Q4 2021 Corsair Gaming Inc Earnings Call
[music].
Speaker 1: Good afternoon and welcome to the Corsair Gaming...
Good afternoon, and welcome to the Corsair Gaming's fourth quarter 2021 earnings Conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording at this time all participants are in a listen only mode. A brief question and answer session.
Speaker 1: fourth quarter 2021 earnings conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
We will follow the formal 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 the call over to Mr. Ronald Vanderveen Corsairs, Vice President of Finance and Investor Relations. Thank you Sir please begin.
Speaker 1: 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 the call over to Mr. Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please press star zero again for negative feedback.
Thank you.
Speaker 2: Thank you. Good afternoon, everyone, and thank you for joining us for the Sheriffs Financial Results Conference call for the fourth quarter ending December 31st, 2021.
Everyone and thank you for joining us for <unk> financial results conference call for the fourth quarter ending December 31 2021.
Speaker 2: On the call today, we have our CEO , Andy Paul, and CFO Mike.
On the call today, we have our CEO and Paul and CFO , Michael Potter for them.
Speaker 2: Before we begin, allow me to provide a disclaimer regarding forward.
Begin allow me to provide a disclaimer regarding forward looking statements this call, including the Q&A portion of the call May include forward looking statements related to the expected future results of our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties.
Speaker 2: This goal, including the Q&A portion of the goal, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking.
Speaker 2: actual results made different materially from our projections due to number of risks and insert.
Speaker 2: risks and uncertainties that forward-looking statements are subject to are described in an earlier release.
Risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings.
Speaker 2: Today's remarks will also include references to non-GAAP financial-
Today's remarks will also include references to non-GAAP financial measures.
Speaker 2: Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided.
<unk> information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release.
Speaker 2: I would also like to remind everyone that until our 10K is on file, Q4 2021 numbers are up for release.
Also like to remind everyone that until our 10-K filed for 2021 numbers are preliminary.
Speaker 2: This conference call will be available for replay by webcast from Coursera's investor relations website at IR.com.
This conference call will be available for replay by webcast <unk> Investor Relations website at IR <unk> com.
Sure.
Speaker 2: And we'll begin with our fourth quarter business highlights in a discussion on what we're seeing in the market. And Michael will then take you through a review of the financials and our outlook before we proceed to Q&A. With that, we'll begin our discussion on the financials and our outlook.
And we will begin with our fourth quarter business highlights and a discussion on what we're seeing in the market and Michael will then take you through a review of the financials and our outlook before we proceed to Q&A with that I'll turn the call over to Ed.
Speaker 3: Thank you, Ronald, and welcome everyone to our Q4 2021 earnings call.
Thank you <unk> and welcome everyone to our Q4 2021 earnings call.
Speaker 3: We're pleased to report that for the fourth quarter, revenues were $510.6 million at the high end of our guidance.
We're pleased to report that for the fourth quarter revenues were $510 6 million at the high end of our guidance.
Speaker 3: resulting in a record 1.9 billion for 2021, 11.8% growth over 2020.
Resulting in a record $1 9 billion for 2021 11, 8% growth over 2020.
Gross profit for the quarter came in at $121 8 million.
Speaker 3: Gross profit for the quarter came in at 121.8 million and a record 513.9 million for the year.
At a record $513 9 million for the year.
Speaker 3: We accomplished this as the world started to move towards a post-pandemic environment, and by the second half of 2021, outside entertainment had mostly opened back up, and shelter at home guidelines had generally been relaxed.
We accomplished this as the world started to move towards a post pandemic environment.
First half of 'twenty, one outside entertainment had mostly open back up and shelter at home guidelines have generally been relaxed.
Speaker 3: Throughout 2021 and continuing today, we continue to be in a challenging supply chain environment.
Throughout 2021, and continuing today, we continue to be in a challenging supply chain environment.
Speaker 3: And based on feedback from our customers, we believe that the market for self-built gaming PCs continues to be constrained by the shortage of high-performance graphics cards.
Based on feedback from our customers, we believe that the market. The self build gaming Pcs continues to be constrained with a shortage of high performance graphics cards.
Speaker 3: Michael will walk through more of our financial results in greater detail later in our call and address some of the questions we received at our investor day related to 2020-2021 and short term business conditions which we were unable to address at the time.
Michael will walk through more of our financial results in greater detail later in our call and address some of the questions. We received at our Investor day.
2000, 22021, and short term business conditions.
Which we were unable to address at the time.
Speaker 3: It was our first ever investor day as a public company and we received quite a bit of positive feedback. If you've not yet had a chance to listen to the recording I'd encourage you to do so.
It was our first ever Investor day, as a public company and we received quite a bit of positive feedback.
Not yet have a Charleston. This was the recording I'd encourage you to do so.
I will now take a moment to recap some of the highlights of our Investor day.
Speaker 3: I'll now take a moment to recap some of the highlights of our investor base.
Speaker 3: we outline three pillars of our growth strategy, which I'll quickly repeat now.
We outlined three pillars of our growth strategy, which I'll quickly repeat now.
Firstly, the gaming and create a market continues to grow quickly.
Speaker 3: Firstly, the gaming and creator market continues to grow quickly.
Speaker 3: and gaming hardware is growing much faster than gaming software revenue.
And gaming hallway was growing much faster than gaming software revenue.
Speaker 3: as consumers start to become more competitive and want to buy better PCs and peripherals.
As consumers start to become more competitive or want to buy better Pcs and peripherals.
Speaker 3: The creator market is exploding as video interaction becomes the norm.
The creator market is exploding as video interaction becomes the norm.
Secondly, we continue to take market share in most categories.
Speaker 3: Secondly, we continue to take market share in most categories.
Speaker 3: This was highlighted by the fact that in the markets we track from external sources, we have number one market share in almost every category of components that we sell that allow gamers to build high performance gaming PCs. And we're in the top three in almost every category of components that we sell.
This was highlighted by the fact that in the markets. We track from external sources, we have number one market share in almost every category of components that we sell but allow game is to build a high performance gaming Pcs.
Top three at almost every peripheral category.
Speaker 3: Thirdly, that we continue to enter new categories by both organic development and by acquisitions, and in the last 18 months we have entered three large new markets.
Thirdly, we continue to enter new categories by both organic development and by acquisitions and in the last 18 months, we have entered three large new markets.
Speaker 3: microphones and cameras for content creators, and monitors for both gamers and content creators.
Microphones and cameras for content creators and monitors for both gaming and content creators.
Speaker 3: We also showed our internal goals of reaching $3.5 billion of revenue by 2026.
We also showed our internal goals of reaching three $5 billion of revenue by 2026.
During 2021, we launched 141, new products and we have increased our number of product lines to 30.
Speaker 3: During 2021, we launched 141 new products and we have increased our number of product lines to first.
We have several examples of how new products and innovative marketing is helping us grow our direct to consumer business.
Speaker 3: We have several examples of how new products and innovative marketing is helping us grow our direct-to-consumer business.
Speaker 3: In November we kicked off our Corsair Collections product line with the Flavourush series of our K65 RGB 60% mechanical gaming keyboard.
In November we kicked off our core collections product line with the flavor of our series of our case 65, LGB, 60% mechanical gaming keyboards.
