Q3 2020 Corsair Gaming Inc Earnings Call
Greetings and welcome to the Corsair gaming third quarter 2020 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.
It is now my pleasure to introduce your host Ronald plan being of course, there's vice President Finance Investor Relations. Thank you Mr. <unk> you may begin.
Thank you good morning, everyone and thank you for joining us for <unk> financial results conference call for the third quarter ending September Thirtyth 2020.
On the call today, we of course your CEO.
CFO Mike.
Before we begin allow me quite a disclaimer regarding forward looking statements on this call, including Q and a portion of the call may include forward looking statements related to expected future results of our company and are therefore forward looking statements.
Actual results may differ materially from our projections due to a number of risks and uncertainties the risks and uncertainties. The forward looking statements are subject to are described in our earnings release.
<unk>.
Today's remarks will also include references to non-GAAP financial measures additional information, including reconciliations between non-GAAP financial information to the GAAP financial information is provided in the press release.
This conference call with available for replay by webcast of course, Harrison Investor Relations website at <unk>.
I are adults Corsair dot com.
You didn't go begin with an overview of course here, so our third quarter.
I see then take you through a review financials before we proceed today [noise].
I'll now turn the call over to Andy.
Thank you Ronald and welcome to upsize things called a public company.
It was great to meet many of you during the course of all IPO Road show in September and we look forward to getting to know will get better as we go forward.
Now some of you may be nuanced story I'd like to spend a few minutes to take you through a brief overview truly all what we do and the growing market opportunity, we see in terms of us.
Please note that this so you will make todays call a little longer than what would be typical going forward.
Oh, and then I'll provide an overview of our recent progress and performance and then turn the call over to Michael for financial review of the quarter.
We all know a leading global provider an innovative high performance good so gamers in content creators.
Oh gave me a good helps game as the full at that peak across PC. All console platforms. I know streaming get labels creates is to produce studio quality content to share trends altera payroll costs to millions of friends.
We served markets, where the two decades.
And most of all product lines maintain a top three U.S. market share position with several in number one positions. According to data from NPD group, an internal estimates.
We have built a traditional base of loyal customers, who build and upgrade the again P.C.S using coal second please and then use our peripheral products the gaming and streaming.
Competitive gaming awards speed precision and reliability.
As you know the sports.
Specialized type always gets such as gaming mice keyboards, headsets and performance controllers.
Well they'll digital athletes to perform at that best.
Multi games also requires significant processing power tremendously high resolution graphics, and the world the speed and precision of user into whats driving demand still counsel gaming components and systems.
So that in a world where the ability to create content is democratized and competition from your engagement is greater than ever.
Content creators, particularly stream is.
Oh increasingly seeking ways to maximize the quality of the video capture in broadcasting.
Which requires specialized high pulled its good.
Our solution is the most complete suite of give them a major competitors.
Addresses the most critical components for both games performance in streaming.
Our product offering is enhanced by our two proprietary software platforms.
Thank you for gamers and L. ghettos stream is suite for content creators.
These software platforms provide unified intuitive performance and steady control in customization across the respective product families.
As gaming has gone mainstream streaming.
Streaming is followed suit.
Games, and they'll be more cost over the internet.
The tournament level and by games Uh Huh.
Today, 71% of millennial gamers in the U.S., what's gaming video content on streaming platforms for an average of almost six hours a week.
So the though the 6 million committed streams in the world today to fuel the over 12 billion streaming hours watched in 2019 alone.
The Derby docket, the PC in streaming good so.
$36 billion in 2019.
Oh is that 83% spending from competitive been committed gamers.
These are the players who the spend between 1000 to over $800 on gaming hardware and accessories.
These are all core customers.
What's incredible is these competitive in combating committed gamers.
Well accounting for 83% of spend only account for 18%.
Oh the worldwide total of 524 million PC game as in 2019.
With the remainder being casual gamers so.
Often did not yet only specialized gear.
This highlights the significant growth potential for our time.
We see that the average spend of game that is still fairly low compared to spending and other sports kit.
And very concentrated at the high end.
As casual game has become competitive and committed game as the spending grows.
If the average spend to this group of gamers want to significantly move up.
Then the multiplayer gaming gear could grow by multiples.
In gaming, where we see the biggest opportunity and market growth isn't peripherals, because well most entry level game as we'll have access to a council or some sort of PC in the home.
They would likely not have specialized peripherals.
We have seen the peripherals goes really exploded.
