Q2 2021 Turtle Beach Corp Earnings Call

August 5, 2021

[music].

Ladies and gentlemen, thank you for holding for the conference call for Turtle Beach second quarter. Please continue to hold the conference will begin and approximately 2 minutes.

Once again, thank you for holding for the Turtle Beach. The second quarter Conference. Please continue to hold your conference will begin and approximately 2 minutes. Thank you for your patience.

Yes.

Yeah.

[music] and.

Yeah.

Any further I would like to turn the call over to Alex Thompson of the Gateway Investor Relations Turtle Beach I R advisor as he reached the company's safe Harbor that provides important cautions regarding bored looking statement Alex. Please go ahead.

Thank you Michelle.

And today's call will be referred you. The press release from this afternoon. The details of the company the second quarter of 2021 results.

Which can be downloaded from the Investor Relations page at Corp, Dot Turtle Beach Dot Com, where you'll also find the latest earnings presentation that supplement the information discussed on today's call.

Finally, a recording of the call will be available on the investors section of the company's website later today.

Please be aware and then some of the comments made during this call and May include forward looking statements within the meaning of the federal Securities laws States.

Statements about the company's beliefs and expectations containing words, such as May well could believe expect anticipate and similar expressions constitute forward looking statements and.

These statements involve risks and uncertainties regarding the company's operations and future results that could cause turtle Beach. These corporations results to differ materially from management's current expectations.

While the company believes that the expectations are based on upon the reasonable assumptions.

Numerous factors may affect actual results and may cause resulted from materially. So the company encourage you to review the safe Harbor statements and risk factors contained and today's press release and and his 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 also may cause actual results or events to differ materially from those described and hour forward looking statements. The company does not undertake the publicly the update or revise any forward looking statements. After this conference call.

Gaming headsets, PC accessories, streamer, and pro microphones as well as entering the 2 new market categories that I'll cover shortly.

Returning to the market NPD reported net for the first half of 2021 across North America 5 of the top 10, selling council of gaming headsets, where our Gen..2 stealth 607 hundred line of wireless headsets and 10 of the top 15 headsets by revenue.

Were ours.

We've been the leader and council of gaming headset category from more than a decade based on delivering and expansive portfolio of great headsets with a steady stream of innovations and industry firsts that has made us. The go to brand for council of gamers in the second quarter. We continued this with the launch of the <unk> 500 gaming headset.

This product delivers unprecedented sound quality at every frequency with our patented eclipsed dual drivers essentially of woofer tweeter and each year Cup and the groundbreaking wood composite acoustic category. This is an innovative addition to our popular recon line and the <unk>.

500, multi platform technology and affordable price at $80 is a great choice for gamers looking to elevate their gaming audio experience.

We believe it is also a perfect upgrade for the millions of <unk> 50, and <unk> 70 users.

We also announced rockets all new <unk> pro are premium wireless gaming headsets, which has become our top wireless offering among our award winning PC brand. The sin Pro are further elevates the perfect mix of rockets German design and engineering with Turtle Beach is audio expertise and patent technologies and it's our best.

See gaming headset yet.

And our progress and expanding our award winning rocket portfolio of PC accessories, and gaining share in that $3.5 billion market is going well and.

NPD reported that U S sales of PC headsets keyboards, and mice rose approximately 40% in the first half of 2021 versus 2020 rocket sales grew by approximately 200% during that same type of these.

And these numbers really illustrate the impact of our expanding line of PC accessories as high demand products like the all new cone pro PC gaming mice, the magnum of membrane and pyro mechanical keyboards hit retailers in the quarter were really excited about these fantastic products.

We also secured additional gaming partnerships to support our Turtle Beach and rocket brands first renewing and extending our partnership with the popular call of duty Challenger team team wore 2 more will continue to use turtle Beach elite pro to gaming headsets as well as the new Recon 500 gaming headset.

Our partnerships include rising NBA Star and manual quickly who will exclusively sport Turtle Beach headsets went off the court and we added MDA Star Grace and Allen as the Turtle Beach Gaming Ambassador.

We're now of proud long term partners with glisten to support LGBTQ plus gamers.

The diversity and inclusion have been important parts of our culture and we've continued to add initiatives in this area across the company. The partnership with Glisten is of Great. Recent example.

Next our need microphones team announced the long awaited king the 2 analog XLR microphone, which is fans very excited.

And neither is already well known amongst musicians and recording artists and the release of the King be too is the first of multiple all new analog and digital USB microphone products launching this year, we're entering the $2.3 billion global microphone market with the best team and the category and we're excited about redefining the levy.

The quality and performance in streaming and acoustic microphones at multiple price points.

In addition to adding amazing new products across our existing product categories, We announced our entry into game controllers and flight simulation hardware.

And the entry into the council of controller market is a natural fit for us given how strong our brand is with council of gamers. They know we deliver great products that make gaming more immersive and our gamers more competitive and we've done that within our new controller, we've designed to integrate our unique and patented audio capabilities to enable.

Millions of our recon headset users to upgrade their audio experience, while playing with the great controller of course of the controller works with any headset, but our recon headsets have a huge installed base.

The controller includes our exclusive and patented super human hearing capability, which of recent study demonstrated is providing significant competitive advantages and gains superhuman hearing helps gamers win the reaction has been very positive and the controllers have received rave reviews and.

We estimate that the market for third party gamepad controllers is roughly 600 million. So that's a big opportunity for us.

We also announced our entry into the flight simulation controller market with our velocity, 1 flight system for PC and Xbox.

And I commented on our earnings call a year ago that I believe that the level of realism on the upcoming Playstation and Xbox Council's would be a step change improvement and drive high demand for the new consoles. Indeed that has happened with both council setting records despite semiconductor constraints.

The way to being of gaming accessories leader, leveraging our decade plus of delivering high quality gaming products with cutting edge technology and innovations I'll provide some thoughts on how the gaming market are excellent progress on our strategic and financial goals and how we expect the rest of the year to play out after John covers our Q2 <unk>.

Results in more detail John.

Hey, Thanks, Juergen and good afternoon, everyone. As Juergen noted we are pleased to reported another excellent quarter exceeding our internal guidance during the second quarter of 2021.

Given the unusual cash.

<unk> dynamics in 2020, and 2021, we are providing year to date performance alongside our second quarter summary. This is also particularly relevant given our 93% revenue growth in Q2 of 2020, which far outpaced our peers.

Net revenue for the second quarter of 2021 was $78.6 million roughly flat to the $79.7 million and the record year ago quarter first half of 2021 net revenue was up 50% compared to the year ago period, providing us with a great start to our year.

<unk>.

