Q4 2020 Turtle Beach Corp Earnings Call
Ladies and gentlemen on today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach, what's quite a handful of years 'twenty 'twenty conference call. The living today's prepared remarks, our chairman and Chief Executive Officer, Juergen, Stark and Chief Financial Officer, John Hanson following their prepared remarks, the management team will open up the call for any.
Before we go for it then I would like to turn the call over to Sean Mcgowan of Gateway Investor Relations Turtle Beach of IR adviser as he meets the Companys Safe Harbor that provides important cautions regarding forward looking statements. Sean. Please go ahead.
Thank you joelle.
On today's call, we will be referring to the press release filed this afternoon. The details the company's fourth quarter 2020 results, which can be downloaded from the Investor Relations page at Corp, Dot Turtle Beach Dot Com, where you'll also find the Lady latest earnings presentation. The supplements. The information discussed on today's call finally, a recording of the <unk>.
Call will be available on 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 will could believe expect anticipate and.
And similar expressions constitute forward looking statements. These statements involve risks and uncertainties regarding the company's operations and future results of that could cause turtle beach corporations.
Our results to differ materially from management's current expectations, while the company believes that its expectations are based upon reasonable assumptions numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe Harbor statements and risk factors contained in today's press release and in its filings.
With the Securities and Exchange Commission, including without limitation. Its annual report on form 10-K, and other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in our forward looking statements.
<unk> does not undertake to publicly update or revise any forward looking statements. After this conference call the copper.
He also notes that on this call it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP and you can find such a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided.
In today's earnings release and presentation.
And now I'll turn the call over to your can start of the company's chairman and Chief Executive Officer Jurgen.
Good afternoon, everyone and thank you for joining US we are very pleased to reported another record quarter in what was a record year for the company.
Our fourth quarter sales rose to $132 9 million, an increase of 31% over last year, bringing our full year sales to over $360 million more than 25% higher than the highest annual sales in our history.
The fourth quarter and the full year revenues exceeded our expectations as both the market and our products continued to perform strongly.
We also delivered a record EBITDA of over $60 million for the year and a record operating cash flow of 51 million.
As you all know by now of the market for gaming has continued to be strong in general and this past year saw a large sudden surge as existing gamers began gaming more and millions of new gamers entered the market as the stay at home orders hit in the spring.
In addition, gaming headsets are great for working and schooling at home, which drove additional demand from non gamers for our headsets.
The surge in demand impacted all gaming categories and created an unprecedented opportunity as well as an unprecedented set of challenges.
We rose to the challenge and captured the opportunity significantly outperforming the market through great execution for.
First we believe we were able to ramp up our factory capacity faster than most within a few weeks of seeing the first signs that the stay at home orders were driving a steep surge in demand we increased our factory output by a factor of five times from what we had planned this meant not only adding more production capacity.
But also of forecasting and securing components far in advance it meant securing shipping and transportation capacity at a time when most flights for grounded in logistics capacity was highly constrained and the men working in a retail landscape that was constantly changing and staying coordinated on it.
Day to day basis, with our retail partners globally.
But similar to 2018, the best time to outperform the market is when the market is booming and that's what we did again.
As an example of according to NPD the U S Counsel headset market was up in 2020 by 41% in dollars and 29% in units sales of Turtle Beach Council headsets in the U S were up 53% in both dollars and units. We ended 2020 with of 46 eight.
Percent dollar share of the U S counsel headset market up from 43% the year before and by the way. This outperformance only got better as the year went on in December our dollar share rose to 51% and our unit share rose to over 60% of strong finish.
Cash to the year.
Our ability to out execute the rest of the market not only enabled our financial success last year, but helped ensure millions of consumers could get great headsets and our retail partners to capture the surging market demand.
At the best selling council of headset models for the U S. For 2020, all five of the top five best selling models, where ours as were eight of the top 10 are strong counsel headset results were also helped by the launch of the Gen. Two spell 600, and 799% of $149 wire.
The list headsets for Xbox and Playstation which quickly became top selling models those new headsets had big shoes to fill as they replaced our top selling prior models and the Gen. Two models did it with the best headsets, we've ever delivered at those price points in December our Gen. Two models had six.
Six of the top 10 revenue spots in the U S market.
The product and market share performance are a testament to the enduring strong brand, we built with council of gamers and the recognition of our high quality and innovative products for all levels of gamers.
In PC gaming accessories, which includes headsets keyboards and mice, we are still a relatively small player, but we have seen very encouraging growth in what was our first full year with an expanded product line.
