Q1 2024 Turtle Beach Corp Earnings Call
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Operator: Welcome to the Turtle Beach First Quarter 2024 conference call. My name is Dede, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star 11 on your touchtone phone. Delivering today's prepared remarks are Chris Kern, Chief Executive Officer, and John Hanson, Chief Financial Officer.
Welcome to the Turtle Beach first quarter 'twenty 'twenty four conference call. My name is Judy and I will be your operator for today's call.
Operator: At this time all participants are in a listen only mode.
Operator: Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press star one one on your Touchtone phone.
Operator: Delivering today's prepared remarks are Chris Kearney, Chief Executive Officer, and John Hanson, Chief Financial Officer.
Operator: Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the conference is being recorded.
Operator: Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the conference is being recorded. I will now turn the call over to Alex Thompson from Investor Relations. Alex, you may begin.
Alex Thompson: I will now turn the call over to Alex Thomson from Investor Relations, Alex you may begin.
Alex Thompson: Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon. The details of the company's first quarter 2024 results, which can be downloaded from the investor relations page at corp.turtlebeach.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 events and presentations section of the company's website later today.
Alex Thompson: Thank you operator on today's call, we'll be referring to the press release filed this afternoon that details the company's first quarter 2024 results, which can be downloaded from the investor Relations page at corporate 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 events.
Alex Thompson: The presentations section of the company's website later today.
Alex Thompson: 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 that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially, so the company encourages you to review the Safe Harbor Statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including without limitation, its annual report on Form 10-K, and other periodic reports which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statement.
Alex Thompson: 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.
Alex Thompson: As a result that could cause turtle beach corporations results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe Harbor statements and risk factors contained in today's press release.
Alex Thompson: 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 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.
Alex Thompson: The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, they 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 company's recorded GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now I'll turn the call over to Chris Kern, CEO of Turtle Beach. Chris.
Alex Thompson: Forward looking statements after this conference call.
Cristopher Keirn: And 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 recorded GAAP results in the reconciliation tables provided in today's earnings release.
Cristopher Keirn: Presentation, and now I'll turn the call over to Chris <unk> CEO of Turtle Beach, Chris.
Cristopher Keirn: Thank you all for joining us today on our first quarter 2024 earnings call. I'm very pleased with our continued progress in a transformative year for the company. As expected, we have made significant progress on multiple strategic initiatives to drive profitable and sustainable growth. While we are in the early stages of integration for our recent acquisition of PDP, this infusion of additional talent and expertise has further energized our team, and we are executing to achieve both revenue and cost synergies.
Cristopher Keirn: Thank you all for joining us today on our first quarter 2024 earnings call I'm very pleased with our continued progress and a transformative year for the company.
Cristopher Keirn: As expected we have made significant progress on multiple strategic initiatives to drive profitable and sustainable growth.
Cristopher Keirn: While we are in the early stages of integration for our recent acquisition of PDP. This infusion of additional talent and expertise is further energize our team and we are executing to achieve both revenue and cost synergies.
Cristopher Keirn: We look forward to maximizing the benefits of our increased scale and enhanced product portfolio in 2024 and beyond. First quarter revenue was $55.8 million, up roughly 9% year-over-year, which included incremental revenue contribution in the back half of March from our acquisition of PDP. We also realized improved profitability in the quarter, delivering 1.4 million of adjusted EBITDA, compared to an adjusted EBITDA loss of 2.8 million a year ago.
Cristopher Keirn: We look forward to maximizing the benefits of our increased scale and enhanced product portfolio in 2024 and beyond.
Cristopher Keirn: First quarter revenue was $55 8 million up roughly 9% year over year, which included incremental revenue contribution in the back half of March from our acquisition of PDP.
Cristopher Keirn: We also realized improved profitability in the quarter delivering $1 4 million of adjusted EBITDA compared to an adjusted EBIT loss of $2 8 million a year ago. As we've previously communicated we continue to see year over year improvements in profitability through our portfolio optimization SKU rationalization.
Cristopher Keirn: As we've previously communicated, we continue to see year-over-year improvements in profitability through our portfolio optimization, skew rationalization, and platform product development initiatives, all of which are coming into full effect this year. Following market gains that started in December of 2023, both the U.S. gaming headset and gaming controller markets continued to climb with double-digit year-over-year revenue growth in Q1. Persercona, combined console and PC headset markets were up 18%, and gaming controllers were up nearly 20% in revenue. Third-party controllers exceeded revenue growth compared to first-party controllers, driven by our new Stealth Ultra controller and increased sales of PDP models.
