Corona virus, even though the Chinese factories are fully committing to our supply needs for the rest of the year.
And of course, having non China production also enables us going forward to have the ability to flex production between.
China factories, and non China factories, and gives us just simply a more diversified supply chain, which is something we've been working on since 2018.
On the demand side, we have not seen any meaningful impact on demand, it's something we're watching closely especially in countries that are.
That are hot spots.
I will just say that it's not clear that while retail sales might suffer online sales might counteract that and remember that gaming is something that people do at home for entertainment. So just by its nature.
It's hard to judge whether that's going to have an impact.
On us or not.
But it's something we're watching very closely.
Thanks for taking my question here again.
Thanks, Tom.
Thank you. Our next question comes from Mark Argentina from Lake Street. Your line is open.
Hi, guys. This is John on for Mark. Thank you for taking my question.
Yes.
To kind of on the PC business.
Overall first how do you see gross margin trending both overall and on a seasonality basis is PC becomes a larger portion of the mix and number two none of it sounds like you have rocket fully integrated your positioning yourself to make investments.
Gross.
What are some early signs that give you confidence that you will not only be able to kind of grow with the market, but also be able to take share from your competitors in the PC accessories market. Thank you.
Sure. So a question on margins our target for the company remains mid Thirtys gross margins.
This year, our guidance is a few points lower than that and that's that's reflective of some impact of tariffs and additional airfreight is the biggest impact.
And that takes a few points off to the off of our kind of our normal target run rate.
PC, we said before we're targeting.
Being lower Thirtys gross margins and Thats, mainly because we're attacking the segment now, but because we believe the segment long term can have a margin profile. That's in the mid thirtys. So that may have a small impact on our average gross margins as PC becomes a bigger and bigger part of our of our business.
This but we're still targeting in the long term margins in the mid Thirtys range.
So thats on that's on the margins and then give me. The second one is is I think you asked for signs of success and I mentioned two things. So and these are I think important leading indicators Germany.
Where rocketed really had its core focus before the acquisition rocket is one of the key players in the market.
They are one of only three players in the largest retailers to have a dedicated area of the stores for example, and in 2019, we outpaced the market.
Growth in Germany in PC accessories by three X.
So that means that we obviously grew enough share in Germany, two to two outpaced the market growth and we achieved double digit growth in our PC accessories. There and then the you I mentioned the us market, we outpaced the market, thereby qx.
Which means we gained share in the overall PC accessories category in the us as well in there obviously the base is small, but it's a good sign a progress in a market where we are really just getting started.
Thank you guys said.
Thank you thanks John.
Thank you.
Ladies and gentlemen, she'd like to ask a question. Please press Star then one when you touched on telecom.
Please.
Our next question comes from the Haas choke ski Maxim Group. Your line is open.
Oh, yeah. Thanks.
So you guys.
Beat your calendar 19 free cash flow by massive 16 million almost two X looks like that's largely results in the construction of that cash conversion cycle.
Should we looking at does a sustainable compression any thoughts on there.
By the coming out of our Hyatt Neonates, John I think coming out of.
Coming out of 2018, obviously, we did expect to see some benefit from working capital management in 2019, what you're seeing but we would expect that to moderate a little bit. Yes. It's largely the result of just normal working capital shift back as as that happens with a lower market size and lower revenues of normalizes.
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Right right.
The.
The reason why I'm trying to detail. This is because does have some attack.
The calendar 2000 free cash flow relative to the but.
Free cash flow no the free cash flow so.
You are talking about operating cash flow before free cash flow will follow the rough same formula we've had in the past so its EBITDA minus.
Four ish so of Capex this year Capex will be higher because we're spending on tooling and some other.
It was associated with new product launches and then minus cash taxes.
Okay Cool and then.
Cash interest.
Okay and then.
So the 9 million Incrementalist investment Pcs for calendar 2008, what's the justice.
Question time for return on investment.
So thats part of a two year effort as I mentioned, they how to drive growth in both the portfolio and make investments in brand so that when those products launch over the next two years. Some this year more next year.
The brand will be.
The there to support and then we'll continue to the brand investments in next year as well, we may have some additional portfolio and that growth investments, but really it's part of our two year plan to kind of aggressively grow our position in PC. The gestation period, what I would what I would expect from that is that starting.
That number one it enables continued double digit growth in PC revenues overtime and that it helps enable the company to grow at our target of 10% to 20% revenue growth.
And if we didnt make their investment what kind of growth in PC was you had the would you.
On a long term basis than.
I don't know that there is an easy way to judge that.
We have a good position in PC with the portfolio that we haven't we do well with the products that we have in the price tiers, particularly keyboards and mice and the price tiers that we we have products and.
And so our view is expanding that product portfolio in the different price tiers with with more variety is the product is going to be a very worthwhile investment and then in brand is obviously something that needs to be built particularly.
Outside of Germany. The rocket brand is very strong in Germany.
Kind of it so it's known in Europe, it's less known here, but our consumer testing showed that it's no would actually among PC gamers and has very positive attributes and so.
At the kind of like other investments of that type, it's kind of hard to separate out if we didnt promote and market the brand what would happen to the.
Business. Our conclusion very simply is that that is a very worthwhile investment to support the revenue growth overtime.
Alright, thank you ill get back into queue.
Thanks Neil.
Thank you.
This concludes our question answer session.
I will now, let's turn the conference back over to Mr. Starks for closing remarks.
Thank you we look forward to speaking with our investors and analysts when we report our first quarter results in May.
Thank you.
Thank you.
Ladies and gentlemen, this does conclude today's conference.
You may disconnect your lines at this time, thank you for your participation.
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