Q2 2021 Corsair Gaming Inc Earnings Call

August 3, 2021

Alright.

Yes.

Right.

Yeah.

Good morning, and welcome to the Corsair gaming back this quarter and 'twenty twice, you want and earnings conference call and your.

Langer todays call is being recorded and your participation implies consent to such recording at this time all participants are in listen only mode. A brief question and answer session will follow the follow on presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

With that I would now like to turn on all over to Ronald Benzene Court Cherry Vice President of Finance and Investor Relations. Thank you Sir please begin.

Thank you.

Good morning, everyone and thank you for joining us what per share financial results conference call for the second quarter ended June 30th 2020.

And 1 on the call today, we have corsair, CEO and CFO Michael power.

Before we begin allow me to provide a disclaimer regarding forward looking statements and school, including Q&A portion of the call me and look forward looking statements related to the expected future results and overcome.

And are there for forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties risks and uncertainties. The forward looking statements are subject to are described in our earnings release and.

And the box.

Today's remarks will also include references to non-GAAP financial measures.

No information, including reconciliations between non-GAAP financial information to the GAAP financial information is provided and press release.

I would also like to remind everyone debt until our 10 Qs on file for Q2 guarantee 'twenty 1 numbers are preliminary.

And from school will be available for replay.

Yes for sure Investor relation website, and I are Doc per share that's cool and.

Andy will begin with our second quarter business highlights and Michael will then take you through and review the financials before we proceed to Q&A with that I'll now turn the call over to Andrew.

Thank you, Rob and welcome to our Q2 'twenty 1 earnings call.

Well overall I'm very pleased with our Q2 performance, where we delivered net revenue growth of 24% to $473 million and so.

And what is 24% gross profit growth to $130 million, which is our best second quarter ever.

Our results highlight the strength of the underlying fundamentals of our business as game has continued to purchase and upgrade they gear, even as entertainment and outside of the home and travel begins was and back up.

We experienced growth in every category, despite key component shortages and the market such as graphics cards for enthusiastic Bill gaming Pcs, as well and semiconductor shortages logistics issues and port delays.

We are now at a $2 billion run rate compared to our 2019 revenue of $1.1 billion, which speaks to the strong momentum and our business.

We therefore are continuing to expand our resources and invest heavily in R&D marketing and infrastructure.

We are extremely excited about the recent launch of our first camera, which has received an overwhelmingly positive response from the creator community.

We've launched over 75, new products. So far this year, which is just astounding pace of innovation.

On new El Gallo Camra called face Cat.

And is designed specifically for streamers and content creators and.

Outputs Uncompressed 10, ADP video at 60 frames per second which is of course significantly higher quality than a standard web com.

It has many features similar to a dealer saw camera.

Software that controls contrast, white balance zoom et cetera, and all of those settings can be stored and the camera again, unlike and stay on the webcast.

Thanks, Ken also features a multilayer coded lens and a high and Sony camera.

We also introduced our 7000 series full tower case, which allows for multiple radiators southern and ultimate gaming PC can be built for maximum performance.

And the virtuoso RGB X T on new flagship gaming headset offering incredible sound and impeccable clarity now includes Bluetooth as well as often for a few slipstream the low latency wireless connection.

Yeah.

NPD data continues to show year over year growth and the gaming peripherals market.

And with recent data showing keyboards and mice growing faster than headsets.

We believe this is further evidence to support our conviction that his game and spend more time, playing games and improving their skills.

They will want to upgrade to better gear that is designed specifically for gaming.

Yes.

We continue to observe the market for the gaming gaming is that and early stage of evolution.

The average annual growth pre COVID-19 for PC gaming peripherals had been running at about 24% per year and the U S and a similar weighted in Western Europe, where we're able to collect detailed market data.

Now in 'twenty, and 'twenty with locked down and this increase to approximately 80%.

These growth numbers, all substantially higher than all of the increase and new games to the market or the rate of growth and video gaming software.

So what we believe is happening is that after people learn to play PC games for awhile and get good at them. They start to 1 better specialized gaming gear.

And because the market is still a loyalty stage and the penetration is so low and that's why we're seeing such high growth rates and gaming hardware and beautiful low base.