Cristopher Keirn: <unk> and platform product development initiatives, all of which are coming into full effect throughout this year.
Cristopher Keirn: Following market gains that started in December of 2023, both the U S gaming headset and gaming controller markets continued decline with double digit year over year revenue growth in Q1 <unk>.
Cristopher Keirn: <unk> combined console and PC headset markets were up 18%.
Cristopher Keirn: And gaming controllers were up nearly 20% by revenue.
Cristopher Keirn: Third party controllers exceeded revenue growth compared to first party controllers, driven by our new stealth Ultra controller and increased sales of PDP models.
Cristopher Keirn: We remain optimistic about continued growth in the gaming accessory markets and have an exceptional lineup of new Turtle Beach products launching in just a few weeks and then again before the holidays. Q1 demonstrated that accessory sales, at this point in the console cycle, are growing, as gamers remain highly engaged with a strong lineup of titles over the last year. We believe another contributor to market growth in Q1 was the result of a replacement cycle lift from pandemic-era accessory purchases, especially with a new generation of accessories in the market that offer upgrades to technology and features.
Cristopher Keirn: We remain optimistic for continued growth in the gaming accessory markets and have an exceptional lineup of new turtle Beach products launching in just a few weeks and then again before the holidays.
Cristopher Keirn: Q1 demonstrated that accessory sales at this point in the console cycle for growing as gamers remain highly engaged with our strong lineup of titles over the last year. We believe another contributor to market growth. In Q1 was a result of a replacement cycle lift from pandemic era accessory purchases, especially with a new generation.
Cristopher Keirn: Of accessories in the market that offer upgrades to technology and features.
Cristopher Keirn: As mentioned in previous calls, we anticipated that pandemic-era replacement purchases would contribute to gaming accessory market growth in 2024. Double-digit market growth for key gaming accessory categories in Q1 was a good indicator that these replacement purchases are underway, and we believe replacement purchases will continue to support market performance in future quarters. In our headset and PC categories, we proactively reduced channel inventory and promotional activity in Q1, ahead of our significant new headset and PC product launches in Q2.
Cristopher Keirn: As mentioned in previous calls we anticipated the pandemic era replacement purchases would contribute to gaming accessory market growth in 2024.
Cristopher Keirn: Double digit market growth for key gaming category accessory categories. In Q1 was a good indicator that these replacement purchases are underway and we believe replacement purchases will continue to support market performance in future quarters.
Cristopher Keirn: And our headset and PC categories, we proactively reduced channel inventory and promotional activity in Q1 ahead of our significant new headset and PC product launches in Q2.
Cristopher Keirn: Channel load-in for our new headsets and PC products is occurring now, and channel inventory is projected to return to normalized levels once the new load-in of new products is completed in Q2. We are eager to bring these fantastic new products to our gaming customers and are confident they will deliver strong results for the business. Our new controller and simulation models, including the Premium Stealth Ultra Controller and Velocity One Simulation products, drove Q1 share gains for Turtle Beach.
Cristopher Keirn: Ken a load in for our new headsets and PC products is occurring now and channel inventory is projected to return to normalized levels. Once the new load in of new products is completed in Q2.
Cristopher Keirn: We are eager to bring these fantastic new products to our gaming customers and are confident they will deliver strong results for the business.
Cristopher Keirn: Our new controller and simulation models, including the premium stuff Ultra controller and velocity one stimulation products drove Q1 share gains for Turtle Beach, a revenue share of the U S flight simulation market grew from 20% in Q1, 2023% to 25% in Q1 2024 as reported by <unk>.
Cristopher Keirn: Our revenue share of the U.S. flight simulation market grew from 20% in Q1 2023 to 25% in Q1 2024, as reported by Cercana. With additional products in development, we anticipate continued share growth over time in simulation categories. Additionally, we are pleased with the extraordinary pre-orders and ongoing post-launch demand for the PDP Riffmaster guitar controller. The Riffmaster launch was timed to Fortnite Festival's recent update, which added guitar controller capability to the game.
Cristopher Keirn: <unk>.
