Q2 2022 Corsair Gaming Inc Earnings Call
Good afternoon, and welcome to the core Therapeutics second quarter 2022 earnings Conference call.
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 are there for especially will follow the formal presentation.
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I would now like to turn the call over to Ronald Betsy of course, there was the vice President of Finance and Investor Relations. Thank you Sir you may begin.
Thank you everyone and thank you for joining us for <unk> financial results conference call for the second quarter ending June 32022.
On the call today, we have mark <unk> CEO and.
And CFO Michael power.
Andy will review highlights from the second quarter and the business environment, Mike will then review the financials and outlook.
We will then have time for any questions.
Before we begin allow me to providing its claims 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 statements.
Actual results may differ materially from our projections due to a number of risks and uncertainties.
<unk> and uncertainties. The forward looking statements are subject to are described in our earnings release and SEC filings.
Today's remarks will also include reference to non-GAAP financial measures additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release, we issued after the market close today with that I'll now turn the call over to Ed.
Thank you Ronald and welcome everybody to our Q2 2022 earnings call.
The first half of 2022 has been challenging from a macro perspective on the other hand, we have recently started to see encouraging signs.
With the reduction in supply chain lead times shipping costs move down and consumer activity pick me up.
Our revenues for the second quarter came in at $284 million below our expectations entering the quarter.
So this does not reflect the purchases of consumers from our retailers, which was significantly higher.
As the channel inventory level normalizes, we will see a return to more balanced selling versus sell through and stronger growth.
We spent much of the second quarter, helping our channel partners reduced inventory, which was ordered on long lead times and when the inventory you're right. The consumer demand in the first half was less than forecasted.
This is consistent with the broader macro weaknesses has been widely discussed.
This is especially prevalent in Europe , whether shipping lead times the longest in.
And immediately after the start of the Russia, and Ukraine wall demand drop due to lingering consumer concerns about that war on about rising energy prices.
As we mentioned in our previous earnings calls the supply chain situations last year also caused many of the key components that gaming enthusiasts needs to build their gaming platforms and they count on us.
Unavailable or prohibitively expensive.
This in turn caused many consumers to hold off building new gaming space.
I am pleased to report that the shortages are now generally over the most expensive items graphics cards, and Cpus and now readily available.
So we see consumers starting to build and upgrade the gaming Pcs again at higher levels than last year as we move into the second half.
This is more in line with the strong underlying fundamentals of our long term business and why we remain so excited about our long term opportunities.
In fact doing Amazon Prime week, this year, which moved to July we saw significant growth in this area with any modest increase in promotional spending.
And consumer sales for components used to grow gaming Pcs were higher than last year in both Europe and the U S.
We expect this trend to continue during the second half.
Our inventory levels in the channel and in our warehouses is now coming down small reasonable levels and we expect that during the second half revenues will be more in line with consumer sell out from our channel partners.
Let me take a minute now to update you on some of our significant new products introduced in the second quarter.
The most notable is our announcement of our new gaming laptop the Voyager <unk> hundred.
Designed in partnership with AMD.
Which combines high performance gaming features with streaming technology from our El Gallo.
While the majority of our revenue in the past as companies use yes, we like to build the PC gaming platform some components.
There is a growing market for gaming laptops in fact is the fastest growing area in gaming platforms.
This laptop as being the single highest starting the investment in our company's history.
We expect that we will see significant growth at our prebuilt gaming platforms due to this launch.
Install shipments during the third quarter.
We also launched new gaming keyboard the K 17 many.
60% keyboard designed to allow gamers customized switches and key caps and this is an area that we see significant growth in the basket.
And we also launched a partnership with Nvidia.
We incorporated the new broadcast suite of software onto our streaming products, allowing streamers to significantly enhance that bolthouse quality.
We are looking forward to the release of new graphics cards from Nvidia and use CPU platforms from AMD during the second half, which.
Which we believe will stimulate new platform builds an increased gaming hardware such states.