If we look at gaming headsets, which is the most widely purchase profile.

And then only 20% of gamers, playing premium games and the U S have bought those and the last 3 years, which is roughly the refresh cycle with the other 80 per cent yet to come into the market.

So our belief is that the situation in 2020 and early 'twenty, 1 where our game is clearly spent more time on the homes lens play games better that should establish a higher base of consumers ready to step off and upgrade their gaming setup.

Which includes peripherals as well as gaming Pcs.

Headset tends to be the first peripheral but games by.

And make the game more immersive, but as scale improves the next purchase tends to be high performance gaming mice and keyboards.

The market for gaming Pcs and laptops and the last 12 months has been phenomenal 1 of the fastest growing consumer electronics categories. According to NPD.

Hi, and graphics cards was very difficult to buy and the last 6 months and we believe there is a large number of gaming enthusiasts true in the wings waiting to build a new P C.

On top of the elevated numbers of people that actually did build a new gaming way.

And you create a peripherals, we continued to be the market leader and video capture cards and lighting.

Our weighted microphone and which we launched last year has gained significant market share quickly.

On a stream deck has now become the standard for whom broadcasting and we now have several apps from third parties that he and his stream day.

Turning now to our outlook for the year the guidance for the full year 2021 remains unchanged from Q1 with total revenue and the range of $1.9 billion to $2.1 billion.

Representing growth of 11, 6% to 23, 4%.

Adjusted operating income and the range of 235 to children and $55 million and adjusted EBITDA in the range of $245 million to $265 million.

Thank you for your time and continued support I'll now turn the call over to Michael to discuss our financial results for the quarter.

Thanks, Andy and good morning, everyone.

During the second quarter, we delivered net revenue of $472.9 million and increase of 24, 3% compared to $384 million and Q2.2020.

The Gamer and creator peripheral segment provided $155.2 million of net revenue during the second quarter and increase of 49% from $110.1 million and Q2, 2020 driven by strong growth across all product and product categories, including sales of our scoffed.

Landed console products.

The Gamer and create a peripheral segment net revenue contributed 32, 8% of total net revenue and increase of 390 basis points from 28, 9% from Q2, 2020.

The gaming components and systems segment provided $317.7 million of net revenue during the second quarter and increase of 17, 6% from $273 million in Q2, 2020, primarily driven by strong growth across all product product categories as <unk>.

<unk> continued to buy and build gaming Pcs of this revenue memory products contributed $158.7 million.

Gross profit and the second quarter increased by 24, 1% to $134 million from $105.1 million and Q2, 2020, which is a second quarter record.

The increase over Q2.2020 was primarily driven by increased revenues gross profit margin remained flat at 27, 6% the positive impact of mix shift towards the gamer and create a peripheral segment was offset by significant increases and logistic costs, particularly ocean freight.

The gamer and create a peripheral segment gross profit was $54.6 million and increase of $15.9 million from $38.7 million and Q2, 2020, primarily driven by an increase in revenue in the same period gross profit margin was 35, 2%.

Flat with Q2.2020, we continue to see a mix shift as gamer and creative <unk> contributed 41, 9% of total gross profit in Q2, 2020, 1 as compared to 36, 9% and Q2.2020 2.

This remains a great overall story and Formula for continued overall margin expansion as our fastest growing and highest margin segment also sits and our largest market.

The gaming components and systems segment gross profit of $75.7 million and increase of $9.4 million from $66.3 million and Q2, 2020 was primarily driven by an increase in revenue and the same periods.

Gross profit margin decreased to 23, 8% from 24, 5% and Q2.2020, primarily due to freight cost.

Gaming components and systems contributed 58, 1% of the total gross profit in Q2, 2021 as compared to 63, 1% and Q2.2020 are.

Our memory projects margin and this segment was 17, 7% for the quarter.

Second quarter, SG&A expenses were $80.2 million and increase of $23.3 million or 41, 1% compared to $56.8 million and Q2, 2020, primarily driven by an increase and outbound freight costs do they need to do to increase in revenue and increase due.

To expenses related to being a public company and an increase and personnel related expenses.