Ahead of the holidays, we launched our new line of three Elo PC gaming headsets, reflecting a great combination of rocket teams design and branding and Turtle Beach is audio expertise that we have.
That have made our council headsets best sellers for more than the decade.
We launched three new models of our Vulcan PC gaming keyboards. These are line extensions to the bulk of $1 21 on $1 22, keyboards, which our top selling keyboards in Germany.
Two of the models use our new proprietary tightened optical switches. We also launched two new PC gaming mice, the first core and burst pro both of these also use our new tightened optical switches and the burst pro features.
New extremely lightweight transparent honeycomb shell with really cool organic lighting coming through the shell as.
As a result, we've more than doubled our rocket revenues last year versus 2019 and remain on track to continue to significantly grow rocket revenues this year.
I'm going to take a moment right now to again, thank our great team I know I. So I say that every quarter, but last year really did percent on unprecedented set of challenges for any team in the consumer electronics business. Our people, we're dealing with the same pandemic worries and uncertainties that everyone was facing and they had the suddenly of comdata.
Is this that was booming changing by the hour all while working from home and adjusting many facets of their lives not to mentioned launching a record number of new products, while working remotely and not being able to visit the factories.
They stepped up in a big way and I'm very proud of each and every one of our team members. Thank you.
Getting back to our results as impressive as our sales growth has been over the past years the improvement in our balance sheet is also striking at the end of 2017, we ended the year with net debt of $84 million.
Net debt was high cost and keeping us from pursuing the opportunities where you wanted to in new product areas. Just three years. Later, we ended 2020 with $47 million of cash and not a penny of debt.
It's an improvement in our net cash position of over $130 million in three years, which is more than the entire enterprise value. Just three years earlier, our balance sheet has gone from something that needed fixing two of strategic tool.
We have already begun to use of this improved liquidity to expand our business in the new categories that have added billions of dollars in addressable market that we can go after.
And as pleased as I am by our record performance last year with revenues up more than 50% that's more than $125 million from 2019, I'm, even more pleased that we believe we have an opportunity to grow further this year.
That's the result of our continued strength in council headsets, our view of tremendous opportunities to grow in PC accessories, and additional investments we made last year and we'll make this year to enter new categories like microphones, and seven and several others yet to be announced.
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 market and our business in 2021.
John.
Hey, Thanks, Juergen and good afternoon, everyone. We are pleased to report that the strong momentum. We saw early last year continued right through the end of the year, allowing us to deliver better than expected results across all of our financial metrics as Jurgen said as the company, we set new records for sales and adjusted EBITDA.
Though.
Net revenue for the fourth quarter of 2020 was $132 9 million or $131 2 million on a constant currency basis compared to $101 8 million in the year ago quarter, we had not given specific revenue guidance for the fourth quarter, but the third.
1% increase in our fourth quarter revenue was obviously much better than the roughly flat level of sales that was implied in our second half revenue guidance of $245 million.
It is particularly notable that this growth came despite the fact that we believe that roughly $20 million of holiday purchasing had been pulled forward into the third quarter because of retailer sales plans, which in turn drove our third quarter increase even with this pull forward.
<unk> fourth quarter consumer demand continued to be stronger than expected and our products continue to perform extremely well and we were able to meet that demand.
Revenue growth in the fourth quarter was the result of many of the same factors that drove our results all year strong increases in consumer demand for headsets, the launches of new consoles from Sony and Microsoft excellent sales performance of our console headset and the significant expansion of our PC accessory offerings.
Full year net revenue was a record $360 1 million up 53% compared to $234 7 million in 2019, the growth was driven by the same factors cited above.
Growth gross margin in the fourth quarter was 35, 8% 70 basis points higher than the 35, 1% we reported in the fourth quarter of 2019. This increase was driven by several factors moving in different directions.
Lower than normal and lower than expected promotional spending as a result of consumer demand dynamics of favorable shift in our sales mix volume driven fixed cost leverage partially offset by roughly $2 million and incremental air freight costs to facilitate the increase in sales full year.
Gross margin was 37, 2% a 370 basis point improvement over 2019, driven by the same factors that drove up our fourth quarter margin.
Operating expenses in the fourth quarter of 2020 were $27 6 million compared to $22 $3 million on the same quarter of 2019, the increase was driven by volume related selling costs as well as additional investments to expand our PC accessories business and drive future growth.
As a percentage of net revenue operating expenses in the fourth quarter were 28%, a 110 basis point improvement over last year's fourth quarter. When operating expenses were 21, 9% of net revenue.
