Q2 2023 Corsair Gaming Inc Earnings Call
Good afternoon, and welcome to the Corsair gaming.
Second quarter 2023 earnings conference call.
Today's call is being recorded and your participation implies consent to such recording.
At this time, all participants are in listen only mode.
Brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star one on your telephone keypad with that I would now like to turn the call over to Ronald benzene Corsairs, Vice President of Finance and Investor Relations. Thank you Sir please begin.
No.
Thank you.
Everyone and thank you for joining us for <unk> financial results Conference call for the second quarter ended June 32023.
Today, we have Chris.
Coursera, CEO and Paul and CFO Michael power.
Andy will review highlights from the quarter, Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin allow me to provide a disclaimer regarding forward 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 our data.
Forward looking statements.
Actual results may differ materially from our projections.
A number of risks and uncertainties the risks and uncertainties. The forward looking statements are subject to are described in our earnings release.
SEC filings note that until our 10-Q has been filed these numbers are preliminary today's remarks will also include references to non-GAAP financial measures additional information, including reconciliations between non-GAAP financial information to the GAAP financial information is provided in the press release issued after the market close.
With that I'll now turn the call over that.
Thank you Rolf and welcome everyone to our earnings call.
The key takeaways for Q2.
First our revenue exceeded expectations for Q2 growing nearly 15% on a year over year basis.
Consumer spending on gaming hardware is holding at significantly higher levels than pre pandemic.
We believe that even with a challenging macro level environments.
We're seeing increased activity due to new game as they came into the mix in 2020, now starting to refresh and upgrade their gear.
Second gross margins showed strong growth with healthy inventory profiles and reduce freight costs.
Third we're now active again in M&A, which is a key component of our growth strategy.
Strong cash balance and low leverage is now, allowing us to pursue M&A opportunities with the latest announcement made in July we agreed to purchase dropped incorporated.
Taken together, we expect the gaming market to continue to be healthy for the balance of the year.
With new game titles and lower costs GPU cards in the market.
And we expect to continue to take market share with our continued new product rollouts.
Let me take a few minutes to expand on these points.
So first I am very pleased to report that our results for the second quarter, we exceeded our original expectations.
The gaming hardware market is healthy and appears resilient to macroeconomic effects driven by new games and new graphics cards launching.
For components used for building gaming Pcs, depending on region, we see a 24% to 28% increase from Q2 19 to Q2 'twenty three.
The gaming peripherals, we see an overall increase of 57% to 63% this year compared to pre pandemic.
No it's reasonable consider reasonable to consider current consumer activity as a post pandemic baseline.
Since there's no evidence of increased current activity due to COVID-19 related stay at home behavior.
Based on everything we're seeing and hearing we believe this increased activity is coming from the surge of new gaming hardware buys to enter the market during 2020 in 2021.
Which we now refer to as the Covid bulge.
Since this capacity is now four years that would lead to a net CAGR from pre pandemic to post pandemic.
As approximately 5% to 6% for PC platform building and 12% to 13% for gaming peripherals.
This is roughly in line with what we shared with investors over the years as expected growth rates for these categories and we think it's reasonable to expect that this will continue over the next few years.
Second margins continue to improve in all categories.
In our components category, we gained significant market share in 2022.
That on top of a healthy market meant that we were running short of inventory in many of our top skus.
Requiring us to airfreight in products, so our hubs.
We largely caught up with inventory names by Q1 dollars 23, and so in Q2, we had the benefit of lower freight costs and healthy inventory positions.
Thus driving up gross margins.
In gaming peripheral categories, we have had some delays in getting a new flagship products out.
We also noted in previous earnings reports that we appear to clear excess channel inventory faster than our competitors and so we decided to hold back from matching their high levels of discounting.
Both of these things combine to cause us to lose some market share over the near term.
But competitive discounting is now largely calmed down.