Gross margin and the second quarter was 36, 5% compared to 36, 7% reported and the second quarter of 2020, lower airfreight cost and fixed cost leverage were slightly more offset by changes and business mix are returned to a more normalized level of promotional spend.

And and higher Ocean and land based freight costs.

Operating expenses and the second quarter of 2021 were $28.3 million compared to $19.3 million and the same quarter of 2020, our business is on track for 60% higher revenues than 2019. So a big driver of these increases are the resources and the infrastructure and <unk>.

Acquired to support our larger business, we're also productively investing and new product categories and marketing expenses were more heavily weighted to Q2 than normal given the stream of product launches, we just discussed adjusted.

Adjusted EBITDA and the second quarter of 2021 was $5 million.

Compared to $12.9 million and the year ago quarter, reflecting the aforementioned opex to accommodate the larger business and our investments to expand our PC accessory business and enter new market categories first half adjusted EBITDA was up 98% comparing compared to the year ago period.

And <unk>.

GAAP net income and the second quarter of 2021 was $1.7 million compared to $8.2 million in the year ago quarter first half of 2021 net income was up 127% compared to the year ago quarter GAAP net income per share and the second quarter of <unk>.

2021 was <unk> <unk>, a share and $18.3 million weighted average diluted shares outstanding compared to a net income per share of <unk> 51.

And $16.2 million weighted average diluted shares outstanding and the year ago quarter.

Adjusted net income for the second quarter of 2021 was $2.6 million or <unk> 14 per diluted share compared to $6.8 million or <unk> 42 per diluted share and the year ago period.

Q2 includes the recognition of certain tax charges and credits, which we expect will flow through to our full year effective tax rate of approximately 20%.

Cash flow from operations was $12.4 million and the second quarter of 2021 compared to $31.8 million and the second quarter of 2020, a big driver of the change here is the intentional increase and inventory to ensure supply to our customers, which I'll discuss momentarily.

Now I'll turn it out of the balance sheet as of June 32021, we had $56.2 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line that the.

A $35 million net improvement from the end of June 2020.

Inventories on June 32021 were $81 million compared to $45 million as of June 32020, and $71 million as of December 31, 2020.

Now last year's Q2, ending inventory levels were unusually low to start but our inventory increase this year wasn't intentional operational strategy to help ensure supply and light of semiconductor shortages global freight and logistics bottlenecks and other potential global supply chain risks.

We are also seeing and expect to continue to see retailers ordering earlier to help ensure their own supply.

And now I will turn the call back over to Juergen for some additional comments.

Gordon.

Thanks, John and we continue to see gaming as a market rich with opportunities and benefiting from multiple long term tailwind and the earnings presentation is a good summary of these trends.

As we advance our business, we're focused on executing our strategy to take maximum advantage of the tailwind and.

As I mentioned, we're tracking very well first we're continuing to lead the $1.7 billion Council of gaming headsets category with 10 of the top 15 revenue products and the U S and the ability to continue to drive innovation as evidenced by the new Recon and 500 headset, we see strong demand continuing moving forward.

And the fact that Xbox and Playstation both announced record sales of the new consoles. Despite supply shortages has its excited to see how they will perform as those shortages of receipt.

Second we're rapidly expanding our rocket PC gaming accessories portfolio and continuing to deliver compelling and unique products that will drive growth.

I've already covered some examples of our progress, but here's an interesting fact that sums it up nicely.

We closed the rocket deal at the end of May 2019, and have already generated more than 7 times, the roughly $11 million purchase price and net revenues and we're really just getting started.

Third we entered new we're entering new categories over time organically <unk> through M&A.

Our PC accessories, and the new categories.

New categories are forecast to come in above our plans and make up the difference. So we are maintaining our revenue guidance of 385 million growing 7% from 2020, where we posted over 50% growth.

I continue to be very pleased that were and are positioned to do this given we outperformed the market and our peers significantly last year based on our rapid response to increase supply and excellent operational execution in.

In particular of this includes Q3, where we posted a 141% revenue growth year over year and outpaced the rest of the market and our competitors in the U S counsel headset sell through by a factor of more than 3 just as a specific example.

We're also reaffirming our EBITDA target of $50 million for this year and believe of 13% EBITDA margin target compares favorably to peers, particularly when considering are somewhat smaller size.

We are maintaining and adjust our adjusted EBITDA outlook, while we're maintaining our adjusted EBITDA outlook, we are forecasting significant incremental ocean and land based freight costs, reflecting global shortages of containers shipping bottlenecks and capacity constraints on inland logistics this will create significant.

The temporary incremental cost the extent of which will depend on how the freight situation evolves in the coming months and our ability to at least partially mitigate the impacts.

On the flip side, we know these issues are impacting our industry and more broadly and combined with semiconductor supply issues could result in competitive shortages, which may produce lower promotional spending levels. So we are holding our EBITDA guidance in light of the puts and takes.

And as always when there are unusual dynamics and operational challenges and our market, we strive to execute well as we've done in the past.

For the second half of the year, we're expecting revenue to be approximately $213 million and adjusted EBITDA to be approximately $30 million as I mentioned, we have seen and continue to expect retailers to order earlier and build inventory to ensure that our own supply. This contributed to Q2 and will likely continue to cause 2021.

1 to have unusual quarterly phasing.

Just like 2020 did particularly in Q3, which given our significant outperformance of the market look more like a Q4 then of Q3 last year. So we continue to recommend that investors focus on our progress towards annual results rather than trying to gauge by comparing individual quarters for 2 and.

Unusual years.

That said, we estimate roughly 35% of our annual revenue to be in Q4 of course as always the Q3 Q4 revenue split could move around given high velocity of shipments late September and into October without impacting the second half totals.

We are very pleased with where the company is positioned today and we remain focused on our goal of driving 10% to 20% revenue.

The revenue growth rate over time, while delivering category, leading EBITDA margins.

To this and and when would you anticipate the supply demand imbalance normalizing and then I have a follow up.

Sure so semiconductors as everybody knows that are affecting.

All of electronics categories.

And it started in the fall of last year I believe we've been quite on the ball in terms of of responding including changing out semiconductors in multiple products in advance.

Of expected issues and the literally giving ourselves more supply as a result.

It's very tough to quantify because in some cases it affects it affects the wireless headsets and and powered products essentially a lot of our revenue are passive headsets and passive products.

But it's hard to quantify because to some extent already been holding off on some promotional activities and.

And constraining sales a bit.

And that we expect that will continue basically so that we can avoid stock outs in those categories rather than driving pulses of sales for example, and then and then stocking out.

We also.

It's important to note we've anticipated the supply constraints in the 385. So we're holding the revenue guidance that we had early from early in the year and updated in the last earnings call. Despite the constraints and how that moves will then depend on how semiconductors proceed to come in.

And.

And how the logistics frankly also play out for the second half of the year.

