Q1 2020 Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach at first quarter 2020 conference call.
If I'm all participants are in understanding only mode.
After the speakers a presentation there will be a question and answer session. Catholic question. During this session you'll need to press far one on your telephone and if you require any farther system. So please press bars near.
Before we get smart you will be only starting to the press release files today, but details. The company first word 2020 results, which can be downloaded from their investor Relations Page AD Corp, Dot Turtle Beach Dot com.
Where you'll also find the latest earnings presentation that supplements the information does cost on <unk>.
Finally are recording of the call will be available on the Investor section of the company website later this evening.
Seems to be aware that some of the comics made during this cold may include forward looking statements within the meaning of the federal <unk> <unk>.
Statements about.
The company's belief and expectations containing words words, such as May Bill could believe expect anticipate on similar expressions constitute forward looking statements.
These statements involve risks uncertainties regarding the company's operations on future, we thought but could cost turtle beach corporations that result to defer materially from management to current expectation.
While the company belief that its expectations are based upon reasonable assumptions numerous factors may affect actual results. They may cause result, pity for materially. So the company encourages future you to say use harbor statements.
Risk.
Actors contained in today's press releases filings with the Securities and Exchange Commission moving.
Without limitation, it's annual report on form 10, K. Most recent quarterly report on form <unk>.
<unk> excuse and other periodic reports.
Which identify specific risk factors, but also may cost actual results or you've been to defer matures.
Are you from Dos described in forward looking statements.
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He does not undertake to publicly update or device and forward looking statements after they Stockton cool.
The company also notes that Andreas Kohl, Yeah, we'll be discussing non gap financial.
Information the companies, providing that information as the supplement to information prepared in accordance with accounting principles generally accepted in the United States or gap.
You can find every constellation of these metrics to the company's reported gap results in third constellation table provided entities earnings really presentation.
And now I'll turn to go over to your against Spark The company Chairman and Chief Executive <unk>.
Good afternoon every one in thank you for joining us we hope the short delay allowed more of you to join the call at the beginning here.
We are pleased to report results for the first quarter of 2020 that exceed our expectations for revenue margins and profitability.
During these unprecedented times in addition to being a source of entertainment gaming is providing away for friends to stay connected.
On top of that schools closed and moved to distance learning and most offices required workers to work from home. Many are finding our headsets well suited for two way school or work communications.
These factors combined to increase the demand for our headsets, resulting in a stronger than forecasted quarter and an increase in our outlook for the year.
Before I talk in more detail about our results for the first quarter in our outlook I want to think are incredible employees for how quickly Dave adjusted to work from home and a great job they've done keeping all parts of our business productively moving forward.
Like others, we prioritize the health and safety of our employees and I've had them or work working remotely for the most parks since March we haven't missed a beat despite the challenges of adjusting to work from home.
Adding to the challenge was an incredible and unexpected increase in demand for our product combined with an extremely volatile retail environment that it has been changing on a region by region week by week basis.
This is required working double time to analyze market trends update forecasts manage supply expedite shipments and cover a number of markets were demanded volume suddenly became much higher than normal.
Quite simply our team has done a phenomenal job and I couldn't be more proud of each and every employee for how they managed to really challenging circumstances.
Turning to our results.
Those of you who were on our fourth quarter earnings call back in early March, which seem which which is only two months ago, but seems like years ago.
Remember that we expected industry sales of council headsets to decline roughly 20 per cent year over year. During the first three quarters of the year and then pick up in Q4 and into 2021 after the anticipated launches of the new councils from Sony and Microsoft.
That'd be was based on patterns, we have seen over the past council upgrade cycles exacerbated by the much earlier than usual announcement of these next gen councils.
We continue to believe in those trends for the council gaming market, but to stay at home measures have changed the patter consumers are spending much more time gaming and retailers are reporting higher than expected sales of councils as well as of gaming software.
In addition to favorites like fortnight. The recently launched call of duty worst zone has done extremely well as a new social multiplayer game.
$10 animal crossing which allows voice chat has also done phenomenally wealthy.
We believe customers are also using gaming headsets for two way communication as well learning and working at home.
These factors have led to a sudden and steep increase in demand for gaming headsets starting mid March.
