Q2 2023 Turtle Beach Corporation Earnings Call
Yes.
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Welcome to the Turtle Beach second quarter 2023 Conference call. My name is Gigi and I'll 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 answers.
Session. If you have a question. Please press star one one on your Touchtone phone delivering today's prepared remarks are nonexecutive chairman of the board Terry Jimenez interim Chief Executive Officer, and senior Vice President of Global sales, Chris <unk> and Chief financial.
Sure.
John Hanson following their prepared remarks, the management team will open the call up for any questions. As a reminder, this conference is being recorded.
I will now turn the call over to Alex Thomson from Investor Relations, Alex you may begin.
Thank you operator on today's call, we will be referring to the press release filed this afternoon that details the company's second quarter 2023 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 supplements. The information discussed on today's call finally, a recording of the.
Call will be available on the investors section of the company's website later today.
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 statements 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.
It could cause turtle beach corporations results to differ materially from management current expectations.
The company believes that its expectations are based upon reasonable assumptions numerous factors may affect actual results and may cause the 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 the Securities and Exchange Commission, including without limitation. Its annual report on form 10.
K and other periodic reports, which are done to 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.
The company also notes that on this call it will be discussing non-GAAP financial information. The company 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 and now I'll turn the call over to Terry Jimenez, the company's chairman of the board.
Thank you Alex I am excited to be here today, and I'm very pleased with our board and the management team's recent progress energy and focus as.
As previously disclosed the board is conducting an extensive and well organized search process for the permanent CEO position, we are focused on finding and appointing the best possible CEO for Turtle Beach shareholders and the board is moving forward with discipline and urgency.
While the search is ongoing we are pleased to have Chris Connor, our long time global head of sales serving as our interim CEO .
Since Christmas appointment effective July one 2023. The board has worked extensively with Chris regarding the path forward and we have full confidence in his ability to lead the company. During this transition we will provide an update at the exclusion of the CEO search process.
Next I'd like to briefly comment on the value enhancement Committee of the board, which continues to review any and all ways to drive value for our shareholders and stakeholders in conjunction with the full board and the management team.
Significant progress has been made to date and the work of this committee of the management team and the full board is giving me a significant amount of optimism for the potential of Turtle Beach.
We have engaged a new financial adviser at Jefferies.
And while we are encouraged by the early engagement in that process, we do not have a formal update at this time.
While I'm proud of the progress to date, our work is not done and we will continue to drive a clear path to near and long term value creation.
We look forward to sharing more developments at the appropriate time and we appreciate your investment and support of Turtle Beach.
I believe that the prospects and potential for Turtle Beach continues to get stronger every day.
With that I will hand, it over to Chris <unk>, our interim Chief Executive Officer, Chris.
Thanks, Terry and good afternoon, everyone. Thank you for joining us to discuss our second quarter 2023 results and I'm pleased to be speaking with you as turtle Beach's interim CEO .
Before we review the results from the second quarter speak about the balance of 2023 and provide insight into our accelerated initiatives. Let me say a few words about my current role.
Being named as the interim CEO I've worked at Turtle Beach for over 10 years and have a deep understanding of our business our strength and our opportunities ahead.
In the last seven years I've led our industry, leading global sales team and I'm passionate about driving best in class performance across our entire organization. We have an excellent team in place that's accelerating and focusing our efforts to grow revenues lead in product innovation and strive for flawless execution.
Capacity as interim CEO , and taking steps to drive our business forward.
Accordingly, we are driving several value creating initiatives already underway that I will discuss later in the call not only are these opportunities significant but many are expected to tape. It takes shape as soon as the second half of 2023 positioning 2024 for tremendous potential improvement in the company's profitability.
First our view on our second quarter results. The second quarter provided a number of reasons to be optimistic about our future and we remain on track to meet our full year 2023 guidance of 10% to 12% revenue growth and between six to 8 million of adjusted EBITA.
Recall that as we stated in May This 2023, adjusted EBITDA guidance includes headwinds of approximately $10 million and a higher promotional spend and freight costs that we consider transitory and expect to normalize in 2024.
Our second quarter of 2023 reported net revenues of $48 million up 16% year over year.
This revenue growth exceeded overall market performance by double digits due to share gains across key categories and geographies.
The U S console headset market is up three 5% year to date, including growth in the month of June which is a favorable sign for the back half of 2023 and for 2024.