This was a fun and colorful customer limited release.
Speaker 3: providing unique and deeper personalization for our most engaged customers.
Providing unique and deep personalization for our most engaged customers.
Speaker 3: The 60% keyboard has been quite a success in the market since we released it early last year and the Corsair collections are exclusive to our Corsair web store in North America.
60% keyboard has been quite a success in the market. Since we released it early last year and of course, our collections are exclusive to our course, a web store in North America.
Speaker 3: In December we introduced our long awaited PlayStation 5 controllers.
In December we introduced a lower weighted Playstation five controllers the.
Discuss reflect series with.
Speaker 3: With price points ranging from $199 to $259, the Reflex, Reflex Pro and Reflex FPS
With twice points, ranging from 199% of children and $59 reflects reflects pro and reflects Fps use.
Speaker 3: use our patented re-mappable paddles, and these adjustable controls give players the edge in most competitive games.
Use our patented remarkable paddles in these adjustable controls give players the edge and most competitive guidance.
The customer demand was simply incredible and we saw initial launch stock sell out in minutes.
Speaker 3: The customer demand was simply incredible and we saw initial launch stocks sell out in minutes.
Speaker 3: The Reflex series of controllers are currently available exclusively on our SCUF website.
The reflects series of controllers of currently available exclusively on all scuffed website.
Speaker 3: And in our overall retail channel, we launched our new line of DDR5 memory products, as well as gaming systems using DDR5.
And you know overall retail channel, we launched a new line of DDR five memory products as well as gaming systems using Didi all five.
Speaker 3: DDR5 is the latest technology standard for DRAM and we are currently shipping kits with speeds up to 6400 MHz.
PDL five is the latest technology standard for DRAM and we are currently shipping kits with speeds up to 6400 Mega hubs.
Speaker 3: Both Intel and AMD are supporting this interface on the latest processors, which helps dramatically improve system performance.
Intel and AMD are supporting this interface on the lasers processes, which helps dramatically improved system performance.
Speaker 3: Overall demand has remained strong for gaming components and gaming peripherals. In fact, recent market data shows consumer demand for peripherals at close to the elevated 2020 work from home level.
Overall demand has remained strong for gaming components in gaming peripherals. In fact recent market data shows consumer demand for peripheral is it close to the elevated 2020 work from home level.
As I mentioned before the semiconductor shortages caused graphics cards to be in very short supply compared to demand.
Speaker 3: As I mentioned before, the semiconductor shortage has caused graphics cards to be in very short supply compared to demand.
Speaker 3: and has driven market pricing of certain graphics cards to 150 to 200% of normal MSRP.
And it's driven market pricing of sudden graphics cards to 150% to 200% of normal MSRP.
This has caused gaming enthusiasts to hold back on building new high end gaming Pcs that used all components.
Speaker 3: This has caused gaming enthusiasts to hold back on building new high-end gaming PCs that use our components.
Speaker 3: By our estimate, approximately 10% of the natural demand for our components and memory products in our gaming component segment was held back in 2021.
By our estimate approximately 10% of the natural demand for components and memory products in a gaming component segment was held back in 2021.
Speaker 3: We believe this should cause a bubble of pent-up demand which will be released as GPUs return to normal MSRP in 2022.
We believe this should cause a bubble of pent up demand, which will be released as Gpus term's enrollment MSRP in 2022.
Speaker 3: So in closing, after the extraordinary growth in 2020 caused by gamers spending more time at home gaming and the large growth in the creator economy, we're pleased to see that after lockdowns and shelter at home were lifted, our Q4-21 net revenues were within about 8% of Q4-20.
So in closing after the extraordinary growth in 2020 caused by game is spending more time at home gaming and the large growth in the creative economy.
Pleased to see that after lockdowns and shelter at home were lifted.
Our Q4 'twenty one net revenues were within about 8% of Q4 'twenty.
Despite the ongoing logistical and supply chain challenges impacting markets.
Speaker 3: Despite the ongoing logistical and supply chain challenges impacting markets.
Speaker 3: including the lack of availability of reasonably priced GPUs in the retail channel, we experienced healthy growth over 2020 in both our operating sectors.
Including the lack of availability of reasonably priced gpus in the retail channel, we experienced healthy growth over 2020 in both of our operating segments.
Speaker 3: Our gaming and creator peripheral segment grew 20% year over year, demonstrating the underlying secular growth trends in the overall gaming, esports, content creator and streaming hardware and services market.
Our gaming and create a peripheral segment grew 20% year over year, demonstrating the underlying secular growth trends in the overall gaming esports content creative and streaming <unk> services market.
Speaker 3: We remain focused on expanding our presence in the market and are well positioned to continue to gain market share.
We remain focused on expanding our presence in the market and are well positioned to continue to gain market share.
We remain pleased with our fiscal year 'twenty, one results and the positive momentum we have retained and the overall business into 'twenty to 2022, which provides us confidence in achieving our full year and longer term outlook.
Speaker 3: We remain pleased with our fiscal year 21 results and the positive momentum we have retained in the overall business into 2022, which provides us confidence in achieving our full year and longer term outcomes.
Speaker 3: We have an exciting growth potential and plenty of market share to capture.
We have an exciting growth potential and plenty of market share to capture.
Speaker 3: 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.
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 afternoon, everyone.
Speaker 4: Thanks Andy, and good afternoon everyone. We have a lot of numbers to run through as we release both quarterly and annual results, so please bear with me.
We have a lot of numbers to run through as we released both quarterly and annual results. So please bear with me.
Speaker 4: In Q4, we delivered net revenue of $510.6 million, though a decrease of 8.2% compared to our record $556.3 million in Q4 2020. It remains well above Q4 2019 pre-pandemic level of $326.6 million.
In Q4, we delivered net revenue of $510 $6 million, though a decrease of eight 2% compared to a record $556 3 million in Q4 2020. It remains well above Q4, 2019 pre pandemic level of $326 six.
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Speaker 4: Net revenue for the year was $1,904,000,000, an increase of 11.8% year over year.
Net revenue for the year was $1.904 billion, an increase of 11, 8% year over year.
Speaker 4: As Andy mentioned earlier, our fourth quarter result and really the whole second half remain challenged by a very difficult logistics and supply chain environment. Logistics remain slower than usual with many shipping lanes taking over double the normal shipping times and at a much higher cost.
As Andy mentioned earlier, our fourth quarter results and really get the whole second half remain challenged by a very difficult logistics and supply chain environment.
<unk> remains slower than usual with many shipping lanes, taking over double the normal shipping times and at a much higher cost.
Speaker 4: We estimate that the effect of increased supply and chain costs continues to have a 2-3% headwind on our gross margin and resulting EBITDA percent during the fourth quarter and we expect this to continue in the upcoming quarter. Ocean freight of 40-foot containers remains elevated compared to historical prices, but we did see some flight easing at the end of 2021 fourth quarter and expect somewhat better rates for 2022. Turning now to the next slide.
We estimate that the effect of increased supply chain costs continues to have a 2% to 3% headwind on our gross margin and resulting EBITDA percent during the fourth quarter and we expect this to continue in the upcoming quarter.
