Q1 2022 Turtle Beach Corp Earnings Call
[music].
Yes.
Welcome to the Turtle Beach first quarter 2022 conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero then one on your Touchtone.
Phone 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 up the call for any questions.
As a reminder, this conference call is being recorded I will now turn the call over to Alex Thomson Alex you may begin.
Thanks Darryl.
On today's call, we will be referring to the press release filed this afternoon that details the company's first quarter 2022 results, which can be downloaded from the Investor Relations page at Corp that Turtle Beach Dot Com, where you'll also find the latest earnings presentation that supplement the information discussed on today's call.
Finally, the reporting of the call will be available on the investors section of the company's website later today.
Please be aware that some of the comments made during this call may include forward looking statements within the meaning of the federal Securities laws.
Shipments 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 expectations.
While the company believes that its expectations are based upon reasonable assumptions numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe Harbor statements and risk factors contained in today's press release and in its filings with Securities and Exchange Commission, including without limitation.
We will 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 in 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 on this call. It will be discussing non-GAAP financial information. The company is not providing is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP.
You can find a reconciliation of these metrics to the Companys reported GAAP results in the reconciliation tables provided in today's earnings release and presentation I would like to inform you that Turtle Beach Corporation has filed a definitive proxy statement and related proxy materials with the SEC in connection with the 2022 annual meeting of stockholders.
In connection therewith, its directors and certain of its executive officers are participants in the solicitation of proxies from stockholders in connection with such annual meeting stockholders of Turtle Beach are strongly encouraged to read such proxy statement and all other related materials filed with the SEC carefully and in their entirety as they contain important.
Formation about the 2022 annual meeting and now I will turn the call over to European Stark, the company's chairman and Chief Executive Officer Yoga.
Good afternoon, everyone and thank you for joining us I'm pleased to report that our first quarter results were in line with our expectations as laid out during our last conference call.
Continuing difficult gaming and macro market conditions.
We launched an announced innovative wireless products and maintained our leadership position in counsel gaming headset categories. While also making good progress across our increasingly diversified product portfolio of gaming and creator accessories.
We're operating in a significantly different and varied economic environment compared to a year ago, but we have taken measures to stay ahead as we continue to showcase diligent operational execution.
During the first quarter, we delivered net revenues of $46 7 million and an adjusted EBITDA loss of $5 7 million in line or slightly above our estimates as.
As we anticipated on our last earnings call. The first quarter was impacted by slower channel replenishment as retailers brought inventories back to normal post holiday levels additional economic factors have constrained growth compared to last year, such as the absence of stimulus checks and more cautionary consumer.
<unk> spending caused by inflation and the geopolitical concerns stemming from the war in Ukraine.
Nonetheless, our ability to meet our projections. Despite the significantly impacted consumer spending environment is a testament to the strength of our team and the quality of our offerings.
It is important to note that our 166% revenue growth in the first quarter of 2021 significantly exceeded the growth rates of underlying gaming markets and of our public peers.
The gaming markets continue to show favorable long term secular trends for our news new Global markets report, it's estimated that by the end of 2022, there will be more than 3 billion global gamers. That's a staggering figure and we continue to believe that the gaming market remains the market to be a leader in.
In the near term there are obvious headwinds stated above that are impacting the gaming industry and the economy more broadly in fact per NPD first quarter U S. Videogame accessory spending declined 16% counsel headset market was down over 35% and PC accessories markets were down about <unk>.
25%.
Major European markets fared better but were also down.
In addition to consumer spending caution across all major markets. The lack of stimulus checks, which drove significant incremental spending in the first half of last year contributed to difficult market comps.
And as I mentioned, our history of outperforming the market in boom times like first quarter 2022 makes our comp even more challenging.
While these factors will curb the gaming industry's growth as compared to last year short term consumer caution can create pent up demand in the long term opportunity remains attractive.
Hard at work to continue to produce great products, which attract gamers at all price points and very much look at these times.
As an opportunity to prepare our product portfolio and business for the coming market upswing.
<unk> as we've done in past challenging periods.
