Q2 2020 Turtle Beach Corp Earnings Call
They live in today's prepared remarks, our chairman and Chief Executive Officer, Juergen start and she financial Officer, John Hanson.
All of them, they're prepared remarks, the management team will open to call up for any questions.
Before we go further I would like to turn the call over the Sun Mcgowan, a gateway Investor Relations turtle beaches IR adviser is he has the company safe Harbor that provides important cautions regarding forward looking statements.
<unk>. Please go ahead.
Thank you Andrew on today's call, we will be referring to the press release filed this morning. The details the company's second quarter 2020 results, which can be downloaded from the Investor Relations page at <unk> Dot Turtle Beach Dot Com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call.
Finally, a recording them to call will be available in the investors 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 well could believe expect anticipate and similar expressions constitute forward looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause turtle beach corporations results too.
Different materially from management is current expectations. While the company believes that is expectations are based on reasonable assumptions numerous factors may affect actual results and may cause results to defer materially. So the company encourages you to review the Safe Harbor statements and risk factors contained in today's press release and then it's filing.
With the Securities and Exchange Commission, including without limitation. Its annual report on form 10-K. The most recent quarterly report on form 10-Q, and other periodic reports, which identifies specific risk factors that also may cause actual results or events to defer materially from those described in our forward looking statements the <unk>.
[noise] does not undertake to publicly update or revise any forward looking statements. After this conference call.
Company also notes that on this call it will be discussion non gap financial information. The company is providing that information as a supplement your information prepared in accordance with accounting principles generally accepted in the United States or gap and you can find a reconciliation of these metrics to the company is reported gap results in the reconciliation table.
Provided in today's earnings released and presentation and now <unk> turn the call over to Juergen start the company's chairman and Chief Executive Officer, Oregon.
Good morning, everyone and thank you for joining us I hope, you're all healthy and well.
The 90 days since our last earnings call has certainly been among the most unusual any of us have ever experienced.
So many routines you've been disrupted so many things we took for granted it hasn't been suspended so many plans put on hold.
Against the backdrop of so much uncertainty you one of the clearest and most powerful development has been that people are playing video games more than ever both to stay entertained and to socialize with their friends.
Our sales and the second quarter, we're almost 80 million not only a record for the second quarter, but more than 30% higher than our previous record of 61 million for the June 2018 quarter at the height of the battery all driven gaming Serge.
So let's talk about this powerful increase in demand for every single related to gaming, including hardware software and accessories for both council and P. C and how we were able to not only capitalized on this increasing demand but to once again outpace the market based on the strength of our products and brand.
As well as our supply in retail execution, enabling us to produce record levels of sales and profits for the second quarter.
And as a result, we are significantly increasing our outlook for the full year two 300 million.
Which would be a record revenue level for us.
Our continued strong performing some council headsets together with the investments we are making to drive growth in new market segments like P. C. Make us believe that we can even exceed that record revenue level next year.
We think you'll agree that gaming has been and continues to be you wanted the best if not the best consumer category in which to be a leader.
According to the recent study from N. P. D group three out of every four people or 204 44 million people in the U S play video games.
That figure is 32 million or 13% higher than it was in 2018.
Score recently reported that the number of U S households, with a council.
Increased by 31% in May 2020 versus May of 2019, and that time spent on gaming was up 133% in may of 2020 compared with May of 2017.
Of course gaming and gave me accessories had been a good gross market over the past years, but the stay at home orders and loss of many other forms of socializing and an entertainment have driven a dramatic increase in gaming.
And on top of that gaming headsets work, great for and are being purchased for non gaming purchases like video conferencing for work school or socializing.
No that the growth is not only happening in council headsets, but are crossed our entire product line is I'll expand out a bit later.
One of the things that is so noteworthy about this growth is how unexpected it was.
The year to date growth figures masks. The fact that many gaming categories were down in the first two months severe consistent with our initial forecast we expected this to be a year, where console headsets would be down for the first nine or 10 months of the year, we had been calling in an error pocket as consumers prepared for.
The launch of new console from <unk>, Sony and Microsoft Instead, the air Pocket has turned into a turbo boost in turned 2020 into a year, where we think we will see record sales.