Ocean freight of 44 containers remains elevated compared to historical prices, but we did see some slight easing at the end of 2021 fourth quarter and expect somewhat better rates for 2022.
Turning now to our segments, the gamer and create a peripheral segment provided $176 $9 million of net revenue during the fourth quarter impacted by supply and logistics constraints.
Speaker 4: The gamer and creator peripheral segment provided $176.9 million of net revenue during the fourth quarter, impacted by supply and logistics constraints, a decrease of 7.8% from $191.8 million in Q4 2020, and well above Q4 2019 of $94.1 million.
Decrease of seven 8% from $191 $8 million in Q4 of 2020, and well above Q4, 2019 of $94 $1 million the gamer and create a peripheral segment net revenue contributed 34, 6% of total net revenue an increase of 10 basis point.
Speaker 4: The GameRun Creator Peripheral Segment Net Revenue contributed 34.6% of total net revenue, an increase of 10 basis points, from 34.5% in Q4 2020.
<unk> from 34, 5% in Q4 of 2020 for the year Gamer and creator peripheral segment net revenue was a record $647 $2 million, an increase of 20% year over year.
Speaker 4: For the year, gamer and creator peripheral segment net revenue was a record $647.2 million, an increase of 20% year over year.
Speaker 4: The gaming components and system segment provided $333.7 million of net revenue during the fourth quarter, a decrease of 8.4% from $364.5 million in Q4 2020, primarily driven by a shortage of reasonably priced GPUs and supply and logistics constraints.
The gaming components and systems segment provided $333 7 million of net revenue during the fourth quarter, a decrease of eight 4% from $364 $5 million in Q4, 2020, primarily driven by a shortage of reasonably priced gpus and supply and logistics constraints.
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Speaker 4: and well above Q4 2019's level of $232.5 million. Just over half of this revenue came from memory products, which contributed $176.8 million. For the year, net revenue was $1,256,9 million, an increase of 8.1% year over year.
Well above Q4, 2019 level of $232 $5 million just over half of this revenue came from memory products, which contributed $176 8 million for the year net revenue was 1 billion $256 $9 million.
An increase of eight 1% year over year.
Speaker 4: Gross profit in the fourth quarter decreased by 20.8% to $121.8 million from the record $153.8 million in Q4 2020 and is well above the Q4 2019 pre-pandemic level of $70.5 million.
Gross profit in the fourth quarter decreased by 28% to $121 $8 million from the record $153 $8 million in Q4, 2020 and is well above the Q4 2019 pre pandemic level of $75 million.
The decrease over Q4 2020.
Speaker 4: which primarily increased logistics costs, a return to more normal seasonal promotional activity, and reduced revenues.
It was primarily increased logistics costs are returned to more normal seasonal promotional activity and reduced revenues gross profit margin was 23, 9% a decrease of 370 basis points from 27, 6% in Q4 of 2020, mainly due to.
Speaker 4: Gross profit margin was 23.9%, a decrease of 370 basis points.
Speaker 4: from 27.6% in Q4 2020, mainly due to significant increases in logistics costs, especially ocean freight and promotion activity.
Increases in logistics costs, especially ocean freight and promotional activity for the year. This was a record $513 $9 million an increase of 10, 4% the.
Speaker 4: For the year, this was a record $513.9 million, an increase of 10.4%.
Speaker 4: The gamer and creator peripheral segment gross profit was $52.8 million, a decrease of 23.3% from $68.9 million in Q4 2020, primarily driven by a decrease in revenue in the same periods, increased supply chain and logistics costs, and a return to more normal pre-pandemic level of holiday promotions.
The Gamer and creator peripheral segment gross profit was $52 8 million a.
A decrease of 23, 3% from $68 $9 million in Q4, 2020, primarily driven by a decrease in revenue in the same periods increased supply chain and logistics costs and a return to more normal pre pandemic level of holiday promotions gross profit margin was 29.
Speaker 4: Gross profit margin was 29.9%, a decrease of 600 basis points from 35.9% in Q4, largely due to the previously mentioned supply chain and logistics costs and rebate levels.
Nine 9% a decrease of 600 basis points from 35, 9% in Q4, largely due to the previously mentioned supply chain and logistics cost and rebate levels.
Speaker 4: For the year, Gamer and creator peripheral segment gross profit was $224.9 million, an increase of 18.5% and a record 43.8% of total gross profit. This continues to be a great overall story and a formula for overall margin expansion as our fastest growing and highest margin segment also sits in our largest growth market.
For the year Gamer and create a peripheral segment gross profit was $224 9 million an increase of 18, 5% and a record 43, 8% of total gross profit. This continues to be a great overall story and a formula for overall margin expansion as our fastest growing and highest mark.
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Speaker 4: The gaming components and systems segment gross profit was $69 million, a decrease of 18.8% from $84.9 million in Q4 2020, primarily driven by the decrease in revenue in the same periods and increased logistics costs.
The gaming components and systems segment gross profit was $69 million a decrease of 18, 8% from $84 9 million in Q4, 2020, primarily driven by the decrease in revenue in the same periods and increased logistics costs gross profit margin was 27% of <unk>.
Speaker 4: Gross profit margin was 20.7%, a decrease of 260 basis points from 23.3% in Q4 2020, primarily due to freight costs.
<unk> of 260 basis points from 23, 3% in Q4 2020, primarily due to freight costs, our memory products margin. In this segment was 17, 5% for the quarter for the year gaming components and system segment gross profit was $288 $9 million in it.
Speaker 4: Our memory products margin in this segment was 17.5% for the quarter. For the year, gaming components and system segment gross profit was $288.9 million, an increase of 4.8%.
Increase of four 8%.
Speaker 4: Fourth quarter SG&A expenses were $81.5 million, a modest increase of 0.5% compared to $81.1 million in Q4 2020, primarily driven by an increase in outbound freight costs due to increases in ocean and air freight, offset by a decrease in volumes due to lower revenue, and an increase in personnel related expenses.
Fourth quarter SG&A expenses were 81 $5 million, a modest increase of <unk>, 5% compared to $81 $1 million in Q4, 2020, primarily driven by an increase in outbound freight costs due to increases in ocean and air freight offset by a decrease in volumes.
Due to the lower revenue and an increase in personnel related expenses.
Speaker 4: Fourth quarter product development expenses were $15.1 million, an increase of 9.9% compared to $13.8 million in Q4 2020, primarily driven by an increase in personnel related expenses as we continue to focus on bringing an increasing number of products to the market.
Fourth quarter product development expenses were $15 $1 million, an increase of nine 9% compared to $13 $8 million in Q4, 2020, primarily driven by an increase in personnel related expenses as we continue to focus on bringing an increasing number of products to the market.
Operating income in the fourth quarter of 2021 was $25 1 million a decrease of $33 8 million from $58 9 million in Q4 of 2020 for the year. This was $137 $9 million a decrease of $25 million.
Speaker 4: Operating income in the fourth quarter of 2021 was $25.1 million, a decrease of $33.8 million from $58.9 million in Q4 2020. For the year, this was $137.9 million, a decrease of $20.5 million from $158.4 million in 2020.
$158 $4 million in 2020.