Our counsel gaming headsets continue to perform well in the first quarter per NPD three of the top five best selling Xbox headsets and five out of the top 10, best selling Playstation headsets were turtle Beach products and this is before our new wireless headsets hit retail.
We've been the number one gaming counsel headset provider for 12 years running and customers know that we deliver innovative high quality headsets for every level of gamer.
Looking at new product launches, we unveiled the <unk> 600, Gen. Two Max and stealth 600 Gen. Two USB for Xbox is new entries in our industry best selling gaming headset series.
And then he was still 600 Gen. Two Max model adds multiplatform capability.
The massive best in class 48 hour battery life to one of the industry's top selling products.
Well 600 Gen. Two Max offers gamers all the same features that made it a best selling product since it came out like powerful game style and crystal clear Chad comfort and key proprietary features like superhuman hearing.
And the Max model now connects to Xbox series X. It S. Xbox one PS five PS for Nintendo switch Windows, Pcs and Macs, the new multi platform Max model will be available for $129 99, MSRP when it launches. This weekend, we're also launching the new.
<unk> 600, Gen, two USB, which keeps everything fans love about the series, including its attractive 90, 999, MSRP, but also extends battery life by 60% to 24 plus hours.
Equally exciting we are launching a Max version of our acclaimed 700 series also one of the industry's top selling gaming headsets.
New all new stealth 700, Gen. Two macs for Xbox ups battery life to 40, plus hours and is also fully multi platform. It includes Bluetooth connectivity to iOS and Android mobile devices and to customize settings via the mobile App. This new 700 series. It basically works on every <unk>.
Modern gaming platform, including mobile.
These upgraded features of course are in addition to the premium gaming audio and comfort features that's made the 700 series the best selling premium gaming headset for years.
As we've commented on prior earnings calls the semiconductor shortages severely impacted our wireless headset sales. These still 600 700 launches and more are coming are the result of significant engineering efforts to transition off of highly constrained wireless semiconductor platforms and onto <unk>.
My conductor platforms with better availability, all while also delivering best in class battery life, and Matt multiplatform capability, which is becoming increasingly important to gamers.
We boosted our presence in mobile gaming space with the launch of the Scout Air in Sin buds are true wireless gaming ear buds designed for console and PC gamers on the go. We also introduced a wider set of gaming here, but the thing but its core in January .
The mobile gaming market grew to more than $90 billion in 2021, and we're continuing to expand our portfolio of mobile gaming products. So gamers on iOS, Android and Nintendo switch can capitalize on the game winning advantage of using turtle Beach and rocket gear more mobile gaming products are coming.
Next from Turtle Beach in Q1, we launched the Recon are this is a 40 dollar wireless chat only headset designed for gamers, who already have a great sound system and only need a headset to chat with friends <unk> talked to other players.
It's also a great wireless Bluetooth headset for audio or video conferencing. In fact this is Mike go to audio product for video conferencing when I'm traveling.
The recon air has precisely to noise canceling mics to ensure your voice comes in clearly in the minimize background distractions plus a rechargeable 10 hour battery life. There are versions for Xbox or Playstation and compatibility with Windows Pcs and Mac.
And Bluetooth enabled iOS and Android devices.
For our award winning rocket brand, we continue to grow our lineup of stunning PC accessories first we released the cone XP PC gaming mouse, which we designed to be the perfect size mouse with stunning three D. RGB lighting, a variety of customizable buttons and made with our latest tax so PC gamers can win with.
Style and confidence.
Additionally, we revealed the rocket burst pro air as the premium wireless edition to its fan favorite burst family of lightweight PC gaming mice are wired versus pro was well received by first person shooter players, who prefer an ergonomic and symmetrical mouse and we're excited to now offer gamers who prefer.
Wireless all the same benefits with diverse pro are.
Both new.
Nice feature stunning RGB lighting, if you look at our lineup of rocket products Youll understand why I can't get away from the adjective stunning.
For our creator microphones, we've now launched a total of four high quality USB and XLR microphones in the U S and are just launching the <unk> brand.
Flexible piece, the king be two in the work or be too XLR microphones, along with the bumblebee too and skyline continue to while reviewers and consumers alike for the quality of products and the prices. They were available for <unk> flagship king be two extra letter microphone offer studio great performance.