While there was clearly a surge of activity in consumer spending in 2020 in 2021 due to people spending more time at home during the Covid pandemic, we now see that spending is higher now than.
And before the pandemic started.
Every category that we're in.
Which indicates that new game has continued to come into the market looking for products that help their gaming experience.
This all leads to be very encourage pretty exciting 2023 and continued growth.
Let me now turn the call over to our CFO , Michael Potter for details on the financials. Michael. Please go ahead.
Thanks, Andy and good afternoon, everyone and.
In Q2, we delivered net revenue of $283 $9 million.
This compares to $472 $9 million in Q2, 2021, which was a record second quarter for Corsair that benefited from stimulus checks and pent up demand our channel partners continued to reduce their inventories in Q2 2022 to current and expected consumer demand.
And the reduced transit and lead times.
Sales to the European region continued to underperform the company as a whole and contribute about a quarter of our revenues well below the historic average in the high 30 percentile.
As Andy mentioned earlier, we're starting to see positive signs for example, we continued to see sales out from our channels partners inventory exceed our sales into them. This indicates channel inventory is gradually coming down and the inventory overhang is moving towards a more normal level at which point our sales were right.
As backup to match the level of consumer demand.
Turning now to our segments, the gamer and create a peripheral segment contributed $89 million of net revenue during the second quarter, a decrease of 42, 6% from $155 $2 million in Q2 2021, the Gamer and creator peripheral segment net revenue contributed $31.
3% of total net revenue a decrease of 150 basis points from 32, 8% in Q2 2021 the.
The gaming components and system segment contributed $194 9 million of net revenue during the quarter a decrease of 38, 7% from $317 7 million in Q2 2021.
Over half this revenue came from memory products, which contributed $99 1 million.
Overall gross profit in the second quarter decreased by 72% to $36 $5 million from a record $134 million in Q2 2021, the decrease compared to Q2 2021 was primarily driven by reduced revenues.
An incremental $19 5 million inventory reserve charge.
Kris logistic costs and a return to a more normal promotional activity.
Gross profit margin was 12, 8% compared to a record 27, 6% from Q2 2021, mainly due to significant increases in logistics costs, especially ocean freight higher promotional activity and lower absorption on reduced volumes.
Adjusting for the increased inventory overhang reserve charge gross margin was just under 20%.
We are working to offset the impacts of inflation by raising prices where appropriate.
Expect to continue such actions in Q3.
Logistics cost headwinds have continued to moderate during Q2, so as discussed before there is typically a four to five month lag before these cost reductions are reflected in our P&L as inventory turns.
The gamer and create a peripheral segment gross profit was $10 6 million a decrease of 87% from $54 $6 million in Q2, 2021, primarily driven by a decrease in revenue the inventory reserve charge increased supply chain logistics cost.
And a return to more normal pre pandemic level of seasonal promotions.
Profit margin was 11, 9% compared to a record 35, 2% in Q2 2021, largely due to the previously mentioned inventory reserves supply chain and logistics costs and rebate levels adjust.
Adjusting for inventory reserve charge gross margin was about 28%.
The gaming components and systems segment gross profit was $25 $9 million.
A decrease of 65, 8% from $75 $7 million in Q2, 2021, primarily driven by the decrease in revenue in the same periods and increased logistics costs.
Gross profit margin was 13, 3% compared to 23, 8% in Q2 2021 adjusting for inventory reserve charge. The gross margin was around 16% our memory products margin in this segment was 9% for the quarter.
Second quarter SG&A expenses were $73 4 million slight decrease of eight 5% compared to $82 million in Q2 2021, the impact of outbound freight costs due to reduced revenue was offset by increases in outbound ocean and air freight rates.
Adjusted operating loss in the second quarter of 2022 was $14 2 million a decrease of $63 5 million from operating income of $49 $3 million in Q2 2021.