Cristopher Keirn: With additional products in development, we anticipate continued share growth over time and stimulation categories.
Cristopher Keirn: Additionally, we are pleased with the extraordinary preorders and ongoing post launch demand for the PDP riff Master guitar controller. The risk Master launch was time to Fortnite festivals recent update which added guitar controller capability with the game.
Cristopher Keirn: Demand has greatly exceeded our initial supply, and our teams are working diligently to expedite deliveries of additional goods. We remain highly focused on delivering value to our shareholders and gaming customers everywhere through launching our innovative new products, maximizing the extensive benefits from the PDP acquisition, and driving our initiatives for profit enhancement and growth. John will now take us through the financials in more detail.
Cristopher Keirn: Demand has greatly exceeded our initial supply and our teams are working diligently to expedite deliveries of additional goods.
Cristopher Keirn: We remain highly focused on delivering value to our shareholders and gaming customers everywhere through launching our innovative new products maximizing the extensive benefits from the PDP acquisition and driving our initiatives profit enhancement and growth John will now take us through the financials in more detail John.
John T. Hanson: Hey, thanks, Chris, and good afternoon, everyone. As Chris noted, our first quarter 2024 revenue was $55.8 million. That's an increase of approximately 9% compared to the year-ago period, driven by increased sales of our controller and simulation products and incremental revenue from the PDP acquisitions. Console headset revenue was down year over year as we intentionally reduced channel inventory levels in Q1 ahead of the launch of our new wireless headsets and rebranded PC accessories. We are currently reloading the channel to support the launch of these products in Q2.
John T. Hanson: Hey, Thanks, Chris and good afternoon, everyone as Chris noted our first quarter 2024 revenue was $55 8 million, that's an increase of approximately 9% compared to the year ago period, driven by increased sales of our controller and stimulation products and incremental revenue from.
John T. Hanson: PDP acquisition.
John T. Hanson: Console headset revenue was down year over year as we intentionally reduced channel inventory levels. In Q1 ahead of the launch of our new wireless headsets and rebranded PC accessories. We are currently re loading the channel to support the launch of these products in Q2.
John T. Hanson: <unk>.
John T. Hanson: Gross margin in the first quarter was 31.8 percent, compared to 27.5 percent. That is a 430 basis point improvement from the year-ago period. The increase resulted from lower freight costs, product costs, promotional spend, and return reserves and is driven by the various profit improvement initiatives we have been executing over the past month. Operating expenses in the first quarter were $23.5 million compared to $20.6 million a year ago and include $5.0 million in costs related to the acquisition of PDP in March of this year. In the first quarter, cash-based recurring operating expenses declined approximately 6% year-over-year, primarily driven by ongoing proactive expense management.
John T. Hanson: Gross margin in the first quarter was 31, 8% compared to 27, 5% that is a 430 basis point improvement from the year ago period. The increase resulted from lower freight cost product cost promotional spend in return reserves and is driven by.
John T. Hanson: Various profit improvement initiatives, we have been executing over the past months.
John T. Hanson: Operating expenses in the first quarter were $23 5 million compared to $20 6 million a year ago and include $5 5 million in costs related to the acquisition of PDP in March of this year.
John T. Hanson: First quarter cash based recurring operating expenses declined approximately 6% year over year, primarily driven by ongoing proactive expense management.
John T. Hanson: Our first quarter adjusted EBITDA improved to $1.4 million compared to an adjusted EBITDA loss of $2.8 million in the year-ago period. The $4.3 million year-over-year improvement is primarily driven by revenue increase, margin improvement, and cash-based recurring operating expense reduction. Our first quarter net income was a positive 0.2 million, or one cent per diluted share, compared to a net loss of 6.7 million, or 40 cents per diluted share, a year ago.
John T. Hanson: First quarter, adjusted EBITDA improved to $1 4 million compared to an adjusted EBITDA loss of $2 8 million in the year ago period, the $4 $3 million year over year improvement is primarily driven by the revenue increase margin improvement and cash base.
John T. Hanson: Recurring operating expense reductions.
John T. Hanson: Our first quarter net income was a positive <unk> 2 million or <unk> <unk> per diluted share compared to a net loss of $6 7 million or <unk> 40 per diluted share a year ago.
