Q3 2023 Corsair Gaming Inc Earnings Call
Good afternoon, and welcome to the coarser gaming third quarter 2023 earnings conference call.
As a reminder, today's call is being recorded and your participation implies consent to such recording.
At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press the pound zero 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.
Thank you good afternoon, everyone and thank you for joining us for per share financial results conference call for the third quarter ended September 32023.
On the call today, we have Corsair C O N, Paul and CFO, Michael Bonner Andy.
Andy will review highlights from the quarter, Mike will then review the financials and our outlook. We will then have time for any questions.
Let me begin.
I had a disclaimer regarding forward looking statements this call, including the Q&A portion of the call May include forward looking statements related to expected future results for our company and are therefore forward statements.
Actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward looking statements are subject to I described.
Chili's and others.
Yes.
Today's remarks will also include references 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 market close today with that I'll now turn the call Overtreated.
Thank you Robert and welcome everyone to our earnings call.
The key takeaways for Q3, Oh, we achieved strong revenue and profit was Q3 revenue growth of 16%.
Adjusted net income growth of 75, 7% on a year on year basis.
Second we continue to drive gross margin expansion.
We're seeing without listen I S T in Belgium from new products, along with a return to healthier inventory level a more promotional.
Promotional practices across the industry.
So the total slate of major new titles being released continues to drive new demand from gaming So baseball peripheral systems.
<unk> popular releases like style field jetblue for those escape cyberpunk.
So there's positive catalysts given the increased hardware requirements needed to run these games the maximum settings.
Overall, we are pleased with our progress and the momentum we're building.
Now, let me take a few minutes to expand on these points.
Well I saw strong growth in Q3.
Well, we're seeing the consumer markets in general are softer in 2023, we can see the gaming hardware spending as close to 'twenty to 'twenty, two and saw elevated compared to pre pandemic.
Roughly 50% higher so both gaming thresholds of the total as compared to 2019.
At this point, we are beating the market with both.
It reflects the momentum we're getting from our new product launches.
A recent survey from Dfc intelligence.
Found that 84% of TCE enthusiasm gamers, who built P C systems in 'twenty 'twenty.
Within the high speed segment.
I enjoyed a build or buy new P. C's over the next 24 months.
Disagrees with all of the observations, we believe that the pandemic.
That's a good number of gamers, we started to spend on competitive hardware to enhance the gameplay.
Believe these new competitive gamers in the hallway suggests we will continue to spend over the next decade.
Secondly, we continue to drive gross margin expansion led by an up lift today, it's been largely from new products turn.
To help your entry level, a more promotional practices across the industry.
Gross margin this quarter was 24, 6% compared to 23% in Q3 last year.
Thirdly, we've been very active and then you put up some of the Gulfstream bumps.
Recently, several new keyboards.
Hey, 70 line they use all the switches and also released high performance wireless and wired headsets.
Our new age 80, Max headset features more radios to connect more devices.
You wanted which was opened by catch has been well received.
Excellent sound characteristics.
And we recently brought to market a new P C controller discuss ambition.
This is a cultural style controller with some stakes organized in a P. S five range.
But with significant enhancements and P C class.
Well, many PC gamers liked to use cultural controllers for certain games.
Then have the same number of inputs available using a keyboard mouse.
We'll discuss envision we have added 11 additional airports, which is fully programmable.
This is a game changer for PC gamers, and we were sold out immediately on launch day.
So very excited about the recent launch of our El Gallo marketplace.
This marketplace allows our growing installed base of streams that users to buy apps plug ins from not only our inhouse traders.
Over 203rd party programs with creators who partner with us.
We believe this will enrich the experience the stream that users, which would in turn help to accelerate unit sales an installed base of strain that hardware.
This also drives a completely new revenue stream for us.
We also recently launched the El Gallo telephone check which comes complete with a display in the mirror.
Behind which you can Mount Isa and El Gallo Phase Campbell any jail and saw camera.
This allowance streamers or anyone doing a video call to maintain eye contact with people who are looking at content all scripts.
Twice the children to $79. This product is sold out in the first few days of launch.
With regard to Q3 inventory do you have a healthy level of inventory in the channel at this point and feel good about our position entering Q4.
We expect all aspects of the gaming Hall, but I'll get you resumed growth again.
Talk about the elevated level of activity that we're now seeing compared to pre pandemic.