Second quarter product development expenses were $15.5 million and increase of $3.6 million or 38% compared to $11.8 million and Q2.2020, primarily driven by an increase and personnel related expenses as we continue to focus on bringing and increasing number.

Products to the market.

Operating income and the second quarter of 2021 was $34.7 million a decrease of $1.7 million from $36.4 million and Q2.2020.

Adjusted operating income and the second quarter of 2021 was $49.3 million and increase of $1.9 million from $47.4 million and Q2, 2020.

Second quarter net income was $27.7 million or 28 cents per diluted share as compared to net income of $22.6 million or 26 cents per diluted share and Q2, 2022nd.

Second quarter adjusted net income was $35.7 million or <unk> 36 per diluted share as compared to adjusted net income was $32.3 million or <unk> 37 per diluted per diluted share and Q2.2020.

Adjusted EBITDA for Q2, 2020, 1 was $51.6 million and increase of $2 million or 4% compared to $49.6 million for Q2.2020, resulting in an adjusted EBITDA margin of 10, 9% a decrease of 210 basis point.

For year over year.

Turning now to our balance sheet, we continue to convert our strong financial performance into an opportunity to further strengthen our balance sheet and Q2, 2021, and we generated $31.6 million and cash from operations and use it to reduce debt by an additional $25 million with face value now at.

$274 million and net debt at 139.4 million, resulting in a net leverage ratio of <unk>..5 we did this for growing quickly and leaving sufficient resources to further accelerate growth and the future.

We expect to continue to reduce debt and 2021 subject to business conditions and any need for additional growth capital and we're also looking to reduce the carrying cost of our existing debt significantly.

As of June 20th 2021, we had $48.6 million of capacity under our revolving credit facility total GAAP long term debt of $270 million and cash excluding restricted cash of $134.6 million.

The additional modeling details underlying our outlook remains the same as we've discussed on our first quarter earnings call with the exception of and now further reduce interest expense and <unk> and a slightly lower effective tax rate due to the deductibility of options exercise for EPS I'll repeat them.

We expect gross margins to slightly improve year over year and operating expense to increase as well to support our higher revenue level and the need to continue to innovate and larger scale and a full year of public company costs.

Assuming no further debt pay down we now expect interest expense of approximately $4.1 million per quarter.

As noted we've already paid down $53 million of our debt and expect to pay down approximately an additional $47 million for a total of $100 million and debt reduction and 2021 subject to business conditions and any need for additional growth capital and the $4 million patent trial win in Q1 and 2020.

1 is not and our outlook this amount could vary depending on what the judge rules is subject to appeal and the timing of recognition of a gain if any is uncertain at this time.

And effective tax rate of approximately 20% to.

And to 22% for 2021 and.

And full year weighted average diluted shares outstanding of approximately 100 to 102 million shares.

Overall, we're pleased with the continued progress we have made and our strategic initiatives and performance of the business. We grew in Q2.2021, and we are expecting growth and revenue and the adjusted operating income and adjusted EBITDA for 2021 with the exception of a number of our premium products with high semiconductor content and the channel is much better.

<unk> now and with Prime day at the end of Q2, coupled with the upcoming holiday season, we expect a more normal promotional environment and.

In Q2 shipping expenses were much higher than normal and we expect that to continue for the rest of 2021 finally memory chip prices started moving down near the end of Q2 and that normally lower margins on our memory products, while prices and moving down these are expected to somewhat counter balance the strong demand.

We have from our loyal existing and new customers.

With that we're now happy to open the call for questions on.

Operator will you. Please open up the line for Q&A.

Certainly.

And we will now begin the question and answer session to join the questions here and you know on press Star then 1 on your telephone keypad, if I'm sorry on a ton acknowledging you're on a cash.

Moving on Speakerphone, please pick up your handset before pressing any key channel.

Let's try a question. Please press Star then 2.

And we'll pause for a moment as callers join the queue.

The first question comes from drew Crum with Stifel. Please go ahead.

Okay, Hey, guys good morning I.

Wondering if youre willing to address your competitive performance from the quarter, whether you added or lost share during the period.

And then separately any guidance you can give concerning.