John T. Hanson: Turning to the balance sheet, at March 31, 2024, we had $17.8 million of cash and no outstanding borrowings on our revolving credit line. The company secured a $50 million term loan for the PDP acquisition, and our net debt was $32.1 million at quarter end. Inventory at March 31, 2024 was $69.5 million compared to $65.2 million at March 31, 2023. The increase resulted from the addition of $23.8 million in inventory for PDP, partially offset by a $19.5 million reduction in Turtle Beach inventory.
John T. Hanson: Turning to the balance sheet at March 31, 2024, we had $17 8 million of cash and no outstanding borrowings on our revolving credit line.
John T. Hanson: The company secured a $50 million term loan for the PDP acquisition.
John T. Hanson: And our net debt was $32 1 million at quarter end.
John T. Hanson: Inventories at March 31, 2024 were $69 5 million compared to $65 2 million at March 31, 2023, and the increase resulted from the addition of $23 8 million and inventory for PDP.
John T. Hanson: Partially offset by a $19 $5 million reduction in Turtle Beach inventory.
John T. Hanson: Cash flow from operations was $27.3 million, compared to $29 million at March 31st of 2023. Free cash flow was $26.6 million. Our ability to generate strong free cash flow from revenue growth and operational efficiency opens the door to a variety of value-creating opportunities. Chris?
John T. Hanson: Cash flow from operations was $27 3 million compared to $29 million at March 31, 2023 free cash flow was $26 6 million our ability to generate strong free cash flow from revenue growth and operational efficiency opens the door for a.
John T. Hanson: Variety of value creating opportunities.
John T. Hanson: And now I'll turn the call back over to Chris for some additional comments Chris.
Cristopher Keirn: Thanks, John. As I've mentioned, we are pleased with our progress to the first quarter of 2024. We've continued our focus on driving profitable growth and are excited about our upcoming product launches and the demonstrated success of our multiple profit improvement initiatives. As a result of this, we are maintaining our full year 2024 outlook. Net revenues are expected to be in the range of $370 million to $380 million, with growth driven primarily by the acquisition of PDP, gaming accessory market growth, and our expected outperformance of gaming markets with compelling new accessory launches in 2024.
Chris: Thanks, John as I've mentioned, we are pleased with our progress to the first quarter of 2024. We've continued our focus on driving profitable growth and are excited about our upcoming product launches and the demonstrated success of our multiple profit improvement initiatives.
Cristopher Keirn: From this we are maintaining our full year 2024 outlook net.
Cristopher Keirn: Net revenues are expected to be in the range of 370 million to $380 million with growth driven primarily by the acquisition of PDP gaming accessory market growth and our expected outperformance of gaming markets with compelling new accessory launches in 2024.
Cristopher Keirn: Including synergies from the PDP acquisition, we expect pro forma combined adjusted EBITDA to be between $51 million and $54 million, which incorporates approximately nine months of operations from PDP. I want to thank our entire team at Turtle Beach for their excellent efforts and contributions, which have delivered a strong quarter to start this very exciting year. We have a lot in store for the remainder of 2024 and remain confident about a renewed growth strategy and execution for this year and beyond to drive value for our shareholders and gaming customers. And with that, let's turn to Q&A. Thank you. As a reminder, to ask a question,
Cristopher Keirn: Including synergies from the PDP acquisition, we expect pro forma combined adjusted EBITDA to be between $51 million and $54 million, which incorporates approximately nine months of operations from PDP.
Cristopher Keirn: I want to thank our entire team at Turtle Beach for their excellent efforts and contributions which have delivered a strong quarter to start this very exciting year we.
Cristopher Keirn: We have a lot in store for the remainder of 2024 and remain confident about our renewed growth strategy and execution for this year and beyond to drive value for our shareholders shareholders and gaming customers and with that let's turn to Q&A.
Operator: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A list.
Speaker Change: Thank you.
Operator: Minder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Operator: And our first question comes from Mark Argento of Lake Street Capital markets. Your line is open.
Mark Nicholas Argento: Hey Chris, hey John, just a couple quick ones from me. Chris, maybe you could just delve in a little bit more in terms of the kind of product refresh or the kind of restocking in terms of inventory? And some of the new products you guys are launching.
Mark Nicholas Argento: Hey, Chris Hey, John just a couple of quick ones for me.