We will still have to take all your dropped products to the wholesale channel in 'twenty to 'twenty four.
And we expect with all new recent.
Product launches will have a positive effect on market share in Q4 of this year as well as in 'twenty 'twenty cool.
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. Our strong Q3 results reflect a continuation of the substantial year over year financial improvement that started in the first half of the year revenue gross margin and adjusted EBITDA all improved over the prior year with very encouraging gross margin recovery in our core peripherals.
Products, we further reduced debt in Q3, and we continue to expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves in terms of the specifics Q3 2023 net revenue was $363 2 million.
Compared to $311 $8 million in Q3 2022 for the first nine months of 2023 net revenue increased six 8% to 1 billion $42 $6 million from $976 $4 million in the year ago period.
European markets continue to be softer than Americas, but did show signs of improvement and contributed about 36.5% of our revenues, which is an increase from 32, 3% in Q2 'twenty three.
Turning now to our segments.
The Gamer and creator peripheral segment contributed $94 million of net revenue during the third quarter compared to $96 $8 million in Q3 2022 for the first nine months of 2023 Gamer and greater peripheral segment revenue was $258 $1 million compared to three.
$20 million for the first nine months of 2022.
The gaming components and system segment contributed $272 $8 million I've met revenue during the quarter, an increase of 26, 9%.
From $214 $9 million in Q3 2022.
Memory products contributed $131.7 million in three Q2 thousand 23, compared to $115.2 million and three Q2 thousand 22 for.
For the first nine months of 2023 gaming components and system segment revenue increased to $784 $5 million from $656 $4 million in the first nine months of 2022.
With revenue from memory products, increasing to $371 $9 million from $346 $5 million.
Overall gross profit in the third quarter was $89 $4 million compared to $71 6 million in Q3 2022, reflecting the higher revenue in the current quarter gross margin increased to 24, 6% compared to 23% in Q3 2022, we continue to benefit.
Good for improvements in freight costs as well as new product introductions with an uplift from our IQ linked products and the latest stream back to name a few overall gross profit increased to $257 $6 billion for the first nine months of 2023 compared to 198 point.
$8 million in the first nine months of 2022.
The gaming components and systems segment gross profit was $59.4 million, an increase of 49, 4% from $39 $8 million in Q3 2022 gross margin was 21, 8% compared to 18, 5% in Q3 2022.
Our memory products gross margins in this segment were 16% for the third quarter compared to 14, 4% in Q3 2022.
Third quarter, SG&A expenses were $74 million or 10, 6% increase compared to $66 $9 million in Q3, 2022, reflecting the operating leverage in our business given the faster rate we grew revenue at.
Third quarter, R&D expenses were $16 $1 million up 3% compared to Q3 2022, as we continue to prioritize our investments in new products.
GAAP operating loss in the third quarter of 2023 with $758000 compared to a GAAP operating loss of $11 million in Q3 2022.
Third quarter adjusted operating income was again, a bright spot for us increasing the $19.6 million compared to $5 $9 million in Q3 2022.
Adjusted operating income increased to $53 $6 million for the first nine months of 2023 from $5 million in the first nine months of 2022.
Third quarter net loss attributable to common shareholders was $3 $1 million or three cents per diluted share as compared to a net loss of $8 $9 million or a loss of nine cents per diluted share in Q3 2022 on an adjusted basis third quarter net income improved to 13 point.
$4 million or 13 cents per diluted share compared to $7.6 million or eight cents per share in Q3 2022 for the first nine months of 2023, adjusted net income improved to $35 $1 million or <unk> 33 per diluted share from an adjusted.
Net loss of $2.2 million or a loss of two cents per diluted share in the first nine months of 2022.
Finally, we increased third quarter, adjusted EBITDA to $23 million compared to $10.1 million for Q3 2022. Our Q3 results include the impact of the recently acquired draw which resulted in a net decrease of adjusted EBITDA of approximately $1 million. We expect this to turn.
Positive next year as we are excited about the revenue and cross selling opportunities or drop acquisition provides and will continue to help grow our direct consumer channel for the first nine months of 2023, adjusted EBITDA increased to $61 $3 million to $14 $5 million in the year ago Pierre.
Good.
Turning now to our balance sheet.
We ended Q3 in a strong financial position with a cash balance including restricted cash of $147 $8 million. This reflects our acquisition of drop after the close of Q2, which was an all cash transaction and not material.