Teenagers play extraordinary to other online multiplayer games on Pcs and laptops.
Sure there is more and more gaming is watch the online gaming.
The game is a sponsor to emulate professional streamers.
Resulting in incremental spending on good.
We also successfully gaming these emerging applications represent a promising avenue for the continued expansion of the streaming get lucky opportunity.
So moving on to our growth strategy.
We intend to grow our business by increasing value to our customers expect.
Expanding our market opportunity and further differentiating ourselves from our competitors.
We believe all brand name high performance given market position.
Allowing us to capture load share this market growth.
We intend to continue to make significant marketing investments in leading E sports scenes athletes streams and social media Influencers.
Other key college football growth strategy include.
Continuing to develop innovative market, leading gaming and streaming good.
We intend to prioritize investment in creating innovative gaming and streaming here.
And related software to enhance the customer experience by delivering cutting edge technology.
Secondly, expanding into new gear and serves as the girl market opportunity.
Since our inception, we have successfully entered the number that you get categories, including gaming PC peripherals streaming accessories, cultural controllers, and prebuilt and gaming Pcs and laptops.
As the gaming and content creation landscape continues to evolve we.
We intend to continue to introduce new products and services to address our customers' new and changing needs and to grow a market opportunity.
[noise] next leveraging all software platforms to sell more geared to existing customers.
Oh software platforms integrated in hone so ecosystem of gaming and streaming it which drives customer loyalty and allows us to successfully sell additional gear to existing customers.
Strengthening our relationships with end users by increasing direct to consumer sales.
Through our acquisition of origin in scope in 2019.
We acquired two companies, who sells a primarily generated through direct to consumer channels.
While sales in this channel and relatively small contributor to our revenues they were.
We believe the Redskins human cells represents a significant avenues to drive gross bye bye.
Facilitating increased engagement with our consumers.
And finally woken.
We will continue to grow market share globally.
As a globally recognized brand, we haven't footprint that reaches customers in more than 75 countries.
We will continue to invest in enhancing our sales and distribution infrastructure to expand our leadership position in the Americas and Europe.
We view Asia Signet as a significant long term opportunity.
We are clear market leader in the gaming PC components market.
And we have a steadily growing market share and galeon streaming good.
So with that as a backdrop.
I'd now like to review our performance in the quarter.
We are very pleased with our strong results in the third quarter, which.
Which exceeded all expectations.
As we achieved net revenues of $457.1 billion.
60.7 year on year growth.
And we achieved adjusted EBITDA of.
$63.7 million, which is a year on year growth of 194.9%.
Looking at the business highlights.
The market just gaming and streaming game continues to grow constraint destroying.
Lets people, who are spending more time at home or learning how to play games better how to stream content to their friends and how to build high performance gaming Pcs.
All of these things are quite high performance gaming and streaming good.
So we are massively benefiting from this trend in fact, we hope would helping drive this trends.
Well, we live in Q3 was that the surgeon gaming activity, which started in Q2.
No it doesn't appear to be a pull forward in sales.
In other words, how growth in Q2 did not come at the expense of Q3 of two people.
Oh from it what are we alone what we're learning is that the biggest part of the increased demand is coming from first time bonus.
In other words gamers, who have not war gaming products before.
This is evidenced by strong sells for entry level products.
Which means new games and stream is beginning to invest real money on the kids to school they'll be for the first time.
And there are many more games a stream as who have not bought any good yet.
As we mentioned before most of the time at this point its spend by the top 80% of the market.
With the remaining 80 to extend the game is mostly not having bought much if any good.
Oh, that's the mix all that in the U.S., where we have very good data.
The incremental you, but as they come into the market this year and started to buy getting extremely good.
<unk> less than 5% of total U.S. gamers.
Our expectation is that all these new games and streamlines, who are buying I'll give the first time.
Well come back the following is to upgrade and buy more high performance products from us.
Demand was strongly up in all product lines.
Most notably in these streaming in gaming segment, where we grew by 129% year on year.
But all gaming components and systems segment also showed huge growth was 38% year on year and is now on a yearly run rate up over a $1 billion.
These incremental you gave us they're not just buying triples, many of them are buying gaming Pcs, all buying ready assembled machines as well.
During the quarter, we introduced several new high performance products.
These are all listed out in detail in the press release, but.
But they include.
Couldn't you keyboards, including the K 100, new flagship products.
You bought it smells and you have to be headset.