For example, we noted during prime day that while we had prices at reduced levels of discounts compared to previous prime days, we actually outperformed compared to the total category sales with Amazon in almost every one of the categories that we track.
So we saw that in Q2, while our gaming peripheral revenue was less than expected.
By the end of the quarter, we are experiencing much improved margins are much better sales momentum going into and coming out of Prime day and prime week.
As our latest new flagship products get launched during the second half of this year and into early next year.
We would expect to continue to gain market share and increase margins further.
We are now active again on the M&A front as we benefit from our strong catch cash balance and low leverage.
There are a lot of M&A opportunities out there and we have been disciplined in evaluating companies we've.
We have acquired six companies to date.
I have a very good track record.
Our latest announcement was in July that we agreed to acquire drop.
<unk> known as mass drop a commute.
<unk> based ecommerce companies specializing in customized DIY keyboards are key caps and many other enthusiasts and <unk> products.
Personalized keyboards that can be modified by the consumer was one of the fastest growing trends in the gaming peripheral space.
<unk> is actively engaged with millions of enthusiasm to support his products and building showcase gaming battle stations.
Drop has proven to be one of the leaders in this space and with <unk> global footprint, we expect to significantly grow the <unk> brand worldwide.
We expect some significant opportunities in synergies here, both by offering custom versions of our products on the job site as well as introducing some of the popular products into our worldwide channel.
Our target is for this to mirror the success, we have had with El Gallo.
As a reminder, we acquired <unk> about five years ago.
We've increased our revenue by more than three times and we've expanded the brand into a totally new revenue areas, including microphones cameras and lights.
We also just did a soft launch of our marketplace a few weeks ago.
And expect this to grow over time.
The new stream deck marketplace will allow third party plug ins and applications development.
Our world famous stream deck to be sold to content creators directly from the El Gallo website.
Developers will now be able to easily access ocado is large and rapidly growing stream deck install base.
We believe that these added plug ins and applications will dramatically increase our installed base of streams that uses an open a significant new revenue stream for us as we make stream that can even more useful tool.
Overall, we're off to a strong first half.
And we expect a further improvement in the second half of 2023.
We expect the gaming market to continue to be healthy for the balance of the year.
And we fully expect to build on our leading market share in the categories. We serve.
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.
Pleased with the substantial financial improvement in Q2 led by revenue growth steadily improving adjusted EBITDA and a more balanced inventory, we exceeded our near term expectations for gross margins and we continue to be operational cash flow positive while investing modestly in inventory to support this.
Expected stronger second half of 2023.
In terms of the specifics Q2, 2023 net revenue was $325 4 million.
<unk> $283 9 million in Q2 2022 for the first six months of 2023 net revenue increased two 2% to $679 4 million from $664 6 million in the year ago period.
European markets continue to be softer than Americas, but are improving and contributed about 32, 3% of our revenues, which is an increase from 32% in Q1 2023.
Turning now to our segments.
The Gamer and creator peripheral segment contributed $78 8 million of net revenue during the second quarter compared to $89 million in Q2 2022 for the first six months of 2023 Gamer and creator peripheral segment revenue was $167 7 million.
Compared to $223 1 million for the first six months of 2022.
The gaming components and system segment contributed $246 7 million of net revenue during the quarter, an increase of 26, 6% from $194 $9 million in Q2, 2022 memory products contributed $108 9 million in Q2.
To 2023 compared to $99 1 million in Q2 2022 for the first six months of 2023 gaming components and systems segment revenue increased to $511 7 million from 441 5 million in.
In the first six months of 2022.
Revenue from memory products, increasing to $242 million from $231 3 million.
Overall gross profit in the second quarter was $82 8 million.
Compared to $36 5 million in Q2, 2022, which had lower revenue and then excess inventory reserve gross margin increased 25, 5% compared to 19, 7% in Q2 2022 without the effect of the excess inventory reserve.
Ongoing improvements in freight costs as.