As a result of the revenue growth gross margin increase and operating expense leverage adjusted EBITDA in the fourth quarter of 2020 was $23 6 million, an increase of 42% compared to $16 6 million in the year ago quarter the year over year improvement includes approximate.
<unk> 2 million of air freight expense as well as our previously announced investments in growth.
As Juergen will discuss later on these improvements were also driven in part by lower than normal levels of promotional spending we had expected promotional spending to return to normal levels in the fourth quarter, but the dynamics of consumer demand and product availability eliminated the need for normal levels of spending.
Our full year 2020, adjusted EBITDA was 61 4 million compared to $22 8 million. In 2019. This is the highest level of adjusted EBITDA in our company's history exceeding our prior record back in 2018.
GAAP net income in the fourth quarter of 2020 was $16 3 million compared to net income of $20 4 million in the year ago quarter, reflecting the trends I just discussed GAAP net income per share in the fourth quarter of 2020 was 93.
On $17 6 million weighted average diluted shares outstanding compared to net income per share of $1 29 on $15 7 million weighted average diluted shares outstanding in the year ago quarter.
The increase in the diluted share count is primarily the result of lower assumed share repurchases under the treasury method for calculating diluted shares.
Please note that on a GAAP basis, the fourth quarter of 2020 included the benefit of $1 6 million from a change in the fair value of contingent consideration and the fourth quarter of 2019 included a seven 4 million benefit from the release of the tax valuation allowance.
Excluding these and other minor adjustments adjusted net income for the fourth quarter of 2020 was $14 8 million or <unk> 84 per diluted share compared to adjusted net income of $13 million or <unk> 83 per diluted share in the 2019 per.
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Cash flow from operations was $18 4 million in the fourth quarter of 2020 up 52% from $12 1 million in the fourth quarter of 2019 for the full year cash flow from operations totaled $51 million in.
An increase of 29% compared to $39 4 million in 2019. This was by far the highest level of cash flow from operations, we've ever had and was 21% higher than our prior record, which was $42 2 million in 2018.
This is the third consecutive year, we have delivered cash flow from operations of at least $39 million.
Our effective tax rate for the fourth quarter was 26, 3% and for the full year. It was 26, 1% slightly lower than the 27% rate. We had said we expected following the third quarter now.
Now turning to the balance sheet at December 31, 2020, we had $46 7 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line, that's a $54 million net improvement from the end of 2019.
Inventories at December 31, 2020 were $71 3 million compared to $45 7 million at December 31, 2019. The increase in inventory was driven by expected continued strong demand in early 2021 and a higher revenue.
New run rate for the business.
Now I'll turn the call back over to Juergen for some additional comments juergen.
Thanks, John I will finish with some comments on what we see for the market and for our results in 2021.
As you've heard me say many times, we believe that gaming has been and continues to be one of the best if not the best consumer category in which to be a leader.
It has become more of the focal point of consumer attention the movies television sports and other activities as the entertainment. It continues to grow in the share of People's Leisure time.
And Theres also become one of the most popular ways for people to get together.
And this was all going on and getting more pronounced even before people were forced to spend time indoors and before the launches of the new consoles.
Over the last 12 months gaming has become even more important as a form of entertainment competition and socializing, we believe that even when things return to so called normal gaming is going to be bigger than it was and continues to be a booming market and.
And we are one of the top few hardware companies in the $5 billion market for gaming headsets keyboards and mice. In fact in 2020, we were the top seller of those products in the U S combining council and PC gaming.
That's despite us really just getting started in the PC segment, we continue to believe that the future for the gaming market and for us looks very bright.
We have several elements to our growth strategy first continue to lead in Council headsets. This has been and will continue to be about delivering high quality headsets for every level of gamer and finding ways to innovate and give gamers features that nobody else has this is how we've held the lead that.
Worse, the nearest competitor for more than a decade, and we have some more industry first innovations coming this year.
Second we will continue to expand our PC gaming portfolio of headsets keyboards and mice. The additional rocket PC products, we launched in the fall last year will be followed by another wave of really exciting new PC gaming products. This year as I've mentioned, our near term goal is to create an incremental 100.
The business in PC accessories, and our longer term goal is to lead those PC gaming categories. We will make investments this year to continue our progress towards both of those goals.
Third continuing to identify and move into additional categories for expansion despite.