Yes.

And the long expected to continue.

Right now, we're we're expecting semi conductor constraints to continue into 2022, and that's we're planning accordingly essentially.

Okay.

And then my follow up.

You mentioned and you aspire to get the industry, leading adjusted EBITDA margin is there a specific number of range of can share with us on the on that metric.

We started the year at 12%, 12% EBITDA margin, we felt was a good peer comp.

And for public company peers in our space and.

And our goal and our financial planning.

Which will continue going forward is to try to hit that industry, leading our category, leading EBITDA margin, while investing and the business to drive future growth, we update we update the 13% as we as we increased our EBITDA target and the last earnings call and I think Thats a very good.

Good range, we think that's a very competitive EBITDA margin.

However, we do expect as we continue to grow and get operating leverage over the coming years that that EBITDA margin should modestly creep up over time.

Got it okay. Thanks, guys.

Thanks drew.

The next question and the queue comes from Mark Argento from Lake Street. Your line is open. Please proceed.

Youre going to job income.

Quick ones here.

The amount of $100 million and.

The console headset revenue a year ago.

And you could potentially achieve.

All of 12 launch could you break that down a little bit for us in terms of the overall segment.

And so as the predominantly going to be PC.

Surgeries or you take bites and some of the other categories.

And actually the needle as well.

Yeah. Good question, so the $100 million again, it's kind of a great Testament to our strategy Thats working well, we hadn't expected to have a shot at that goal next year already but given that the PC category is going very well we've expanded the portfolio consumers.

Consumers like the product all of that I would expect the majority of that to be in the PC category that category has also got a year the 2 head start over the others.

Mike or knew that portfolio will expand next year controllers and flight Sim or also new with the first products. Both essentially single products right now in each of those categories that portfolio will also grow in the coming years.

So that will be the smaller part of it but I will tell you that the controllers, we've increased our forecast for the year on controllers. We've increased the forecast for this year on flight Sim and I mentioned 15000 email notification sign ups on flights and it just it just astounding, particularly given it's the 350.

The other product but.

But it is a clear indication of a market that I think has continued to grow rapidly, especially when flights and comes to Xbox as it recently has and so those could be meaningful contributors next year.

Super helpful color appreciate the.

And then.

Just more housekeeping and John on the attach rate you said, you've split 20 per subs this year.

The interest rate is that some of the new rate going forward or is the bump back up and 2022.

Yeah at this point.

I would expect it to bump back up.

And to March of the 25%.

Level here.

After this year.

Alright, and then just 1 last 1.

In terms of the M&A strategy of wood.

Goodbye and more tuck in acquisitions.

And organically grow leverage of the platform the distribution you anticipate jurgen.

And to be the strategy of more tuck ins or would you look to do.

Some of the more chunky.

And that's a good target.

I would say everything is fair game Mark.

If we can do things organically, we'll do it as we have with flight Sim and controllers, we hired a team that has decades of experience in those product categories.

That's hard to find zone.

And the rocket acquisition, which I would for us would be more medium size I would say versus just the small tuck in to be already at the point, where we've generated 7 times the purchase price and revenues slightly over 2 years in is a pretty good indicator of our ability to the by well and then the leverage the app.

Acquisition. So we don't we're not looking for really big stuff.

If we can build a big business off the right team and.

And the smaller acquisition spend but everything is fair game and I'll, just I'll reiterate a comment I made in prior calls we're very selective the team's got to be right. The cultures got of you're right. If there are existing products. They got to be good quality and have a good reputation and the.

<unk> have to be good and generate an attractive return for us to pursue any M&A.

Great. Thanks, guys, congrats and good quarter.

Great. Thanks, Mark.

And the next question comes from Tom Forte with D. A Davidson. Your line is open. Please proceed.

Great. Thanks, Congrats on the quarter the Q.

Granular questions and 1 more high level, so I'll start with the 2 the Juergen and can you talk about when you talk about kind of of the logistics inflation and how much of that is higher costs related to the containers and then on that front do you think the transitory or do you think its permanent I apologize it sounds like the fed there.

And then the second is on the chip shortages or just the supply chain challenges.

Do you feel like it's gotten better or worse of beta.

And the first quarter and the second quarter.

Great Tom.

And I'll address both of those.

And on freight there are a variety of issues first of all of China imports into the U S are up significantly Asian imports into the U S are up something like 30%. So that's already a strain on capacity of shipping of containers and of ports.

Second problem is that because ports or bottleneck.

<unk> traders are having to wait to get loaded and unloaded and those ports are occasionally getting shut down by COVID-19 or at least facing reduced capacity for periods of time, so that creates a waiting period something that used to take 6 weeks might now take 8 or 9 weeks, that's and impact on everybody's <unk>.

Business by the weakest products don't get here as soon as you would expect them, but that also ties up containers in essentially work in process inventory sitting on those ships waiting to get unloaded and and reloaded. So those factors of derivative in the last month or 2 a rapid increase.

And in the cost of containers, that's a major major factor.

And the second thing is that rail has also congested. So inland freight is highly congested the point where rail yards or some type of shutting down. So we are having like many other businesses to find other ways to get our containers into our warehouses and we're doing that but it is just more expensive. So we've tried to factor the.

And things in 2 of the second half forecast and the annual forecast. The situation is very dynamic as usual I believe we've got a team that is all over it and operationally working had been working for months already to find ways to mitigate expenses to optimize inventory levels.

All of that so.

And we've held our EBIT guidance no.

<unk> also by the way that there could be some advantages to the extent that competitor Stockout and we outperform in supply that could also drive a reduction and promotional levels and and the positive frankly to EBITDA.

That kind of the freight and Tim and my follow up yes.

Yes, and my conductors Tom had been relatively.

Stable over the last months, we don't see it getting better right now we are tracking to our expectations in terms of what we thought we would get we're getting and we're continuing to exercise flexibility, where we need it to actually swap out semiconductors, which is an engineering effort by the way.

And in order to help assure continued supply.

Alright, and then I know it may be the early well.

When we think about the new class of theme or the entered.

Entered the market during the pandemic.

Are there any important observations on behavior purchases of buses.

And Mike.

The same day this historical saturate the historical.

Any high level thoughts there.

Sure. So I know investors and analysts are always interested in our insights into the console gaming headset market and we have done and another survey like we do once a year to help frankly inform our own business forecasting and planning as I mentioned briefly in the in the prepared remarks. The survey is shown.

High levels of gaming, including these new gamers, who have entered the only the only.

Modification I would say is that there is there are more weighted towards the entry level.

Yes.

Products, which is not surprising it's a little bit common sense, but the interesting thing is and we're seeing and as frankly with the high.

With the.