A new range of cases, a new family of CP you coolers.
And then you gave me P.C. featuring the new Nvidia Aussie X studies there is GP is.
We expect to continue to launch new high performance products at a blistering pace.
Approximately one a week and use these new products to gain market share.
Oh, you microphone started shipping in volume in Q3 and exceeded our sales expectations.
More recently, we acquired the popular I've called Eecol Kim.
Which allows you're likely to be configured to the webcam.
And connect wireless need your PC or Mac.
This is one of the most popular apps in the Apple store in the photo and video category.
This adds to our video solutions that we already have in the El Gato product portfolio.
Our main products in this category. These days can link for pay which allows people to connect a high resolution the LSR camera directly to a PC and PC in stream Fourk video.
The book came out what else your funds to be used as a second be camera open. Many people can be any camera they use a casual video interaction with others.
We expect to continue to add to our streaming video solutions in the near future.
And lastly, we have made two significant steps and I'll move into coaching and training.
Let's see we talk with pipeline.
Which is a cool space education platform to help streamers improve that quality and then an increase of yours.
Well the ultra these courses bundled with our L. gotta streaming products.
Secondly, we just announced the acquisition of gave a sense I, which is one of the top platforms connecting games with coaches, who helped me into that game play.
We believe that the coaching and training bucket around gaming and streaming largely untapped.
We expect that eventually it should be a similar market size that we see in other sports in past times, such as skiing Gulf of tennis.
Well lessons are always almost always part of someone's journey to improve their performance.
In closing I'm, obviously, very pleased with our strong third quarter results and our progress heading into the end of this year.
We continue to execute on our strategic growth and it initiatives.
I mean really focused on capitalizing them tremendous market opportunity before us.
Our recent IPO it was a significant milestone for us.
Although we are very proud of what we've achieved so far.
We acknowledge that this is just the next step forward and certainly our customers employees and shareholders.
Thank you for your time and continued support ill now turn the call EBITDA, Michael to discuss our financial results for the quarter.
Thanks, Andy and good morning, everyone.
During the third quarter, we delivered net revenue of $457.1 million, an increase of $172.7 million or 60.7%.
Parents to $284.4 million in Q3 2019.
Our strong top line performance was driven by strong growth across both the game burn creator Purple segment, and the gaming components and systems segment.
We believe the strong revenue growth year over year is driven in part by the COVID-19 shelter in place orders as consumers spend more time working on gaming at home.
The gamer and create a purple second provided $161.6 million.
Net revenue during the third quarter, an increase of $90.9 million or 128.8% from $70.6 million. In Q3 2019. This was primarily driven by strong growth across all product product categories in particular sales of our algavia.
<unk> branded streaming products. In addition to the contribution from Scott, which we do not own in Q3 2019 the.
The gamer and create a powerful as net revenue was 35.3% of total net revenue an increase of 1050 basis point from 24.8% in Q3 2019.
The gaming components and systems segment provided the $295.5 million of net revenue during the third quarter, an increase of $81.8 million or 38.3% from $213.8 million in Q3, 2019, primarily driven by strong growth across.
All products, including our P.S. Yoo cooling PC cases in DRAM due to continued strong market demand our memory products contribute contributed $141.3 million of this revenue.
Gross profit in the third quarter was $127.9 million, an increase of $67.7 million or 112.4% from 60.2 million in Q3, 2019, primarily driven by the increase in revenue in these periods as well as the power.
It's sort of more margin impact from sales of higher margin, Scott product and streaming gear.
Gross profit margin increased by 680 basis points to 28% from 21.2% in Q3 2019.
The gamer and create a powerful segment gross profit was $60 million, an increase of $40.1 million from $19.9 million in Q3, 2019, primarily driven by an increase in revenue in the same periods gross.
Gross profit margin was 37.1% compared to 28.3% in Q3 2019. The increase in gross margin was driven largely by product mix related to the strong growth in sales of higher margin streaming products, coupled with less promotional activities and the addition of higher margins golf products.
As Andy mentioned, we continue to see a mix shift as gamer and creator peripherals contributed 46.9% of total gross profit in Q3 2020 as compared to 33.1% in Q3 2019.
This is a great overall story and Formula for continued overall margin expansion as our fastest growing and highest margin segment also sits in our largest market.
The Gamer components and systems segment gross profit was $67.9 million, an increase of $27.7 million from $40.3 million in Q3 2019.
