Q3 2021 Turtle Beach Corp Earnings Call

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

Delivering today's prepared remarks are chairman and Chief Executive Officer, Juergen, Stark and Chief Financial Officer, John Hanson following their prepared remarks, the management team will open the call up for any questions Bill.

Before we go further I would like to turn the call over to Alex Thomson of Gateway Investor Relations. So it'll be just IR adviser as you read the Companys Safe Harbor statement that provides important cautions regarding forward looking statements. Alex. Please go ahead.

Thank you.

Today's call, we will be referring to the press release filed this afternoon that details the company's third quarter 2021 results, which can be downloaded from the investor Relations page at corporate that 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.

Thanks, Alex Good afternoon, everyone and thank you for joining us I'm pleased to be with you today to discuss our excellent third quarter 2021 results in which we delivered the second highest Q3 revenues in our history launched highly anticipated products unveiled new products and revealed new partnerships that will continue to.

<unk> grow our consumer base.

I'm, especially proud to report that we remain on track to deliver full year revenue growth on top of a record year in 2020, despite global supply and logistics constraints, which are creating an extremely challenging operational environment.

Our Q3 revenues were $85 3 million and adjusted EBITDA was $6 7 million only out done by Q3, 2000, Twenty's record breaking results, where we posted 141% year over year growth and outpace the market and our peers driven largely by our strong operational execution.

<unk>.

While this Q3 faced a difficult comp against the year ago quarter. We're now a completely different business operating in seven gaming market categories with addressable markets of over $8 5 billion and for the first time, we are approaching 20% of our revenues in categories outside the counsel of gaming heads.

<unk> category that we've led for over 10 years.

The gaming market continues to grow with gaming, leading the entertainment world as the largest and most expansive industry worth over 254 billion.

The number of global gamers continues continues to grow and is expected to reach three 3 billion gamers by the end of 2024, which drives higher demand for quality gaming products.

We continue to closely follow these broader underlying trends also noting that per NPD U S market retail tracking the counsel headset and PC markets are normalizing from the stay at home driven demand spike.

Still up year to date after an exceptionally strong first quarter, but down for Q3.

Control system.

In September we launched our newly redesigned recon 200, Gentoo headset, which is rechargeable multiplatform headset that delivers powerful sound and many premium features for just $60.

Works with X box, Playstation Nintendo switch and comparable P C and mobile devices and this feature set and multiplatform capability at this price point is highly appealing to gamers.

Last quarter, we revealed our plans to enter the game controller in flight simulation hardware categories and provided first looks at the upcoming recon controller and velocity one flight simulation control system.

Ah Recon controller, which is designed for Xbox and also works with Windows P. CS is the first to combine turtle Beach is patented audio innovations with game winning controls and has been met with rave reviews, among reviewers and controller fans since launching in August.

We've seen strong demand since launch and is have also gained multiple new retail placements in this category with major retailers.

Are highly anticipated velocity, one flight simulation control system was a best of show award winner at E. Three last quarter and our team drove significant interest through marketing and PR efforts throughout Q3.

At the end of October we had over 21000 flights and fans and enthusiasts signed up to be notified about preordering that product.

And yesterday, when we announced that velocity one flight was available for preorder R. U S U K and German supply sold out in 15 minutes and the rest of the world in an hour.

That's obviously, a very strong start for us in this rapidly growing $400 million category.

We have additional inventory arriving in the weeks ahead to support our November 14th 2021 product launch.

On the topic of our product selling out we also launched limited edition Turtle Beach in rocket gear in collaboration with Dr. Disrespect.

Gaming's premiere superstar screamer.

Keyboard rocket also teamed up with popular UK content creator Vikram Vik Star and we're excited his fans are now experiencing rockets sleek design and performance advantages to boost performance.

Additional Additionally, rocket and openly launched a new limited edition Rockley rocket PC gaming eyewear collection to get PC gamers and rocket fans yet another competitive advantage. This time through a combination of precision vision and sound.

In total in 2021, so far we've launched 22, new rocket PC gaming accessories, and announced 11, new partnerships as we continue to broaden our PC portfolio and the rocket brand.

As we continue to expand into the $2 $3 billion global microphones market through our neat brand, we announced availability of needs all new skyline desktop USB microphone with the Nic teams decade long expertise, creating many of the world's best high performance microphones, the all new skyline as does.

<unk> to provide exceptionally good audio quality in a sleek plug and play USB microphone.