Revenue and adjusted EBITDA phasing by quarter and the second half.

Okay.

So with the.

I think the second part is when we know that the.

The first part of the question.

We actually did pretty well and Q2.

And it varies by product type.

But in general.

We did quite well in and components.

And in peripheral and we stay roughly even.

And I think as you.

Probably have gathered.

And the situation that us and listen to our competitors moving right now is.

Trying to get.

And now.

And products.

And Asia.

And was net of expenses and sales.

And so.

We also have as you know.

And semiconductor shortages, so while we've been faced with over the year is.

We tend to have high market share.

And high ASP.

Categories.

And low market share and very low ASP categories in other words, we're not typically and entry level player.

And so the initial surge last year was a lot of entry level products.

And so.

And so that changed the dynamics and a little bit but.

Now, let's turn to get some more supply of <unk>.

Higher ASP higher semiconductor content and products.

Helping with market share.

In terms of.

The guidance for by quarter, we don't give quarter guidance, we give annual guidance.

Last call when asked a similar question yeah, we appointed the seasonality like for example, and second quarter tends to be the 1 of the lower quarters of the year.

And you have to take into account and timing of things like Prime day, and such as well but.

Normally the second half is stronger than the first half for normal seasonality and normally.

And normally you tend to sort of ramp as we come out of the summer and as we go into the holiday season.

And.

Got it okay. Thanks, guys.

The next question comes from Mario Lu from Barclays. Please go ahead.

Great. Thanks for taking the question. So yeah I know you guys only guide for I saw your numbers, but on.

TCE revenues came on a little bit below the street, just curious how it performed relative to your own expectations.

Any strength or weaknesses within certain product lines.

That is worth highlighting.

Yeah.

Yes, I think.

<unk>.

The most obvious thing is that.

And you talked about semiconductor shortages and that's not just related to components that we buy someone's interest going through our components. So as you probably know there's been a huge shortage of high and Cpus and graphics cards.

So it's actually been quite difficult for us.

For the most extreme game as the building these 2.3 and $4000 gaming Pcs.

It's been difficult for them to build and.

And so we actually think we've got a huge amount of.

Of people waiting and the wings.

And to build as these called steps become available.

And so what we saw half on was that.

And video and to certain extent AMD allocated a lot more products into the fifth.

<unk> finished PC manufacturers.

Alienware, Dell et cetera.

And not so much products into Amazon and the retail segment and so that's now starting to change.

So the point is.

The component side of our business, we had quite a few headwinds with little low components being available. So that we will build Pcs the peripheral market is still pretty strong.

And at the moment.

NPD data is showing that quicker.

<unk>.

Same same size and some cases being a and last year.

So and now lapping total.

Total quarters.

And streaming and seems to be very strong.

And so hopefully that gives you.

Slight indication of what's going on.

That's helpful. Thanks, Andy.

The next question comes from Matt Cabral with Credit Suisse. Please go ahead.

Yes. Thank you you guys have called out supply constraints and logistics issues. Several times already I'm just wondering if there's any way to quantify the impact of both of those factors. Both as we think about revenue and the quarter as well as kind of looking further down on gross margin.

Yes, I mean, it's really difficult to give an exact number because.

Suddenly, it's and it's in the tens of millions.

But we haven't sort of gone through and done the math to see exactly what we thought we would have shipped if we'd had.

For full supply and uncompetitive as full supply, but I think I think the biggest issue right now.

And <unk> is probably the lack of graphics cards is holding back the component market and stuff and doable and Pcs.

The second issue is.

And with really.

Yes, that's a situation, where our highest and products so high ASP products.

Fully in stock.

And then we have.

Very expensive freight to deal with some of the freight cost obviously you get offset.

Because as we introduce new products, we're able to adjust pricing.

And some of our competitors.

But it's meaningful numbers.

Got it and then just a follow up if I could I guess trying to understand how to think about normalized profitability for the business I guess, if I if I look at EBITDA for the last 12 months you guys have been a little bit above 13% Bruce if I go back both for Covid, you know prior to 2000 and.

It was more like mid to high single digits and.

And I don't think they've changed there's been M&A and.