Our wireless products being 5 of the top 10 revenue producing products in the United States first half of the year that indicates a very high level of upgrading into these better products and we think that the fact that these new gamers have come in and more entry level.

Creates good future opportunities as well.

Alright, Thank you erinn.

Thanks, Tom Thanks, Tom.

The next question and the queue comes from Jack Vander Ark with Maxim Group. Your line is open. Please proceed.

Great. Congrats on the solid results guys, yet again and say.

And for taking my questions.

So.

Just following up with the initial that initial $100 million revenue target outside of your core console headset business I know if there is already a question on this but it sounds like you're going to hit that or you have a chance to hit that next year.

So first I'd just like to say congrats that's the impressive execution.

My question is and I'm sure there's multiple scenarios that could play out here, but if you would or if you were to achieve that 100 million target by next year. What do you think is the most likely scenario of that needs to play out.

What is the X factor is it a breakout performance from the sales of the new flight simulator, and Xbox controller product or outperformance and your existing businesses and product lines or does it require of like another new product launch that's yet to be announced what are your thoughts there.

Sure. So given how PC is tracking and our expectations from mikes controllers and flight Sim and there's no major kind of breakthrough that would be needed to come near or over $100 million next year. What we need really is for those categories to continue to grow and perform well as they have particularly and PC.

Where we have a track record and and.

And the controllers and flight Sim to sell I would say to very reasonable forecasts.

We could especially and flight Sim.

And we could find ourselves surprised with even higher performance than we've got kind of roughly penciled in for next year.

Excellent Okay. That's helpful.

And then just a follow up if I could revisit your kind of long term.

Revenue growth target you are multiyear target plan.

And separately, regardless of hitting that 100 million plus non console revenue.

It doesn't matter, where the revenue has come from just is there any update on your outlook for maybe initially for 2022 and then just also of that long term revenue target do you remain confident you stick with that how is that shaping up.

Sure. So our long term revenue growth goal is 10% to 20%.

Through the end of 2020, we've delivered a 5 year revenue CAGR of 17%. So we're tracking right in the sweet spot.

Our EBITDA CAGR by the way for 5 years is over 90%. So we're doing very well on our goals.

Historically, we're not going to provide and update on 2022, yet it's still too early a lot to go and 2021, but we're certainly targeting to continue growth.

Off of this year and again with years that'll be higher and lower and all of that but to continue to be in that sweet spot of 10% to 20% revenue growth.

Got it that's helpful helpful of historical context.

Good to hear and Thats It from me thanks.

Thanks Jack.

And thank you and.

And the question is from Mark Yang with Oppenheimer. Your line is open. Please proceed.

Okay.

Good afternoon, and yoga and good afternoon John.

The first question is maybe you can think of US more details of all the investments in sales and marketing this year, particularly around how much opex increase.

The associated with.

And the new products the rocket the microphone and the new.

New controllers.

Share Martin so we the Opex will be higher this year as we've stated in the remarks. The primary drivers of the fact that the business is up.

60% run rate over 2019, and while the business grew a lot last year you just can't catch up you can't get people in place you can't get infrastructure and resources and systems in place to handle the business that in 2 years has gone from $235 million and revenue to not tracking the $3.85.

So that's the biggest driver we don't break out and frankly would be very hard at this point the breakout.

The other than specific dedicated marketing expenses any of the rest of our business between the core headset business and the new categories, because everything is run in and integrated way sale.

Sales is fully integrated operations as fully integrated much of engineering leverages multiple organizations.

And so again other than specific targeted marketing campaigns.

Given that this kind of growth and and investing as we go is just the core part of our normal operations of the business, we can't really break it out.

Yes, it makes sense and the.

And maybe can you comment.

Each product category do you.

Or should we expect the the most growth.

And your marketing and promotional activities.

And again would be hard.

In general the PC category, because Thats got 3 categories headsets mice keyboards, and it's a global business, including efforts, we're putting in to growing net business, which is which are going very well in some key countries in Asia. So that would get the of the new categories that 1 would get the.

The biggest share, but the way to think about it really is each product launch needs to have some marketing behind it. That's why also we had somewhat higher marketing spend in Q2 than we normally would we released a lot of new products. So when our product releases, you've got to provide marketing to communicate that the consumers and <unk>.

The sales going.

And that's really going to be driven by the number of products and the portfolio that are launching and at any given point in time and everybody gets their fair share.

On top of that our investments to continue to drive the brand development. So of Turtle Beach brand get some that's well developed recon controller and the flights and we'll leverage that flights and we did under the Turtle Beach brand because it's going to work on Xbox where very few flight simulation of hardware actually work.

Today, and we are of Great Turtle Beach is 1 of the top brands and counsel rocket brand is getting marketing investment and we'll continue to get investment to grow that brand and awareness of the brand is kind of the foundation.

Under which and we're on top of which we launched the new product and then neat is its own brand and I'll need happens to be pretty well known among musicians and pro audio, but thats a brand that will get some modest brand building marketing again underneath the specific product launches.

Got it.

And.

And 1 of you already answered.

Sort of alluded to a potential <unk>.

<unk> scaled back promotional spending.

Competitors are seeing more severe shortages and is there.

And the other potential drivers for margin this year, where we can see the potential lift.

Sure. So we're projecting the year to come in and around 35%. So mid thirties, which is very much in our target range for gross margin the mid thirty's.

Hi.

And you have anticipated as well as we can the incremental freight costs, which will be and those there will be incremental cost but.

And also the fact that Q1 of the year started very strong for everybody and with less promotional spend the normal sort of Q1 came in higher and with higher margin and so when you average all of that out we're tracking right in our in our desired target band.

The comment about Q4.

And was not was related to the fact that we've seen and in the past last year for example.

When the product starts to.

The short short of supply everybody runs less promotions and there is an incremental benefit to the promotional level, we're not counting on that in Q4, but it certainly could happen depending on who is able to get what supply and and the timing of that during Q4.

So thats 1 of the.

That would add up the a positive incremental margin contributor to help offset what we what we believe will be higher freight costs.

Thank you.

Question from me should we expect more entries into new product categories in 2022.

Yeah well.

We're looking.

But I feel very good.

And about the PC category controllers that we have been looking at for quite some time, we wanted to wait until after the new consoles launched so you don't launch of controller and find out of it doesn't work on the New Council. So we timed that very intentionally.

Flights and came about literally from seeing the demo and understanding that that was going to launch an Xbox which means there is a whole new ecosystem and set of consumers that can use that platform.

And once you're in flight, Tim by the way and now that we've hired a team that has a lot of expertise and that category racing simulation is a natural extension same kind of products same kind of connectivity same types of manufacturers. So we do see as we.

We continue to expand the portfolio and flight Sim there'll be more products coming.