America, driven by the increase in revenue in the same periods gross profit margin was 23% compared to 18.8% in Q3 2019. This was due to product mix and less promotional activities.
Gaming components and systems contributed 53.1% of the total gross profit in Q3 2020 compared to 66.9% in Q3 2019, our memory products margin in this segment was 18.8% for the quarter.
Third quarter, S., DNA expenses were $65.3 million, an increase of $25.5 million or 64.1% compared to $39.8 million in Q3, 2019, primarily driven by SGN, a expenses from Scott and increase in output.
Bound freight cost due to the increase in revenue and an increase in personnel related expenses.
Third quarter product development expenses were $12.9 million, an increase of $3.4 million or 36.5% compared to $9.5 million in Q3, 2019, primarily driven by an increase in personnel related expenses and the acquisition that's golf.
Operating income in the third quarter of 2020 was $49.7 million, an increase of $38.8 million from $11 million in Q3 2019, adjusted operating income in the third quarter of 2020 with $61.4 million, an increase of 40.5 million.
In dollars or 193.7% from two.
$20.9 million in Q3 2019.
Third quarter net income was $36.4 million or 40 cents per diluted share as compared to net income of $1.5 million or two cents per diluted share in Q3 2019.
Third quarter, adjusted net income was $48.5 million or 54 cents per diluted share as compared to adjusted net income of $10 million or 13 cents per diluted share in Q3 2019.
Adjusted EBITDA for Q3, 2020, with $63.7 million, an increase of $41.4 million or 184.9%.
The $22.4 million for Q3 2019.
Turning now to our balance sheet on September 25th 2020, we completed the initial public offering of our stock at a price of $17 per share.
We in certain challenge stockholders completed the sale of 15.1 million shares, including 1.1 billion shares issuance improved pursuant to the exercise of the underwriters' option.
Purchase additional shares the IPO raised proceeds net of underwriting fees of approximately $118.6 million for courts, there and $120.7 million for certain selling stockholders 80.
$86.6 million of course, there's IPO proceeds were used to pay outstanding debt.
As of September Thirtyth, 2020, we had cash and restricted cash of $120.1 million $48 million capacity under our revolving credit facility and total long term debt of $376.1 million.
As of September Thirtyth 2020, consolidated total net debt was $259.9 million last 12 months consolidated adjusted EBITDA was $168.9 billion, indicating a consolidated net leverage ratio of 1.5 times.
Last week, both our rating agencies upgraded the rating on our outstanding debt, we plan to reduce our debt load over time ball preserving cash for growth.
Turning now to the guidance for the full year of 2020 total revenue in the range of $1.616 billion to 1 billion $631 billion total.
Total adjusted operating income in the range of $178 million to $184 million.
And adjusted EBITDA in the range of $187 million to $193 million.
We also expect interest expense to be approximately $5 million per quarter, assuming we don't pay any that we.
We expect to have an effective tax rate of approximately 20% to 22% for Q4 2020 and.
We expect our full year weighted average diluted shares outstanding.
Approximately 91 million with approximately 100 million for Q4 2020.
Overall, we are pleased with the progress we have made on our strategic initiatives and performance of the business.
With that we're now happy to open the call for questions. Operator will you. Please open the line for Q and a.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation tunnel indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star. He's one moment. Please while we poll for questions.
Our first question comes from the line of Ron <unk> with Goldman Sachs. Please proceed with your question.
Hi, guys. Thanks for the question congrats on a great first quarter.
I wanted to I guess I wanted to start off the problem doesn't seem to be demanded supply. So wanted to see if you could talk a little bit more about the supply situation what products are.
Our out of stock and you know what are your expectations for getting things back into stock and so on.
And did that have any effect on your balance sheet or other financials, I guess, probably not but just to double check that and then I'm just curious to as we head into the holiday season here what products are selling the bad you know can you I know and you went through a lot of the new products. What are the ones you have the highest hopes for how.
Are you doing in the different categories do you think from a share point of view just kind of curious what's going on competitively now that you know some of the new products are out there in the market. Thanks.
Yes, Hi, real nice that's it for me so a few questions I think from a supply standpoint.
[noise] I would say that much of the year has been supply constrained and.
That's you know.
It is not just for us but.
With our competitors as well so generally have you been into a.
[noise] bio traditional EMS and you'll see there's a lot of stockouts relevant to shelves.
Clearly.
We didnt expect to grow 50% this year right. So.