Despite being very busy executing on a complex set of retail and supply chain dynamics last spring, we launched additional efforts to grow our addressable markets over time I think it's safe to say that if you can think of a gaming accessory category. We have spent time evaluating the potential for us to enter.
For that category and we pulled the trigger and began executing on a few last year.
Our recent expansion of neat Microsoft acquisition of neat microphones is of Great example of the first announced additional expansion category as we said when we announced the acquisition need is a pretty small company right now in the portfolio. We acquired the company for is yet to be announced and launched but it has.
This potential of particularly given that the new team now part of the Turtle Beach built blue microphones, including the digital microphones that are the current industry leading products.
The overall microphone market is over $2 billion in size globally, and the digital USB portion is roughly $700 million in the fastest growing part of that market. The.
Microphones are not related exclusively to gaming, but we see a lot of overlap between gamers streamers and Influencers, who are also often use other gaming accessories.
Just like with our rocket acquisition, we've added a specific set of skills that can enable us to not only take a meaningful position in a category, but have an opportunity to lead that category overtime.
We will continue to look for logical adjacencies, where we can either buy or build our way in and leverage our core competency competencies in brand product development distribution and execution and as I've hinted we have several new categories coming this year.
A fourth engine for growth as geographic expansion, we're number one in council headsets in North America, the UK and other countries by a significant margin, but we believe we have opportunities to grow our share in other geographies and other product segments were not going to go into specifics for competitive reasons, but we will be putting resource.
Just behind expanding into new geographic markets, where we see opportunities across all of our product segments.
Let's turn now to our outlook for 2021 and beyond.
Those of you who've been following our story for a long time no debt when the console headset market surged in 2018.
We knew this was likely to have two implications for the years after 2018 for.
First the influx of millions of new gamers would create some level of onetime bump that year as they bought their first headsets.
Many of those new gamers would join the market upgrading and replacing the gear over time, leading to a step function increase in the size of the market.
That's exactly what happened.
We see something similar happening after 2020, if we look at the three drivers of growth last year existing gamers gaming more millions of new gamers joined the market and for headset some level of non game or buying for working and learning from home. We think there are some very encouraging implications for the longer.
Term for.
For Council headsets, we expect that 2020 had some level of onetime impact of new gamers buying their first headsets. After all of the second quarter was nearly double normal sell through in third quarter was up nearly 50% and that is unlikely to repeat.
But the millions of new gamers that entered the market.
Also has the long term benefit of a similar step function increase in the size of the market that we saw from 2017 to 2019.
However, 2021 is also starting strong from the sell through standpoint and has the added benefit of the new Council launches, which typically provide an additional tailwind demand for the new Xbox and Playstation consoles continues to exceed supply and we continue to be big believers in the market potential of those.
Forms with the or hard to tell it's not real level of graphics and audio.
Given that it's a tough call whether the market for console gaming headsets will be up or down in 2021 relative to 2020, but our working assumption is that it will be down roughly mid single digits from the record 2020, particularly in Q2 and Q3 and then continuing to show good growth in future years.
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PC accessories market saw a similar significant increase in demand in 2020 from the stay at home on orders as well as the upgraded Cpus and Gpus that launched last year like count The council market, we expect of that market to be significantly larger than 2009, but down somewhat from 2020. This.
Year, and then continue to show growth in the coming years.
That's the market for Turtle Beach, even if the underlying console and PC markets are down a bit from record 2020 levels. We believe we can offset this by continuing to substantially grow our PC accessories business by driving additional growth in several new gaming categories entering the mic market with our.
Upcoming neat portfolio and growing in a few selected geographies, where we see strong opportunities.
We have targeted our financial metrics to reflect the investments to support that strategy. Accordingly this year.
Given this we have two simple goals for 2021 number one drive growth in 2021 and beyond despite record 2020 revenues and to do so in a way that still delivers category, leading EBITDA margins.
We are targeting revenues of approximately $370 million this year, reflecting the market dynamics and our specific growth vehicles I just discussed.
We set of target level of EBITDA at 12% of revenue, which we believe compares favorably to others in our category. Despite are somewhat smaller size. Therefore, we anticipate that our adjusted EBITDA in 2021 will be approximately $45 million.
This approximate $45 million on expected EBITDA reflects a few other dynamics, we expect this year.
First gross margins in 2020 were benefited by significantly lower than normal levels promotional levels as stock was constrained for the whole industry.
Of the year.
This benefit is the large inflows directly to EBITDA, we anticipate promotional levels to return to more normal levels of this year.