And comes with its own pop filter in shock Mount offer for a $169 99, MSRP that feels like about half of what you would pay for similarly equipped competitor product.
The $99 Bumblebee to USB, Mike features of 25 millimeter capsule, the largest class along with the latest electronics to ensure your voice sounds clear.
We have more exciting products across all categories coming this year and the expansion of our product portfolio outside of counsel gaming headsets is going very well I'll now pass it over to John to cover financials, after which I will provide further commentary on the quarter and outlook and before we wrap up prepared remarks.
I'll also address some of the questions. We have received from investors regarding the board's approach to M&A and strategic alternatives based on the disclosures we made in our recent shareholder communication.
John .
Hey, Thanks, Juergen and good afternoon, everyone for the first quarter, we reported net revenue of $46 7 million slightly above our expectations compared to $93 1 million a year ago, where the company's revenues were up 166% year over year as a result of.
Exceptional consumer demand across console headsets, and PC gaming accessories, and our significant outperformance of the market and peers.
Q1, 2022 was 33% above Q1 of 2020 as a useful reference.
Gross margin in the first quarter was 31% compared to 37, 5% a year ago period due to significantly higher freight costs fixed cost deleveraging in more normalized promotional credits, partially offset by business mix.
Gross margins in Q1.
2022 were somewhat above expectations due to lower volume based program and product spend.
Operating expenses in the first quarter were $22 3 million compared to $22 6 million in the year ago period.
The decrease was primarily driven by lower revenue base sales spend and lower marketing spend partially offset by higher product development expenses to support portfolio and geographic expansions versus the comparable period.
Our first quarter adjusted EBITDA loss was modestly better than expectations as we reported $5 7 million compared to adjusted EBITDA of $15 3 million in the year ago period, the year over year variance in the modestly higher than expected gross margin result is primarily driven by the items I've covered it.
<unk>.
Adjusted net loss for the first quarter of 2022 was $6 3 million or <unk> 39 per diluted share compared to adjusted net income of $9 4 million or <unk> 52 per diluted share in the year ago period, we expect our effective tax rate for the full year to be 25%.
Cash used for operating activities in the first quarter was $13 3 million compared to cash flow from operations of $21 1 million in the year ago period. The decrease was primarily due to lower net earnings and working capital deployed to mitigate current and potential supply constraints.
Turning to the balance sheet at March 31, 2022, we had $23 7 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line.
Inventory at March 31, 2022.
$117 4 million compared to $59 1 million a year ago.
Elevated inventory levels are a reflection of continued significantly longer shipping lead times as well as intentionally higher target inventory levels to absorb COVID-19 driven supply chain disruptions that we've experienced many times over the past two years.
That said, we expect inventories to build modestly during the summer given the seasonal load in prior to the holidays, but be significantly lower by year end.
And now I'll turn the call back over to <unk> for additional comments.
Jordan.
Thanks, John as we said we're pleased to have delivered first quarter results in line with our expectations, which again demonstrate our ability to execute well in a challenging macro environment as I mentioned earlier retail sell through was down significantly in the 20% or even 30% year over year across council and PC accessory businesses.
Due to the absence of stimulus checks and lingering stay at home orders that significantly contribute to heightened numbers in the first half of 2021. Additionally, as John covered retailers have reduced their inventories throughout the first quarter and competitive discounting and promotions have been much higher than normal, particularly in the PC.
Categories still I'm pleased to note that our PC accessories business executed to plan in the quarter as did our overall business.
We expect the overall gaming markets to continue to be challenged through second quarter, where we expect our revenues to be flat to slightly up sequentially from the first quarter. We continue.
To expect the second half of the year to show strong growth, particularly Q4, given the launch of new AAA games in advance of the holiday season expectation of less constraints on council supplies recovery in consumer retail dynamics, including some potential pent up demand as well as the impact of <unk>.
Our expanded portfolio in council PC simulation controllers, and microphones, all of which have exciting product launches coming yet this year.
Given this we are maintaining our full year 2022 outlook and expect revenue to be approximately flat plus or minus 5% from record 2021 levels again I am pleased with the strong execution. We've displayed in Q1 and there is a lot of in store. These next three quarters.