Mark Nicholas Argento: Chris maybe you could could you just delve in a little bit more in terms of kind of the product refresh or the kind of the restocking in terms of inventory.
Mark Nicholas Argento: Some of the new products you guys are launching that would be helpful.
Cristopher Keirn: Sure, hey Mark, thanks for the question. Yeah, in Q1, we've got coming up in Q2, we are refreshing our wireless lineup at that key $99 price point. So this is Stealth 600 and Stealth 500. We've announced that those products are gonna be replaced here coming up in May, actually within a couple of weeks. And those are the most widely distributed products globally for wireless gaming headsets.
Chris: Sure Hey, Mark Thanks for the question.
Cristopher Keirn: Yes. The in Q1, so we've got coming up in Q2, we are refreshing our wireless lineup at that key $99 price point. So this is still 600 and stealth 500, we've announced that.
Cristopher Keirn: Those products are going to be replaced here coming up in may actually within a couple of weeks and those are the most widely distributed products globally for wireless gaming headsets. So thats a significant amount of channel that we have to transition from the last generation into this new generation. So we saw that.
Cristopher Keirn: So that's a significant amount of channel that we have to transition from the last generation into this new generation. So we saw that coming. If you remember in Q4, we had driven a good amount of promotions, right, to get that inventory in a very healthy position. And then as we went through Q1, we turned off replenishments on those, you know, midway through Q1. So we expected to see that channel come down, and we did that proactively. And to the team's credit, we were also able to do that without running, with promotions running lower than last year, actually. So that is now complete.
Cristopher Keirn: Coming if you remember in Q4, we had driven a good amount of promotions right to get that inventory in a very healthy position and then as we went through Q1.
Cristopher Keirn: We turned off replenishment on those.
Cristopher Keirn: Midway through Q1.
Cristopher Keirn: So we expected to see that channel come down that we did that proactively and.
Cristopher Keirn: We are also to the team's credit we're also able to do that without running with promotions running lower than last year actually.
Cristopher Keirn: <unk>.
Cristopher Keirn: We're in the middle of reloading the channel now, and we've seen those channel inventory numbers here in Q2 return as expected to those levels. So we did have some transitional impact there in Q1 that will, you know, recover in Q2. Across the other categories, we're also launching new products in SIM in Q1, with a new race product, and new flight SIM products. And on the PDP side, that guitar controller has just been a fantastic surprise for us.
Cristopher Keirn: That is now complete we are in the middle of reloading the channel now and we've seen those channel inventory numbers here in Q2 return is expected to those level. So we did have some transitional impact during Q1 debt.
Cristopher Keirn: We will recover in Q2.
Cristopher Keirn: As expected.
Cristopher Keirn: Across the other categories.
Cristopher Keirn: Also launching new products and Sim in Q1, with a new <unk> product new flight Sim products.
Cristopher Keirn: And on the PDP side that guitar controller has just been a fantastic surprise for us.
Cristopher Keirn: We knew it was a great product, but the demand out there has been pretty exceptional. So a lot of good load-ins here coming in Q2 that we feel good about. I appreciate the color there, and then John, maybe, you know...
Cristopher Keirn: We knew it was a great product, but the demand out there has been pretty exceptional so.
Cristopher Keirn: A lot of good load ins here coming in Q2 that we feel we feel good about.
Speaker Change: I appreciate it.
Speaker Change: Any color there and then John maybe in terms of the overall guidance, including obviously pro forma for PDP.
Cristopher Keirn: That kind of imply backing out the <unk>.
Cristopher Keirn: What does that imply for kind of the core tier products.
Cristopher Keirn: Flattish is it up a little down a little.
Cristopher Keirn: Should we just be thinking about the core growth rate.
Cristopher Keirn: On the legacy business.
John T. Hanson: Yeah, so hey, thanks for the question, Mark. So the core business, certainly within our guidance is expected to grow, and it's going to be in the, you know, the single digit, you know, the mid single digit range, which, you know, which we signaled back in November that we felt that the core business still had, you know, that potential for growth, obviously, with the cost improvements from the laser sharp focus cost work cost initiative work we've done, that's going to deliver And then you overlay PDP and their contribution, and that's how you get to the $51 to $53 million guidance for adjusted EBITDA for the calendar year 2024.
John: Yeah. So thanks for that question Mark So the core business certainly within our guidance is expected to grow and it's going to be in the it's going to be more to the.