The potential to add racing simulation, which by itself is another $600 million rapidly growing market opportunity that would be of natural extension of.

On top of that we're looking we continue to look at other categories that are adjacent to the ones. We're in that use common retail and common consumers and all of that but I don't feel a pressing need right now to try to get us into additional categories.

But that doesn't mean it may not happen if we if we have an opportunity coming and the next year or 2.

Thank you for answers.

Congrats on good results.

Thank you. Thank you.

Currently this concludes our question and answer session I would now like to turn the call back over to Mr. Stark for any closing remarks.

Thank you very much we hope everyone is staying safe and enjoying the summer months here, we look forward to speaking with our investors and our analysts again, when we report our Q3 and November have a great day, everyone. Thank you.

Ladies and gentlemen, this will conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach, the second quarter 2021conference call.

Delivery of today's prepared remarks are chairman and Chief Executive Officer, Juergen, Stark and Chief Financial Officer, John Hanson Followings.

Following their prepared remarks, the management team will open up the call for any questions before.

Before we go any further I would like to turn the call over to Alex tops and of the Gateway Investor Relations Turtle Beach IR adviser as he reached the Companys Safe Harbor that provides important cautions regarding forward looking statements. Alex. Please go ahead.

Thank you Michelle.

On today's call, we'll be referring to the press release filed this afternoon. The details the company's second quarter 2021 results, which can be downloaded from the Investor Relations page at Corp, Dot Turtle Beach Dot Com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call.

Finally, a recording of the call will be available on the investors section of the company's website later today.

Please be aware and then some of the comments made during this call may include forward looking statements within the meaning of the federal Securities laws.

And it's about the company's beliefs and expectations containing words, such as May will could believe expect anticipate and similar expressions constitute forward looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause turtle beach corporations results to differ materially from management's current.

<unk> well.

And while the company believes the expectations are based on upon the reasonable assumptions.

Numerous factors may affect actual results and may cause results to differ materially. So the company and encourage 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 also may cause actual results or events to differ materially from those described and our forward looking statements. The company does not undertake to publicly update or revise any forward looking statements. After this conference call.

The company also note that this call and we'll be discussing non-GAAP financial information. The company is providing that information as a supplement the information prepared in accordance with the accounting principles generally accepted in the United States or GAAP you.

You can find the reconciliation of these materials to the company's reported GAAP results and the reconciliation tables provided in today's earnings release and presentation and now.

Now I'll turn the call over the year against dark the Companys, Chairman and Chief Executive Officer Jurgen.

Good afternoon, everyone and thank you for joining us I'm pleased to be with you to discuss our excellent second quarter performance and which we delivered strong financial results unveiled significant product launches and entered into 2 new gaming product categories and I'm, especially pleased to note that we delivered a record first half results and confirmed.

Our guidance for 2021, which would result, and 7% revenue growth and build strongly on a record year in 2020.

We're also tracking very well on our long term growth strategy and our financial objectives are.

Our Q2 revenues were 79 million and adjusted EBITDA was $5 million, both substantial beach to our guidance. In fact, we delivered the second highest Q2 and the Companys history only out done by Q2 last year, when the gaming market share and unprecedented surge and demand related to the stay at home orders and our strong execution enabled.

Thus the outperformed the market and our peers.

The gaming market continues to grow increasing demand for quality gaming products. Our recent game or serve a reinforced this trend in gaming levels with many new gamers entering at lower price points. This suggests strong future market opportunities for product upgrades, particularly for us with our comprehensive portfolio.

<unk> for all levels of gamers. Our survey also indicated that the overall replacement cycle has remained consistent.

And we've closely followed these trends and position the company for further value creation by innovating and launching new products of cost from our gaming headsets, PC accessories, streamer and pro microphones as well as entering the 2 new market categories that I'll cover shortly.

Where are we.

We've been the leader and council of gaming headset category from more than a decade based on delivering and expansive portfolio of great headsets with a steady stream of innovations and industry firsts that has made us. The go to brand for council of gamers in the second quarter. We continue this with the launch of the re kind of 500 gaming headset.

And 500 to multi platform technology and affordable price at $80 is a great choice for gamers looking to elevate their gaming audio experience. We believe it is also a perfect upgrade for the millions of recall 50 and 70 users.

We also announced rockets, all new scent and pro are premium wireless gaming headsets, which has become our top wireless offering of our award winning PC brand. The thin and pro are further elevates the perfect mix of rockets German design and engineering with Turtle Beach is audio expertise and patent technologies and it's our.

Best PC gaming headset yet.

And our progress and expanding our award winning rocket portfolio of PC accessories, and gaining share and that $3.5 billion market is going well and.

<unk> reported that U S sales of PC headsets keyboards, and mice rose approximately 40% in the first half of 2021 versus 2020 rocket sales grew by approximately 200% during that same type of these.

<unk> really illustrate the impact of our expanding line of PC accessories and high demand products like the all new <unk> Pro PC gaming mice, the magnum of membrane and pyro mechanical keyboards hit retailers in the quarter were really excited about these fantastic products.

We also secured additional gaming partnerships to support our Turtle Beach and rocket brands first renewing and extending our partnership with the popular call of duty Challenger team team War.

The more we will continue to use turtle Beach is elite pro 2 gaming headsets as well as the new recon and 500 gaming headset.

Our partnerships include rising NBA Star Emmanuel quickly, who will exclusively sport Turtle Beach headsets went off the court and we added MDA Star Grace and Allen as the Turtle Beach Gaming Ambassador and.

We're now of proud long term partners with glisten to support LGBTQ plus gamers and.

The diversity and inclusion have been important parts of our culture and we've continued to add initiatives in this area across the company. The partnership with Glisten is of Great. Recent example.

Next our meat microphones team announced the long awaited <unk> 2 analog XLR microphone, which is fans very excited.

The need is already well known amongst musicians and recording artist and the release of the King <unk>..2 is the first of multiple all new analog and digital USB microphone products launching this year, we're entering the $2.3 billion global microphone market with the best team and the category and we're excited about redefining the levy.

The quality and performance and streaming and acoustic microphones at multiple price points.

In addition to adding amazing new products across our existing product categories, We announced our entry into game controllers and flight simulation hardware the entry into the council of controller market is a natural fit for us given how strong our brand is with council of gamers. They know we deliver great products that make gaming more immersive and our <unk>.

Or is more competitive and we've done that with our new controller, we've designed it to integrate our unique and patented audio capabilities to enable millions of our recon headset users to upgrade their audio experience, while playing with the great controller of course of the controller works with any headset, but are we kind of headsets have of.

Huge installed base the.

The controller includes our exclusive and patented super human hearing capability, which of recent study demonstrated is providing significant competitive advantages and gains superhuman hearing helps gamers with the reaction has been very positive and the controllers have received rave reviews and.