Second gross margins were negatively impacted by the roughly $9 million of air freight we spent in 2020 to expedite supply and capture the surge in market demand. We expect are free to be a more normal couple of million dollars. This year.
That said constraints on particular components <unk> logistics capacity could increased costs, which would have an impact on gross margins, but our financial plans assume we're able to resolve constraints by spending a bit more rather than having the constraints impact revenues.
Third we will be increasing our opex, particularly in the sales and marketing categories to support the targeted growth this year as well as to set us up for continued growth in 2022 and beyond.
As a result, we expect adjusted net income per diluted share to be approximately $1 35 for 2021, using an average share count of roughly $17 5 million and of tax rate assumption of 28%.
Now a few words about the expected revenue phasing of this year and our expectations for Q1.
Just as we saw last year on unusual quarterly phasing of revenue. So will 2021, we expect but in a different way.
The first quarter of 2020 was soft for the counsel headset market ahead of new console launches following a similar pattern to prior counsel transition years that happened exactly as we expected with Q1 U S sell through for the market down over 25% through February.
Then in late March and through all of Q2 the.
Counsel headset market experienced nearly a 100% increases in sell through of state home orders hit and millions of new gamers and accessory buyers entered the market.
Q3 continued with sell through nearly 50% higher than 2019 Q3 also saw some revenue shift from Q4 because of earlier retail holiday purchases in Q4 things started to normalize but also included the new council launches, albeit with constrained supply.
All of this work to create an unusual quarterly sales pattern in 2020 move.
Moving to 2021 strong sell through has continued as many people are still staying at home for work or school.
The new council launches are contributing even while they remain supply constrained. This combined with the strong finish to last year is driving of retailers to replenish and build their stock levels. As the result for the first quarter 2021, we are expecting revenues to be approximately 88 million up from 35.
Million in the first quarter of 2020 the.
The 150% increase expected growth reflects both weaker than normal first quarter last year combined with higher than normal level of revenues for the first quarter of 2021.
The year over year quarterly comparisons of this year could be pretty confusing because they will jump up and down considerably given the unusual patterns, both last year and expected. This year. So we'd encourage investors to stay focused on full year guidance and our progress towards those annual results.
We're expecting first quarter adjusted EBITDA to be approximately $14 million up from negative $2 7 million in the first quarter of 2020. This reflects the factors, we already discussed above including more normal promotional spending and investments in new products for.
For the first quarter of 2021, therefore, we expect adjusted net income per share to be approximately 45.
In conclusion, three takeaways, we have about our outlook.
Number one we believe we can grow total revenues this year because of growth in business outside of the council headsets, even as we continue to do very well in that market segment.
For two we're using our financial strength to invest in future growth, which we believe will give us the ability to grow in 2022 and beyond.
Number three we are targeting an adjusted EBITDA margin of around 12% this year, which compares well to our peers and enables us to invest to drive future growth.
We had another great year in 2020, and we're very excited about 2021 and the coming years, both for the gaming market and for US as a company. We are in an enviable position of leadership in one of the best consumer electronics segments to be in we have grown our leadership and counsel headsets have a very.
Strong growing beachhead in PC gaming accessories, and we're entering new adjacent categories that can leverage our strengths.
We again demonstrated the ability to execute extremely well across our entire business.
Our balance sheet has never been stronger and we intend to ramp up investments to produce revenue growth and superior cash flow returns for years to come.
Let me reiterate in closing my appreciation for the global Turtle Beach team members, who have done an incredible job under challenging circumstances.
For all truly what makes this company succeed and I'm very proud to be of part of this great team with you on.
Operator, we're now ready to take questions.
Thank you Sir as a reminder to ask the question you will need the press star one on your telephone to withdraw.
The question pets per pankey, please standby will be compared of the Q&A roster.
And the first question will come from Thomas for it.
With D. A Davidson. Please proceed.
Great. Thanks, Youre going to John outstanding year excellent performance sorry of.
One question on the next 12 months and then I have one question on the next couple of years. So first I'll start with the next 12 months, So European is Microsoft and Playstation.
Able to get the supply to catch up with demand for their next generation consoles.
How would that make your life better or not have an impact when I think about your outlook for 'twenty one.
Sure. So I think they will ultimately catch up with demand here, but I don't think its going to have a big impact on us other than potentially just shifting the timing around of the market a bit it's actually I would view it as a net positive for us that the the new.
Counsel sales essentially some of which probably of what happened last year slipped into this year because of supply constraints and that that demand is likely to be more spread through the course of this year than frontloaded. So.