As well as the investment in inventory ahead of Q4 seasonally our largest quarter.
We ended Q3 with $223 $8 million of debt at face value and our 100 million dollar working capital revolver remains undrawn and fully available.
We further reduced debt in Q3 and plan on reducing it again in Q4.
Overall, we expect liquidity remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves.
M&A remains our priority for use of cash, but our expected strong cash generation will allow us to continue to reduce outstanding debt on a regular basis.
In terms of the full year 2023, we're adjusting our previous outlook. We now expect total revenue in the range of one four to one $5 billion.
Adjusted operating income is now expected to be in the range of $80 million to $90 million.
And adjusted EBITDA in the range of $95 million to $105 million.
Outlook includes drop, which we expect to generate a small EBITDA loss in 2023.
We integrated our systems people and supply chains, we expect us to quickly turn positive in 2024, as we realize the cost savings from this year and generate revenue synergies as well, we believe that we're well positioned for Q4 and for the year beyond.
We've been able to execute well on our plans for 2023, including growing at what has been a tough economic backdrop the investment in new products. During the downturn last year has allowed us to have a robust new product release schedule. This year.
These recent releases of both open up new markets for us and rounded out our existing product lines for our core peripherals market.
So far the year is in further in the middle of our expectations.
Even at the lower end of our current annual guidance, we're more than doubling our adjusted EBITDA over last year and delivering revenue growth gross margins have steadily improved through the year, even with a tougher than normal promotional environment at the beginning of the year. The company has demonstrated that we generate ample cash to carry out.
Both M&A and reduce our debt and our net debt remains low with that we're now happy to open the call for questions. Operator will you. Please open the call for Q&A.
We will now begin the question and answer session.
Ask the question you May Press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To Australia from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from George Wang with Barclays. You May now go ahead.
Oh, Hey, guys. Thanks for taking my questions.
Firstly.
Can you kind of full game more color in terms of that drop integration.
You guys alluded to.
Generating positive EBITDA in calendar 'twenty four just curious if you can double click on the revenue and the cost synergies going forward.
Well, firstly, George nice to meet you we haven't spoken yet so.
Great to have you on board.
So we don't really give me out too many details on drop it was obviously a small acquisition.
It was slightly negative EBITDA. When we bought them are we expect to be able to move that fairly quickly in 24 to a slightly positive EBITDA.
And I would say, it's not so much cost as most of the synergies going to come from.
Our revenue expansion.
So both selling all products on the dropped platform and selling someone drops products in our channel.
Oh, Okay, great I just have one quick follow up as we head into the holiday season.
Can you comment on the retail channel restocking and any update on the promotional environment.
It's encouraging to see the promo environment has normalized in the third quarter, but its kind of first half of this year.
But kind of where we stand today.
Just just any kind of thoughts on the overall retail environment as it relates to the kind of higher end of your guidance.
Yeah.
Well it's I.
I would say that at this point with pretty positive on what we're hearing we put a chart in the in the in the deck. This time to show that the.
The growth a little softness in gaming hardware for all the inputs that we get most of the U S and in Europe is about a 3% down.
That's for Q3.
So we're tracking to basically be on par with last year, and we think Q4 is going to follow the same pattern.
There was a little Prime day, you know October Prime day that Amazon had and we noticed the gaming.
Hardware it was roughly the same as last year.
A little bit little bit stronger so the moment channel is.
Is stocking up in anticipation for a pretty good pretty pretty good holiday season suddenly you know somebody does it.
Last year.
Okay, great. Thank you.
Yeah.
Our next question will come from Aaron Lee with Macquarie You May now go ahead.
Okay.
Hi, good afternoon, Thanks for taking my questions and nice results with the revenue growth.
I wanted to touch on your product launches. So obviously, you've lost a bunch of new products. This year I'm curious how should we think about the cadence of product launches for 2024 was this year unusual at all in terms of the number of new product introductions or could you maintain that cadence next year or even increase things well I think the comments, we made were more about the.
In fact, we brought out products.
He hit the Mark in terms of price and performance.
So we had we had.
Two products that we launched a pretty significant one was the H S 80, HSA D. Max headset line.
Doing very well in fact, where we're sold out at the moment, so we're having to fight them in.
And the other one is a political the case 70 coal which is a full feature.
Keyboard, which is being.
Retail for $99, and so and that is using our own switches.
We've now bought out a course S which is both in the.