We estimate that the market for third party gamepad controllers is roughly $600 million. So that's a big opportunity for us.

We also announced our entry in the the flight simulation controller market with our velocity, 1 flight system for PC and Xbox.

<unk> also experienced a step change and realism with the new graphics cards that launched last year simulation games for flight and racing benefit greatly from these advancements to the point, where it can be difficult to notice a difference between reality and stimulation.

Once we saw the pre released demonstration of Microsoft Flight. Some 2020 early last year and learned that it would also be coming to Xbox of this year. The opportunity was clear so we assembled and expert team with deep experience in the category and chartered that team with producing a groundbreaking all inclusive of <unk>.

Lights, and controller for Xbox and PC, which I'm glad to say they've done and.

And the flight simulation category, frankly was ripe for a better product. So I'm confident this will prove to be and excellent move.

Over 15000 email notifications sign ups already.

And is certainly a great start the.

The flight simulation controller category adds another $400 million and addressable market and thats, not including future products, which will branch into racing as well.

Together these 2 new product categories at $1 billion and additional market for us to attack.

So when we look at it all together in just 2 years, we submit significantly grown our rocket PC accessories portfolio and revenues since expanding into the PC category, adding to that is our exciting portfolio of need microphones launching this year and now by expanding into the large game controller and gaming simulation hardware market.

And I expect we could approach or even be over $100 million and revenues outside of our historical core Council has the business next year we.

We are well on the way to being of gaming accessories leader, leveraging our decade plus of delivering high quality gaming products with cutting edge technology and innovations I'll provide some thoughts on how the gaming market are excellent progress on our strategic and financial goals and how we expect the rest of the year to play out after John covers.

Our Q2 results in more detail John.

Hey, Thanks, Juergen and good afternoon, everyone. As Juergen noted we are pleased to reported another excellent quarter exceeding our internal guidance during the second quarter of 2021 given.

Given the unusual.

Quarterly dynamics in 2020, and 2021, we are providing year to date performance alongside our second quarter summary. This is also particularly relevant given our 93% revenue growth in Q2 of 2020, which far outpaced our peers.

Here.

Gross margin and the second quarter was 36, 5% compared to 36, 7% reported and the second quarter of 2020, lower airfreight cost and fixed cost leverage were slightly more offset by changes in business mix of returned to a more normalized level of promotional spend.

And and higher Ocean and land based freight costs.

Required to support our larger business, we're also productively investing and new product categories and marketing expenses were more heavily weighted to Q2 than normal given the stream of product launches and we just discussed.

Adjusted EBITDA and the second quarter of 2021 was $5 million compared to $12.9 million in the year ago quarter, reflecting the aforementioned opex to accommodate the larger business and our investments to expand our PC accessory business and enter new market categories.

First half adjusted EBITDA was up 98% comparing compared to the year ago period.

2021 was <unk> <unk>, a share and $18.3 million weighted average diluted shares outstanding compared to a net income per share of <unk> 51.

And $16.2 million weighted average diluted shares outstanding and the year ago quarter.

Adjusted net income for the second quarter of 2021 was $2.6 million or <unk> 14 per diluted share compared to $6.8 million or <unk> 42 per diluted share and the year ago period Q2 includes the recognition of certain tax charges and credits, which we expect will flow through to the.

Full year effective tax rate of approximately 20%.

Now I'll turn it out of the balance sheet as of June 32021, we had $56.2 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line.

As a $35 million net improvement from the end of June 2020.

Inventories on June 32021 were $81 million compared to $45 million as of June 32020, and $71 million as of December 31, 2020 now.

And now last year's Q2, ending inventory levels were unusually low to start but our inventory increase this year wasn't intentional operational strategy to help ensure supply and light of semiconductor shortages global freight and logistics bottlenecks and other potential global supply chain risks we are.

<unk> also seen and expect to continue to see retailers ordering earlier to help ensure their own supply.

And now I'll turn the call back over to Juergen for some additional comments.

<unk>.

Thanks, John we continue to see gaming as a market rich with opportunities and benefiting from multiple long term tailwind and the earnings presentation has a good summary of these trends.

As we advance our business, we're focused on executing our strategy to take maximum advantage of the tailwind.

As I mentioned, we're tracking very well first we're continuing to lead the $1.7 billion console gaming headset category with 10 of the top 15 revenue products and the U S and the ability to continue to drive innovation as evidenced by the new re kind of 500 headset, we see strong demand continuing.

Moving forward, the fact that Xbox and Playstation both announced record sales of the new consoles. Despite supply shortages has its excited to see how they will performance of those shortages of receipt.

Second we're rapidly expanding our rocket PC gaming accessories portfolio and continuing to deliver compelling and unique products that will drive growth.

And I've already covered some examples of our progress, but here's an interesting fact that sums it up nicely.

We closed the rocket deal at the end of May 2019, and have already generated more than 7 times, the roughly $11 million purchase price and net revenues and we're really just getting started.

Third we entered new and we're entering new categories over time organically <unk> through M&A. We will soon launch the first of her coming portfolio of mic products with our acquisition of the microphones and enabling the addition of $2.3 billion and global addressable market for streaming and professional mikes and organically.

Entered game controllers and gaming simulation hardware as I described before with another $1 billion and addressable market and.

Accordingly, and the last 2 years, we've increased the markets that our products cover from essentially $1.7 billion to now over $8 billion.

Back in 2019, when we announced the rocket acquisition I stated that our first goal was to reach $100 million and incremental revenues outside our core counsel headset business.

As I mentioned before we have a possibility to already hit that target next year, a year or so earlier than we had anticipated in.

In terms of how we see the remainder of the year playing out again, we note. The continued challenges on semiconductors and logistics that had been widely publicized and we factored these variables into our outlook to the extent possible given the very dynamic situation the.

Despite these challenges and is of great illustration of our strategy that is working we are maintaining our $385 million revenue guidance.

And the semi constructor semi conductor constraints are holding back several counsel headset products, our PC accessories, and the new categories.

New categories are forecast to come in above our plans and make up the difference.

So we're maintaining our revenue guidance of 385 million growing 7% from 2020, where we posted over 50% growth.

And I continue to be very pleased that were and are positioned to do this given we outperformed the market and our peers significantly last year based on our rapid response to increase supply and excellent operational execution.

We're also reaffirming our EBIT the target of $50 million for this year and believe of 13% EBITDA margin target compares favorably to peers, particularly when considering are somewhat smaller size we.

Temporary incremental cost the extent of which will depend on how the freight situation evolves in the coming months and our ability to at least partially mitigate the impact.