Second quarter net loss was $51 8 million of which $52 million is attributable to Coursera Gaming Inc. This represents a loss of 62 cents per diluted share as compared to net income of $27 7 million or 28 cents per diluted share in Q2 2021.
There was an impact of approximate eight on EPS in Q2, 2022 associated with either play largely due to accounting for put rights.
Second quarter, adjusted net loss was $19 million or <unk> 20 per diluted share as compared to adjusted net income of $35 7 million or <unk> 36.
<unk> per diluted share in Q2 2021.
Adjusted EBITDA for the second quarter of 2022 was a loss of $11 million compared to earnings of $51 6 million for Q2 2021.
Turning now to our balance sheet.
We ended the quarter with $35 9 million of unrestricted cash an increase of $6 $8 million over the last quarter no draw on our $100 million revolver and $246 $3 million of debt at face value.
We spent $7 6 million on Capex, which included $3 $4 million related tour relating to our new headquarters in Milpitas borrowings strategic investment opportunities, we look to bring our cash balance to Q3 or Q4 2021 levels overtime.
2022.
Has so far been challenging and we've already taken actions to adjust to the lower revenue level in the first half of 2022 and our expectations for the remainder of the year.
We have proactively taken actions to reduce operating expenses, including a small layoffs and we have adjusted product ordering and took a $19 5 million reserve against potential inventory overhangs, we believe our business fundamentals remain strong with a positive long term outlook and we continue to build.
<unk> at the South Dakota gaming PC market will begin to accelerate in the second half of 2022.
Spite the headwinds we've been facing we have continued to invest in product development and have and will continue to release innovative in what we believe to be industry leading products.
In terms of the full year of 2022.
We are updating our outlook as follows we now expect total revenue in the range of 135 billion to $1 $45 billion.
Adjusted operating income in the range of 35 million to $50 million and adjusted EBITDA in the range of $50 million to $65 million.
There are some changes to the additional modeling details underlying our outlook.
We believe that we continue to be in an inventory correction, but further advanced than in the first half of the year can be particularly we believe that components inventory in the channel is close to normalization and this should help lift our second half revenue in combination with GPU starting to become reasonably price and the release of Amd's New am five platform.
Some of the largest and most successful retailers have struggled to actually call. The right inventory levels and believe that we have appropriately you responded to changing circumstances and the changes in market demand caused by inflationary pressures revenue has been quite difficult to forecast as we believe that the end market demand has not fallen as much as our order from our customers.
<unk>.
Like inventory logistics cost of slowly reduced during the year and will be a positive impact on gross margins in the second half of 2022 compared to the first half.
We will continue to invest in new product development in order to maintain a rigorous release schedule.
Moderate other operating expenses in tune with the current business environment.
2022 annual EBITDA range is not a good indication of a more normalized run rate.
As the lower than expected first half is essentially not contributing to the annual number.
With the fed rate hike cycle in progress forecasting interest expense is more difficult assuming no further debt paydown. We now expect interest expense of approximately 3 million to $4 million per quarter.
Our effective tax rate of approximately 15% to 20% for 2022.
And full year weighted average diluted shares outstanding of approximately 98 to 100 million shares.
To summarize our Q2 results were below our expectations, but we're starting to see signs of improvement in our channels. We expect that the second half will show improvement over the first half, but at lower levels than we expected at the start of the year in particular GPU prices have moderated in Gpus are generally available now to our <unk>.
Customers that coupled with the expected exciting product releases from us for our <unk>.
Product lines, plus new AMD motherboards, and Nvidia Gpus should provide a good foundation for improving results in our components business.
We've seen a slow easing of logistics costs through the reduction of container rates also through the through less need to airfreight products higher revenue, where help margins as absorptions will improve and our mix, including new product releases should improve overall margins through the second half.
Consumer and demand continues to hold up we expect at the end of 2022 will provide a good foundation for 2023.
With that we're now happy to open the call for questions. Operator will you. Please open the line for Q&A.
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Your first question comes from Mario Lu with Barclays.