As well as new product introductions for the main reasons for the improvement overall gross profit increased to $168 2 million for the first six months of 2023 compared to $127 2 million in the first six months of 2022.
The game room creator peripheral segment gross profit was $25 5 million.
Compared to $10 6 million in Q2 2022 gross margin was 32, 4% compared to 11, 9% in Q2 2022, we benefited from a further reduction in excess promotions by some leading competitors in gaming peripherals in Q2, which we continue to believe will lead to further.
Improvements in margins later in the second half of 2023.
The gaming components and systems segment gross profit was $57 3 million an increase of 121, 3% from $25 9 million in Q2 2022 gross margin was 23, 2% compared to 13, 3% in Q2 2022.
Our memory products gross margins in this segment were 14, 6% for the second quarter compared to 9% in Q2 2022.
Second quarter, SG&A expenses were $70 million or four 7% decrease compared to $73 4 million in Q2 2022, driven in part by reduced freight rates. This reflects the impact of some prior 2020 to head count reductions along with her.
Continued close management of all expenses as we support revenue generating areas second.
Second quarter, R&D expenses were $15 $6 million down.
Down about 13, 5% compared to Q2 2022, as we've continued to prioritize our investments in our new products GAAP operating loss in the second quarter of 2023 with $2 $7 million compared to a GAAP operating loss of $55 million in Q2 2022 as noted.
Earlier, the year ago period included the impact of the excess inventory charge.
Second quarter adjusted operating income was again, a bright spot for us increasing to $15 9 million compared.
Compared to an adjusted operating loss of $14 2 million in Q2 2022 <unk>.
Adjusted operating income increased to $34 million for the first half of 2023 from a loss of <unk> 9 million in the first half of 2022.
Second quarter net income attributable to common shareholders was $1 1 million or <unk> <unk> per diluted share as compared to a net loss of $59 4 million or a loss of <unk> 62 cents per diluted share in Q2 2022.
On an adjusted basis second quarter net income improved to $9 8 million.
Or <unk> <unk> per diluted share compared to an adjusted net loss of $19 million or a loss of <unk> 20 per share in Q2 2022.
For the first six months of 2023, adjusted net income improved to $21 8 million or <unk> 20 per diluted share from a loss of $9 8 million or a loss of <unk> 10 per share in the first six months of 2022 finally, we increase the second quarter adjusted EBITDA.
To $17 8 million compared to an adjusted loss of $11 million for Q2 2022 for.
For the first six months of 2023, adjusted EBITDA increased to $38 3 million from $4 4 million.
In the year ago period.
Turning now to our balance sheet.
We ended Q2 with a cash balance of $184 million shortly.
Shortly after quarter end, we invested in growth via our acquisition of drop which Andy provided details on earlier this will be reflected in Q3, but the acquisition cost was not significant it was in the low double digits of millions of dollars.
We ended Q2 with the $228 million of debt at face value and our 100 million working capital revolver remains undrawn and fully available.
Overall, we expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves.
We are pleased that the first half performed slightly above our expectations and we believe that we're well positioned for the second half both channel and our inventory are in a healthy state.
Although we are closely monitoring this because of economic headwinds from high interest rates and inflation affecting consumer confidence. We continue to believe that we have substantial white space to sell into and room to recapture market share as excess discounting in gaming peripherals eases and as new products continue to be introduced.
In terms of the full year 2023.
Reiterating our previous outlook of flat to up revenue. We continue to expect total revenue in the range of 135 billion to $1 $5 5 billion.
Adjusted operating income in the range of $75 million to $95 million and adjusted EBITDA in the range of $90 million to $110 million with that we're now happy to open the call for questions. Operator will you. Please open the call for Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear three Tom prompt acknowledging your request.
And your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q. If you are using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Aaron Lee with Macquarie. Please go ahead.
Hi, good afternoon, and thanks for taking my question.