And on the flip side, we know these issues are impacting our industry and more broadly and combined with semi conductor supply issues could result in competitive shortages, which may produce lower promotional spending levels. So we are holding our EBITDA guidance in light of the puts and takes.

And as always when there are unusual dynamics and operational challenges and our market, we strive to execute well as we've done in the past.

And to have unusual quarterly phasing.

Just like 2020 did particularly in Q3, which given our significant outperformance of the market looked more like a Q4 then of Q3 last year. So we continue to recommend that investors focus on our progress towards annual results rather than trying to gauge by comparing individual quarters for 2 and.

Usual years.

That said, we estimate roughly 35% of our annual revenue to be and Q4 of course, there's always the Q3 Q4 revenue split could move around given high velocity of shipments late September and into October without impacting the second half total.

And we're very pleased with where the company is positioned today and we remain focused on our goal of driving 10% to 20% revenue revenue growth rate over time, while delivering category, leading EBITDA margins.

And given how well we're tracking on our strategic and financial goals. We think that's a great formula for growing shareholder value.

Finally, I want to thank our entire turtle beach team for another strong quarter that as a result of their continued focus and execution delivering products. These days is filled with unusual challenges given the state of the world as well as the global supply chain situation and I'm very grateful for our team's ability to continually.

Overcome these challenges.

Constantly impressed with the quality of our people and their talent and dedication is what drives us forward.

Operator, we're now ready to take questions.

Thank you Sir during the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone.

Our first question will come from drew.

Drew Crum with Stifel. Your line is open. Please proceed.

Okay. Thanks, Hey, guys. Good afternoon, so you called out.

You called out the semiconductors shortage of having an impact on the business is there a way the size whether its the percentage of sales.

And what the company has exposure to this and then and when would you anticipate the supply demand imbalance normalizing and then I have a follow up.

Sure. So semiconductors as everybody knows are affecting all of electronics categories.

It started in the fall of last year I believe we've been quite on the ball in terms of responding including changing out semi conductors in multiple products in advance.

Of expected issues and the literally giving ourselves more supply as a result.

It's very tough to quantify because in some cases and affects it affects the wireless headsets and and.

Power products, essentially a lot of our revenue our past of headsets and passive products.

But it's hard to quantify because to some extent already been holding off on some promotional activities and constraining sales a bit.

And we expect that will continue basically so that we can avoid stock outs in those categories rather than driving pulses of sales for example, and then and then stocking out.

We also.

Important to note.

We've anticipated the supply constraints in the 385, so we're holding the revenue guidance that we had early from early in the year and updated in the last earnings call. Despite the constraints and how that moves will then depend on the how semiconductors proceed to come in and.

And how the logistics frankly also play out for the second half of the year.

So and.

And how long expected to continue.

Right now, we're we're expecting the semiconductor constraints to continue into 2022, and that's we're planning accordingly essentially.

Okay.

And then my follow up.

You mentioned and you aspire to get the industry, leading adjusted EBITDA margin is there a specific number of range of can share with us on the on that metric.

Yes, we started the year at 12%, 12% EBITDA margin, we felt was a good peer comp.

And for public company peers and our space.

And our goal and our financial planning, which will continue going forward is to try to hit that industry, leading of category, leading EBITDA margin, while investing and the business to drive future growth, we update we update the 13% as we as we increased our EBITDA.

And the last earnings call and.

And I think Thats a very good range, we think that's a very competitive EBITDA margin.

However, we do expect as we continue to grow and get operating leverage over the coming years, but that EBITDA margin should modestly creep up over time.

Got it okay. Thanks, guys. Thanks.

Thanks drew.

The next question and the queue comes from Mark Argento from Lake Street. Your line is open. Please proceed.

Go ahead John.

Quick ones here and here.

Incremental $100 million of knob.

The console headset revenue and a year ago.

The AG.

All of 12 launch could you break that down a little bit for us in terms of the the overall segments of the predominantly going to be PC.

Surgeries or you take bites and some of the other categories.

It actually moves the needle as well.

Consumers like the products all of that I would expect the majority of that to be in the PC category that category has also got a year the 2 head start over the others.

The dollar product, but it's a clear indication of a market that I think has continued to grow rapidly, especially when flights and comes to Xbox as it as it recently has and so those could be meaningful contributors next year.

Super helpful color I appreciate that.

And then.

Just more housekeeping, John and the attach rate you said you'd split 20% the for this year.

The interest rate the new rate going forward or is the bump back up and 2022.

Yeah at this point.

I would expect it to bump back up.

And to March and the 25%.

Level here after this year.

Great and then just 1 last 1.

In terms of the.

The M&A strategy of wood.

Goodbye and more tuck in acquisitions, and 1 organically grow leverage the platform and the distribution you anticipate jurgen.

Continue to be the strategy of more tuck ins or would you look just basically doubled the more chunky if you could flow.

And that's a good target.

I would say everything is fair game Mark.

If we can do things organically, we will do it as we have with flight Sim and controllers, we hired a team that has decades of experience in those product categories.

That's hard to find zone.

And the rocket acquisition, which which I would for us would be more medium size I would say versus just the small tuck in to be already at the point, where we've generated 7 times the purchase price and revenues slightly over 2 years and is a pretty good indicator of our ability to to buy well and then the leverage the app.

Acquisition. So we don't we're not looking for really big stuff.

If we can build a big business off the right team and.

And the smaller acquisition spend but everything is fair game and I'll, just I'll reiterate a comment I made in prior calls we're very selective the team's got to be right. The culture has got to be right. If there are existing products. They got to be good quality and have a good reputation and the.

<unk> have to be good and generate an attractive return for us to pursue any M&A.

Great. Thanks, guys, congrats and good quarter.

Great. Thanks, Mark.

And the next question comes from Tom Forte with D. A Davidson. Your line is open. Please proceed.

Great. Thanks, Congrats on the quarter the Q semi.

Granular questions and 1 more high level. So I'll start with the 2 full years and can you talk about when you talk about kind of of the logistics inflation and how much of that is higher costs related to the containers and then on that front and you think it's transitory or do you think its permanent I apologize it sounds like the fed there.

And then the second is on the truck shortages or just the supply chain challenges.

Do you feel like it's gotten better or worse of beta.

And the first quarter and the second quarter.

Great Tom.

And I'll address both of those.

Second problem is that because ports or bottleneck.

And in the cost of containers, that's a major major factor.

And the second thing is that rail has also congested. So inland trait is highly congested the point, where rail yards or some type of shutting down and so we're having like many other businesses to find other ways to get our containers into our warehouses and we're doing that but it is just more expensive. So we've tried to factor the.

All of that so we've held our EBITDA guidance no.

That kind of the freight from line.

Follow up yes.

Yes, and my conductors Tom had been relatively.