Taking a step back we continue to execute on a clearly defined plan to leverage the strong trends in the gaming market and capitalize on the opportunities ahead.
The gaming sector remains the market to be in with a total addressable market of $180 billion that is expected to reach north of $200 billion by 2024.
Our diverse portfolio and proven strong consumer demand for our products have extended our markets by over $7 billion in the past three years and positioned us well for future success.
Here are our key priorities.
First continue to lead the counsel of gaming headsets market, where we have maintained market share of 40 plus percent in the U S.
12 consecutive years, driven by great products valuable innovations a go to brand and strong execution.
I am very excited about our new wireless models, both of those we've announced and those still pending.
Second continue to expand our PC gaming portfolio of headsets keyboards, and mice and grow our share in that $3 8 billion PC accessories market.
The acquisition of rocket mid 2019 for $11 million has enabled us to build a business that has nearly doubled each year. Since then already generating more than 10 times the purchase price and cumulative revenues.
When we pitched the rocket deal to the board. We said, we expect it will accelerate our ability to build a sizable PC business by several years and it's done exactly that.
Third drive continued growth in the gamepad controller gaming simulation accessories and microphone categories that we entered in 2021.
These products further expand the markets, we serve and fully leverage the core competencies of the company, we have exciting new products coming in these categories later this year as well.
And fourth.
Continue to identify and selectively pursue other growth opportunities or business expansion across product categories and geographies is performing well and we continue to look for organic growth and acquisition opportunities to expand our addressable markets and drive growth in line with our 10% to 20% annual growth target.
We continue to target roughly $100 million in revenues outside of our council.
Headset business for 2022, and expect those new businesses to generate a positive contribution to EBITDA already this year.
Obviously, it takes investments to enter and grow new categories and these investments have enabled us to go from roughly zero in early 2019 to over $70 million in 2021 in these new category revenues.
Balancing these investments to fuel our growth over time, while still delivering peer competitive EBITDA margins like the 10% EBITDA margin last year in line with the peer was five XR size is a key point of focus in our annual operational planning and in how we strive to execute over time.
The successful execution of that strategy has enabled us to significantly outgrow the counsel headset market expansion outside of counsel headset also reduces our dependency on that market, which has a cyclical nature that has created annual growth rates varying from positive 71% to negative 22.
2% are very large share of the counsel headset market makes it nearly impossible for us to move our topline significantly differently from the overall counsel headset market last year is a great example, the counsel headset market was down roughly 5%, but we were able to grow modestly in addition.
We correctly predicted that multi platform gaming will become increasingly important driving a blurring of the lines between counsel headsets and PC headsets. Good anticipation of these factors was part of the drive to acquire rocket in 2019, with the strong capabilities and skills in PC accessories.
Significantly accelerating our ability to produce and take share of the market with compelling PC products.
Category expansion efforts, therefore, it not only worked out well financially, but also have a favorable impact on our strategic positioning.
While there will always be periods of economic downturn gaming market weakness or operationally difficult environments like we've seen multiple times over the past decade gaming is and remains a great market to be a leader in our successful efforts efforts to maintain our strong leadership and counsel headsets while <unk>.
<unk> expanding our product market categories have us positioned well for the future. Both in terms of participating with the long term <unk> and gaming and also in continuing to grow revenues and our ability to operate with a very high level of productivity at well over $1 million in revenue per employee it means growing the.
<unk> is the best way to grow earnings over time.
In combination with our strategic and operational goals, we're delivering on the long term financial goals that we regularly communicate specifically, we strive to deliver 10% to 20% top line growth over time, and notably our five year revenue CAGR is more than 16%.
Generate peer competitive EBITDA margins, while investing for growth targeting 10% and growing over time as we gain operating leverage by our revenue growth.
And leverage our strong balance sheet to provide flexibility to pursue organic or acquisition based investments to support our growth strategy, while keeping an eye on opportunities to return capital to shareholders as we've done historically.
Before I open up the call to Q&A I wanted to address some questions. We've received about the board's approach to strategic alternatives given disclosures, we made in our letter to stockholders on April 25 2022.