Wanted to start with the guidance range, which you obviously noted in the release incorporates a softer macro.
It seems like Theres greater confidence out there that the U S will avoid a hard landing so could.
Could you just talk about the degree to which a stronger than expected macro environment would impact where you land in your guidance range versus some of the things that you can control.
Well, let's be clear.
If the if the economy improves obviously, our revenue go up and vice versa. So I think that the since we had at the beginning of the year, which was the market would be roughly flat.
Is.
What we think about today, so that Hasnt really changed I think the sense is that the market was slightly down the consumer marketing general and.
And you've seen that across different industries little parts are down some are flat, but certainly a little little further down than we thought and we think second half will be a little further up so I think it's going to end up.
He has the full year is probably going to be flat as we expected.
So that.
Overall market the range has.
Decent possibility of growing year over year, yes.
Yes understood fair enough.
As a quick follow up you guys have done a great job expanding the course here ecosystem.
Like with IQ Link recently, and obviously you had the acquisition of drop.
As you think about your peripheral ecosystem can you talk about any white spaces that are left.
Yes, there's quite a few actually.
Couple of things were pretty interested in.
One is.
One is mobile gaming.
And at the moment mobile gaming.
Is largely done on the phones I mean thats the attraction of it because the nook business as needed, but there is a growing opportunity for <unk>.
Wrap around.
Controllers.
Can put a photo of an iPad in it it's a relatively small market now, but we're watching that carefully to see how that evolves, especially with game pass which allows you to plan on the same game on different platforms.
That's one.
Interested in Sim racing.
We see that as a.
<unk>.
This is <unk>.
Full simulator.
As to.
Send you an F one driver.
That has grown significantly that market, especially in the U S. After the drive to survive came out which has got everybody interested here in F. One that's already pretty big in Europe , but that is starting to expand.
And Thats, a nice market for us to move into because.
And you need a system that you need a whole bunch of festivals like occasional seats and pedals and wheels and that sort of thing. So we're pretty interested in that market.
And obviously, we've always been looking at.
VR doubles that at the moment, we don't think there's a big opportunity to make money on VR headsets still a very early market, but we're watching that space carefully as well.
Fantastic Thanks for the color.
Your next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.
Hi, guys. This is lane on for Zach Thanks for taking my questions.
I just wanted to you on the chart acquisition.
Could you just speak to what the deciding factor.
That led us to.
So acquiring drop and then how should we be thinking about the timing in terms of integration and the synergies that you've seen.
Yes, so that the main reason we bought <unk>.
As <unk>.
Possibly or probably noticed most of the acquisitions, we do a direct to consumer and drop is no exception.
Congrats to consume and that's because over time, we want to expand our direct <unk>.
Connection with consumers, so that we can sell them multiple items.
Most of the.
Products that we sell to consumers through the channel.
As one of the time and obviously in the gaming platform and gaming PC.
Five to 10 different things that you can sell somebody.
So that's the first thing is a strong e-commerce platform. The second thing is it was a community based enthusiast.
E Commerce player and so a lot of the things that they are selling well being sold so very similar customers.
But we already have but.
Slightly outside the traditional people that are building gaming PC. So it kind of expands our market, but in the same genre.
And thirdly, they've done a really good job with.
Mechanical will equal DIY keyboards. So there is a growing trend among enthusiasm actually.
Some people that would never even think about gaming or building a gaming gaming platform, but just like to have something different on the desk.
And as you keep holds that you can have a variety of different.
Which is key caps and then you can change them like close every six months.
So when we looked at that.
Overall packages is pretty interesting and that leads us into the synergy aspects. Obviously, we have an enormous footprint.
Throughout the world.
Mostly in the channels. So what we want to do that is take a lot of the key skus that they've got to put them into the channel with the expectation that we can then continue to sell things like different key caps to those customers directly.
And then we'll take some of our products that are difficult to sell through the channel.
Like.