And we believe some of these trends will drive longer term market growth not just one time not just the one time Serge similar to the way that 2019 battery all surge drove a sustained increase in market size.
Based on our extensive analysis, including consumer research, we've completed over the past month, we see three drivers of the tremendous surge in demand <unk>.
Category, one existing gamers are gaming more and that's translating into purchasing of gaming accessories across our entire product line.
Well, we expect a portion of these purchases maybe pull forwards we believe that the increase in gaming in general could drive a sustained longterm increase.
[noise] category to lapsed gamers in new gamers are gaming and gaming with headsets.
This has to be installed base of gaming headset users, which if they continue the game with headsets, which history indicators likely can drive a longterm increase in the size of the market.
Category three non gamers are buying headsets for working schooling and video socializing at home <unk>.
Aiming headsets work great for this some of them are that also using headsets for gaming to the extent that these work and school from home trends continue.
This is a new source of demand for our headsets.
Our analysis leads us to believe the impact of each of these three factors is roughly equal across the three categories. So each driving roughly one third of the incremental demand over the past months.
Categories wanting to wood drive increased demand across all gaming categories noxious gaming headsets, which is why we are seeing increases across all of our product categories.
<unk>.
Decision to boost their initial production in order for Playstation five from 6 million units to 10 million units by March of 2021.
And all three categories could drive sustained incremental demand.
I think it's important to note that are strong sales performance is not just driven by the growth in the industry, but also by our ability to respond to it.
Most competitors and our product categories are benefiting from the demand Serge, but they are not all reporting growth rates as strong as ours. This is driven by a couple of factors first as soon as we noticed the uptick in demand back in early March we immediately worked with our factories to increase production within a matter of week.
We were able to triple the output from these things and then within a few more weeks, we were able to achieve roughly five times the plant factory output.
Then we had to get the product into our local markets, which was an enormous challenge given the drastic reduction in available airframe capacity. We spent over 4 million expert to do this what is John will outline. This was very worthwhile financially and we know that our retail partner value our efforts to get them supply as well.
L.
And finally, our teamwork around the clock with their retail partners to make sure. We we're putting the right amount of product in the right locations. All this wilder retail dynamics, who is open versus clothes online versus offline cetera, where shifting constantly on a country by country basis.
As I said earlier, it's not just council headsets that are driving our growth.
We're seeing very strong growth in our P C accessories as well.
In the second quarter D. U S market for P. C gaming peripherals, which is headsets keyboards, and mice was up 123 per cent and retail sales of our P. C products were up more than 280 per cent. In fact, we've exceeded the market performing in each P C product category in the.
S and across the board in most of our major markets.
We executed extremely well across all these dimensions and that enabled us to outpace the market and cancel headsets and P. C gaming accessories in our largest market the U S and many of our other markets.
With that in mind I'd like to again, thank our incredible team globally for the great work over the past five months, particularly given all the adjustments each of us have had to make to accommodate working remotely and all the other challenges of the stay at home orders.
With that I will turn the call over to John to review, our financial performance after which I will come back with some additional comments about what we see for the balance of the year John.
Hey, Thanks, Sugar and good morning, everyone. We are pleased to report another very strong quarter, a better than I expected results across all of our financial metrics. They.
They give you some idea of how consistent our business has been.
Consider that R. Headset business has posted positive adjusted EBITDA on a trailing 12 month basis every quarter since 2012.
Since we stopped are Hypersound investments in 2017, we have reported consolidated gap gross margins on a trailing 12 month basis between roughly 33% and 38% for 12 consecutive quarters.
And our consolidated adjusted trailing 12 month EBITDA has been positive every quarter for the past 15 quarters. So while we have seen some ebbs and flows in revenue growth. Our business has been consistently able to generate good gross margins positive adjusted EBITDA and a 12 month basis.
Is.
And that revenue for the second quarter of 2020 was 79 7 million or 81 million on a constant currency basis compared to $41.3 million in the year ago quarter, the 93% increase put our sales just above the high end of the revised revenue outlook we issued.
[noise] in mid June and nearly 80% above our initial June quarter issued back in early may.