Our newly released staff pro has already captured over 15% of the premium 200, plus price tier of the U S console gaming headset category. During its first two months of sales in May and June highlighting the power of the Turtle Beach brand stuff.
<unk> probe garnered a variety of top review scores and accolades, including a five out of five from games radar, who called it a masterpiece outside of our core console gaming headset products, we are continuing to realized growth across other categories as reported by <unk>. Our U S flight controller sales are up 20%.
7% year to date and our share of the flight simulation category now exceeds 20%.
More amazing products, including new simulation models and controllers will be announced later this year and we have meaningful reason to be optimistic about the growth runway in these categories.
U S. PC gaming accessories markets have been weak and are still down roughly 12% year to date, but we gained share during Q2 in U S gaming keyboards, and mice and achieved share gains in Europe across these categories. We expanded our Vulcan keyboard lineup with the launches of Vulcan too many air and Vulcan.
Mechanical keyboards, and we're taking actions to ensure that as the market normalizes, we will be better positioned to drive continued growth in our PC gaming accessories.
On this note before I turn it over to John for his detailed review of the quarter.
I'd like to spend a minute to highlight the initiatives. We are driving that will create value for our customers and shareholders working closely with our board and the previously announced value enhancement Committee, we have mobilized an accelerated initiatives for a variety of efficiencies that includes SKU rationalization portfolio.
Immigration platform product development for a range of cost improvements and more.
We are pleased to announce today that these strategic initiatives are expected to contribute meaningfully to the profitability of turtle Beach on a run rate basis.
Based on the work completed to date, we now have line of sight to exiting 2023 with a run rate adjusted EBITA in the range of 25 million to $30 million.
In line with the 10% adjusted EBITDA target that we have previously identified as a baseline level of profitability.
While formal earnings guidance for 2024 will be provided early next year as is consistent with our past practice and after we receive complete visibility on an important Q4, we felt it appropriate to highlight the clear opportunity that we believe lays before us and the work completed thus far that has gone into identive.
Fine and developing such opportunities.
I'll now pass it over to John to cover the financials John .
Hey, Thanks, Chris and good afternoon, everyone for the second quarter, we reported revenue of $48 million.
A 16% year over year increase compared to $41 3 million a year ago. The revenue increase was primarily driven by strong performance in console headset and stimulation products year over year. Additionally.
Additionally, channel inventories have stabilized compared to the prior year and this dynamic is aligning sell in and sell through versus last year.
Gross margin in the second quarter improved 560 basis points to 24, 7% compared to 19, 1% in the year ago period, driven by lower freight costs warehouse costs promotional credits and business mix.
Operating expenses in the second quarter were $27 7 million compared to $29 3 million in the year ago quarter.
Second quarter recurring operating expenses declined eight 2% year over year, which was primarily driven by continued proactive expense management.
Over the past six quarters, our recurring operating expenses on an LTM basis have decreased $17 5 million or 19%.
Our second quarter adjusted EBITDA loss was $5 6 million compared to a loss of $12 1 million in the year ago period.
The year over year improvement is primarily driven by higher revenue as well as proactive cost management initiatives. We are on track to continue generating adjusted EBITDA improvements throughout the year and expect to deliver positive adjusted EBITDA for 2023.
Adjusted net loss for the second quarter was $7 million or <unk> 41 per diluted share compared to adjusted net loss of $12 7 million or <unk> 77 per diluted share in the year ago period.
We expect our effective tax rate for adjusted net income to be approximately 25% for the full year.
Turning to the balance sheet at June 32023, we had $15 8 million of cash and no outstanding borrowings on our revolving credit line.
Inventories at June 30 were $67 8 million compared to 127 million at June 30th of 'twenty to.
Cash flow from operations was $24 2 million, which was a $65 5 million dollar improvement year over year on a year to date basis, we continue to be focused on optimizing inventory levels, taking into consideration the current logistics market dynamics.
Additionally in March of 2023, we announced that our board of directors approved the extension of our share repurchase program for an additional two years through April 19, 2025, authorizing the acquisition of up to $25 million of shares of common stock during the second.
Order of 2023, we repurchased 85900 shares at an average price of $11.34.
Totaling roughly $974000.
At June 32023, we had approximately $16 $6 million remaining under the share repurchase authorization.