This is jesse on for Mario Thanks for taking my questions two from me.
So first in light of weaker than expected trends in the second quarter and you guys talk a little bit about market share gains are continuing and how the competitive landscape has shifted in both the components and peripheral peripheral segment of the business.
And then second you guys mentioned, some price increases to offset margin pressure with consumer wallet starting to tighten against the current macro.
Starting to see customers trade down and trying to in terms of.
Product Asps or do you think.
The premium gaming market is fairly insulated from a recessionary type environment. Thank you.
Yes.
Yes.
So in terms of competitiveness.
We are very competitive on.
Components in memory is that we increased our market share over the most recent months.
In fact in memory.
In the U S about 70% market share. So that's that has done very well.
Gaming peripherals, we obviously have some bigger competitors.
Who have similar inventory overhang.
In the channel and some of.
<unk> been very aggressive clearing inventory.
How to balance margins and revenue on triples.
So.
We step back a little bit of market share because of that.
We expect to gain that back.
It was cleared out their excess inventory.
In terms of pricing.
There's been a few things going on pricing.
Little bit on some of our bulky items things like test cases.
Because of shipping and in some cases because of tariffs.
That does no.
So.
Tend to sort of stopped consumers buying anything about if you find the components for building a two and a half thousand gaming PC.
Very focused on things like graphics cards, the Cpus, which the less expensive items and those folks have been coming down recently.
I think so.
The other part of your question.
Yes, it was always saying people trade down.
And the answer is not really.
Other than the fact that we've got competitors discounting heavily and so people are able to.
To pay a little bit less in general we've seen that across the categories. Like this enthusiasm categories people tend to prioritize those over some of the other spending we're doing.
Our next question comes from Rod Hall with Goldman Sachs.
Yeah, Hey, guys. Thanks for the question.
I guess I wanted to come back.
Michael to the $19 5 million just kind of check that you have to have reserve against inventory.
Could you give us any more detail on that like what kind of inventory you're reserving against is it mainly peripherals youre worried about or is it kind of across the board or <unk>.
Just any more color you can give us on that and why you are taking the reserve here.
Obviously, there is an inventory correction, but I guess, what youre, saying.
You think theres some risk that maybe the inventory doesn't sell through any end or or something like that but just kind of want a little more color on that and then I'm going to follow up.
It's more heavily weighted in the peripheral those areas in the components area and the peripheral it has.
Got it more variations are products that come out a little bit more quickly than components. So we're for our sales out are a little slower than you expected and you have new products coming out later in the year and the beginning of next year. If you wanted to get rid of the old product a little faster. So that was more of what we looked at when it came to taken the reserve realizing we've got lower sales.
Prices, if you wanted to move quicker.
Why is it going to be replaced by a better product in the future now that happens all the time and consumer electronics companies, you kind of expect us to have new and better stock every year and we just have to adjust our pricing strategies.
Fit with channel inventory and end market demand.
Okay, Yes that makes those but and then I wanted to come back maybe Andy and ask you about the you guys are cutting the guidance that you are pretty optimistic on Gamer PC builds later in the year and I wanted to kind of try to juxtapose. Those two things together are you, saying that most of the pessimism here in the.
The reduction in guidance is peripherals or do you also think.
Just help us understand kind of how you see the back end of the year developing as we sit here today.
Yes. So we are already seeing a strong pickup in activity around <unk> billion get Mpc's. Most of this is because graphics cards, they will come down to MSRP and in some cases.
Below MSRP because NV.
In video, we think we'll be launching a new series of congrats Scott.
Yes.
So they've got to clear out.
Inventory.
So that's the that's the positive side clearly in Europe , we still have a market that's a little shell shocked from the rule and they are experiencing higher inflation that we are here.
So that naturally will reduce a little bit of spending so those two balanced together what leads us to the.
So the numbers so we what.
While we are pleased about is the now with through the pandemic completely we can kind of really see what's happening.
The.