Accessories cables that sort of thing and we will run those through to the job site.
In terms of.
Acquisition.
We've got a pretty as six months.
Scheduled out.
Integration will be largely trying to.
Combine activities save some some opex.
The revenue synergy.
Which I'm more excited about is.
Is going to be ongoing was starting that immediately so we're looking at skus now that we can put into the channel.
Some of that takes some time.
The product into best buy the next window is probably Q1.
So does that will that happen over the next year or two.
Okay, great. Thank you.
Your next question comes from drew Crum with Stifel. Please go ahead.
Okay. Thanks, Hey, guys good afternoon.
On your peripherals business can you comment on your retail inventory position heading into the second half and the conversations we're having with retail partners and their willingness to restock inventory levels.
Into the holidays, and then I have a follow up.
Yes, I mean.
Q2, the time, we got into Q2, it's pretty neutral I think we've in terms of our sales in versus sales out I think we've.
Said on previous calls that we largely cleared up our channel inventory last year.
Overall to the tune of about $100 million.
Which we thought was in excess.
No.
And so this year has been generally neutral.
Obviously depends on category.
Yes, I wouldn't say, we were concerned about having too much inventory in the channel at this point.
Okay, and then Andy just a follow up on the drop acquisition I think there was a comment in your preamble, suggesting that you hope to replicate your experience here with similar to El Gordo is that more of a qualitative comment or would you aspire to grow sales three times as you have with <unk>.
The ocado asset thanks.
Well, both I mean.
We still obviously, including that in the kind of guidance because we've been together for five minutes, but I think there's a big opportunity.
I don't know how big that is yet because the.
The DIY keyboard market is very new.
And there is lots of small players. So it is similar to when we bought El Gallo and the streaming market was very small.
We're anticipating that this market will grow at a fair crack, but it's way too early to say, whether this is something we could double sales or triple but we obviously believe we can make some significant impacts.
Okay got it thanks guys.
Your next question comes from Colin Sebastian with Baird. Please go ahead.
Yes. Good afternoon. This is reis on for Colin Hey, Mike and Andy.
I guess, we have two questions one would be.
Could you maybe just talk about the keys that the key to success that worked with <unk> and the products there.
Maybe some of the things you did more on the internal side that wouldn't be present to investors that you could maybe replicate with drop in then.
Maybe just looking at the guidance what what is.
Looking at the environment today, what is required to kind of maybe get to the upper end. The upper end of the guidance range or or what is the environment need to look like for that to happen.
Alright, well that's it.
That's it.
There's one at a time.
So what we did with <unk>.
Was fairly straightforward and it's actually typical to most of the startups.
So let me back up a second so.
Most of the small companies, we buy and I'm talking about sub $50 million companies spin off their life battling cash flow significant a significant amount of the overhead is is in is in G&A.
And so if he is not able to focus on purely bringing products to market.
And that's no different than job, it's been a it's been a bit of a struggle for that company over the last few years.
To be cash flow positive. So they spend a lot of that time is trying to raise money and that sort of thing. So all that goes away, allowing them to completely focus on.
On the set products, we're bringing to market that was very similar to <unk>. When we when we did the El Gallo carve out.
We left behind the G&A because it was a it was a company with two divisions, we bought one of them.
So that's the first thing is focus the second thing is we we took a lot of that key products into a much wider channel so with El Gallo within about three months, we had some of the key products in every single best buy store.
And we're obviously going to try and retrofit replicate the same thing.
It's just that you'd never know how fast this African rollout.
<unk>.
Or is it too late now to sort of get into pre <unk>.
2023 Holly.
Situations those things usually planned out in advance.
So yes, we are going to try and do exactly the same thing. It's just a question of how big the market is and how fast the market grows.
Now the second thing was the second question was on guidance.
What's going to happen in the environment to hit the high end of.