Speaker 4: Adjusted operating income in the fourth quarter of 2021 was $38.5 million, a decrease of $32.6 million from $71 million in Q4 2020. For the year, this was $194.5 million, a decrease of $10.3 million from $204.8 million in 2020.
Adjusted operating income in the fourth quarter of 2021 was $38 $5 million a decrease of $32 6 million from $71 million in Q4 2020 for the year. This was $194 $5 million a decrease of $10 $3 million from two.
$204 $8 million in 2020.
Speaker 4: Fourth quarter net income was $24.7 million or 25 cents per diluted share as compared to net income of $43 million or 43 cents per diluted share in Q4 2020. For the year net income was $101 million or $1.01 per diluted share compared to $103.2 million or $1.14 for diluted share in 2020.
Fourth quarter net income was $24 $7 million or 25 per diluted share as compared to net income of $43 million or <unk> 43 per diluted share in Q4 2020 for the year net income was $101 million or $1 <unk> per diluted share compared.
$103 $2 million or $1 14 per diluted share in 2020.
Speaker 4: Fourth quarter adjusted net income was $34.7 million or $0.35 per diluted share as compared to adjusted net income of $53 million or $0.53 per diluted share in Q4 2020. For the year, this was $144.9 million or $1.45 per diluted share compared to $145 million or $1.60 per diluted share in 2020.
Fourth quarter, adjusted net income was $34 $7 million or <unk> 35 per diluted share as compared to adjusted net income of $53 million or <unk> 53 per diluted share in Q4 2020 for the year. This was $144 $9 million or $1 45 per diluted.
Sure compared to $145 million or $1 60 per diluted share in 2020.
Speaker 4: Adjusted Ibit-Daw for Q4 2021 was $39.5 million, a decrease of $33 million compared to $72.5 million in Q4 2020, resulting in an adjusted Ibit-Daw margin of 7.7%. A decrease of 530 basis points from 13% in Q4 2020.
Adjusted EBITA for Q4, 2021 was $39 $5 million, a decrease of $33 million compared to $72 $5 million in Q4, 2020, resulting in adjusted EBITA margin of seven 7% a decrease of 530 basis points from 13.
Percent in Q4 of 2020 adjusted EBITDA for the year was $199 2 million compared to $213 million in 2020.
Speaker 4: Adjusted IBDOF for the year was $199.2 million compared to $213 million in 2020.
Turning now to our balance sheet as we discussed in our Q3 earnings call in order to mitigate logistics delays, we strategically put more inventory in our hubs closer to our markets. There's certainly paid off as reflected by our sequential growth over Q3, but we did pay for much of this inventory last year.
Speaker 4: As we discussed in our Q3 earnings call, in order to mitigate logistics delays, we strategically put more inventory in our hubs closer to our markets.
Speaker 4: This certainly paid off as reflected by our sequential growth over Q3, but we did pay for much of this inventory last year, and have not collected in all the sales, resulting in an increase in our networking capital and a relatively low AP balance compared to our inventory.
And if not collected in all of the sales, resulting in an increase in our net working capital in a relatively low AP balance compared to our inventory as funds come in during Q1 'twenty two net working capital will return to more normal levels.
Speaker 4: As funds come in during Q1-22, networking capital will return to more normal levels.
Speaker 4: During 2021, we paid off over $78 million in debt. We financed our remaining long-term debt to more favorable terms in Q3, saving over $8 million in interest expense per year, and increased our revolver capacity to $100 million, which was unutilized at the end of the year.
During 2021, we paid off over $78 million in debt refinance for our remaining long term debt to more favorable terms in Q3 saving over $8 million in interest expense per year and increase our revolver capacity to $100 million, which was unutilized at the end of the year.
Speaker 4: We ended the year with $248.8 million in debt at face value and $62.4 million of unrestricted cash and a net leverage ratio below one.
We ended the year with $248 8 million in debt at face value and $62 4 million of unrestricted cash and a net leverage ratio below one we continue to look for strategic opportunities to use the cash we generate such as our recent investment in I display borrowings such off.
Speaker 4: We continue to look for strategic opportunities to use the cash we generate, such as our recent investment in iDisplay.
Speaker 4: Barring such opportunities, we look to continue to reduce our debt.
<unk>, we look to continue to reduce our debt.
Speaker 4: The last two years marked a transformation of a relatively leverage LBL to a comfortably leverage growth company. We're comfortable with our current debt levels and will value growth investments over debt reduction, but we do expect to continue to reduce that.
The last two years Mark for transformation of a relatively leverage LBO to comfortably leverage growth company, we're comfortable with our current debt levels and more value growth investments over debt reduction, but we do expect to continue to reduce debt.
Turning now to our outlook for the year for 2022, we expect.
Speaker 4: Turning now to our outlook for the year. For 2022, we expect total revenue in a range of $1.9 billion to $2.1 billion, representing growth of approximately 0-10%.
Total revenue in the range of $1 9 billion to $2 $1 billion.
Representing growth of approximately zero to 10%.
Speaker 4: Adjusted operating income in the range of $195 million to $215 million, and adjusted EBITDAW in the range of $205 million to $225 million.
Adjusted operating income in the range of $195 million.
$215 million and adjusted EBITDA in the range of $205 million to $225 million.
Speaker 4: For 2022, we were expecting an approximately 45%, 55% revenue split for the first half and second half. We expect supply to reasonably price GPUs to be more available as the year progresses, thus unlocking the pent-up demand that Andy discussed earlier. Because of the timing of the holiday period in 2021 and Lunar New Year in 2022, we expect greater than average seasonal effect on Q1 revenue.
For 2022, we're expecting an approximately 45% 55% revenue split for the first half and second half we expect supply it's a reasonably priced gpus to be more available as the year progresses, thus unlocking the pent up demand to Andy discussed earlier because of the timing of the.
Paula day period in 2021, and lunar new year in 2022, we expect greater than the average seasonal effect on Q1 revenue.
Speaker 4: The additional modeling details underlying our outlook remain largely the same as we've discussed in our prior earnings calls for ease. I repeat them.
The additional modeling details underlying our outlook remained largely the same as we've discussed in our prior earnings calls for ease I'll repeat them.
Speaker 4: We expect gross margins to remain pressured by logistics costs, especially in the first half of the year.
We expect gross margins to remain pressured by logistics costs, especially in the first half of the year.
Speaker 4: Operating expense will increase to support a higher revenue level and our continued investment in new products. Assuming no further debt pay down, we expect interest expense of approximately $1 million per quarter. The $4 million patent trial win in Q1 2021 is not in 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.
Operating expense will increase to support our higher revenue level and our continued investment in new products, assuming no further debt pay down we expect interest expense of approximately $1 million per quarter. The $4 million patent trial win in Q1 2021 is not in our outlook. This amount could vary depending on.
On what the judge rules is subject to appeal and the timing of recognition of a gain.
If any is uncertain at this time.
Speaker 4: an effective tax rate of approximately 21 to 23% for 2022, and a full year average weighted diluted shares outstanding of approximately 100 to 102 million shares.
Effective tax rate of approximately 21% to 23% for 2022.
Full year average weighted diluted shares outstanding of approximately 100 to 102 million shares.
Speaker 4: To summarize, we're pleased with our strong financial performance to conclude 2021, with fourth quarter revenue and profitability metrics achieving the high end of our expectations.