I believe for a while at the public markets don't value. It properly I also believe that there is more volatility in the stock price then there should be despite the way we've consistently run the business and delivered on results. The board has been fully aligned with this which is why we stated many times that the board.
Continues to be open to strategic alternatives that maximize shareholder value.
I've also stated that we don't need any external prompting for this and we don't to.
To that end the board and I have extensive experience and openness to strategic alternatives. In fact, we are engaged in banker led proactive outreach processes to potential acquirers on three separate occasions in the past five years.
In the most recent of those efforts we retained a banker in late 2020 to engage in outreach to third parties outreach that started in early 2021 in the spring of 2021, we made the decision to switch bankers and engaged bank of America to continue our outreach efforts.
Since that time, we've engaged with the most logical potential strategic buyers as well as select financial sponsors.
Given our experience with two prior rounds of outreach, we know the most logical prospects well along with our financial advisers. During this third round of outreach we have been in contact with 29 potential acquirers signed 10, NDA and held nine management meetings.
Throughout the course of this extensive engagement that began early last year, we received feedback from prospective buyers and their advisers in a number of cases, we heard that they were unable to move forward because we had too much reliance on counsel gaming headsets and the cyclicality that comes with that I mentioned council market growth rates historically.
<unk> of plus 71% to minus 22% earlier we.
We had received the same feedback in the prior two rounds of outreach, which is one of the many reasons, we pursued our value creating diversification strategy.
In the prior two rounds of outreach, we reached an outcome that resulted in bids that would not have been attractive to shareholders. In both cases like today. The stock price was low based on overall market conditions and we subsequently drove higher value for shareholders than the bids offered.
The reality is that the best way for us to create value for shareholders, including in the context of future transaction is to continue to execute our strategy, while remaining open to engagement with potential acquirers.
Our extensive experience reaching out to perspective buyers now in three rounds is also why among other reasons. We believe publicly announcing a formal sale process is not advantageous and may not result in the best deal for our shareholders. It is also not advantageous to disclose the status.
Of these types of discussions however, we are doing so now based on shareholder feedback seeking to understand the board's view regarding strategic alternatives as is always the case there are no guarantees that discussions of this nature.
<unk> in a transaction.
The board's openness to value maximizing opportunities also included our full in good faith engagement with done rail, where we tried repeatedly to establish their financing and make their bid real and actionable. Despite.
Despite our efforts done rail could not or would not verify their financing. Unlike incredible potential buyers. Additionally, it is important to note that feedback from multiple perspective acquires has been that <unk> dissemination of false and misleading information about the company, which started mid 2021.
One has unfortunately deterred and discourage them from advancing discussions with us.
It should now be fully clear that this board, including myself has been and continues to be fully open to strategic alternatives, if they can create shareholder value and.
And as mentioned, we continue to believe that the best way to create value, whether it's stand alone or by a strategic alternatives is to drive the execution of our strategy to grow and diversify the business and increase earnings over time exactly as we've done and we will continue to do.
I again want to extend my thanks to the entire Turtle Beach team, we're very pleased with our start to 2022 and our team continues to keep us in a position to meet and exceed our long term goals their dedication productivity and strong execution drives this business forward. Thank you to the collective turtle Beach.
<unk> team.
With that let's turn to our Q&A sticking to the quarter and the business.
And if anyone has a question you can press zero then one on your Touchtone phone. Once again, if you have a question. It's zero then one on your Touchtone phone.
And our first question comes from drew Crum go ahead.
Okay. Thanks, Hey, guys good afternoon.
First question on the second quarter sales guidance expecting it to be flattish versus <unk> can you talk about some of the puts and takes there and then separately Juergen can you address your commentary and more detail around the net positive contributions to EBIT.
For the new businesses.
Yes.
Sure. So as we mentioned drew in the prepared remarks, we expect Q2 to be roughly flat to up slightly to Q1. That's basically a result of the continued kind of economic pressures and overall gaming market weakness, which we expect to abate.
We as we get into Q3, and then produce a very good growth rate.
Starting in Q3, but then in Q4 and it really is driven by the surrounding macro.
<unk> gaming and economic conditions.