John T. Hanson: The single digit mid single digit range.
John T. Hanson: Which which we signaled a which we signaled back in November that we felt that the core business.
John T. Hanson: Phil.
John T. Hanson: Has that that potential for growth, obviously with the cost improvements from the laser sharp focused cost.
John T. Hanson: Work cost initiative work, we've done that's going to deliver much higher EBITDA than the business has has realized in the past and then you overlay PDP and their contribution and that's how you drive to the 51% to 50 $53 million guidance for adjusted EBITDA for.
John T. Hanson: The calendar year.
John T. Hanson: 2024.
Speaker Change: Got it okay.
Mark Nicholas Argento: That's helpful. All right, I'll hop back in the queue, guys. Appreciate the call. Great. Thanks, Mark.
Speaker Change: Helpful. All right I'll hop back into queue guys I appreciate the color.
Speaker Change: Great. Thanks, Mark Thanks.
Operator: Thank you. One moment for our next question, and our next question comes from Jack Vander Aarde of Maxim Group. Your line is open.
Speaker Change: One moment for our next question.
Operator: Yeah.
Speaker Change: And our next question comes from Jack Vander Ark of Maxim Group. Your line is open.
Jack Vander Aarde: Okay, great. Great
Speaker Change: Okay, great great great to see the strong results guys and reiterated outlook.
Cristopher Keirn: Great to see the strong results, guys, and reiterated outlook. Maybe that's a question maybe on the first quarter. Revenue was definitely stronger than, you know, typically seasonally speaking, and PDP contributed to that. Maybe, are you able to just touch on, you know, PDP was, I think, about a 100 million run rate business in terms of revenue. How much of that was related to PDP and, maybe just directionally.
Speaker Change: Yes mid case, that's a question maybe on the first quarter.
Cristopher Keirn: Revenue was definitely stronger than typically seasonally speaking PDP contributed to that.
Cristopher Keirn: Maybe are you able to.
Cristopher Keirn: Just touch on PDP was I think about $100 million run rate business.
Cristopher Keirn: There is a revenue.
Cristopher Keirn: How much of that was was related to PDP.
Cristopher Keirn: Maybe just directionally.
Cristopher Keirn: Sure, yeah Q1 it was about 5.9, I think was there 5.8 contribution, so you know so we did we get some benefit there in the back half of March. You're correct in the historic size of that business and we see strong growth in the PDP business coming this year that's included in our guidance and you know so when you look at the core business you know we were really happy to see the markets performing as well as they have for accessories you know we talked about before that we're ending that phase of the the console cycle now where you're getting into you know folks have bought they bought plenty of great games last year they were finally able to get a console last year and now we're ending that phase of the of the cycle where typically you'll see accessory repurchases and particularly with the pandemic you know replacement purchases coming from a few years ago so we believe that's what's driving that that strong lift in both headsets and consoles and controllers and you know we were happy to see that in Q1 pretty high double-digit growth there for the markets and also for our sell-through so as an example on the core business we still saw double-digit value sell-through growth but you know with us taking the channel inventory down that's why you see kind of flattish results you know for the core business in Q1 that's a timing issue seasonally we're going to see the benefit that load in
Speaker Change: Sure, Yes, Q1, it was about.
Cristopher Keirn: About five nine I think was there five eight contribution.
Cristopher Keirn: So.
Cristopher Keirn: So we did get some benefit there in the back half of March.
Cristopher Keirn: You are correct in the historic size of that business and we see strong growth in the PDP business come in this year. That's included in our guidance.
Cristopher Keirn: And so when you look at the core business, we were really happy to see the markets performing as well as they have for accessories, we talked about before that we're entering that phase of the console cycle now where.
Cristopher Keirn: Youre getting into folks have bought they bought a plenty of great games last year. They were finally able to get a console last year and now we're entering that phase of the cycle, where typically yossi accessory repurchases and particularly with the pandemic replacement purchases coming from a few years ago. So.
Cristopher Keirn: We believe thats whats driving that that strong lift in both headsets.
Cristopher Keirn: And comps and controllers and.
Cristopher Keirn: We are happy to see that in Q1.