High end of our guidance and I would say is what we were talking about earlier, we're looking we're looking to see how how much the market recovers how much. It grows as I said earlier, it's significantly above pre pandemic levels and it feels like we're sort of getting to a point where generally the economy is looking at a soft landing and I'm already seeing.
Pretty.
Good results from Prime day.
Both that Amazon total in our results at Amazon. So it does feel to me as though the market the market started off being a little under water from last year, the beginning of the year and now it's much more neutral.
Now if that continues to go positive and goes positive in <unk>.
Large way and we do what we're supposed to do and gain market share.
To bring our products and I'm sure we'll be at the higher end if if the market is much much flatter.
Then that becomes more difficult.
Yeah, Yeah got it and maybe just as a follow up to that can you maybe just provide some color on where the promotional environment stands with your competitors in the channel and what you're seeing there. Thanks.
Yes, so I mean.
On.
In peripheral as well.
It's a bit more seasonal and a bit more of a spike you tend to get on Prime day, and black Friday and that sort of thing.
There was much less discounting going on.
With our main competitors.
Than previously and so we actually found that with less discounting.
We did a lot better than last year.
So.
That meant.
Lower discounts were much more attractive compared to people knocking things off et cetera.
So I presume that happened.
Cause competitors largely.
Taken care of the inventory bubble that they had and then getting to the point, where they didn't see the need to run clearance all the time.
Thank you goodbye.
Your next question comes from Doug Crudes with TD Cowen. Please go ahead.
Okay.
Hey, yes.
There was a pretty big industry release slate in Q2, and I was just wondering if you could comment to any games that you think might have helped push either PC builds or peripheral sales and then just looking ahead to Q3, I think star fields coming out, which is probably a big PC title and just your view on whether that could be an important gaming driving PC builds. Thanks.
Yes, I think the one that everybody was talking about really was Diablo four.
Over the last quarter, what are you seeing helped.
I put in the.
In the deck and have you seen that yet.
IR website.
The eight new games that we've listed.
And I think it was in <unk>.
You have call of duty coming out at the end of the year.
Which will be pretty big cyberpunk folk is releasing.
Something in September Yes staff held in September .
<unk> two is listed as summer of 'twenty three.
That would be huge.
So yes, there's a lot of games.
But I think it's the first half for with Diablo was the biggest one and I suspect.
Call of duty and counterstrike for second half.
I think the most interesting thing is if you look at the required specs for the new games coming up there.
They are much higher than they have been there if you want to get all of the eye Candy and the extra features youre really targeting a much higher spec PC more memory and much higher in video card, which means more power requirements. So it fits pretty well into into the suite of products that we do.
Yes, I think that's a good point.
Great. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Your next question comes from Mario Lu with Barclays. Please go ahead.
Great Hi, this is Jack all around for Mario Thanks for taking my questions.
I was just wondering whether you could talk a bit more about.
Some of the partnerships you now have.
And place with content creators a couple of quarters ago.
You announced the <unk> partnership and now we get them.
Courage J D.
I'm just curious maybe what sort of response have you seen from the gaming community to these specifically if theres any indicators you are seeing that these partnerships are working and then maybe how that initiative.
As evolved or will continue to evolve if theres any update to how youre thinking about about partnerships.
Yes, I would say.
Firstly I mean, we've got a lot of different partnerships. I mean, these are two pretty big names, we've been with Nick <unk> on the <unk> side for some time courage is new.
But it's too early to draw any conclusions from that how that works you didn't you didn't see a big spike immediately for many of these things.
So, yes, I think thats a wait wait till next next earnings.
Later in the year before we can give you any meaningful data from that.
Yeah.
Got it great. Thanks.
There are no further questions at this time I will now turn the call over to Andy Hall.
Okay, well, thank you everybody for joining us on the call today and thanks for the continued support any follow up questions. Please contact our Investor Relations Department.
And we look forward to updating you next quarter. Thank you and have a good evening.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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