Obviously, the big surge and demand over the past year, I guess I'm just trying to think through what steady state profitability is for the business and if it is higher than that pre COVID-19 baseline I guess help us just understand the factors underneath that.

Yes.

And we've always said that we wanted to be in the.

And the low teens and perhaps gets the bid seems obviously, we had a little bit of a tailwind last year was the.

With the market ramping up fast and that we could possibly expand the business right now we're at a fairly hefty.

Expansion mode in terms of R&D and marketing because the business has got so much bigger.

So we know we know and they're sort of a mature.

Business will tell you that we've got and exact targeted mine, but somewhere in that range is how we try and manage the business.

And so that would be above pre COVID-19 levels, but not right now today the same level as Q1, which we talked about on the Q1 that that was a particularly strong quarter and we haven't finished investing and the business yet, but we think that what we did in Q1 is achievable, we just need to grow the business more and keep putting out good high margin.

Price product and they'll help also note that we are seeing a shift towards more higher margin Gamer and creator protocols, which continued in Q2.

And thats going to be lifting our margins overall over time.

So that that should be a good tailwind for us for margins going forward.

Thank you.

The next question comes from Tom Forte with D. A Davidson. Please go ahead.

Great. Thanks, So I have for questions. Other quick I'll go 1 at a time.

The first 1 is on the pressure cost pressure from logistics.

Should I think about it is this leaning into air because of demand or is it how should I think about the costs can you give a little more granularity.

So I think last year was a lot of airfreight, that's right because we were so short on low supply.

On the most recent quarter, it's more of is the cost of containers. So.

On the cost of containers is probably 3 to 4 times on what it was 2 years ago.

And we certainly expect that's going to be.

Somewhat of a temporary situation otherwise.

Otherwise it will be starting up contained the company's book.

And probably so and so.

So the whole consumer electronics.

Serge.

Dies down.

And I extend that continue for some time, but its and its extraordinary high levels for the.

Thank you that's very helpful and it right. So and then the second question is and when.

When you think about the cost pressure than from logistics and how should we think about your ability and your interest and taking price across your portfolio.

Yeah. So that's a good question and this all depends on the timeframe and the same is true with our competitors and so if we see cost to increases in.

The fundamentals that are going to stay there we have see adjusted and the pricing if we see cost increases that are temporary.

It's difficult to go and adjust retail level.

Price points.

On a short term basis, so we look for that.

But so far we have lately huge changes.

And obviously, it's a bit of a mixture because lot of our bigger retailers and above.

And from Us.

Directly in Asia, and then paying for the containers themselves.

But so far we haven't.

In fact, most of our competitors.

And any wholesale changes in the MSRP.

The general sense is that we're going to weather it for the next couple of quarters until.

We see what will the natural level is but we can say the price is right now very elevated day.

On the certainly would have to come down for the end of the year.

If not before.

Good alright, so last 2 so from our vantage point, when we think about secular shifts.

And we really see this self broadcasting.

As you know accelerating there's a lot of anxiety among investors on tough compares for gaming.

You know secular shift towards consumer self broadcasting and using your products to help them broadcast when they play fortnite and things like that.

So I guess do you agree with that assertion that that trend is accelerating and then what are the implications for corsair.

Well look we just double down on what we announced our first camera last week and that's clearly the biggest part of the self forecast and as you say, we call it self forecast and live streaming or whatever but the biggest part of that Tam is the camera and so we'd net literally jumped into that.

It's probably close to $1 billion market Tam.

And we've never been and before.

So not only is that market continuing to grow.

But we have increased our footprint.

As you probably realize there is some parts of the cell broadcasting market that gets a little bit confused with people at home doing zoom calls and so.

We think that the Mcdonald's for majority of the products that we sell.

And going into.

Gaming and content creators rather than home offices.

But clearly some products get bought by by that and that market will suddenly be retiring debt.

So I think what we can see with the.

The Street and we'll touch on credit is there is a strong tailwind from the secular shift to people sharing and sharing content and streaming.

And a little bit of a little bit of a headwind from those people that were buying.

Muscles and cameras for the home office.