The sales increase was driven by strength in both cancel headset and P. C gaming accessory as you're gonna covered and reflected our ability to significantly and rapidly increase supply during the quarter.
Gross margin and the second quarter was 36, 7%.
480 basis points higher than the 31.9%, we reported and the second quarter of 2019 and higher than any other June quarter. Since we became a public company in January of 2014.
This increase was driven by several factors volume driven fixed costs leverage lower than normal promotional levels, given the surge in demand and favorable business mix, partially offset by over $4 million, an incremental airfreight cost to facilitate the increase in revenues.
Operating expenses and the second quarter of 2020, or 19.3 million compared to $15.5 million in the same quarter of 2019.
The increase was driven by the inclusion of rocket for the entire quarter. This year as opposed to essentially one month and the second quarter of last year volume driven selling expenses and higher personnel a marketing cost.
Including a portion of the roughly 12 million and increased investment to drive future growth.
These were partially offset by lower transaction expenses compared to last year when expenses related to the rocket acquisition were recorded and the second quarter.
As usual, there's tremendous operating leverage an incremental revenues, which is why spending to expedite supply is financially beneficial and why continued growth is a key golf for us.
Accordingly, adjusted EBITDA and the second quarter of 2020 was 12 $9 million compared to $1.6 million a year ago quarter. The year over year improvement was driven by higher revenue increase in gross margins and operating expense leverage and includes over $4 million of airfreight as well as the poor.
<unk> of our growth investments year to date adjusted EBITDA is 10.2 million.
Net income and the second quarter of 2020 was eight $2 million compared to a net loss of $2.4 million a year ago quarter, reflecting the commentary I'd just covered.
Net income and the second quarter of 2020 was 52 cents and 16.2 million weighted average diluted chairs outstanding compared to a net loss per share of 16 cents on 14.6 million weighted average diluted chairs outstanding in the year ago quarter note that the high.
Sure Count is primarily a result of shifting from a loss to a profit for the comparable quarter as the polluted sure kind of is higher and profitable quarters, then in quarters with a net loss.
Oh, just that net income for the second quarter of 2020, which excludes transaction costs and adjustments related to the acquisition of rocket as well as changes in the fair value of contingent consideration with six 8 million or 42 cents per diluted sure compared to and adjusted net.
Loss of 9 million or six cents per diluted sure in the 2019 period.
Cash provided from operations during the second quarter was $31.9 million. This continued strong cash flow allowed us to have zero borrowing outstanding on a revolver throughout the quarter.
As I mentioned back in March are effective tax rate could be higher if we exceed the full year guidance. We provided on that call were significantly increasing our financial outlook for the year is you're gonna cover so the full year tax rate for 2020 is now expected to be approximately 28%.
Now turning the balance sheet at June 30th 2020, we had $21.2 million of cash in cash equivalents with zero that under a revolving credit line. This compares to 3.4 million of cash in cash equivalents and 10.8 million an outstanding debt under a revolving credit facility at June 3rd.
2019.
Inventories of June 30th 2020, or $45 million compared to $54 million at June 30 last year.
The decrease in inventory was driven by the strong increase in sales, reducing our stock levels and in fact, a portion of significant portion of this inventory at the end of the quarter was in round to our distribution centers as retail inventories remained low.
Now I'll turn the call back over to your getting for some additional comments yergin.
Thanks, John I will finish with some comments on what we see for the second half of the year and beyond.
While there are significant market economic and pandemic related dynamics that create a higher than normal level of uncertainty and variability and outcomes for the rest of the year. We expect to have a very good second half at our significantly increasing our full year outlook as a result.
Also continue to be very optimistic and excited about 2021 and believe we are well positioned for the future I'll expand on these points now.
Is John said retail inventories of our product remained very low and we have a significant amount of product that has arrived and continues to arrive since the end of June.
Q3 started and continues with strong channel refill.
I talked to our analysis covering the three key drivers of incremental headset sales over the past months or view for the second half is that while there is likely to be some by ahead amongst existing gamers the higher level of gaming activity overall, the new one lapsed gamers being added is headset user.
As well as non gaming headset buyers are likely to result in a sustained higher demand for gaming headsets.
In addition.