In order to help assure continued supply.

Excellent Alright, and then I know it maybe the early well.

When we think about the new class of gamers and the entered the market during the pandemic.

Are there any important observations on behavior purchases.

Of course at the same way the historical saturate the historical.

And just any high level thoughts there.

High levels of gaming, including these new gamers, who have entered the only the only modification I would say is that there is there are more weighted towards the entry level.

Yes.

The products, which is not surprising it's a little bit common sense, but the interesting thing is and we're seeing and as frankly with the high.

And with the.

Our wireless products being 5 of the top 10 revenue producing products in the United States.

First half of the year that indicates a very high level of upgrading into these better products and we think that the fact that these new gamers have come in and more entry level.

H, good future opportunities as well.

Alright, Thank you erinn.

Thanks, Tom Thanks, Tom.

The next question and the queue comes from Jack Vander Ark with Maxim Group. Your line is open. Please proceed.

Great Congrats on the solid results guys yet again.

And thanks for taking my questions.

So youre again.

So first I'd, just like say congrats to the impressive execution.

My question is and I'm sure, there's multiple scenarios that could play out here, but if you could or if you were to achieve that 100 million target by next year. What do you think is the most likely scenario of that needs to play out.

Sure. So given how PC is tracking and our expectations from mikes controllers and flight Sim and there is no major kind of breakthrough that would be needed to come near or over $100 million next year. What we need really is for those categories to continue to grow and perform well as they have particularly and PC.

And where we have a track record.

And and the controllers and flight Sim.

And to sell I would say to very reasonable forecast.

We could especially and flights and.

And we could find ourselves surprised with even higher performance than we've got kind of roughly penciled in for next year.

Excellent Okay. That's helpful.

And then just a follow up if I could revisit your kind of long term.

Revenue growth target you are multiyear target plan.

And separately, regardless of hitting that 100 million plus non console revenue.

It doesn't matter, where the revenue has come from just is there any update on your outlook for maybe initially for 2022 and then just also of that long term revenue target you remain confident you stick with that how is that shaping up.

Sure. So our long term revenue growth goal is 10% to 20%.

Through the end of 2020, we've delivered a 5 year revenue CAGR of 17%. So we're tracking right in the sweet spot.

Our EBITDA CAGR by the way for 5 years is over 90%. So we're doing very well on our goals.

Historically, we're not going to provide and update on 2022, yet it's still too early a lot to go and 2021, but we're certainly targeting to continue growth.

Off of this year and again with years that'll be higher and lower and all of that but to continue to be in that sweet spot of 10% to 20% revenue growth.

Okay. That's helpful helpful of historical context.

Good to hear and Thats It from me thanks.

Thanks Jack.

And thank you and the question is from Mark Yang with Oppenheimer. Your line is open. Please proceed.

Okay.

Good afternoon, and yoga and good afternoon John.

First question is moving.

And it give us more details of all the investments in sales and marketing this year, particularly around how much opex increase.

It will be associated with.

And the new products, the rocket the microphone and and the new controllers.

Share Martin so we the Opex will be higher this year.

And as we've stated in the remarks, the primary drivers of the fact that the business is up.

60% of run rate over 2019, and while the business grew a lot last year you just can't catch up you can't get people in place you can't get infrastructure and resources and systems in place and a handful of business that in 2 years has gone from $235 million and revenue to not tracking the $3.85.

So thats the biggest driver.

We don't break out and frankly would be very hard at this point the breakout.

Other than specific dedicated marketing expenses any of the rest of our business between the core headset business and the new categories, because everything is run in and integrated way.

Sales is fully integrated operations as fully integrated and much of engineering leverages multiple organizations and and so again other than specific targeted marketing campaigns.

Given that this kind of growth and and investing as we go is just the core part of our normal operations of the business, we can't really break it out.

Yes, it makes sense and the.

And maybe can you comment.

Each product category do you.

Or should we expect the the most growth.

In your marketing and promotional activities.

I again would be hard.

That would get the of.

The new categories that 1 would get the biggest share but the way to think about it really is each product launch needs to have some marketing behind it. That's why also we had somewhat higher marketing spend in Q2 than we normally would we released a lot of new products.

<unk> releases, you've got to provide marketing that to communicate that the consumers and get the sales going.

That's really going to be driven by the number of products and the portfolio that are launching and at any given point in time and everybody gets their fair share.

On top of that our investments to continue to drive the brand development. So turtle Beach brand get some that's well developed recon controller and the flights and we'll leverage that flights and we did under the Turtle Beach brand because it's going to work on Xbox and where very few flight simulation hardware actually work.

Under which and we're on top of which we launched the new products and then neat is its own brand and I'll need happens to be pretty well known among musicians and pro audio, but that's a brand that will get some modest brand building marketing again underneath the specific product launches.

Got it.

And so.

And 1 of your already answered.

And you sort of alluded to a potential.

<unk> scaled back promotional spending.

The competitor are seeing more severe shortages and is there.

And the other potential of drivers for margin this year, where we can see it best of luck.

Lift.

Sure. So we're projecting the year to come in and around 35%. So mid thirties, which is very much in our target range for gross margin the <unk>.

Mid thirty's.

And the of anticipated as well as we can the incremental freight costs, which will be and those there will be incremental cost.

But the also the fact that Q1 of the year started very strong for everybody and with less promotional spend the normal sort of Q.

1 came in higher and with higher margin. So when you average all of that out we're tracking right in our in our desired target band My comment about Q4.

And was not was related to the fact that we've seen and in the past last year for example.

When the products start to.

The short short of supply everybody runs less promotions and there is an incremental benefit to the promotional level, we're not counting on that in Q4, but it certainly could happen depending on who was able to get what supply and and the timing of that during Q4.

So thats 1 of the.

That would add a b of positive incremental margin contributor to help offset what we what we believe will be higher freight costs.

Thank you.

Question from me should we expect more entries into new product categories in 2022.

Yeah well.

We're looking.

But I feel very good.

Flights and came about literally from seeing the demo and understanding that that was going to launch on X box, which means there is a whole new ecosystem and set of consumers that can use that platform.

The more products coming.

The potential to add racing simulation, which by itself is another $600 million rapidly growing market opportunity that would be of natural extension.

On top of that we're looking we continue to look at other categories that are adjacent to the ones. We're in that use com and retail have common consumers and all of that but I don't feel a pressing need right now to try to get us into additional categories.

But that doesn't mean it may not happen if we if we have an opportunity coming and the next year or 2.

Thank you for answers.

And some good results.

Thank you.

Currently this concludes our question and answer session I would now like to turn the call back over to Mr. Stark for any closing remarks.

Ladies and gentlemen, this will conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Q2 2021 Turtle Beach Corp Earnings Call

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