So when we set our supply chain.
Okay focus now, we didnt put them into that level.
So what do you what it comes down to is.
Well complex products.
With wells that have gone.
Shoulders in them in Microcontrollers et cetera.
Some of those lead times are starting to stretch out to his own 16 weeks.
Typically even you know without shortages.
We tend to sort of women want to give a 12 weeks.
A visibility to Oh supply chain. So the point is the sales in September.
The full costs. So those are made in may which is.
And this is really you know Q2 was the start of people, but he focusing on getting the streaming and find good so [noise].
So that's a little bit of what happens.
Clearly you know now we've got a.
Much of the year.
[noise] under our belt, we're pretty comfortable.
A little bit easier to forecast, what's going on with.
Seeing that you know this is not a.
Pull forward in other words is not people that would have put us in Q3. The 40 Q2. This is a big surge in gaming and streaming activity.
Mainly from some new.
People coming into.
Discovering gaming industry is the first time.
So no we faced a full cost quite considerably in supply chain and.
Gradually.
Moving stuff levels up.
Now in terms of what products.
Selling well, we're pretty happy with all the new products Weve is.
I think some of the brand new categories.
We are we just went into the microphone category, we launched that foil got a subsidiary.
I think in June so that should be done in July. So Q3 was the first quarter.
Quarterly shipments were pretty happy with the results that we had to double the supply chain almost instantly.
Typically in in Q4.
Yeah.
Things that are more seasonal or those products that tend to be given as gifts and that tends to be.
[noise] rules as I always joke.
Since then tend to buy the kids power supplies and many motorists Christmas So we didn't see it.
As much of a seasonal activity that but.
I think you know out of all the product lines headsets for the easiest thing that gets given as.
As gifts, so we usually see a.
Hi, I'm a high number.
In Q4.
Seasonal nature, so hopefully that answers dismissed the question other than that there's no issue.
Issue on the balance sheet, all financials with the supply chain.
[noise] being offensive.
The numbers have begun.
All right that's great. Thanks, and your my daughter Watts of power supply, but I guess you.
Strange one so [noise] anyway.
Anyway. Thanks for the thanks for the answers appreciate it.
Thank you. Our next question comes from the line of Matt Cabral with Credit Suisse. Please proceed with your question.
Yes. Thank you Andy you mentioned this in your prepared remarks, I think you've hit it on the last question, but I'm wondering if you could expand a little bit more on just how much of this year's growth. You think is from new gamers. They maybe have the potential to become more committed over time versus just the existing user base and I I know you said.
You haven't seen a pull forward impact in Q3, Q4, I guess as we roll forward to start thinking about next year I'm, just wondering how to balance the risk of maybe some normalization from this year's surge in demand versus sort of sustainable underlying levels.
Yeah, I mean, obviously, we don't have you know.
Clear Crystal balls right. So.
The thing we can we can see just from the mix shift.
This year in particular is that there's a lot more entry level products going out.
And when.
When we talk to our retailers.
They tell the same thing in other words, it's it's new.
The game is coming to the shelves people that have never bought stuff before.
People are just discovering streaming.
So thats encouraging.
Even so expenses game instead of upgrading I think.
You know this is not a one time thing might too so what we what we see in general is like any sport will help your past time, if you have a little bit more time to spend on important couple times I'm done.
To get into in the first place that's not a short term effect.
Ah. So if for example, we are friends say skiing, you like skating for risky for a while we continue to buy good.
And this is what we sort of expect is going to happen.
Going to happen is it will these new people that have been introduced perhaps game is the.
That said never built a game PC before now they discovered how to do it now upgrade in the future. So.
We think there's a lot of people is just the beginning of a long.
The long term spin cycle.
Okay, and then a quick follow up I'm wondering if you talk a little bit more about what growth and I've got to look like in the quarter and maybe just more broadly where you think penetration of streaming gear sits right now and how much of the opportunities within your existing customers versus maybe reaching a different audience than you typically sell to.
Yeah, we don't we don't break out I will get to sort of separately.
I mean, obviously with where we are pretty happy with a with that acquisition.
I think we spotted.
ER trends in streaming.
The one thing we've learned about streaming in general is the when we first went into this we imagine the.
Everybody that the streaming was trying to be you ship stuff.
And would pay for the kids.
Adam you know advertising postseason so it would be like us so the small b to b.
But if I just don't really what's happening when we look at all the number of channels.
The vast majority of channels streaming channels have less than 100.