Expect to be able to continue to outpace the council Mark headset market, given our brand supply chain and retail execution as well as several exciting new console headsets.
That we will be announcing shortly.
And given the statements by so many in Microsoft It they expect to launch the new consoles as planned if that holds we expect the above items to be net incremental to our prior holiday sales estimates for council headsets.
We also believe or P. C business will exceed our earlier expectations. Given current sales trends are performance in the past month and the P. C accessories market and several exciting new product in our P. C lineup coming in this year.
In fact, while we will continue to report on our progress in P. C. On an annual basis. When we report full year result in March we can say now that in 2020, we expect to more than double the roughly 14 million in a rocket related revenues we had in 2019.
Both and products, we acquired and new products that we've developed through the fully integrated organization.
As you know, we are making investments to significantly expand our P C portfolio.
Two market the rocket brand and we are already seeing the first benefits of those investments and have factored that into our increased outlook for our P. C lineup for Q3 and Q4.
As a result, we are increasing our sales outlooks for the year two approximately 300 million from the prior estimate of 224 to 234 million.
300 million would put us at over 27% year over year topline growth and a five year.
Average growth rate from 2016 of over 11% consistent with our longterm objective to drive 10% to 20% topline growth.
Given the continued pandemic dynamics and the preventative measures that continue to be taken we do expect retail patterns to remain unusual is this year. We expect sales to continue to skew more to online channels, including our own online store. In addition, as retailers plan.
They will handle holiday sales, we expect some retailers to buy earlier than normal and spread out concentrated sales events like black Friday over longer periods to reduce crowd sizes in stores.
As an example, several large U S retailers have announced plans to be closed on Thanksgiving.
We expect this could shift the distribution of revenues between two three and Q4 well beyond the normal yearly dynamic an estimate Q4 will therefore be roughly one third of our annual sales, but that revenue phrase phasing could easily vary from our estimated reign.
Without impacting the full year, which is why we are again, providing guidance for combined second half like we did last year.
Kind of the 300 million full year revenue guidance, our second half revenue guidance is $185 million.
To continue to facilitate rapid recovery and supply. We also expect to have higher than normal airfreight cost with an estimated four to 5 million incremental in second half for a total of nine to 10 million for the year.
In addition to full year result include an estimated impact of two to 3 million in terrace.
We do expect promotional activities to returned to normal for the holidays for for the full year. We continue to expect gross margins to be in the low thirties, reflecting gains do the operating leverage but also significantly higher than normal airfreight cost to enable revenues.
Note that given the supply chain initiatives. We started two years ago, we know expect to have more than half of our product supply originating outside of China. This year.
In terms of spending given the excellent progress for making we are also increasing our investments to drive future growth, including further product portfolio expansions as well as brand in marketing investments from roughly 9 million 212 million. This year, we continue to feel very good.
About the prospects for these investments to drive future growth is I have discussed.
As a result of the above increased revenue estimates and updates on margins and investments we expect adjusted EBITDA to be roughly 30 million for the full year more than double or prior guidance of $9 million to $14 million.
This implies second half adjusted EBITDA approximately $20 million.
With are expected capex in cash taxes, this level of EBIT should generate over $20 million in free cash flow.
We expect net income per diluted chair for the full year to be approximately 85 cents and adjusted net income per diluted sure to be roughly 80 cents.
Needless to say, we are very pleased with our progress and position for 2020. It's one thing to have the market have a market tailwind drive growth, but I'm very proud of how we positioned our products and brands and then executed to capture the opportunity.
So to summarize our goals for 2020 or one continue to lead in console gaming headsets and nimbly respond to shifts and demand as we prepare for the exciting transition to new consoles.
Drive number to drive growth in P C accessories, including making significant investments and Brandon portfolio. This year and next to put ourselves in the position to lead that market over time.
Number three maintain a healthy balance sheet imprudently manage R capital to enhance long-term shareholder value number for it.
And given this extraordinary dynamic environment continue to execute well across retail supply chain and operations with diligent analysis and quick adjustments as in eat it.
Looking ahead to 2021, while this year's expected very strong a result, obviously increases the challenge the launch of new consoles. The fact that the increase in gaming gaming headset users could easily sustained itself after things quote returned to normal and the excellent.