Mechanical optical and and magnetic.
So that's the that's a new thing for us. So those are some of the main things I think we also alluded to some of the El Gallo products that were launched.
Telecom to a sold out for three days.
We launched discuss control, especially the P. C enthusiasts it was.
So down the first day. So I think you know, we typically get about one new product out a week on average and we would expect to do the same or more next year.
And but we've had a lot of products recently that are just really hit them off or been.
In new segments like the P. C controller metallic problem. So obviously theres a lot refreshes is brand new segments.
Gotcha perfect. That's helpful. And then on the go to marketplace would you've recently launched and I know, it's only been a month, but anything you can share on the early days on the uptake in the usage of it and how you plan to ramp this up in 2024.
Yeah, well, it's been it's been company is bringing this thing to market. It is quite complicated, but we did a we were happy to launch with other children children 40.
A third party providers Oh creators.
There's a huge number of apps. It. It is as you say very early days the interesting thing we've seen so far is that the.
S. P oldest spends her personal Toyota is pretty high so you've got people spending Hollywood bought some plug ins.
You know that the ASP is not.
On average, but up to 100 Bucks so that was higher than we thought well. We don't know yet is is how to muddle.
The amount of dollars that the average stream that a user who's going to pay you know.
Yeah, we don't know, whether that's five bucks or 100 Bucks a thousand Bucks I mean, we just don't know what that is yet until we get some more data so well keep you appraised as we go through Q4 I think by our early next year, we'll have a good sense of what the model looks like in terms of you know how many people one stream decks.
Jumping on this marketplace and also.
The market places affects the sell through of the stream deck hardware.
Okay perfect. Thanks looking forward to it.
Yeah.
Our next question will come from drew Crum with Stifel. You May now go ahead.
Hi, it's David on for drew Thanks for the question.
Can you provide the puts and takes on the implied <unk> revenue outlook.
You mean.
What is the top end of the range, meaning compared to the bottom end of the range in terms of market conditions is that yes.
Yeah, well I think it's all down to how strongly.
How strong the holiday season is a as we get closer to it these days.
The holiday season, and Black Friday is not just on Friday people stop.
Promoting earlier.
So we'll get we'll get to see that and.
And as people get more and more confident of spending then theyre going to load up more but I think at the moment, we're pretty comfortable with what we're seeing.
And pretty comfortable with the with the range we've given out.
Okay and.
You touched on this a little bit, but was hoping to get a little bit more color or detail around.
The Prime day is what did you learn in terms of.
The health of the consumer or consumer demand coming out of Prime day.
Yeah.
Well.
It's a it's.
It's a bit complicated.
I think the net of it is that the spending this year is similar to last year.
Unfortunately, what's starting to happen with some of these holidays that we get so many of them is that you get a people stop buying with few days before.
Then you get a spike and then no one buys a day. After so you end up with a list of neutral number but but the key thing is that you know we can see the interest level for consumers and that seems to be on par with last year.
Got it thank you.
Again, if you have a question. Please press Star then one.
Our next question will come from Doug <unk> with Cowen You May now go ahead.
Hey, thanks.
As you noted this year has gone pretty much. According to what you expected your you're headed towards the middle of your your sort of initial guidance range, which would suggest that your ability to forecast is sort of back.
To normal levels after several years, where things were were disrupted.
Given that as you sort of think about next year.
You know do you think the industry's gonna be headed back to its sort of historical long term growth trajectory that you had talked about at your analyst day, and if not you know what do you what do you still see out there that you think could hinder that thank you.
Yeah. That's a that's a great question because we're just starting our planning for next year, so right and to think about so we assume that eventually goes away. So we'll get back to where they were well it gives us some positive feelings is that.
We referenced this survey that just came out from D. F C.
Which is.
Confirmation of what we thought would happen in other words there'll be an echo of the Covid Bulge, one refresh cycle later and why do we refresh cycle later, which trusts is about three to four years.
Is 23 and 'twenty four.
So we do expect a bulge I think what's happening at the moment is a lot of the new gamers. All game is for the first time, we're buying hardware during lockdown.
There's a there's an increased number of those NES starting to refresh and rebuy.
And that may be offsetting perhaps some softness in the overall market.
That means that we ended up with a with a market today, that's pretty flat.
We would hope the this bulge will continue into next year and we'll start to see some growth. So I think when modeling.