Cristopher Keirn: Pretty high double digit growth there for the markets and also for our sell through so as an example on the core business, we still saw double digit value sell through growth, but with us taking the channel inventory down. That's why you see kind of flattish results for the core business in Q1, that's a timing issue seasonally we're going to see the benefit of that load in here in Q2.
Jack Vander Aarde: Okay, great. That's really helpful, Culler.
Speaker Change: Okay, Great that's really helpful color.
Speaker Change: And then maybe just in terms of.
Speaker Change: There is another question on the product SKU rationalization maybe.
Jack Vander Aarde: And then maybe just in terms of, there's another question on the product SKI rationalization. Maybe just specifically, does that, does the SKI rationalization, the entire process and kind of strategy, relate to or include PDP as well? I mean, you guys just brought in the acquisition, but how much of that's the core Turtle Beach kind of console headset business versus, and maybe Rocket, but is PDP also involved in that?
Jack Vander Aarde: Maybe just specifically does that does the SKU rationalization does that entire process and cash strategy does this does this relate or include PDP as well I mean, you guys just brought in the acquisition, but how much of Thats. The core turtle beach kind of console headset business versus maybe rocket but.
Jack Vander Aarde: And then, yeah, I'm just looking at the guitar has obviously been a massive success, but just in terms of revenue concentration across the PDP product portfolio, is it, is it similar to the revenue concentration across your core business product portfolio? Sorry for the loaded question.
Jack Vander Aarde: It's PDP also involved in that and then I'm just looking at the.
Jack Vander Aarde: The guitar has obviously been a massive success, but.
Jack Vander Aarde: In terms of like revenue concentration across the PDP product portfolio is it is it similar to the revenue concentration across your core business product portfolio.
Cristopher Keirn: Thanks. Yeah, no, a great question. And that's exactly what we're working through on the integration of PDP right now. We've got the benefit of PDP's business being very complementary to our core business. Historically, PDP has done a great job over the last few years really leaning into those great licensing agreements that they've got doing some great development on the controller front. And, you know, using those partnerships that are already established, and that controller business fits very well with our historically strong headset business. And so the two, the two combined, it's really a one plus one equals three kind of situation where we're getting the benefits of both.
Speaker Change: All other questions.
Speaker Change: Yes, no great question.
Cristopher Keirn: And it's exactly what we're working through on the integration of PDP right now.
Cristopher Keirn: We've got the benefit of PDP business being very complementary to our core business historically <unk> done a great job over the last few years are really leaning into those great licensing agreements that they have got doing some great development on the controller front.
Cristopher Keirn: And using those partnerships that are already established.
Cristopher Keirn: And that controller business fits very well with our historically strong headset business.
Cristopher Keirn: And so the two the two combined it's really a one plus one equals three kind of situation, where we're getting the benefits of both and so what we're working through now with with the portfolio optimization and some of the SKU rationalization. It does include both because.
John T. Hanson: And so what we're working through now with portfolio optimization and some of the SKU rationalization, it does include both because, you know, there are products that are out there that are complementary between the two brands' portfolios. And there are opportunities for us there to realize synergies, not only on the cost side but also on the revenue side as we talk through this with retailers. We've had a really great set of discussions with our retailers, and there is a lot of excitement in the channel about this acquisition and what it means for the gaming category, right?
John T. Hanson: There are there are products that are out there that are complementary between the two brands portfolios and there is opportunities for us there to realize synergies not only on the cost side, but also on the revenue side as we talked through this with retailer who have had a really great set of discussions with our retailers.
John T. Hanson: Lot of excitement in the channel about this acquisition and what it means for the gaming category right because it really when you look at the consolidation happening in the category.
John T. Hanson: Because when you look at the consolidation happening in the category, this really puts us in a different range and on a different scale when we're talking to retailers. Now being able to offer so many categories, you know, as retailers also kind of look at what they're doing with their category space for gaming moving forward. So we've been really excited about what we've seen so far. We're very early in integration, obviously, but it's gone quite well. Okay, I appreciate the update there. Maybe just one more. I'm wondering if you can just touch on a status update on the share repurchase program and just kind of recent developments there.
John T. Hanson: This really puts us in a different range and a different scale when we're talking to retailers now being able to offer so many categories.
John T. Hanson: As retailers also kind of look at what Theyre doing with their category space for gaming moving forward. So we've been really excited about what we've seen so far we're very early in the integration, obviously, but it's gone quite well.