I think for us, it's a net positive and just kind of balancing out.
The demand through more of the year.
Excellent and then my second question is you did an amazing job discussing.
Eric opportunities ways to expand your current portfolio, but I want to know long term, how you thought about services, which is something that of course, there has talked about so basically non hardware revenue, where do you see as the opportunity and is that something you're also considering when youre looking at opportunities to extend your efforts beyond today.
That's a great question, Tom and the short answer is absolutely we're looking at debt.
We look at obviously our strength in gaming hardware.
The key set of assets assets that we can bring to bear on new categories. So hardware will continue to be of strong interest to us.
And lever it be able to leverage distribution.
Apply chain execution all of the things we've demonstrated we can do extremely well.
It said software services.
Also categories in gaming that can leverage the strong brand or brands that we have now and they are definitely of interest in on our radar moving forward.
Great. Thanks, Juergen Thanks, John.
Thanks, Tom.
Thank you on our next question comes span drew Crum with Stifel. Your line is now open.
Okay. Thanks, Hey, guys. Good afternoon. So you are getting you said youre, assuming the comp the market's down mid single digits from 'twenty, one does your guidance assume that.
<unk> give back share you maintain share you pick up some share.
And then separately you talked about a number of the drivers influencing gross margin. So if I had the correct youre assuming.
Promotion spend returns the normal.
You're expecting top line growth. So maybe you get a little bit of leverage in airfreight is going to be down.
Taking that together how should we think about gross margin for 'twenty one.
Sure drew I appreciate the questions. So for the council of market I mentioned that our working assumption, while it's a bit tough to call of this year with all of the puts and takes and certainly the strong start to the year makes it even more difficult to kind of judge our working assumption is that the counsel headset market overall will be down.
On mid single digits, this year and Thats not down in declining that's just not <unk>.
Having the same kind of a onetime bump that happened last year, because we do expect strong growth going forward.
So and in terms of our share we finished with 46, 8%. It always strikes me as the little strange to talk about our share of moving up or down a few percentage points given that the next closest competitor is in the teens.
So we do our financial modeling assumes that our share will normalize a bit this year as we don't expect to have some of the supply chain of supply advantages that we had particularly in some months of Q3, where we had over 50%.
Revenue share, which is abnormally high so we do expect potentially to give back a bit but for our share to stay very strong.
Especially compared to prior years, where typically we have been in the in the low forties.
Got it okay. That's on.
So that's on your first question on gross margins, yes, there are a number of complicated puts and takes the biggest.
The kind of gross margin first impact is promotional spending and as I mentioned last year was abnormal for everybody in the industry. When you're supply constrained you are not typically spending money to do additional displays at the front of retail things like that don't think about promotional spending is just sales and discounts.
It's a much broader bucket than that.
Much of which you don't or can't take advantage of when supply is constrained. So the entire industry showed a lower level of promotional spend last year.
Which has a large impact on gross margin and flows directly through the EBITDA.
Our financial guidance. This year assumes that that pretty quickly returns to normal here of the promotional environment. That's.
That's the biggest impact in the second biggest one would be air freight and as I mentioned, we had about $9 million of airfreight in last year that comes directly off the gross margin line. This year, we'd expect to do a couple of million dollars on airfreight more of a normal level of air freight. So there is of call it roughly <unk> <unk>.
<unk> million dollars gross margin swing that way and then the last thing that impacts gross margins just operating leverage.
And so as we have bigger, especially in quarters that are typically lower the gross margin can move around quite a bit because we have millions of dollars of fixed cost in supply chain team and people that are above the gross margin line.
That answer your question on yes, that's very helpful.
Thanks, guys.
Yes, thanks true.
Thank you. Our next question comes from Mark Argento with Lake Street. Your line is now open.
Hey, Youre going and John Congrats on the Goodyear.
In the year.
Thanks for the granularity.
On the drivers, but just kind of taken it up to 5000 feet. When you think about.
Kind of mix of the business console versus recall other.
Where do you think three.
Three years five years, where do you think console.
As a percentage of sales you could see that kind of adds 50% or or or even below.
Where do you think you could really see that the revenue mix of diversified debt.
How aggressive could you be if you could.
To get there.
Sure I think in the next year or two.
We'll be we'll have more than 30%, 40% of our business outside of the council.
And I think in the next three to four years.
We should be well over half of the business outside of the council.
And thats not that we don't like the council business by the way that's just a matter of taking advantage of opportunities to leverage our strengths and all of the large adjacent multibillion dollar gaming accessory markets.