Progress, we are making and P C with more exciting products coming in 2021 has is optimistic and committed to achieving topline growth for 2021.
As I've said many times I believe we have a terrific position in a great market, we have by far the leading brand and market position in council gaming headsets and are committed to and investing in extending that strength more broadly in the 4.3 billion gave me accessories market and beyond and I believe.
The first half of 2020 has been in the second half will be continued examples of our ability to execute will and dynamic situations.
With the rocket integration going well the excellent team we have here in our strong continued execution, we plan to continue to make investments and take actions to enable and drive long-term growth.
Long-term growth targets remained 10% to 20% average revenue growth over time, and 15% to 30% average growth and adjusted EBITDA.
And finally, but importantly, I would like to once again, thank the global Turtle Beach team members, who have done an incredible job under extremely challenging conditions. You are all truly what makes this company succeed and I'm very proud to be a part of this great team with you.
Operator, we are now ready to take questions.
Thank you, ladies and gentlemen, as a reminder, if you wish to ask a question. Please put a star one on your telephone.
[noise] to withdraw your question push the pound key please standby while we can follow that you want a roster.
Oh No first question comes with a lot of <unk> Argento Lake Street capital.
Oh, you're gonna die drawn congrats on a incredibly strong quarter.
She different questions for you first one I wanted to.
Just talk a little bit about how your view in the next <unk> P. S five and the new arched box.
Rolling out and what kind of assumptions would you have in terms of attach rage terms of new headset sales you know related to.
Spell through a box for the call it the first year or two.
And does that you know different given the environment, where I'm right now.
Okay. You Mark you said you had a couple of questions. So we'll start with that one.
And I appreciate the compliment from the quarter, so new new consoles overall, we're very excited about the new castle.
More has been released over the last few months.
And I personally.
Think that weird those new platforms now kind of start to cross a bridge.
Games and simulation that looks computer generated to something that looks like it's real life and.
Just with the graphics performance increase so so even though every platform every every new set of council's ups the processing and the graphic I think my personal feeling is that we're crossing a threshold where the level of realism is just now incredible and tufted distinguished from.
From real life. So we're very excited about what's coming and we think that kind of transition an improvement will drive a lotta people to buy the new council's over time.
In terms of headset sales.
We have factored in that they're launching on time, which they've communicated they intend to.
But we also believe there'll be some supply constraints for this year.
And.
While they drive new sales the new consoles and obviously, we factor that into into Q4 remembered that the vast majority of the installed base of council users are on the existing generation platforms. So the biggest impact of new consoles really happened in the first.
Full year and then the next full year afterwards, so so we're excited about him. We think they are going to drive a good long term gross pet trend, but have some conservatism built into our numbers for this year.
Okay, and when you and you're prepared remarks, you had mentioned.
Is the next Gen does that <unk> gonna be incremental two guidance.
If it hits on time, or just maybe you could pick out a little clarity around.
That combo.
Sure No. We the 300 million revised revenue guidance reflect the council's launching on time this year with reasonably good demand, but some supply constraints.
Got it that answer your question Alright.
Nope that's helpful. And then just more what kind of a bigger picture question you know in terms of longer term gotta targeted EBITA margins I know back in 2018.
When you guys got pushed a similar revenue number 287 billion. Thank you ended up shaken out at roughly a 20 per cent EBITA larger than I'd realize that there's a lot of put some church there.
You know those those gardens, roughly 10% EBITA large you know I'm, assuming the difference about half of it's probably coming from somebody else <unk>.
And then the other the investment long-term would you how do you think about EBITA margins a balance in the.
Gotcha, that's all relative.
You know margins.
Great Great question and I appreciate the comments on 2018.
So just to answer the question directly our goal for EBIT margins are in the teens and ideally kind of in the mid teens and over time as we gain revenue leverage to be in the upper teens and that would reflect you know good good economics of the core business, but also making investments.
There are two big factors this year, which both of which you mentioned one of them is.
10 million ish nine to 10 million and airfreight very worthwhile economically as we've indicated.
But that obviously impacts EBIT the line and the second is a higher than normal level of investments. So about we've raised the 9 million to 12 million roughly in investments to drive longterm growth P C product portfolio, Brian marketing and some other.