Views and so what is turning into is more.
Of.
Social.
Sharing mechanisms little bit like Facebook well.
But people to just in Smallville, sharing gaming content or whatever they're doing with their friends.
And that means that we've got.
Actually the opportunity.
In terms of the number of the people that could start streaming.
And then the other thing is happening is that you know.
All of us even if you're not the game, though you know one of the issues, though stream at all.
Let's now getting completely familiar with video.
Video tools, I mean, I'd say, 90% of the conversations I have now with people I'm using video well just on the phone so.
So then when he gets more comfortable with how that works and how to set it up.
I think we'll continue to see more and more people turning to a video streaming it.
Thank you.
Thank you. Our next question comes from the line of Mario low with Barclays. Please proceed with your question.
Hey, Maison corridor and others for taking the questions I have one on streaming and one on the full year guide on so the one on streaming besides the acquisition of at the camp.
Are there any other updates in terms of adding a video camera to the El Gato portfolio.
Are there any share price that you know currently think it's still missing on that you could potentially add overtime.
And then on the full year guide.
You know, it's implying that fourth quarter year on year growth of 46% or 4% growth sequentially, which I believe is below the seasonal pattern historically about a 20% growth sequentially. So.
So I guess, Michael if he can provide more detail on what is embedded in the full year and for acute guide on one day. It doesnt create some pull forward of demand or if that's a sentiment that the number of new entrants coming into the market and still remain elevated thank you.
[noise] Yeah was two two parts to that question I think.
I don't really want to comment too much on on new products clearly in the streaming world.
Video is a very important part of it no.
One of the products that are El Gato his most famous for.
As a full quarter can link.
Which sells for about $129 and that allows you to connect a very high quality did us on camera chip.
See a PC at least a lot of those are surprisingly low though so that's what people at the high end tend to do you know the best stream is not using web cams.
These and get us on canvas. So so we already in that in that business people Kim was a slightly different application.
We wanted to start exploring some of the mobile applications.
And what we're going to continue to invest in.
All streaming good we're trying to maximize our oh footprint. So.
So yeah anything you can imagine that would make sense to extremely probably already working on.
Now in terms of the Q4 cadence you.
You're absolutely right normally Q4 is bigger than Q3, and obviously this is a.
Slightly different year, we'd go you know the stock outs everywhere Weve got to consider.
The effects of.
How much our supply chain to react honestly.
It's already pretty stretched and so that's how we arrived at the guidance I'm as I said, we're not in a situation now where we are.
Demand constrained at all.
This is a this is purely a supply.
Driven back.
That helps you.
Thank you. Our next question comes from the line of Tom Forte with D.A. Davidson. Please proceed with your question.
Great. Thanks for taking my question congrats on the quarter. When we think about your long term margin opportunity and we think about your non gaming revenue a coaching being an example, you gave how.
How how accretive can that be.
Just maybe a traditional hardware model and how should we think about your non gaming revenue in general and how that May drive your hardware revenue as well.
Well.
Well, we've looked at coaching and.
And training.
[noise], what we've realized is that most other sports so hobbies or past times have you want to phrase this.
Contain a significant amount of training revenue in fact, you know.
Many sports you know the spend to the people.
Have competitive given lessons you know can be 30% of total revenue.
So so we don't know how big that can be.
What's clear to us is that the existing market for training coaching.
It is kind of you know ranges from free lessons on you too.
To just people on the Internet trying to just so help me.
Got it.
You can imagine being.
Being a gulf and structure and not being associated with the go shop or Gulf coast. So ski instruction not associated with the ski slope.
We believe a difficult to get a little business. So we think the the right place for.
Offering coaching and training for lessons is the same place you go to buy by you'll get.
So we'll have to see how that works out we're pretty bullish about it investing quite heavily see we've made our first and that's the first acquisitions and partnerships just recently I am sure that people.
So yeah. That's that's that's how we think about it now clearly.
In terms of.
How that works in hardware sales you can just imagine that if you're taking golf lessons.
And the Gulf Coast suggest you what helps you should buy you're putting in to take his advice.
And so we expect the same thing in fact, you know any higher level of engagement that we can have with our customers is gonna be beneficial.
Thanks for taking my question.
Thank you. Our next question comes from the line of drew Crum with Stifel. Please proceed with your question.
Okay. Thanks, good morning, guys.