And our previously announced king be to XLR microphone is now available for preorder with the U S launch set for November 16th.

Third $70 King be too is needs highly anticipated successor to their original King B, which was coveted by recording enthusiasts for a studio quality performance. It offered at a remarkable price as I've said before I believe we have the pinnacle team and microphones, creating new products that will reshape.

<unk> for high performance mics at a variety of price points.

Across all of our product categories. We have also made some targeted investments in geographic expansion, particularly in Japan, and South Korea, where we now have stationed in country resources developed new distribution and retail relationships and allocated sales and marketing investments to bill.

Our brands and market our products there.

Those investments are also paying early dividends with a year to date revenue growth in Asia of over 130%.

<unk> is still relatively small for us, but holds tremendous future potential and I am encouraged by the excellent progress we've made there this year.

So our third quarter was very exciting from a product launch standpoint on top of delivering excellent financial results. We continued to advance our strategy by unveiling new and exciting product launches across our gaming market categories and remain on track to delivering year over year revenue growth following a record 2020.

And as I mentioned last quarter, we have the potential to reach our $100 million goal for non council.

Set revenues next year well ahead of schedule.

Higher logistics costs shipping delays and challenges with component availability.

Operating expenses in the third quarter of 2021, or 27 $8 million compared to $21 $9 million in the same quarter of 2020 supporting the larger size of our business.

Selling and marketing expenses also increased to support new product launches and our entry into three large new product categories controllers flight simulation and microphones and several and targeted geographic expansions is you're going to explained.

And R&D expenses increased in connection with the expanded current and future product portfolio.

For the nine month period operating expenses were 78 $6 million compared to $57 million a year ago, reflecting the same factors.

Adjusted EBITDA in the third quarter of 2021 was six $7 million compared to 27 $6 million a year ago quarter. This decrease was primarily a function of lower revenue and margins discussed previously incremental investments I just outlined in lower fixed cost leverage for the nine month period.

Dusted EBITDA was $27 million compared to 37 $8 million a year ago.

GAAP net income in the third quarter of 2021 was $2.6 million compared to $17 $8 million a year ago quarter. This decline was due to the above stated factors gap.

<unk> net income per share in the third quarter of 2021 was 14.

18.3 million weighted average diluted shares outstanding compared to a net income per share of $1.04 on $17 2 million weighted average diluted shares outstanding in the year ago quarter.

For the nine month period, GAAP net income was $13.2 million or 72 cents per diluted share compared to 22.4 million or $1 41 per diluted share a year ago.

The effective tax rate for the third quarter of 2021 was driven by the timing of certain discrete tax items totalling $1.8 million or approximately 10 cents per diluted share. We now expect our full year effective tax rate to be approximately 13%.

Has a material impact.

Shipping delays have also gotten worse, resulting in both new products, an existing product replenishments shipments that are taking four to six weeks longer to arrive in effecting revenues accordingly between the semiconductor shortages and the shipping delays, we anticipate roughly $25 million to $30 million in <unk>.

Revenue constraints this year, while our prior year outlook factored in some constraints conditions have worsened. So we're revising our full year revenue outlook to a range of $365 million to $380 million from 385 million. This anticipated year over year growth remains.

Diversifying into additional attractive categories since 2019.

Operational degree of difficulty for every consumer electronics business is obviously high right. Now this reflects to some extent the growth over the past years in categories like gaming hardware and certainly does not detract from our view of the strong opportunities. We see ahead, we expect the supply chain headwinds too.

Abate during 2022, particularly as we complete several additional programs to engineer away from highly constrained semiconductors to semiconductors with better supply.

We expect freight costs remain high but start to come down in the coming months and I'm highly confident that we are on top of these challenges acting quickly and decisively with both short term and long term moves to put us in the best possible position given the industry wide challenges and fan.

We're just in a position unfortunately, where we sell far more wireless headsets than anybody else. So small amounts of additional components can cover a lot of our competitors business in terms of keeping them in supply on wireless but.

Are often a tiny portion of what we need to actually stay in supply so as I mentioned.

We've gone through multiple changes of semiconductor components already which is highly disruptive it's a major engineering effort.

The team has done a phenomenal job to actually keep us in the position that we're in but even the small gap that we have.

It's meaningful financially as we factored into our revised guidance and we will also have a modest impact I'm sure. This year until the semiconductor component constraints.

Go away.

Thank you and then.

Can you talked about.