In fact, according to N.P.D.U.S. Council gaming headset retail sales hit an all time high for the month month of March higher even than marks of 2018 during the battle Royal driven market expansion.
This partially offset the expected year over year decline in January and February resulting in U.S. Council gaming headset sailors being down only 4% year over year for Q1.
In addition to the better than expected sales levels. We also saw a significant increase in our market share.
You might recall that we have had the number one market share in council headsets for more than 10 years and that our share routinely exceeds the share of the next three competitors combine.
We saw an increase in our share based on the popularity afford Tonight in 2018, partially we believe because we did a better job than our competitors are keeping our product in stock at our retailers and because many of the new gamers drawn in by battery all games, we're purchasing headsets in the sub 50 dollar retail price tier.
Where our market share has been at is even higher than our average here across price tears.
For U.S. Council headset more R.U.S. Council headset market share rose over 500 basis points in March and over 200 basis points for the quarter.
I mentioned that the market experienced a sudden in steep increase in demand in March.
Well that combined with our large here again put us in a position where within a matter of days many areas of the company, we're operating at peak volumes.
In March as measured by revenue all six of the industry's top six selling models and eight of the top 10 models were from Turtle Beach with the stealth 600 for X. box continuing to be the best selling Council had said for the third straight year.
We believe the results continued to be a testament to our strong brand excellent products and our execution at retail, particularly in times like this where retail supply chain and operational execution can make such a big difference both to wash into our retail partners.
Like in 2018 during the fortnight battery L. market increase we are extremely focused on doing everything possible to secure increase supply a products for our retailers and our consumers.
Given the amazing job or retail partners have done adjusting to the dynamic retail environment over the past month. They deserve every bit of effort we are putting into this.
Note that I'm, providing some color on the U.S. counsel headset market since that's the biggest portion of our business.
All of our market major markets across council, N.P.C. headsets keyboards, and mice shock gross in consumer demand in March and in most geography and product categories, our sales outperformed the market.
So is John will now cover our first quarter financial results exceeded our expectations across all key financial metrics and the strong market demand has continued indicate you too I won't come back with comments on a revised outlook 2020. After John provides details two one results John.
I think sugar and and good afternoon, everyone net revenue for the first quarter of 2020 was 35 million or 35.1 million on a constant currency basis compared to 44.8 million in a year ago quarter.
Sales in the first quarter of last year were still being driven to record levels by the battle Royal search while down versus last year, our sales in the quarter, we're about 5 million or 17% above midpoint of our guidance range driven by record setting retail sales in March as you're a good described.
Gross margin in the first quarter was 30.8% compared to 33% in the first quarter of 2019.
Expected decrease was primarily due to the continued impact of terrorists and a decline and volume based fixed costs leverage partially offset by a more favorable business mix.
Operating expenses in the first quarter of 2020 were 15.8 million.
Pair to 13 million on the same quarter of 2019.
The increase due primarily to the inclusion of costs associated with the rocket acquisition, which was completed at the end of May 2000 in 19.
Not lost in the first quarter of 2000 23.6 million compared to net income of 3.1 million a year ago quarter, reflecting the commentary I just covered.
The company typically post a net loss per share in the first two calendar quarters. When sales volumes are relatively lower due to the seasonal nature of the business.
Not lost per share in the first quarter of 2020 was 25 cents I'm 14.5 million weighted average deluded shares outstanding.
Compared to net income per share of nine cents on 16.3 million weighted average deluded shares outstanding in a year ago quarter.
Just could not lost for the first quarter of 2020, which excludes transaction and integration costs incurred related to the acquisition of rocket was 3.4 million or 23 cents per diluted share compared to adjust the Mets I'm a 2.2 million.
Or 13 cents per diluted share in the 2019 period.
These results significantly exceeded our guidance for adjusted net loss per diluted sure, which was a range of 81 sense to 73 sets.
Adjusted either down the first quarter 2020, with a negative 2.7 million compared to positive 4.3 million a year ago quarter.
Adjusted EBITDA was significantly better than our prior guidance of negative 6.5 million to a negative 7.5 million.
Cash provided from operations during the quarter was 17.5 million discontinued strong cash flow allowed borrowings against our revolver to remain nominal in spite of the cash outlay last year for acquisition of rocket.