To summarize we're pleased with our strong financial performance to conclude 2021 with fourth quarter revenue and profitability metrics, achieving the high end of our expectations. We remain focused on growth following the transformation of our debt levels and cost them at cost management efficiencies over the past two years as well.
Speaker 4: We remain focused on growth following the transformation of our debt levels and cost management efficiencies over the past few years. As we begin 2022, we expect to continue to experience elevated freight costs and ongoing supply chain issues, but we currently believe these circumstances will ease as the year progresses.
Begin 2022, we expect to continue to experience elevated freight costs and ongoing supply chain issues, but we currently believe these circumstances will ease as the year progresses as these macroeconomic conditions improve we expect to increase our cash position, which should allow us to execute on.
Speaker 4: As these macroeconomic conditions improve, we expect to increase our cash position, which should allow us to execute on M&A opportunities that fulfill our investment criteria or further reduce debt.
The M&A opportunities that fulfill our investment criteria or further reduce debt.
Speaker 4: With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q&A?
With that we're now happy to open the call for questions. Operator will you. Please open up the line for Q&A.
Speaker 1: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the <unk>.
Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Keith one moment, please while we poll for questions.
Speaker 1: Our first question comes from a Drew Crom with Steeple. Please proceed with your question.
Our first question comes from drew Crum with Stifel. Please proceed with your question.
Speaker 5: Thanks again, good afternoon. Andy, you mentioned launching some products tied to DDR5 during 4Q. Can you comment on how those have performed to date and what your expectations are for 2022? How material are these to your forecast?
Okay. Thanks, Hey, guys good afternoon.
Andy you mentioned launching some products tied to DDR five during <unk> can you comment on how those have performed to date and what your expectations are for 2022, how material are these to your forecast and then separately for Michael.
Speaker 5: And then separately from Michael, you know, the business experience, a little bit of gross margin slippage in 21 as you highlighted and you mentioned some expected pressure in the first half. I just wanted to confirm that you're assuming gross margins for the year improve and whether or not you think 22 gross margin can get back to or see where you were in 2000.
Business experienced a little bit of gross margin slippage in 'twenty, one as you highlighted and you mentioned some expected pressure in the first half.
Wanted to confirm that you're assuming gross margins for the year improve and whether or not you think 22 gross margin can get back to or exceed where you were in 2020.
Yes.
Speaker 3: Okay, so first question was about DDR5.
Okay. So first question was about <unk> five.
Yes.
In terms of.
Speaker 3: Expectation, I mean, we've sold out of everything that we built. So the way to think about this is the
Expectation I mean, we sold out of everything that we built.
So the way to think about this is.
<unk>.
Speaker 3: So, if I'm making up the fabs that make memory chips, we'll gradually move from DDR4 to DDR5. I think next year, maybe 2025, Senator Capacity will move from DDR4 to DDR5. Because of the sort of people that are buying our components and the sort of machines that are building tend to be higher end and big want the latest...
So semiconductor fabs that make memory chips.
We will gradually move from <unk> to <unk> five I think next year, maybe 2025% of the capacity will move from the <unk> five.
Because the sort of people that are buying components and sort of machines that building tend to be.
Higher and the big one the latest performance, there's a much higher demand.
Speaker 3: There's a much higher demand, I think, you know, everybody, if they could spend a few more dollars we'll go with the DDR5 platform.
Everybody if they can spend a few more dollars will go to the <unk> platform.
Speaker 3: So yeah, whatever we can get, we get probably an unshare fair of the supply because we have such a high market share now in consumer memory. But yeah, everything we're getting was sold out. Now, you know, we're not assuming it's gonna be a massive effect, it'll help us a little bit because the ASP is a little higher on DDR5 and DDR4 and it depends on the percentage. But we haven't really modeled that at the moment as a huge increase in memory...
And so yes, whatever we can get we get probably announced yes.
Of the supply because we have such a high market share now in consumer memory.
But everything we're getting with sold out now.
Not assuming it's going to be a massive effect.
It will help us a little bit because the asp's are little high on <unk>, five and <unk> four.
It depends on the percentage, but we haven't we haven't really modeled that at the moment is a huge.
Speaker 3: tailwind, and the reason for that is that the overall market for people building high performance PCs is still somewhat limited by GPUs because they're so expensive. And the difference in price and GPUs to all of the F5 and the DDR4, so I think the big effect that we're gonna have in that side of our businesses.
Tailwind.
And the reason for that is that.
<unk>.
Overall market.
Hey, we're building high performance Pcs is still somewhat limited by Gpus.
Because thats not expensive.
The difference in price and Gpus dwarfs.
The <unk> four so I think.
The big effect, but we're going to have in that side of our businesses.
Speaker 3: Second half of 22, as GPUs become more widely available.
Second half of 'twenty two.
As gpus become more widely available.
Hope that answers the question.
Speaker 4: In terms of your question on gross margin, if you look at the ranges we gave for Ivita, there is a slight improvement if you use the midpoint of the range year over year expected. So we do expect there to be some small improvements in gross margin year over year, and they're going to be weighted more towards the back half of the year.
In terms of your question on gross margin.
If you look at the ranges we gave for EBITDA. There is a slight improvement of use the midpoint of the range year over year expected. So we do expect there to be some small improvements in gross margin year over year, and theyre going to be weighted more towards the back half of the year.
Got it okay. Thanks, guys.
Okay.
Speaker 1: Our next question comes from Mario Lu with Barclays. Please proceed with your question.
Our next question comes from Mario Lu with Barclays. Please proceed with your question.
Speaker 1: Great, thanks for taking the question. Yeah, the first one's a little bit more high level. In terms of the analyst day, you guys go through a couple of weeks ago, you mentioned, you know, the long-term revenue goal of 3.5 billion by 2026.
Great. Thanks for taking the question.
The first one is a little bit more high level.
In terms of the analyst day, you guys. So I see a couple of weeks ago.
You mentioned the long term revenue goal of $3 5 billion by 2026.
Speaker 6: So yeah, I think that implies close to 15% Cager growth starting in 2023. So just curious is that, you know, if you could provide more color in terms of if that includes like a breakout year needed to achieve that number or any drivers that are kind of embedded and cool?
So, yes, I think that implies close to 15% CAGR.
Starting in 2023.
Just curious does that if you could provide.
Provide more color in terms of if that includes like a breakout year needed to achieve that number or any any drivers that are kind of embedded in that goal.
Speaker 3: Well, what I would say there is that when you do year-to-year comparisons, it's very difficult to do that if you include a year where there was shelter at home. And for the purposes of the analysis, I think you remember in the investor day, we showed that from Q220...
Well.
What I would say there is one.
When you do year to year comparison, it's very difficult to do that if you include a.
A year, whether it was shelter at home and for the purposes of the analysis I think you remember in Investor Day, we showed that from Q2 'twenty.
Speaker 3: Through the end of Q221, those five quarters were really shelter at home. And clearly now we see that that caused a bulge in...
Through the end of Q2, 'twenty, one those five quarters.
The shelter at home and clearly now we see that that caused a bulge in.
Speaker 3: Consumer spending and consumer electronic spending. I mean, half the reason that the supply chain is so stressed. Now we're out of that cycle, but...