Your expectation that you'd see some relief funds supply chain and logistical disruptions in the coming months of quarters.

Understanding you are not giving guidance for next year today, but how do you balance that against the company's longer term revenue growth target of 10% to 20%. That's something that you see is achievable next year.

Or not given the macro headwinds thanks.

We launched 34, new products. So far this year 22 in the rocket PC portfolio. The 34 would include the controllers Mikes and flight simulation and Q3 is not quite 20% of revenue, but we're actually tracking to almost 20% and as a result of the efforts.

Here, we expect the year to be roughly 20% outside of our core console headset business. The other note I made on diversification relative to the investments. We've made that are really paying off nicely as we have allocated some investment too.

And specifically, Japan, and Korea, we haven't talked much about that in the past specifically because frankly wanted the results to start to come in and start to be more meaningful to the business and that's what's happening. So those businesses are well more than doubled now year over year and are tracking to additional.

Good growth, which is further helping.

The diversification of the business and the geographic way.

So I appreciate it.

Any additional color there.

And then in terms of the.

And then in terms of the.

The.

We can add some supply chain issues I know you guys.

You can bet your supply chain over the last.

Three or four years, given the volatility in the demand profile that you're going to see.

Wow.

How onerous is it to have to try to go in and.

Reengineer somebody's headset.

How're you doing that quickly.

Is that.

All the way through 2022.

So they are.

It's an industry wide issue.

Our goal like every other time, we faced complex operational dynamics is just to perform and execute well to through whatever those challenges are and I think we have a good record of doing that in the past and I think we're doing that on the semiconductor front as well and then in terms of shipping.

Yeah.

We have done a great job of diversifying the manufacturing supply so that now more than half of our supply. This year already is coming from outside of China that is a multiyear effort.

<unk> that the products still need to come into the U S and they still need to come into Europe, and particularly the U S is where all the bottlenecks are and you can't do anything about that you can't ship into some other you can chip into different parts. We have been very active the team is phenomenal at figuring out alternatives, including using airfreight selectively where we have two and <unk>.

Yes, we do have to use more air freight that is a key impact on the financials for holiday here because when the.

<unk> container vessels are taking four to six weeks longer.

That's year alternative.

And we're doing it so on that front I think the team is doing an excellent job identifying alternatives. Both short term to give us the best possible supply at the best cost, but also looking at longer term efforts like we did when we diversified manufacturing outside of China. We're continue.

To look at other opportunities longer term, there, where if we do have these shipping issues there less of an impact.

Great.

And just one quick one for John in terms of what was the number of shares that you had mentioned that you bought back and what's the remaining authorization.

So 169000 shares were repurchased.

And so the authorization is a total of $25 million we've exhausted.

<unk> used about seven five so there's roughly $16 million remaining $60 million to $70 million remaining.

Great I appreciate it good luck the rest of the way you guys.

Thanks, Mark Thank you.

Next question comes from the line of Victoria James.

Davidson Victoria Your line is now open.

Thank you for taking my question.

Got one and then a follow up so firstly it looks like you started selling the microphones. So congratulations on the launch.

Don't want to be streaming they they've got the rocket.

Keyboard mouse headset, they want to use a mic and the advantage of the torch microphone is that it integrates in terms of lightning and control software and all of that.

Portfolio expansion in microphones underneath is really targeted at.

Professional streamers and also just.

As radios, so they're kind of at the top of the stack in terms of the products that we do other the next kind of level of product impact would be products that are powered because they have some semiconductors.

And then the least impacted of products that are not impacted our products like passive headset that don't have any power and don't have any wireless radios. That's that's a big part of our console headset portfolio, but given our the fact that we are shipping more wireless headsets than anybody else by far.

That's a category where our volumes are high.

To the extent that that others can scrounge some supply of semiconductors. It might cover a lot of their business, but it covers only a small amount of our business given that our volumes in many cases are multiples.

Competitors in the category so on our non counsel headset business.

Across the board from professional reviewers who have been looking at the product as well as a number of of ex pilots that we have given sample products to and all of that I'm really excited about it.

Great well I appreciate the color I'm going to hop back in the queue. Thanks Juergen.

Thanks Jack.

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

Thank you we hope everybody is staying safe and we look forward to speaking with our investors and analysts again, when we talk in 2020 I hope everyone has a great holiday season I really appreciate your interest in the company and wish you a very good day. Thank you very much.

Yes.

This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation have a great day.

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