New initiatives, we started this year given the strong performance and we feel very good about that because we already seeing benefits of those investments I made the comment that now the rocket business, which did just over 14 million. This year will we will more than double that amount of revenue this year both in Prada.
That we acquired and development.
Developments, we've made with our increased investments this year. So those two factors obviously are a bit abnormal for this year. While every year, we would expect to make some level of investments the level is probably higher than normal this year.
Great I'll hop back in the cute thanks, guys.
Thanks, Mark Thank you Mark.
Thank you.
No next question comes with a line of Elliot Albert with D. A David.
Great. Thank you wanted to ask about sales Kid in from the quarter did you see sequential sequential grow through the quarter and to what extent were you able to see sales correlated with some of the reopening cases and different different geography's of the country.
Good question Elliot.
So the sales in cute too.
We're basically driven by supply and we think this is industry wide by the way, but certainly.
Rk's as I mentioned, we more than five extra factory output a lot of that supply was starting to hit at the end of the quarter starting to arrive and and we know even today have significant amount of inventory. That's in route in transit that'll start hitting the shelves soon.
It's actually tough the judge the natural demand in the market.
For products when consumers Austin can't actually by if they want to buy so what we've seen is is sell through dropped off for the whole market by the way in June including Council counsels.
But we think that is less of a reflection of of the natural demand and Moreover, reflection that there were stockout among a lot of product categories, including council's by the way.
You almost can't find a council to save your life right now and when we we saw when we pushed more inventory into retail, especially in the last few weeks that the demand would immediately pick up again.
Okay.
Okay, Great thought it was interesting third of the sales in the corridor from new consumers, if I heard that correctly I Wonder if you could talk about how that has turned is historically.
And then with an influx of new gamers as well as the remote learning demand should we expect to north north more normalized sales cycle. It refresh cycle in the future. Thank you.
Yeah. So when we did the analysis and said roughly a third existing gave me gamers the third new and lapsed gamers a third non gaming uses so that that was a measure of the incremental demand. So the normalised level demand always include some new gamers coming into the market but.
So the one third incremental demand was above and beyond the normal amount of new and lapsed gamers.
Coming into gaming and so we that that could slow down and we factored into that starts to slow down knowledge things quote go back to normal the same way by the way that in in the Ford Night surge in 2018, you had a lot of new incoming millions of incoming new gamers that obviously have.
First time purchase they buy a headset for the first time that key thing though is that.
They then become part of the installed base and all of the historical surveys and research we've done indicate that day then start to.
Upgrade and replace headsets overtime, so while we well we have.
Prudently estimated that these trends will start to kind of normalize.
Over the rest of the year, we are factoring in that that they.
Stanfill part of the new gamers become part of the installed base going forward.
And this is exactly by the way what we saw in 2018 to 2019 2019 was up I think 30 something percent over 2017, just the run right of the industry was up because the 2018.
Battery all searched caused a large increase in the installed base of gamers and that's exactly the same kind of trained we're seeing now.
I appreciate it thank you.
Thank you once they get ladies and gentlemen, if you have a question. Please crestar one on your telephone once again, if you have a question Crestar one.
Our next question comes with a lot of jet Bender already with extra <unk>.
Hey, good morning, Congrats congratulant spell corner.
Thanks for taking my questions. So so you're again.
You mentioned, the two Q and someone else just asked this question or a similar question, but I wanted to go deeper I believe you mentioned in the two cute performs upsize nosy equal distribution of those those three chord drivers that you mentioned.
You know as you look at the remainder of 2020.
Do you expect a similar equal contribution from these three categories.
Or would you expect some shift or you know which of these categories do you have the greatest confidence in as as the revenue drivers for the remainder of the year.
Sure and again, let me just reiterate that those were the drivers of the incremental increase in demand over the last month's not the third of the total sales right. So we take we look at what we would have expected sales to be and the actual sales where significant sell through was significantly.
Higher than the analysis, we did goes at Okay. What are the what are the sources and we were communicating roughly one third we know that that a lot of others in our market listen to our earnings calls and.
Probably use a lot of what we say for their own forecasting so.
Sure.