Reducing our cash interest expense.
Regarding our reported taxes the full your tax provision for 2020.
Expected to be in the range of 1 million to $2 million, depending on natural results for the year with a higher provision corresponding to the higher end of our guidance range.
And now turning to the balance sheet at March 31, 2020, we had $8.7 million of cash and cash equivalents with point 3 million of outstanding debt under a revolving credit line.
This compares to 10.2 million a cash in cash equivalents and zero outstanding debt under our revolving credit facility at March 31st 2019.
As of today, we have over $10 million in cash on hand was zero outstanding debt.
Inventories. It marks 31, 2020 declined to 39.3 million compared to 44.4 million at March 31st last year. The decrease was driven by the better than expected sales, partially offset by the addition of inventory from the rocket acquisition.
Going into 2020, we had brought in a bit more inventory to mitigate the impact of tariffs and that has helped us accommodate increased demand during the quarter.
Now turn the call back over to your good for some additional comments gergen.
Thanks, John.
The environment continues to be highly dynamic as we speak some states across the country in some countries around the world have begun to ease of the cold in 19 related restrictions on consumers and retailers.
How quickly other states in countries open up how the retail landscape might be impacted and how consumers will behave in the coming economic environment or unclear at this point.
<unk> keep priority for US right now there for is to continue our disciplined analysis monitoring market trends that both retailer in country level and adjusting are supplied plans accordingly.
This up surging demand is unlike past demanding increases when a slater strong games induce gamers to buy headsets or an innovative <unk> like battery all comes along.
Those cases, there were strong but relatively smooth curves in terms of demand for gamy accessories that once detected could be extrapolated and model.
Is different.
There has been and continues to be a significant increase in demand as was the case during the fortnight surge, but we expect this demand increase to evolve and potentially change quickly once stayed home orders and plus the increase in demand is currently combined with the retail landscape, which in some areas is actually constraining.
Film and have that demand.
Where for example stores are closed or E. commerce for filming infrastructure is struggling to keep up with orders and deliveries.
However, consumers seemed to be doing a great job finding supply in our quickly shifting they're buying habits, accordingly, including significant shifts to eat commerce go through our retailers and directly on our turtle Beach and rocket brand websites.
As I previously stated our retail partners have done an extraordinary job adjusting their business models ramping commerce capabilities and adapting at record speeds to the changing environment. We're fortunate to have such a great.
Such great retail partners as our top customers.
We expect many of these retail in consumer dynamics to continue to change one stores are able to reopen and we believe our strong performance over the past few months is a good indication of our ability to execute well and thrive in a variety of retail landscapes.
In addition supply chain and particularly air cargo capacity in logistics have been and could continue to be impacted Fortunately are excellent team hasn't been able to successfully to leverage a variety of options to significantly increase supply and expedite its arrival across multiple channel.
Including are now significant manufacturing capacity outside of China.
Since the initial impact of coping 19 on our manufacturing partners earlier. This year. We are pleased that our partner manufacturing capacity has been back on track for many weeks now in fact, we managed to scale production rapidly to meet the increase in demand I would like to offer my thanks to our manufacturing.
Partners for their excellent execution on this.
The fact that Asia base suppliers have been able to resume operations may also bode well for the upcoming launches of Sony and Microsoft New councils. In fact, we believe the strong uptick in demand for gaming across the board will also encourage Microsoft and Sony to maintain he anticipated timing of their council launch.
<unk>.
Always have reinforced their intentions to lawn intentions to launch the new councils as planned before holiday, although there may be lower demand for the new councils as both of their expected premium pricing depending of course on the state of the economy.
We continue to be very excited about the new councils and the start of what we expect will be a new count some market gross cycle later, this year and going into 2021.
So our plan in this unproductive precedented in dynamic environment is to continue to analyze adjust and execute accordingly to serve our retail partners well and keep our excellent products flowing into the hands of our consumers.
Turning to our increased outlook for 2020.
We expect to have a very strong Q1.
For the second quarter of 2020, we expect revenue to be in the range of 42 to 47 million.
This reflects the recognition that the man continued to be exceptionally strong as staying home guidelines and orders remained in place in many markets through the end of April we expected as local and state government relaxed those measures demand could subside.