And now I will turn the call back over to Chris for some additional comments Chris.
John with unconstrained console supply and an exciting upcoming lineup. The game launches, we believe the underlying positive trends in the gaming market will support increased accessories demand for the remainder of the year and into 2024, we remain committed to maintaining our leadership in gaming headsets and driving growth in adjacent categories.
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While we execute on these core pillars, we will continue to proactively manage our operating expenses to support our growth strategy.
As I said at the beginning of the call I am very excited to be working with our board and our management team to deliver on our strategy executing our key initiatives and ultimately increase value for our shareholders. We have an amazing team in place to accomplish our goals.
You to the entire Turtle Beach team for all of your contributions and excellent work with that let's turn to our Q&A.
Thank you we will now begin the question and answer session.
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One moment for our first question.
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Yeah.
Yeah.
Yes.
One moment for our first question.
Our first question comes from the line of shop, Sean Mcgowan from Ross. Your line is now open.
Hi, guys. Thank you.
30 years of Star one is a little tough to say on the memories.
Did you get back.
A couple of questions. If you don't mind I'd like to get some clarity on exactly where the trade is and the restocking.
I wanted to start with this question I think Chris you said that.
Sukarno says the category is up three 2% year to date, but it's my understanding that it accelerated quite a bit in the second quarter.
Do you see more detailed than I do but.
There was some choppiness at the beginning of the year, but I think April and May are rather may and June I think seem to be a lot stronger than that so can you talk a little bit about that and just generally where we are in a restocking.
Sure, Yes, great question, Sean Thanks for the question.
When you look at restocking first on the markets. So.
For console gaming headsets is up three 5% a year.
Year to date, if you recall it was up seven seven in Q1. So what we saw was a bit of a dip in April and May and then it is back to growing in June year over year, which is a very good sign some of what youre seeing from that April and May you are right in the accessories were up more in Q2, but a lot of that was driven from game pads. So controllers grow.
<unk> accessories growth a lot of that I think.
It had to do with tears in the kingdom in that game release as well a huge release great for the industry. So so we are seeing back in June now across the board, including console headsets.
Back to growth there.
On the question about the.
The replenishment and how the retailers are kind of behaving we're seeing normal replenishment at this point, it's very much back to sort of pre pre pandemic behavior from the from the retailers will have a few retailers here and there that may be a little more conservative.
Probably looking for a couple of consecutive quarters.
But for the most part we see good replenishment from the channel.
Okay. So we haven't really been seen.
Days' supply in the channel kind of catch up to it.
Kind of normalized levels from the past is that correct.
Yes for the most part I would say that it has we're seeing sell through and sell in matched pretty well.
And we have seen it really stabilized over the past few months, where the channel is is operating pretty much.
Where the retailers I think have target to run.
Right.
Sell in and sell through is as balanced now that means.
We started the year at lower than normal levels of inventory that would suggest that it is.
Still kind of low like I thought we'd get to a period, where the sell in was actually higher than the cells will be caused the previous levels of inventory to Lowe's.
Base.
Yeah, we really haven't seen that to this point, we ended up I don't know about some of the others in the in the <unk>.
And the industry there, but we ended up at a really clean position kind of exiting last year. So we've seen pretty normal replenishment here this year.
Without any kind of real impact from destocking or anything like that I think moving forward, we would expect to see those replenishment continue and as we see growth in the in the market, we will see the benefit of that as well.
Okay I wanted to ask one other question before handing it off and that is just to kind of clarify the sort of non guidance guidance on EBITDA.
You're at six to eight for the full year, when you say run rate.
That's not meant to be interpreted as an estimate for 'twenty four right. That's just the kind of rate at which you would end the year and continue to make improvements and see growth 24 would be higher than that right.
Correct, it's not our guidance for 2024, what we're saying is on this year's guidance of $2 65 to $2 70 for net revenue, we expect to be exiting the year at a run rate of $25 million to $30 million in EBITA. So obviously you gave a lot of year left.
Yeah.
Over 60% of the year is left in the back half year. So very important Q4, we obviously would need to see how that turns out before we want to guide revenue for next year, but we're cautiously optimistic on how that's going to be turning out, but and we'll be guiding on a normal timeframe next year once we have that visibility.
Okay, Alright, thank you very much.