We've done extensive analysis and we have.
Project did we have broken out those three categories intentionally and we have more precise numbers, obviously and we're communicating because each of those three segments. We are factoring a different level of change and incremental sales activity for the second half and it is.
Also informing those three groups are also informing how we look at 2021 and so just for competitive reasons I'm not going to give a lot more detail into the analysis, we've done and how we're looking at the three groups beyond just to say that we certainly expect.
All of those trends to come down somewhat in the next few quarters and each of them to come down at a different level and have a different impact on long term demand.
Got it thank you for the clarity too that's helpful.
And then and then just on that front to as it relates to the performance.
The outperformance this quarter and then as you look into your your raise guidance for the back happened this year.
Any comments around.
Console gaming headsets in the premium tier any change there in terms like what your market sure <unk>.
Trajectory is and you know how how's that coming along and then also from the from the Rocky acquisition too you mentioned, they're strong.
Contribution there is there a similar market share kind of analysis there between lower to your verse higher tier in terms of what you guys are your core or your strongest areas are.
Sure. So yeah, we've raised our annual out look by over 50%.
Sorry, bye bye over 30% and.
Over 35% for my initial guidance, so we factored in for that.
Very very detailed level of analysis, and I think reasonably prudent all of these various trends including.
[noise] performance and expected sell through in each of the price tears again for competitive reasons I'm not going to go into our assumptions at that level of detail, but we have tried in our in our revised guidance to be prudent and recognize that.
More expensive products are likely to have more of an impact from an economic downturn, then lower price products for example, which I think is maybe what you're asking.
Of course, we do well in.
And frankly have <unk>, leading sure by far eat all price tears from 150 down where the vast majority of the revenues for the market are and while we as new gamers come in like they have.
In the last month.
You do sent tend to see a bit of a mix shift down.
But we expect that to kind of go back to normal as that kind of the market dynamics overall and certainly by next year returned to normal.
Okay. That's helpful too and and then just just lastly, I'm I'm the gross margin front.
Do you expect four to five millions of incremental airfreight for the second half the 20th.
So that on a quarterly average that's less than what are the airport was an <unk> alone.
Which saw gross margin 36 over 36% so.
You know.
So it just appeared that there's rather material level of conservatism, maybe built into this gross margin outlook unless I'm missing something I know, there's an extra tooling or certification costs as well give me to talk about just you know what level of conservatism, maybe built into bad or what would be driving that in the low thirties as opposed to mid.
Mid thirties.
Sure. Good good question and I wouldn't say it's conservatism.
It's the the math behind our estimates and we're trying to get range that we expect a reasonably land.
The Big difference Jack is that in cue to the biggest driver is less than normal promotional activities when when demand surges and everybody is low on stock you're not running the normal level of discount sales and all that that that happened every week.
Every month every quarter as a normal part of consumer electronics business. So that that the lack of normal promotional activity has a large impact on the gross margin that more than offsets. The 4 million of increased air freight as an example in Q2 plus you get opera.
Waiting leverage obviously when you deliver Q2, that's near $80 million. So certainly built in to our back half assumption as I mentioned is that.
Now that demand is not surprising anybody anymore at least shouldn't be.
Stockout as we get through the next let's say month should start to stock level should start to return normal and therefore promotional activity will return back to normal including for the holiday where people will be running black Friday specials all of that so so.
Then the airfreight is is impacting the margins plus <unk>.
Part of our investments that we're making our above gross margin costs right tooling and other items like that.
And so that has.
Couple of points of impact on the grill margin this year and all of that kind of factored into our back half assumption, but again the big driver of the difference is the level of promotional activity in the market.
Understood. That's helpful. That's it for me again fantastic quarter and I I appreciate the time.
Thank you. Thank you.
Thank you.
Thank you once they get ladies and gentlemen, if you have a question. Please crestar one on your telephone.
Once again, if you have a question please fries star y.
Okay.
And I'm sure I'm no further questions at this time I will now turn the call back over the Chairman N C E O Juergen start for any closing remarks.
Thank you.
We wish everybody safety in good health and these unprecedented times, we look forward to speaking with our investors and analysts when we report or third quarter results in November. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating in you mean now disconnect.
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