Channel inventories are low. So then we'll need to be it'll be a need to replenish stock even as demand returns to more normal levels.
The estimated revenue range also reflect our current expectations on products supply, including significant use of airfreight, which could vary up or down given the dynamic cargo situation.
As I mentioned, our priority in times like this is to get supply to our retailers and customers, even if we need to spend extra to expedite.
We expect adjusted EBITDA to being a range of negative 2 million to break even for the second quarter, including the anticipated incremental expediting costs and the longer term gross investments we are making this year.
We expect a loss per diluted share to be in the range of 17 cents to 27 cents and the adjusted loss per diluted share to be in the range of 14 cents to 24 cents.
For the full year 2020, we now expect revenue to be in the range of 224 million to 234 million. This is 10 million higher than our previous guidance. While we recognize that are first quarter beat our guidance and our second quarter sales forecast is well above the consensus of published.
Estimates, we're approaching the full year estimates with some prudence as a few factors remained unclear first we don't know at this point how long the unusually strong demand for gaming accessories will continue if life goes back to something more normal and people are spending less time at home, it's logical to assume that the level of gaming Wilson.
Side and go back to quote normal.
Second we are not sure of the degree to which strong sales we have experience. So far this year might actually have been sales that would otherwise have happened later in the year. So we're factoring in some amount of poll forward purchases in our guidance.
Third it's unclear what the economic environment, including unemployment will be in the second half of the year and whether or not the gaming market will prove to be as resilient in the midst of challenging economic environment as it has been these past months.
We now expect full year adjusted EBITDA to be in the range of 9 million to 14 million for about 4 million higher than our prior guidance, reflecting the investments in future growth I covered in detail last quarter.
And some higher estimate higher costs due to cope in 19, including expediting supply more than offset by the higher revenues.
We continue to be on track for our plan 9 million investment this year to expand our market share and P.C. accessories, and open up that significant additional market opportunity in the future those efforts are well underway.
We expect net income per diluted sure to being a range of a loss of 22 cents to a profit of three cents.
To our prior estimate of the loss of between 46 cents and 13 sets.
We expect adjusted net income per diluted chair to being a range of a loss of 16 cents to a profit of nine cents compared to our prior forecast of a loss of 45 cents and 12 sets based on approximately 15 million diluted shares.
So to summarize our goals for 2020.
Number one continue to lead and counselor gaming headsets and nimbly respond to shift in demand as we prepare for the exciting transition to new councils.
Number to drive growth in P.C. 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 a healthy balance sheet and permanently manager capital to create long term shareholder value.
And number four given this extraordinarily dynamic environment continue to execute well across retail supply chain and operations with diligent analysis and quick adjustments as needed.
As I said many times I believe we have a terrific position in a great market, we have by far the leading brand and market position and council gaming headsets and are committed to and investing in extending that strengths more broadly in the 4.3 billion dollar gaming accessory market and I believe to one has.
Been and two two will be another example of our ability to execute well in dynamic situations.
We believe we are well positioned to drive future gross and continue to have a long term growth targets of 10 to 20 per cent per year in revenue at 15 to 30 per cent per year in <unk>.
And finally I would like to once again, thank our employees, who have done an incredible job under extremely challenging conditions. You are all truly what makes this company succeed I'm very proud to be a part of this great team with you.
Operator, we're now ready to take questions.
Thank you sorry, as a reminder, task questions you'll need to press far one on your telephone to withdraw your question press the pound key please time <unk>.
And her first question work from a from a Mark Argento.
From lakes read capital markets.
You might frisky.
You're going to draw on a just a couple of quick ones.
Touch on a little bit I apologize bunch of between a couple of calls, but you're in terms of supply.
Rule that you can get enough product in the market I know you had mentioned.
<unk>.
In a product to various yeah, D.C.'s or other areas, where it might be you know but center, but.
Talk about your ability to get the outer product that you're seeing in Canada spots.
You know the areas you need it right now.
Sure Hi, Mark.
So the supply chain team as I mentioned is done just a phenomenal job increasing supply.
Two two will be constrained from a comply from up supply standpoint.