Consumer spending and consumer electronics spending I mean thats half of these in the supply chain so stressed.
Now out of that cycle.
Speaker 3: Remember the first half of 21 was still in shelter at home. So we're not going to see the growth in 22 that matches the, you know, the, the, the cager that you're talking about. We should start to see that in 23 and onwards. So what we showed you was that when you look either side of the pandemic and you look at the,
One of the first half of 'twenty, one was still in shelter at home. So we're not going to see the growth in 'twenty two.
The matches.
The CAGR that you're talking about we should start to see that in 'twenty three and onwards. So what we showed you was that when you look on the side of the pandemic and you look at the.
Speaker 3: the basic increase in gamers and spend and that sort of thing. That's the sort of growth that you see that will result from market growth plus our market share increases and that sort of thing. So hopefully that gives you the expectation. There's a lot of reason to be optimistic about the second half of 22, right? The... Um...
The basic increase in gamers and spend and that sort of thing.
That's the sort of growth did you see that.
As a result, some market growth plus our market share increases and that sort of thing. So hopefully that gives you the.
Expectation is a lot of reasons to be optimistic about second half of 'twenty two.
<unk>.
Speaker 3: You know, we've got intel that's probably going to release graphics cards in the middle of the year. We've got Ethereum mining which...
Intel is probably going to release graphics cards middle of the year, we've got a theory of mining which.
Speaker 3: Sometimes during 22, I think it's going to be less profitable or in fact impossible to do mining the way it's being done now. And I think all those factors are going to result in much more available graphics cards, should be much more affordable as well.
Sometimes during 'twenty, two I think is going to be.
Less profitable or in fact impossible to do mining the way, it's being done now and I think all of those factors are going to result.
And much more available graphics cards should be much more affordable as well, so we think thats going to.
Speaker 3: So we think that's going to spur, you know, probably from mid to late 22 to the 2-23. I'd expect there to be a lot of demand as people have been waiting for a reasonable price graphic start to start building again.
Probably some late 'twenty two mid to late 'twenty two through 'twenty, three I would expect them to be a lot of demand as people have been waiting for a reasonable price back in style and start building again.
Speaker 6: Great, so full of think, Andy. And then maybe a follow up on the smart gene improvement. Or is there any updates in terms of the D to C strategy that you guys are implementing? I believe it's up to 11% of revenue now versus 9% a year ago. I guess how's that trending versus your expectations? And are there any other products?
Great. That's helpful. Thanks, Andy and then maybe a follow up on <unk>.
Gross margin improvement.
Is there any update in terms of.
D E strategy that you guys are implementing I believe it's up to 11% of revenue now versus 9% a year ago.
I guess, how is that trending versus your expectations and are there any other products.
Speaker 6: kind of outside of origin and scuffs that you're seeing a higher percentage to the DDC. Thanks.
Outside of Oregon, you discussed that you are seeing a higher percentage of DTC.
Speaker 3: Yeah, well, I think now that we're well into the cycle of having a, you know, a web store team and things you're thinking strategically about it, there's two things. One is as we release new products, we think about the web store strategy as we do it. And so, for example, we might launch, let's say, a microphone in the channel. And then in our web store, we might launch a microphone plus pop filter plus shock mount, for example. So we've got lots of ways of differentiating now.
Yes, well I think now that we went into the cycle of having.
Wed still team.
Thinking about it.
Two things one is as.
As we release new products.
Think about the Wetzel strategy as we do it.
As an example, we might launch let's say a microphone.
In the channel and then in our website, we might launch in microphone plus pulp mills of POS shop Mountain for example, so we've got lots of ways of differentiating now.
Speaker 3: The second thing is that, as you mentioned, with Scott and Origin.
The second thing is that yes, as you mentioned with Scuffing origin.
Speaker 3: But most of the MLA options we're looking at that are smaller tend to be direct consumer because these days if you start a new company.
Most of the M&A options, we're looking at with a smaller tends to be direct to consumer because these days if you start a new company.
Speaker 3: It's so easy with Shopify to start your own web store that most people just go in and do that. So both of those two things are gonna continue to happen. That will drive things up. Obviously, our base business of components and memory and keyboards and mice, we're not changing too much. So most of that business we expect to stay in the channel. The direct consumer is clearly a higher margin
It's so easy with shopify, starting with Westfield and most people just go in and do that.
So both of those two things are going to continue to happen.
To drive things up.
Honestly in our base business.
Components memory and keyboards and mice.
We're not changing too much so most of that business, we expect to stay in the channel.
The consumer is clearly a higher margin.
Speaker 3: business, but it also has cost associated with it. At the moment, we're not trying to aggressively drive customers from the channel to the store, we're more just trying to differentiate between some of the product offerings.
Business, but it also has cost associated with at.
At the moment, we're not trying to aggressively drive customers from the channels of the store with more just trying to differentiate between some of the product offerings.
Okay. Thank you.
Speaker 1: As a reminder, if you'd like to ask a question, please press star one on your telephone keypad.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.
Speaker 1: Our next question comes from Tim Nolan with McCquarty. Please proceed with your question.
Our next question comes from Tim Nolan with Macquarie. Please proceed with your question.
Excuse me Tim Your line is now live.
Please state your question.
Speaker 7: Sorry, I made the usual sticking on mute mistake. Can you hear me now?
Sorry, I had to usual.
On mute mistake can you hear me now.
Yes, alright, sorry about that.
Speaker 7: All right, sorry about that. Thanks for taking the question. I wonder if I could push a bit more on the seasonality question in Q1. You called that out.
Thanks for taking the question I Wonder if I could.
That's a bit more on the seasonality question in.
In Q1, you called that out.
Speaker 7: Looking back, it's a little difficult for us to assess what your kind of seasonality impacts are, given that you came public or in COVID, you've had this big run up. And I've got the supply chain questions, and I've heard you on the second half, hopefully the supply chain issues ease. It's just a little bit difficult to understand kind of how we should be phasing the revenues and therefore the margins throughout the four quarters of the year. Could you just maybe whatever color you're willing to give us? Could you please give us?
Looking back it's a little difficult for us to assess what your kind of seasonality impacts or given that you can public or in Kobe, you've had this big run up and now you've got the supply chain questions and I heard you on the second half hopefully the supply chain issues, either it's just a little bit difficult to understand kind of how we should be facing.
The revenue and therefore the margin.
Out of four quarters of the year could you just maybe whatever color you are willing to give us could you could you please give us.
Yes so.
Speaker 3: That's the typical one because we don't want to start guiding quarterly, but I think what we can say is that, as you've heard from all the discussions just now, clearly there's a lot more tailwinds going to happen in the second half of this year, than the first half.
Yes.
For one because we don't.
Wanted to start guiding quarterly, but I think what we can say is that as you've heard from all the discussions just now clearly there is a lot more tailwind is going to happen in the second half this year.
Then the first half.
Speaker 3: in terms of growth from previous periods because the first half of last year was
In terms of in terms of growth from previous periods, because the first half of last year was.
Speaker 3: a shelter at home here or period. And really for the last 18 months we've had chronic shortages and MSRP increases on graphics cards. So that really stops people building game systems. So I think this year, like last year and the year before, is not gonna be anything to do with historical seasonal norms. But I would say we're, you know, internal expectations are that, but certainly that we're more focused this year.