Thanks, Sean.
Thank you one moment far next question.
Our next question comes from the line of drew Crum from Stifel.
Okay. Thanks, Hey, guys good afternoon.
I just wanted to ask about the adjusted gross margin in the quarter. It appeared the slipped sequentially from <unk> I know you called out some headwinds but to those.
<unk> and how should we.
Anticipate those trending in the back half of the year and then I have a follow up.
Yes, so sequentially. They they did decline slightly and that that was really due to timing.
Timing driven.
We do expect margins to continue to improve in Q3 and Q4.
As per our prior guidance.
Okay. Okay.
Then youre console headsets.
Typically on a two two to three year cycle.
Given the influx of new gamers during the.
Pandemic are you starting to see these consumers come back to your your product.
Yes, that's a great question and we keep a really close eye on that replenishment cycle.
Historically, it's been about that two year, Mark and I believe some of the list youre starting to see in the console gaming headset area is folks starting to replenish based off of this pandemic purchases as you know the pandemic purchases are quite high and so we think that that's a potential tailwind for us as we go into the back half of the year here and get it.
Two 2024.
Okay Chris.
Slip one more in here.
Previously the market forecasts was.
Be flattish to up slightly just given some of your commentary.
To date I know you mentioned the PC accessories segment was a little bit softer but.
Have you changed that outlook or are you still forecasting flattish to up slightly or has that improved based on performance to date.
Yes, I think we're still holding that that view from overall right. What we're seeing is that the mix of that is moving around a little bit which is fine. It's something that happens all the time between the categories, but we think the PC has a good chance of recovering here in the back half if you look at.
Some of the upcoming game releases I know Baldur's gate, three just released last weekend. It sounds like that game is going very well.
Got a few others coming up call of duty just officially got announced today.
Along with counter strike two coming up so theres a lot of good PC releases in the Hopper that we think are going to help that category as.
As well as console headsets being tracking pretty much where we had expected it to run.
Okay.
Yes.
Thank you.
Okay.
Yeah.
Okay.
Okay.
Operator back to you if there's any further questions.
Yes.
Okay.
Okay.
Okay.
Okay.
One moment please for our next question.
Okay.
Great.
It must be having difficulties opening.
The next question there.
Okay.
One moment for our next question.
Please standby.
Okay.
One moment. Please please standby.
Our next question comes from Andrew North Park with Oppenheimer. Your line is open.
Hey, guys. Thanks for taking the question maybe this is Andrew on for Martin.
Really for us to talk about the SKU rationalization.
Do you know what product lines or platform in terms of console versus PC are.
We're getting the most product rationalization and why and then are you guys were building new products under development right now.
Sure.
Yes, great question.
To provide some clarity there we're not going to talk specifically about.
About certain product lines, just due to competitive reasons, but I can tell you we've gone through and looked at.
Our portfolio, we've taken a databased approach to look at consumer demand and also margin profiles across the business and we believe we can get some some really strong efficiencies.
By streamlining that a bit and it's still support all of our growth strategy. So we won't provide any details at this point on specifics, but it's.
It's a pretty significant effort underway to go ahead and two to stream might that portfolio.
Got it thank you.
One moment for our next question.
Our next question comes from Sean Mcgowan with Roth MTN. Your line is open.
Yes, thanks again.
Do you mind, giving us a little bit more color.
Some of these nonrecurring.
Nonrecurring business cost that were posted in the quarter and I guess more hopefully what can we expect to see more of that continuing in the year as the year goes on.
Yeah.
Sure.
Sure Sean John .
So in the quarter.
In terms of EBITDA $4 $2 million.
And of the two of the $4 $2 million approximately 2.9 was related.
To the CEO separation.
So as we're as we're the balance was related to.
Proxy.
Slash activist related costs and expenses.
As we're going forward.
Sir.
In light of where through the annual meeting.
And the proxy activist.
<unk>.
Work is certainly us.
Slowed from where it was we would expect those numbers to decline here in the back half of the year.
Okay. Thank you.
Mhm.
And I am showing no further questions at this time I would like to turn it back to Chris <unk> for closing remarks.
Thank you Gigi.
Wanted to thank you all for your participation and interest in Turtle Beach and have a great day.
Okay.
And this concludes today's conference call hope.
Hope you all have a great day.
Please disconnect.
Okay.
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