Randy you recently launched a headset for the Xbox can you talk about the company's plans to expand your presence in the console headset category and any commentary you can offer in terms of general demand you're seeing.
With product tie to the console transition.
And then separately the Fourq guidance, if we put the midpoint the implied adjusted EBITDA margin of 10.4% My math is correct, which would imply a step down from a 13.9% reported in Threeq I just wonder if you could offer any commentary as to why that that's lower on a sequential basis. Thanks.
[noise], Yeah sure I'll take those in a two part so.
Headsets.
It's an interesting one.
It turns out that that over the last few years.
A lot of resell and each will have been merging headsets in other words console and PC because that's the low and we've got a three poles.
Excellent I.
Connecting interface same thing.
So historically the the notion was that it's good to have licensed products because for those people, especially in the holiday season that it might get a minute quite understand the interfaces. It's easy to have you know.
A package with X folks on it and you can only do that.
You have a license so it's really an experiment we.
You don't have to do that for the the biggest guy county specializing in ER.
In Kelso headsets doesn't necessarily use license it must have products. So you.
It's a bit of an experiment, but we certainly ship quite a few headsets into the council space is being both of the.
It comes we use now what we expect during the transition I think that you know, we're seeing that more with us Gulf subsidiary, which is being shown as the 100% going into high end.
Ah councils.
I'd say this year due to the price points and the limited availability.
Of the new X. books Xps five.
We don't expect the transition to be quite as severe.
Most people knew that x. boxes compatible for some backward backwards in this.
A certain amount of compatibility M. P S five the space for as well so.
We didn't expect it to be so severe but we'll find out you know you won't really know until people start to.
Shopping in a black Friday in December.
I think the other Paul if you want to take the EBITDA. So the for the EBITDA that the different first of all Q3, obviously was a lot stronger than we expected. So when that happens you tend to overachieve 'cause your opex or is sort of what you expected and everything else the fire for that house, but specifically for Q4, if you look at the gross margin.
It's in line a combination of higher airfreight, because a bigger demand in Q4 and that a lot lot more than expected demand in Q3 means a better air freight more things for our customers and obviously, there's a little bit more promotional activity traditionally Q4 than Q3 on the Opex side or if you think this is.
Our first quarter as a public company if its going to be some increased public company expenses, there compared to prior quarters. We're also spending more on product development or for new products coming out next year, but sort of accelerating some spending there and a little bit extra marketing spending around some branding and other initiatives were doing so that's the main components of the difference between.
Actual Q3 and the implied forecast.
Got it okay. Thanks, yes.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Doug Creutz with Cowen <unk> Company. Please proceed with your question.
Hey, Thank you and good morning, Big week for gaming, obviously, the the new console, they're shipping and one of the one of the things that reviewers have consistently said about the P. S. Five haptic.
Tactic feedback controllers are quite impressive I was just wondering with your with your stuff flying is that something that you'll be able to do at some point with its got controllers is that something you're you're planning to do and how important is that you think to being able to maintain your dominant market share position on on Playstation with Scott. Thanks.
Yeah. Yeah. Thanks. Good question. So now that most of the people that are you know pretty competitive on council.
So unhappy golf.
And so people are really trying to concentrate on you know.
In game play its kind of annoying. So that's the first thing, but we'll have it.
The list of products the scout.
Makes today Oh modified versions of the PS.
He asked for on an X. box and we'll be well positioned to past five so we can keep all of 'em lose any part of it normally we basically allow people to take the whole haptic module out of the angry absent a lot of people do that so it's it's you know we don't think its a big deal, but we'll have it anyway.
Okay. Thank you.
Thank you. Our next question comes from the line of Tim Nollen with Macquarie. Please proceed with your question.
Hi, Thanks couple of questions. One another follow up on the on the console is coming out I wonder if it's possible hopefully quantitatively, but at least qualitatively maybe to pull together some of the comments you made thus far and just give us an idea of what the console launches of X blocks and Playstation five will mean for your growth.
Incremental peripheral sales whatever that might be.
And then secondly, I might have missed this but is it possible to provide a number on a call inorganic growth number for Q3, because I know there are some acquired revenues I guess scuff was in there just what was inorganic growth figure for Q3. Please.
Okay, well, we'll come back to the organic growth in the second.
In terms of console cycle.
This is a this is the first first one for us and then.
Actually we've we've watched all the different companies around the space for quite some time, you know, notably Turtle Beach, and ER and Mad Catz when they were.