Shelter at home year or.
Period.
And really for the last 18 months we've had.
Chronic shortages and MSRP increases on graphics cards, so that.
And that really stops travel building gain.
Gaming systems. So I think this year and late last year and the year before is not going to be anything to do with historical seasonal norms.
But I would say.
Internal expectations.
Sure.
Firstly.
With more focused this year.
Speaker 3: comparing with 2020, in other words.
Comparing with 2020.
In other words.
Speaker 3: 2019 and 2020 pre-pandemic. That's what we're looking for now is to try and gauge, you know, how the market is doing.
2019, and 20 pre pandemic, that's what we're looking for now is to try and gauge how the market is doing.
Speaker 3: post-salt at home, a lot of the lengthening, the long term effects are on the answer, those really good news. But this is not going to match the surge of when people will stop at home, nothing else to do. Now everything, you know, bars, restaurants are open and around here, anyway, they're full.
Post shelter at home lengthening the long term effects.
The answer is really good news.
But as I said, we're not going to match the.
When people will stop at home with nothing else to do.
Now exiting baas restaurants will open around here anyway that full.
Speaker 3: So that's the first part of it, but yeah, I would say that the message from here is that internally we're assuming that there's going to be a much bigger headwind in the second half.
So that's the first part of it but yes, I would say is that the message from here is the uncertainty we are assuming that there's going to be a much bigger headwind in the second half.
Speaker 3: And the first because of graphics cards and also, you know, there'll be some easing of freight costs we expect. I'm surprised that hasn't happened already, but we expect that to start going down. Yeah, that's...
And the first because of graphics cards that also.
Some easing of.
Of the freight costs, we expect.
I am surprised that hasn't happened already but we expect that to start going down.
Yes.
So I don't think Thats true.
Speaker 4: I mean, we tried to say expectable 45% first half, 55% second half in total. And I've been here in over two years now. And most of it was during the pandemic time. So I haven't seen a normal quarter yet. I did go back to the time with my team, because I get asked this question all the time what normal seasonality.
I have to say expect about 45% first half, 55% second half in total and.
While I've been here a little bit over two years now and most of it was during the pandemic time, so I haven't seen a normal quarter, yet I did go back to this time with my team because I get asked this question all the time, what's a normal seasonality and.
Speaker 4: And, you know, Q1 tends to be down from Q4, but less than 10% and then Q2 tends to be a little bit up. And then, you know, sorry, a little bit down from there. And then Q3 and Q4 go up.
Q1 tends to be down from Q4, but less than 10% and then Q2 tends to be a little bit up and then saw a little bit down from there and then Q3 and Q4 go up.
Speaker 4: When the lunar New Year timing is like it was a little earlier, tend to be have a little bit bigger impact on Q1, and that conversely tends to help Q2. Not sure how much that's gonna play through with logistic environment we're in, but that would be more typical. We're more impact on Q1 than normal, but less impact on Q2 based on the timing at all.
When the lunar new year is timing is likewise, a little earlier can do we have a little bit bigger impact on Q1 and that Conversely tends to help Q2.
Not sure how much that's going to play through with logistics environment, we're in but that would be more typical where more impact on Q1 than normal but less impact on Q2.
Based on the timing of the holidays.
Speaker 7: Okay, that's actually very helpful because I was trying to go back to prior quarters and I just hard to determine a pattern given the information we have, given what's happened in the last couple of years. Could I ask one other number's question actually please, which is about promotion, rebate cost, you mentioned those going up, I guess just curious. You know, how much is that related to product launches? How much is this just general cost inflation or choosing to market more? And then what can make effect on that front in 2022?
Okay, that's actually very helpful. Because I was.
Trying to go back to prior quarters, I know, it's hard to determine a pattern given given the information we have given what's happened in the last couple of years.
Can I ask one other numbers question actually please which is about promotion rebate costs. You mentioned that was going up I guess just curious.
How much does that related to product launches.
How much is this just general cost inflation are choosing to market more and what can we expect on that front in 2022.
Speaker 3: I think 22 we'd expected to get back to normal levels. I mean, with the surge that happened in the period I described, right? Q2, 20, early Q, I mean, April 20 through July of 2001, there was no need to do any promotions because everything was completely sold out. I mean, I think April , when Shelter Home started pretty much every one of our retailers, the salesmen sold out immediately.
I think 22, we would expect it to get back to normal levels.
With the surge that happened in the pit I described right Q2.
20.
I mean April 20.
Who.
So the July of 'twenty one.
There was nothing to do any promotions because everything was completely sold out I mean, I think April when shelter at home started pretty much every one of our retailers details and sold out immediately.
Speaker 3: So, yeah, so I expected to be more normal compared to what we saw in 2019.
So.
Yes, so I'd expect it to be more normal compared to what we saw in 2019.
More like 2019, okay.
Thanks.
In terms of percentage.
Sure.
Speaker 1: Our next question comes from Doug Krutz with Counts.
Our next question comes from Doug Crudes with Cowen. Please proceed with your question.
Speaker 2: Thanks. It's been a bit over a year since you guys acquired Gamers Sensei just wondering how that's proceeding, whether it's sort of going into your expectations and how maybe your experience of it has sort of affected your interest in other gamer service type acquisitions. Thanks.
Thanks.
A bit over a year since you guys acquired gave a sense. It just wondering how thats proceeding whether it's sort of going according your expectations.
How maybe your experiences.
Sort of affected your interest in and other game or service.
Type acquisitions.
Yes, so we are actually still pretty.
Speaker 3: pretty bullish on the whole space around not just services, but so how we engage with the gaming community and how we interact with them. And as we sort of get more engaged with our Gregg's consumer initiatives, this is certainly an important stepping stone. I'd say, you know, as we've gone through the year, there's been a few changes in terms of how gamers are expecting to
Pretty bullish on the whole space around.
Not just services, but so how we engage with the gaming community.
And how we interact with them.
And as we get more engaged with our direct to consumer.
Initiatives now this is certainly an important steppingstone.
I would say as.
As we've gone through the year.
It's been a few changes in terms of how game as we expecting too.
Speaker 3: you know, do lessons and what's going on in the collegial environment and that sort of thing. So I think at the top level we probably say still a working process, still very bullish in the space.
Do lessons and what's going on in the <unk> environment, and Thats sort of thing. So I think that the top level, we'd probably say, it's still a work in process still very bullish in this space.
Speaker 3: but a little different than we initially thought we went into it.
But a little different than we initially thought when we went into it.
Okay. Thank you.
Our next question comes from Rod Hall with Goldman Sachs. Please proceed with your question.
Speaker 1: Our next question comes from Rod Hall with Goldman Sachs.
Speaker 8: Yeah, thanks for the question. My first question comes back to the promotional activity, Andy and the increased their eye. I'm just curious how close to normal we were in Q4. And when you think promotional activity, we'd be back to whatever the new normal level is. Is that take to the middle of the year? And what does that mean for, I guess, for gross margins the first part of the year? And then I've got to follow up to that.
Yes. Thanks for the question My first question and it comes back to the promotional activity Andy in the.