On your question on on positive net contribution margin net contribution to EBITDA. So thats for the $100 million that we're targeting this year for the new categories. We've been asked that multiple times by investors, which is why we included the information today.
Let me start with we run these businesses in a fully integrated way Theyre all gaming accessories.
All leverage supply chain sales, many parts of marketing and obviously all of the all of the G&A functions that said.
We are able to and are regularly look at the contribution margin of those businesses as part of our annual planning process. We do this so that we have a good sense of how our return on investment is tracking from these new activities from these new categories. So in the way we do that is while <unk>.
Many functions are shared there are also dedicated resources for each of the businesses in particular parts of product management and engineering functions.
As well as obviously dedicated marketing funds.
<unk> funds those types of things to support our product launches the brand all of that so we assigned all of those costs to the businesses, obviously under their gross margin line and we even by the way take if we have accounting that's dedicated to one of the businesses. That's put in there. So we basically tried to take off.
All directly associated cost that we can identify and put them into the businesses. If that number is positive, which we expect it to be this year that then makes a positive contribution to the rest of the business because the rest of the cost basically would not materially change if we didn't have.
Have those new businesses, that's how we do that calculation, it's pretty it's quite robust and as I said it is a core part of our annual planning process and the board's approval of our annual operating plan.
Great helpful. Thanks Jurgen.
And once again, if you have a question you can press zero then one on your Touchtone phone and our next question comes from Frank <unk>. Frank Go ahead.
Hi, good afternoon, everyone.
Alex and thanks for taking my questions here.
You were talking about.
Your guidance for the year I'm talking about consumer confidence being low.
Can you talk about the dynamics in Europe , perhaps.
20% business for you in.
Have some of your peers you are talking about diminishing customer confidence in the region as a result of the war.
Yeah.
Yeah, So as we mentioned I.
And I think we have over 20% of the business in international I think it's closer to 30.
Franco.
The market in gaming conditions, we're seeing are really span.
Spanning all of North America and Europe .
Europe actually fared somewhat better in the overall gaming.
Market year over year comps and part of that is probably because of the stimulus checks had an additional benefit in the United States and while countries in Europe had similar items. They may have had a bigger impact in the U S. So.
The trends, we're seeing are really across the board.
Including in Europe , and we expect them to continue although as we commented to.
To the extent that that and we believe this is happening consumers are holding back on purchases given concerns about inflation concerns about the war and all that that will typically produce some pent up demand over time as they wait and when they start feeling better. They will then eventually they'll need to want to upgrade their headset replace their products.
All of that so so we continue to have a view that the second half of the year, and particularly Q4 will benefit from a revival of the consumer demand some pent up demand as well as the specific gaming market.
Items like the new AAA launches, hopefully less constraint that council supplies as well as our own new product launches, which will all be kicking in as we as we get into Q4 should produce very positive growth for the second half of the year.
Alright. Thank you for all the color there and you also talked about obviously the elevated inventory levels here and how they are expected to rise during the summer months.
I guess can you talk about the ASP of those products into inventory or those some but are.
Across the range. So most of your portfolio or are you focusing on some of the lower end stretched balance at the end of the year.
No the.
Franco the inventory increase is driven by a couple of things first one is <unk>.
<unk> times are four to six weeks longer than normal so no matter what you do no matter what your target internal inventory levels are.
You just have to carry that much more inventory because it's all on freighters on the way over to the various countries the second.
Main driver is that we have a higher level of targeted weeks of supply in our own inventory. That's the inventory that's in the warehouses in the various regions that inventories what gets used to respond to increases in demand and basically provides a buffer that.
That target level of inventory is has been intentionally higher than normal.
Because of the supply disruptions, we've seen many times over the past two years factories will shut down there'll be clogged up ports that even add to the shipping times all of those types of things so.
Those are the two main drivers of the increased inventory is the inventory is very reflective of our overall portfolio versus somehow.
Focused on specific products or price points.
Does it.
Those both of those impacts affect everything we're doing not just certain products.
And then lastly, yes that that inventory level, we expect to creep up a bit in the next two quarters, it's kind of normal as we as we increase the shipments in preparation for the holiday, but we do expect and have a focus on.