Around so we just we've seen this in this instance, always quite different but I'd say in general what tends to happen with councils is the.
When the new consoles veloce.
People spend money on on the Council.
And in the following year people.
People stop buying more accessories for it.
Now what I think is going to be and usually that's if that comes from comes from control. So the first thing people tend to buys another controller.
So that's what we would expect you know certainly we would think that next year would be a strong if discussions than this year.
Having said that she was pretty good because there's lot of people you know playing games Uh huh.
So I know, it's like that really asked the question, it's tough to get to.
Super Super granular on that because it's just too early in the cycle.
I will say the the numbers that are being talked about fast five next book sex I'm, a pretty seem pretty because of supply constraints I think there's going to be a lot of people still buying piece for next boxes for for a while and the same thing with accessories.
In terms of the organic versus inorganic.
Organic growth was about 51.7% to about 9% lower so if you take out the items that we had in 2020 that we didnt have 2019.
Growth would have been about 9% lower so consistently for us our focus has been driven heavily by our own product or if you've bought something a couple of years ago, our ability to ramp up and move.
Our channel.
So I hope that answers your question.
[noise] one follow up just to pass on consoles. The if you will.
Peripheral outside of scale.
That we sell that is largely used by contemplated is headsets. Obviously, you don't use a keyboard mouse for the council.
And the ASP tends to be much lower on consoles that much typically much simpler most headsets it just.
You know Jack plug into speakers, so very little electronics in the Oh, we really can't tell when people to find those at retail with the final console PC because its generally the same product so.
We did see a fairly big surge this year of the entry level, you know 30 40 dollar headsets.
Whether that's by people in a plane console PC all in fact, both its difficult to tell.
We have seen in terms the surveys that there's a.
Sauce crossover in other words, something like 70% to 80% of people. The PC game is also play on council.
So it is difficult to you that the market is not one or the other.
Yes that all make sense, thanks a lot.
Thank you. Our next question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.
Great. Thanks, Congrats on the IPO again, and and a strong quarter to kick things off I wonder how much crossover in sales you're seeing between gaming and streaming product consumers. If if that's something you're able to measure.
And if there is a reinforcing or beneficial impact, they're the streamers purchase gaming gear and vice versa or are they somewhat distinct.
And then secondly, looking further ahead in terms of the direct to consumer offering can.
Can you talk about how E commerce fits into that and the roadmap in terms of marketing or technology upgrades required to capture more direct traffic and sales. Thank you.
You want to say, there's a questions in reverse order. So first thing. We just went live yesterday with our CRM system traditionally we've been a channel.
Channel Company as has Oh got.
So other than sort of Chatham for woman textbook calls and that's the thing we we haven't done too much about our customers.
But but scoping origin, 100% direct to consumer when trying to ramp up I'll try to consume as much as we can just to get higher engagement.
So we're going to learn a lot more was all that data flows into our.
CRM system will get to see what people are doing you know.
Individually on the website, we could also see to some extend will put us into a acute systems.
So yes, she was important because obviously, we've got the opportunity to.
No just so one thing, but you know sort of the right products now.
It was a crossover.
There is a lot of people to the streamers.
I have never built a game PC.
So the so the historical customer base is a little bit different lot of stream is not particularly technical you know people.
So there is there is some crossover.
Finding more and more you know get.
Game as one of the stream and share their friends.
So I would say when we bought El Gallo.
You know the estimate is probably 95% of the.
People buying streaming give streaming live game type.
As you probably know the majority of a 90% of the traffic on twitches is a gaming.
But we also started to see just from social interaction and.
Talking to people that do a lot of people find streaming give full non gaming activities whether it's.
Forecasting cookie.
Cooking make up fitness.
This is a subject so.
I don't see those those people to.
Don't you wouldn't be buying again.
Thank you very much.
Thank you we have no further questions at this time I'd like to turn the floor over to Andy Paul for closing comments.
Yes. Thank you very much look cool pool. So we are at the forefront of a massively growing market since around gaming E sports and streaming.
And with our unparalleled brand and quality of products.
We think we're uniquely positioned to take advantage of this exploding market.
Today, the global and passionate community of gamers and stream is engaged in the relentless pursuit of better performance.
And we're proud to be a leading provider of innovative high performance kit for this new era of Ah insight.
We are committed to giving game is a stream is the tools they need to play the best game.
She is the best content and have some doing it.
Thank you interesting toll seven thank you for joining us on the call today.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.