Right.
Thank God.
You see kind of.
Some of the build versus buy.
EBIT.
Okay, good small buys with brands the technology.
Did you see the opportunity the leverage of Turtle Beach brand, but into other markets or are you going to leave Turtle Beach, Brad really the dominant console, Brad really deal with that strategy of.
Adjacent markets.
For the brands.
That's a great question one of the things I like and Thats been a pretty big change for US is up until 2019, we were of one brand company. So everything we looked at from a market segment standpoint always had the complication of can we utilize of the turtle Beach brand into that segment or do we.
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Essentially then potentially pollute the the strong brand that Turtle Beach Hasnt Council.
Whats very different today as we essentially now have three brands to look at future M&A with Turtle Beach rocket and now meet as well.
Remember that need is not only doing gaming microphone streaming microphones, but also prosumer audio.
And that brand over time has some potential the stretch into non gaming segments as well as we build it so I would say when we look at potential M&A.
Many more options now one option is to use any of the three brands, where it's the best fit and the other option is.
Two to add brands because of the organization is now learned how to be of multi brand company and.
And leverage the flexibility that comes with that.
One other point it may seem from the outside obvious that given how strong turtle Beach is brand is in council to just use that brand for anything else we do.
What that requires though is that you'd be debt you essentially dilute the strength of the brand in one segment like counsel gaming.
In order to have that same brand cover additional segments. So I'll give it a more maybe an extreme example.
Enterprise headsets, we could do those all day long used by by by working people.
That said, we would have to look at weather.
Consumers kids, let's say the making.
Kind of an extreme example would want to be using the same brand the headset debt that data mom was using for work.
And Thats what gets what gets taken into consideration in terms of what is the optimal brand play and as I said I really liked the fact that we have a lot more flexibility now.
Particularly as we look at adding categories organically or by M&A.
That's helpful.
Maybe one for John in terms of.
Think about the model.
It kind of this 12% adjusted EBITDA target is that kind of a good number we should model, where we would expect to help bolster bodies, maybe of 100 or 150 bps.
And quarter of year on year out.
Does that kind of where youre pegged on this thing and you're going to blow it all back in the growth or maybe just talk about the longer term, we've got a bogey.
Yeah, Great question, Mark So 12% is the Mark that we set for 2021, and we would we would we would expect that to inch up over the next two to three years, obviously, we're we.
And we're investing for to drive growth.
We want to get that engine moving here and so but we do expect to increase that over time.
Great. Thanks, guys.
Thank you.
Thank you. Our next question comes from Jack Vander R&D with Maxim Group. Your line is now open.
Great.
That's on the solid results Youre going to John.
All of the results every quarter this year.
Thank you for taking my questions as well.
So I guess, maybe I'll just start with a lot of my questions have been at asked already so maybe I'll start of the question from you kind of of strategic perspective.
I'm wondering how you view of the somewhat early stage, but booming E sports market opportunity and how turtle beach can leverage the growth in audience.
And all the all of the growth vehicles that are within E sports in general.
You've made some strategic partnerships as well in the space. So how do you view esports net opportunity.
Turtle Beach.
Sure.
So first of all we are in the sports. We're one of the top gaming accessory providers in fact across the council on PC landscape, where the top selling <unk>.
The board headset mouse provider in the United States. So.
We are in the sports we've been partnering with teams for years.
<unk> and <unk> and so we're in it we're in it today, we don't position the business as some others. Do is this is just all of the sport because in reality gaming is not just the sports gaming as entertainment.
The competition esports rate bigger audiences than any other sport now other than the NFL and it is socializing and we in our view all three of those trends are what drive the gaming market not just the esports piece.
Okay.
Got it fantastic no that makes a lot of sense in absolutely well the way youre already in the sports just wondering how much.
How much growth can be fueled or how much additional or incremental activity you could be involved with but it sounds like it's all part of our part of the puzzle and Youre already established there. So that's helpful to know and then.
Maybe just follow up question in terms of the the revenue guidance I know a lot of analysts of already touched on this but just given your outlook implies positive growth on the top line. Despite console headsets being down slightly year over year are mid single digits. So I guess that leads growth from PC accessories, and maybe Mike or the new microphone product line up.
Anything you could share or maybe like a rough contribution.
Directional growth out of any anything you can provide color on as to what is driving that debt overall growth in revenue for this year as it relates to those two businesses.
Sure so with our financial model.
For this upcoming year with revenue growth again.
It's our underlying assumption is based on the council of gaming headset being down.