The increase there I am just curious how close to normal we were in Q4 and when you think promotional activity we'd be back to whatever that new normal level does that take till the middle of the year.
What does that mean for.
I guess the gross margins the first part of the year and then I've got a follow up to that.
Speaker 3: Yeah, I think Q4 with pretty much at normal levels.
No I think Q4 Q4 was pretty much.
At normal levels.
Looking at our analyst.
Speaker 4: Yeah, reason why I talked about it when I went through that section is because I was comparing to 2020 to the prior year where there was almost no promotion activity. It has that was in the heart of the shot for a home period. I think I've characterized the end of last year, 21 more like a normal promotional type of environment, sort of like in the prior year of 1918 and so on. So we didn't see anything wild and other ordinary, but certainly compared to the prior quarter, the year before it was a lot more.
Yes, the reason why I talked about.
That section because comparing to.
For 2020 to the prior year, where there was almost no promotional activity that was in the heart of the sharper at home period, I think I'd characterize the end of last year, a 21 more like normal promotional type of environment totally from the prior year of 1918, and so on so we didn't see anything wild and.
Out of the ordinary, but certainly compared to the prior quarter or the year before a lot more.
Speaker 8: Okay, yeah, that's helpful. Thank you. And then that kind of leads to my second question, which is, you guys are saying gross margins up in 22, which, you know, there were 27% mathematically in 21. So I got that put some at 28 in 22, but yet you just printed 24 with normal promotional activities. So it kind of seems hard to get back to 28. And I was wondering if there's any way that you guys could, or, you know, even above 27, can you bridge back to that? Somehow, I'll help us understand how that happened.
Okay. That's helpful. Thank you and then that kind of leads to my second question, which is you guys are saying gross margins up in 'twenty, two which there were 27% mathematically in 'twenty. One so I guess that puts them at 28 and 22, but yet you just printed 24 with normal promotional activity.
It seems hard to get back to 28 and I was wondering if there's any way that you guys get or even above 27 can you bridge back to that somehow help us understand how that happens.
Speaker 4: And it's two main elements, Ross. The first is the easing of the logistics costs and the entanglements around there. So that will certainly give us a pretty big help.
And then two main elements the first is easing up.
Just fixed cost on the entanglements around there so that will certainly give us a pretty big help.
Speaker 4: The second part of it is going to be just a continued shift to higher percentage of a higher growth margin products. They have a higher growth rate, so over time that should list the total margin.
The second part of it is going to be just the continued shift to a higher percentage of our higher gross margin products that have higher growth rates over time.
Thus the total margin so between the two of them were relatively comparable.
Speaker 4: So between the two of them, we're relatively constantly increased margins. Obviously it's difficult to overcome the very high margins at the end of the 20 and at the very beginning of 2021 when promotion activity was quite low to the shot at home. But longer term, we don't see a problem with getting the margins back up.
<unk> margins, obviously its difficult to overcome the very high margins at the end of 2000 and at the very beginning of 2021 when promotional activity was quite low to the shelter at home, but longer term, we don't see a problem with getting the margins back up.
Speaker 8: Right, so you just feel like removal of logistics and some of these access costs will kind of help to put those back to where you're thinking. It sounds like not far above 27 if I'm kind of reading between the lines here though Michael, is that right?
Right. So you just feel like removal of the logistics and some of these excess causal.
It helped to put those back to where youre thinking it sounds like not far above 27%, if I'm kind of reading between the lines here, though Michael is that right.
Speaker 4: I mean, if you look at year over year, the first half of 21 was quite strong. And you know, it was saying the second half of 22 would be stronger. So we certainly think we'll start recovering and bring it up. But we're not projecting. If you look at the Yvodala ranges and figure we're growing our outfits like we said, some are probably around where our revenue levels are based on the numbers there and the operating income in Yvodala. You should see the view just a slight year over year margining.
I mean, if you look at year over year in the first half of 'twenty, one was quite strong in <unk>.
In the second half of 'twenty, two will be stronger. So we certainly think will start recovering and bring it up but we're not projecting if you look at the EBITDA range is bigger we're growing our opex like we said somewhere probably around where our revenue levels are based on the numbers that are on the operating income and EBITDA you should see there'd be a just a slight.
Year over year margin increase.
Speaker 3: Right. Okay. Yeah. The great ad is we did have a few things going on in the last few months, you know, related to COVID. Some of our factors in Vietnam.
Right, Yes, I would add is.
We did have a few things going on.
In the last few months.
Related to Covid.
Some of our factories in Vietnam.
Speaker 3: We were really shut down for a while and we had to then revert back to the sources out of China, which then started affecting us with tariffs. So we did have some unusual costs that were flowing through because of that and that's generally behind us now.
We're really shut down for a while and we had to then the abaxis sources out of China, which then started.
Tariffs. So we did have some unusual.
Cost that were flowing through because of that and that is generally behind us now so.
Speaker 3: We're planning next year on essentially being...
We are planning next year on essentially being.
Speaker 3: I once had done with COVID but it's easy to have the same effect as it did before and we shortly
I won't say done with Covid, but it seemed to have the same effect as it did.
Before and Sean.
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Speaker 3: you know, you have free cost for drop down. The other thing I just would say is that, you know, the biggest increase in sales of dollars but a PC bit gamer than what the build of NPC is, is in graphics cards and keep talking about that. But the place where we sell our highest end
Yes freight costs will drop down the other thing I just.
I would say is that.
The biggest increase in sales of $1.
Our PC Gamer.
So most of the build of MPC is in graphics cards, and keep talking about that but.
The place where we sell our highest then.
Speaker 3: Products is for people that are built in 2.5, 3,000 dollar PCs. And so that's really where the biggest sort of whole back is in builds because, you know, you'd be talking about a thousand dollar increase in a graphics card.
But as the people that are building, two and a half $3000 Tcs.
And so thats really where the biggest sort of hold back and builds because you'd be talking about $1000 increase in the graphics tub.
Speaker 3: So I think that we're being held back on some of our high end products that normally would yield the highest margin. So that's gonna, that should change you in the year. Yeah, okay, all right, I appreciate it. Thanks for all the colors.
So I think.
We're being held back on some of our high end products.
That normally would yield the highest margin so.
And that should change during the year.
Okay, Alright, I appreciate it thanks for all the color.
Yeah.
Operator are there any more questions.
Yeah.
Yeah.
Alright, operator.
Yeah.
Speaker 4: I'm not quite sure what happens to our operator there. Hopefully everybody else can hear us. We wait another minute or two and see if it comes back on. It's not we may have to take questions after the call during our schedule of call time.
I'm not quite sure what happened for our operator there.
Hi, everybody else okay.
Sure.
Wait another minute or two and see if it comes back on it's not we may have to take questions. After the call during our scheduled call time.
Okay.
Speaker 3: All right, well, I think the operator has gone AWOL. So, oh, he's back. No, no, go ahead. Yeah. So thanks everybody for attending. We'll follow up with the analysts in our usual meetings. And we'll see you again next time.
Alright, well I think the operators as well so.
Okay.
Go ahead.
Thanks, everybody for attending.
We will follow up with the.
With the analysts.
Usual meetings.
And we'll see you again next time.
Okay.
Goodbye.