<unk> that is even with a more than three x. increase in factory output between March and May just to give you some sense of the amount of the increase.
So we will be constrained this quarter, we expect and demanding depending on demand that will either be a you know subside as we go into two three.
Or not but our our goal. Obviously is is to continue to Ram supply and get it here quickly, including using airfreight wherever we need to and we know that our retail up retailers recognized the work we do here and they appreciate.
The effort into spending we put put into getting them in supply even when markets have gone up.
By by multiples in in a matter of a week or two.
And then in terms of just managing.
Product versus next Gen product.
I have.
Headsets.
The new tonsils, but.
I'm assuming.
<unk>.
Presentation about the backwards compatibility here. So you just talk about.
The need to discount.
Product.
Versus kind of getting ready for launching the next gen product and if they're backwards compatible.
Maybe we don't use much discounting this year and also given the amount of demand you've seen up front. So.
Perspective, maybe less dramatic of a margin.
Margin degradation, then we see an impasse transitions.
<unk>.
Absolutely Mark both new councils have confirmed that they have three and a half millimeter audio <unk> on them, which means all of the wired products are fully forward backwards compatible. We also expect the wireless products to be forward and back.
Compatible and therefore, we don't expect to have any major kind of counsel transition issues and as you mentioned, while we will have some some products for the new councils the high rate of sales.
I will actually you know help us not we we believe not head into the council transition with with you know inventory that that needs to be discount that we can never be sure, but we certainly believe that this will be not like the last transition and and that will be very on top of managing all of the product.
Transitions.
In in during holiday here.
Great. Thanks, guys.
Thank you Mark.
Yeah.
Again as a reminder to ask the question you will need to press far one on your telephone.
Yeah.
And our next question will come from.
<unk>.
David Soon please go ahead.
Alright, thank you.
How can you talk about your sales trends <unk>, how that changed in the boxes March.
Sales trends in April as well as a perfect match.
Sure so.
We mentioned on the on the call Elliot that January and February the market sales overall were down and we you know given the high market share we have we track roughly with the market.
We're down I don't have the numbers in front of me, but we we we're estimating around 20%, but that you during March the market shot up so much that the quarter closed it only 4% down. Despite you know January cover being down. So we had noted that the jump in.
Market sales and then on <unk> in March and then on top of that we gained 500 basis points of of a revenue share using the U.S.N.P.D. numbers, which made our growth even more dramatic than than the market growth and then in in terms of post the quarter.
And to stay at home orders have been in place through April and strong demand has continued.
You know to through this this week here.
Okay, Great and then was curious if you're saying much higher volume P. or did you see a channel any comments there and then as retail remains clothes are you seeing success in seeing successor, E. Commerce I could just change your physical footprints out strategy going forward.
Sure. So we have seen an increase in E. commerce sales, both our partner retail sites Amazon Walmart target best buy game stop who all have E. commerce fulfillment capabilities, just didn't mention a few and a turtle beach dot com and rocket.
Dot Com website, so L.E. commerce is definitely going up.
Keep in mind, though that a number of retailers you know around the world have been able to remain open like Walmart and target for example.
Yeah, because they have groceries and other retailers I'll I'll stick with U.S. examples like best buy in game stop have very quickly shifted to an order online and pick up at front of store.
Touchless delivery it it's been astounding, how well and how quickly the retail landscape Viet brick and mortar or E. commerce has adjusted and if that wouldn't happen by the way March wouldn't have been able from a marketing standpoint to set a record including versus the Ford.
Boom in March of 2018.
So and even even with the the demand increase there's still some <unk> where demand was was still constrained by the ability to get product tight suppose supply and fulfillment through to the the consumers, but in general the retail environment has just adapted and adjusted.
<unk>, we extraordinarily well and consumers have adjusted to continue to be able to just fine product wherever they they could get it to to result in in the strong marched at the whole marketing.
[noise] <unk>. Thank you.
[noise] currently this concludes our question and answer session.
I don't like to turn the call back over to Mr. Spark for closing remarks.
Thank you we wish everybody safety in good health in these unprecedented times, we look forward to speaking with our investors an analyst when we report our second quarter results in August.
<unk>.
Ladies and gentlemen, <unk> <unk> disconnect. Thank you for your participation.
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