Roughly mid single digits, that's not a small at half of the market.
Market share of nearly that's not a small number for us by the way right. So that's that's $10 million to $20 million of revenue.
And we're adding 10 million more of this year on top of last year. So that's call. It we need to we need to produce $20 million to $40 million of growth.
Outside of the impact of counsel headsets and Thats, what Im Super pleased that we put ourselves in a position to be able to do that will come from PC accessory growth.
We more than doubled the business last year ready you were on track with another new wave of products coming this year of the products that launched last fall doing well to add add a good amount of revenue from the PC accessories market that market is booming. It grew a lot last year as well.
So that's number one number two launching the neat microphone portfolio that'll be smaller this year because of those products will launch during the year, but that's going to be a bigger contributor in 2022, and then while we haven't named them specifically, we have a few additional categories were.
We will be launching that are large where we will be launching new products. This year in gaming that will be announced as we go during the year and those are efforts that really started last spring and are now going to come to fruition. This year, so with that combination thats, how we expect to be able to offset.
Some potential decline, although again, it's hard to judge in the current underlying console gaming headset market.
Sure.
Fantastic and that was the very helpful of granular breakdown of short and concise and to the point there and I appreciate that I'm excited to see what these new categories are.
That's on the quarter again, and all of this year.
Ill jump back on queue.
Thank you as a reminder to ask the question you will need the press star one on your telephone. Our next question comes from Martin Yang with Oppenheimer <unk> Company. Your line is now open.
Hi, John Good afternoon.
My first question is on <unk>.
Now that you had the much more extensive installed base as well as more product categories. How do we think about it even better insight on your consumer behavior on the way the upgrade or the way you use the user of devices.
Interesting question. So we do as you probably know extensive modeling of the markets and supplemented with consumer research.
This is one of the ways that that we I believe have done quite a good job forecasting what the underlying market in our core Council segment is going to do.
I know we're looked at as the bellwether in terms of just forecasting what's going to happen with the market.
Last year, we did a lot of consumer research to try to understand what drove the incremental demand, which was very useful in our ability to forecast the back half of the year will that that combination of <unk>.
Underlying modeling of the the markets. The the economics of those markets gross margins price tiers. We are the largest price tiers are how the price tiers are moving in terms of whether consumers are moving up or down which ones are growing that modeling and assessment hap.
<unk> very rigorously here in on a regular basis and then we supplement it with external consumer research when we have specific trends or questions that we want to want to have answered to add to our door to our modeling or our assessment of a category that we are launching products and so all of that.
<unk> and its just expanded the net now to include.
The PC accessories throwing in microphones as well now and as we move into some new categories. Those categories. We will get the same level of analytical rigor.
Got it.
And my next question is on <unk>.
<unk> for rocket as well as any other.
The <unk>.
PC or non kohl's the product categories.
Do you think there were any useful lessons learned on <unk> growth.
With which you can apply to meet or is there a different category of the requires a different growth tactic for us.
You in the next in the future years.
That's a great question the.
The neat acquisition has gone quite well and the largely to plan.
So it'd be hard for me to say that we learned some lessons in terms of especially things going wrong. We did make decisions early in the in the rocket acquisition too to stop some products that were generating revenues because they just weren't up to our quality standards of our self.
True standards and that those were tough decisions to make at the time. So I would say one lesson. We learned is we're glad we did that because we essentially allowed ourselves an opportunity to reset the portfolio a bit.
And really move forward with a view not just to what the portfolio would accomplish in the year that we were launching the products or the year, we acquired of rocket, but the potential for that portfolio.
To be expanded and take a leadership position in the segment not just gain us market share.
That same philosophy is what we're applying to neat and frankly, it's the same philosophy that the need team brought to us with the acquisition there. They werent looking to launch a few microphones.
We're looking to.
Once again revolutionize as this team has done before the microphone industry, especially the digital and USB market. So.
That was a very good alignment in terms of again kind of wanting not just the focus on taking some share and growing some revenues, but putting ourselves in a position to actually be a leader in the category or lead the category period over time.
Yeah.
Got it thank you.
Thank you currently this concludes our question and answer the question I would now like to turn the call back over to Mr. Stark for closing remarks.
Thank you very much I appreciate everybody joining us today, just a quick note that we have.
Orderly investor presentation, and a new version of the company presentation, that's up on the site.
I would encourage everybody to check those out and with that we wish everybody safety and good health as we inch back towards normal here and we look forward to speaking with our investors and analysts when we report our first quarter results in May Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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