Ending the year at a much lower level of inventory as we as we dialed back on some of the higher target inventory levels.
As some of the supply we expect some of the supply disruptions to abate over time.
Alright, thanks for all the color here again.
If anyone has a question is zero then one our next question comes from Mark Argento Mark go ahead.
Hey, John just a couple of quick ones.
You talked a little bit about the new category.
Hopefully being EBITDA positive on the gross margin side of the house those hurdles.
Products typically run at a higher gross margin.
The traditional console on a normalized basis, maybe help us think through how the <unk>.
Gross margins will probably shake out.
Across thanks, Mark nice to have you on across the categories. It's pretty comparable we have counsel gaming headsets that vary in gross margins with a target of mid 30% overall.
Is driven by that type of product. It is the price point that it's that it's competing in all of that and the same would apply to the new category. There are a range of gross margins in there.
But on average there.
Similar or within a few percentage points of the of counsel gaming headset business.
Great. That's helpful. And then just one quick follow up.
When you think about hardware availabilities for console hardware availability as we transition through this next cycle.
What do you have baked in your model in terms of expectations for availability.
Put decision Xbox is throughout the year.
Yes.
Supply chain's loosen up.
Hardware is available.
Impact your business.
Sure we our expectation is that the supply constraints will abate.
<unk> by the time, we get into holiday.
That we don't expect shipping times to go down a lot or anything like that the abatement or expected improvement in performance on supply on Xbox and Playstation is mainly driven by the fact that we've all been in this environment now for well over a year. So our lead times for ordering semiconductors all.
They are like they are crazy high, but there are no longer impeding our supply because we're used to it and we put the orders in well in advance.
And we expect that Microsoft and Sony will be doing the same thing and as as that takes effect the supply constraint should ease we can't predict it for sure obviously, but thats certainly what were.
We're assuming in the numbers and I would I think that's a reasonable assumption.
Great.
Thanks, guys.
Thanks Mark.
And our next question comes from Martin Young go ahead Martin.
Thank you for taking my question.
Two questions for you.
First can you maybe talk about any potential read on the impact you have from the China shutdowns in the second quarter do you see any lasting impact either you or your direct suppliers or customers.
Hi, Martin, Yes, very good question and very very timely.
We have a fantastic operations team and that team has managed to work around.
The constraints and the disruption so we have not seen anything major it's always a risk by the way if it if shut.
Shutdowns happened for an extended period of time or something.
Yes.
Exact reasons, why we carry somewhat higher level of inventory than we normally would because of those risks are still out there, but I really have to.
So kudos to the operations team for managing and it's been a highly volatile market now for two years.
Got it thank you and another question.
Maybe your interpretation.
<unk> inventory is that.
Alluded to retailers are reducing inventory in <unk>, how does the channel inventory look like to you.
Now, especially comparing to historical levels for instance in 2019.
Yes overall, the channel inventories did come down quite a bit in Q1 exactly as we expected that by the way you always have a double effect on sales like company revenues when the when the market is declining you have decreased sell through which affects revenues and then you have retailers.
That are reducing their inventory to stay at the same target level weeks of inventory and you had the exact opposite effect when the market goes back up they not only need to supply increased sell through they need to also increase their inventory levels to stay at six 912 weeks of inventory. So we definitely saw the.
And part of that happened in Q1.
And the channel inventory levels are overall are at at a reasonable level.
For the the market sell through that we're seeing right now and again, we did see those channel inventories come down a lot during Q1 as I suspect they have four other participants in the market as well.
And do you expect that to be down further in the second quarter.
I think it's hard to judge by the way because part of the question relies on whether retailers.
How they react to the market trends.
Historically.
Have in some cases overreacted like cut back inventory too far in a downturn.
Put too much on in an upturn. So so we don't know for sure but there their inventory levels for the current level of sell through are pretty reasonable so.
Beyond that we can't really anticipate what they what they might do.
Got it.
For Neenah.
Yes.
And that concludes our question and answer session I'll now turn it back to Juergen Stark for closing remarks.
Thank you we look forward to speaking with our investors and analysts again. Following Q2, we appreciate your interest in the company and your support as fellow shareholders. Thank you.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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