In 2020 in 2021 look at we'll start our homeland gaming law, but in every category. We're in the casino itself is quite significantly higher now than it was pre pandemic.
So now we can look back over the last few years of sort of getting an average growth.
That is pretty compelling.
That's great. Okay. Thanks, a lot Andy appreciate it both of you. Thank you.
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Next question comes from drew Crum with Stifel.
Okay. Thanks, Hey, guys good afternoon.
Andy can you remind us what the growth profile and Tam or for the gaming laptop category and just to go back to the previous question.
To clarify this are you suggesting that the.
The self built gaming Pcs for your business grow in the second half year on year, and then I have a follow up.
Yes, we asked a couple of questions.
So PC market clearly will be growing second half of.
This year last year, because second half last year graphics cards with 150% of MSRP.
If we get another war, starting we would expect that to continue to rise and we've already seen the start of that Prime day was really or prime week. If you like was the first part of it and we saw quite significant growth this year compared to last year. So that now the gaming laptop market.
We talked before about the total platform market.
And the laptops.
Very very rough terms, it's almost 50 50, and what Youll get about a $40 billion to $50 billion market.
Of the gaming.
PC market vessels are split 50, 50 between self built and.
Prevail.
Laptop is pretty much 100% pre bill in Calgary DIY laptop market. So it's a pretty good size now the vast majority of laptops gaming laptops and talking about thousands of $300. We're not going to be really targeting that this is going to be much more likely to do with our origin assistance business way with targeting the top end of the mall.
Is it more of a two and a half to $3000 level, but that's where we're coming out with as you would probably say is packed with features mechanic pays.
And.
Extreme extreme that features in it so we think it's going to be a winner.
Pretty conservative in terms of.
Now, we're taking that to market will be conservative this year.
And then next year, you'll see with exceptions like.
And it is good then we'll double down.
In terms of specifically the Tam for that very high end gaming laptop area, we estimate about $2 billion.
And that's based on price more than anything what they segregate it until that Pat segment that our laptop is coming into the $2 billion Tam.
Okay got it and then Michael I think you mentioned the company's proactively taken actions to reduce Opex and you mentioned a modest layoffs.
Is there more cost to be taken out of the business, where we see more activity in the second half.
I think at the current run rate, we're expecting either they continue to be very careful about hiring and where we spend we're talking about the level. We expect we need to be obviously, if things deteriorate more from where they are we'll take more action, but I do think that we're better positioned now for the second half.
Adjusted to the lower revenue that we had in the first half.
Okay. Thanks, guys.
Yeah.
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Next question comes from Franco Granda with D. A davidson.
Hi, Good afternoon, everyone. Just a couple of questions from me today.
Could you, perhaps give us some clarity on whether the jump in Prime day sales are prime week sales were due to heavier discounting than previous years or real demand and then second.
I might have missed it but did you provide an indication of where you think revenues would have come in at I guess under our normal inventory environment.
Okay.
So two questions.
I think the.
The second question was if ourselves in we're matching our sales out what would that delta is that what you're asking.
Correct.
Yeah, So I would say on a worldwide basis, roughly 20% it does vary by country.
I think the.
Having the biggest but that's probably it.
A reasonable number as best we can estimate.
And the first question was about the Prime day discounts.
There is excess over more than normal discounts in prime day, we actually didn't participated strongly in some categories. Because we are a product or a high end and the customers. We aim the math properly at discount taking customer. So we refer to as strategic in a few areas and those areas did well, but we didn't super heavily discount.
Compared to prior years now.
That's helpful. Thanks.
Star One if you would like to ask a question.
Okay.
Thank you I would now like to turn the floor over to Andy Paul for closing remark.
Okay. Thank you.
Sure.
Hello, and thanks, everyone for joining joining us on the call today and for your continued support.
Any follow up questions. Please contact our Investor Relations Department, and we look forward to updating you next quarter.
Thanks and have a good evening.
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.
Okay.
Yeah.
Okay.
Okay.
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