Still you know not a lot of growth in the first half, but we'd expect it to pick up and I am hoping by 'twenty five 'twenty six we get back to the traditional in a 15% plus gross forgetting peripherals in five to 10 per cent for components. So that's as best as we can as we can forecast it at the moment.
Yeah.
Thank you.
Our next question, Okay, Colin Sebastian with Baird.
You May now go ahead.
Good afternoon, I'm, Andy and Michael It's rice on for Colin we have two questions I guess, the first one would be.
Could you guys provide an update on DTC revenues and the overall mix of the company, especially given how that might change with drop next year, presumably it's it's going higher end and then I guess second.
Many more around the state of the consumer and what you guys are seeing.
I guess it sounds like things are going well around the game launches and things like that but maybe more specifically have you seen.
Changes in behavior from gaming launched gaming launch you know if you were to take them again that lunch this year versus the gain that launched last year are you seeing a difference in consumer behavior.
Got it thanks.
Okay. So two different questions. So the first one.
Indeed to see percentage did you see percentages actually main maintained about the same as it was last year.
We all see all hoping for some growth with would drop you know jump is not just with the drop is not a big acquisition or a big revenue numbers. So it'll it'll not be hugely significant we're running right now I think about 10% overall is dredge consumer.
And obviously, we've got goals of raising that up to you know 15 plus.
And job will have a small positive effect on that.
The second question was more around what are we seeing related to some of these launches.
We haven't seen anything.
Uh huh.
From an individual game in other words.
Not like when a fortnite launched and therefore was rushing out to buy a headset.
But what we have seen is a lot of engagement. So I think still feels probably the one that's had the most number of hours Baldur's Gate I think it was the biggest surprise in terms of number of players that jumped in and I think all of these things help with.
With hardware all the new games have got requirements that need more memory. So there's a lot of push right now for 32 gigs of DRAM, which is helpful for us because the.
The data we've seen from some steam.
You know what.
People still figuration is is it 80% of people have 16 giggled less so we are in the cycle of people upgrading and I think the other part of it is people building new machines.
Using the latest graphics.
So all these all these gains helped but I wouldn't say that there's one in particular, that's you know that's outstanding was driven it's just that we've had a lot of games.
The oldest gates.
Style field.
Cyberpunk.
A lot of new games have come out that have been pretty at pretty high level.
Got it alright, thank you.
Okay and if you have a question. Please press Star then one.
Yeah.
Our next question will come from a follow up from Aaron Lee with Macquarie you.
You May now go ahead.
Hi, just a quick follow up I wanted to touch on the survey you you highlighted them about the refresh cycle in your experience is there a difference in the refresh cycle between components and peripherals or do you find that you know people generally refresh refreshing one kind of leads to refreshing the other.
No they're not.
They're not coupled are typically we've seen.
Three to five years full systems diligent people who've spent $2000 on a gaming system anywhere from three to five is when they upgrade for peripherals, it's more like a three year cycle and some being much faster. So we've seen.
You know in some cases, especially at the lower end of.
The entry level of headsets people tend to sit on them break them and so this can be as low as 18 months, but but three three to four years for peripherals three to five years for components as is usually the way we model it.
Gotcha. Thanks perfect.
Yeah.
Our next question will be a follow up from George Wang with Barclays.
You May now go ahead.
Oh, Hey, just to have a little quick follow up just in terms of the.
So the new product categories into next year, and just curious any you know more white space in terms of the peripheral. So obviously you guys launched a quite quite a bit of a new product just curious kind of if you know.
Kind of high level over the next couple of years, which is to me.
GAAP all kind of who you guys can potentially feel if you were to launch new products are kind of two competing with competitive in terms of any additional white space you guys may potentially be targeting.
Yeah, I think we've we've talked about this before the two areas that we're looking at that will probably be the next products categories to launch is a Sim racing and low vol gaming.
And I think you could see from the envision controller that we just did some stuff I mean when of course here. It does something we do something better than what the market is used to a lot of People's PC controllers, or just copy of a console controller, but we added a lot of extra functionality into ours. It made it really a good control there.
For PC games.
So that's the type of stuff that we're good at is that when we do come out with a product like that we really hit what the market needs and add some innovation to it.
Okay, Great sounds good thank you.
Yeah.
Again, if you have a question. Please press Star then one.
Okay.
It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Andy Paul for any closing remarks.
Well. Thank you everyone for joining the call today and for continued support if you have 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.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.