Alright, so Andy sorry, 90, and maybe have a fifth question. So before I get to my last how should we think about the relative gross profit margin and the camera for the rest of your portfolio.

For the cameras a brand new product. So usually when you are ramping and new product into the channel was a little lower margin than ever achieve when it's a little bit more normalized but it's right in line with the other creator peripheral so much higher than the corporate average.

Excellent Alright, and last question and thanks for taking all my questions. So you talked a little about it but how is your performance on Prime day. This year and historically has been has that been and important sales data for corsair.

So it's on the new people on and what is the performance on.

Sorry, So prime day via our share performance, yes, sorry, and played historically is that important sales day for you.

Yes.

Candy.

This year it actually was not a great Prime day for Amazon is probably low.

And mostly because for us.

On a lot of the.

Products that we'd normally lineup for 5 day sales were pretty light on stock. So we actually didn't participate heavily in for low.

And actually a lot of our competitors roll on the same situations. So it ended up being less room for this year than it normally is for that way.

Great So Andy Michael and Ronald Thanks for taking my questions.

Thanks.

The next question comes from Tim Nolan with Macquarie. Please go ahead.

Hey, guys. Thanks. This is Sean on for Tim My question is around the product cycle. So you've watched 75 products. This year so far on any more comments on on the really cycle on the back half as well as anything on usage outside of gaming and I know, we've talked about live streaming and a bit but anything on like general streaming et cetera. Thanks.

Yes, I think we're going to stay on that pace, we built have a pretty good momentum and as we keep adding more categories.

It will have to be refreshed and new categories come in so I wouldn't expect that pace to change.

And if anything may accelerate.

And in terms of <unk>.

New categories on things, we're doubling down on clearly look we just introduced our first camera so you'll see more of those over the net.

Last year true.

You'll see more microphones. So yes, we still think that the biggest growth out of all the segments wins and streaming and we want to.

On that market.

Most of the component.

And as well and refreshed low and.

In the peripheral market.

We still have a few price points that were not present on.

So there's still some more tam that we can increase our footprint sizes.

And I think just generally rise has been some new console sort of come out. So you would expect that Scott could have new console controllers at some point.

And there's obviously a newer memory standard that's going in and more towards the end of the year and we've been in the and the lead for memory, particularly gaming memory forever. So you would expect to see something for that as well.

Really.

And continually innovating and our existing portfolio and increasing our Tam we have a new microphone product that led to use your own XR microphones, but take advantage of our great software that <unk> put together that's the wave XL are they just came out and even screen deck, which is selling very well for us and is very well liked and the market.

And we came up with a newer version, that's a little bit better form factor and a little bit easier for people to use and different uses because it seems that more and more people are discovering screen back and want to use it not just for screaming for it for other applications as well.

Great. Thanks.

The next question comes from GAAP crude with Cowen. Please go ahead.

Thanks.

A lot of concern on the market right now, but what's going on over in China with respect to the governments sort of action from worst about video games can you remind us how how big of a percent of your business, China is and whether youre seeing anything in terms of your business. There recently.

Not related to nominate and what you're talking about we haven't seen the effects channel is.

5.6% some level of our business.

We're not very heavy and grit gaming for Poles, where more components in China, and then gaming peripherals directly.

And that's more impacted by the DIY market and how that's going so and.

And we are obviously sell gaming software. So we wouldn't be as affected by that type of pronouncements from the government.

China has never been a big gaming market in terms of culture.

Compared to.

And Europe and other parts in Asia.

Okay. Thank you.

Yeah.

Once again, if you have a question. Please press Star then 1.

And next question comes from Rod Hall with Goldman Sachs. Please go ahead.

Yes.

Yeah, Hi, Thanks for the question I wanted to just check on our inventory levels.

Where are your out of stock and what types of products. It looks to me and just doing a cursory search like maybe power supplies are short right.

And just curious what things you're having hard time, putting on shelves are populating inventory with.

Yes, and also good question.

For sure.

Hi, and power supplies.

And a very low and stuff and Thats does.

Q2 2021 Corsair Gaming Inc Earnings Call

Request a DemoDemo

CRSR

Corsair Gaming

Earnings