John T. Hanson: Okay.
Speaker Change: Okay I appreciate the update there and maybe just one more I'm wondering if you can just touch on a status update on the share repurchase program and just kind of the recent developments there. Thanks.
Jack Vander Aarde: Yeah, so hey, Jack, it's John. So, as we said in an announcement here with Q4, we increased the size of the authorized share repurchase program, and so it's our intention to continue to pursue opportunities to increase the value for shareholders and, you know, with a focus on capital allocation. And we said that with that increase in the authorized share buyback, we would be opportunistic here going forward to the balance of this year, and that's currently the path we're on Okay, I got it. Well, I appreciate the time, guys.
John T. Hanson: Yeah, So hey, Jack it's John So as we as.
Jack Vander Aarde: As we.
Jack Vander Aarde: Set an announcement here with Q4, we increased the size of the authorized share repurchase program.
Speaker Change: And <unk>.
Jack Vander Aarde: So it's our intention to continue to pursue opportunities to increase the value for shareholders.
Jack Vander Aarde: And with a focus on capital allocation and we said that we would we would be with that increase in the authorized share buyback that we would be opportunistic here going forward.
Jack Vander Aarde: Through the balance of the balance of this year and that is that's currently are that's currently the path we're on.
Jack Vander Aarde: Okay, I got it. Well, I appreciate the time, guys. Thanks.
Speaker Change: Okay got it well I appreciate the time guys. Thanks.
Speaker Change: Thank you.
Operator: And our next question comes from Sean McGowan of Roth. Your line is open.
Jack Vander Aarde: And our next question comes from Sean Mcgowan of Ross Your line is open.
Sean Patrick McGowan: Thank you. Good afternoon, guys.
Sean Patrick McGowan: Thank you good afternoon guys.
Sean Patrick McGowan: At the risk of being that guy, I'm going to say I know it's the first quarter, and I know it's the smallest quarter, and I know that not a lot of dollars move by percentage, but if we're talking about headsets being down in your shipments in the first quarter against industry numbers that look probably better than I would have thought for the category, and even if you strip out flight sim, that would be an even How are you not raising the guys?
Sean Patrick McGowan: Hey, John.
Sean Patrick McGowan: At the risk of being that Guy.
Sean Patrick McGowan: I'm going to say, it's the first quarter and I know, it's the smallest quarter and I know that there's not a lot of dollars move some percentages, but if we're talking about the headsets being down and your shipments in the first quarter against industry numbers that look like probably better than I would've thought for the category.
Sean Patrick McGowan: Even if you strip out flight Sim that would be an even bigger decrease in your shipments of headsets. How is how are you not raising the guidance for the year are you expecting a massive slowdown like in the second half.
Cristopher Keirn: Hey Sean, absolutely not, to the last question: I'm not expecting a massive slowdown. If anything, we're going to see the benefit, and we already are seeing the benefit, actually, of that load on the channel. So when you look at the headset's performance, we knew going into Q1, and we included that in our guidance, that we were going to be draining the channel to get ready for these massive launches that are coming up this month.
Speaker Change: Hey, Sean absolutely not add to the last question not expecting a massive slowdown if anything we're going to see the benefit.
Cristopher Keirn: We already are seeing that benefit actually of that load in on the channel. So when you look at the headsets performance, we knew going into Q1, and we've included that in our guidance that we're going to be draining the channel to get ready for these massive launches that are coming up this month. So as that occurred in Q1, we still saw double.
Cristopher Keirn: So as that occurred in Q1, we still saw double-digit sell-through growth in value in our U.S. headset business for console headsets. So we still realized that growth year over year, but you see it in sell-through. On the sell-in side, because we took all that channel inventory out, you didn't get the sell-in. We're getting that sell-in in Q2 because that sell-through was sustained through Q1 right up into the transition. So we're actually very excited about how that panned out for us because we were able to really reduce a lot of the promotional dollars that we would typically have to spend there to clear inventory.
Cristopher Keirn: <unk> digit sell through growth and value in our U S headset business for console headset. So we still realized that growth year over year, but you see it in sell through on the cell inside because we took out of that channel inventory out.
Cristopher Keirn: Get the sell in we're getting that sell in in Q2, because that sell through was sustained through Q1 right up into the transition so.
Cristopher Keirn: We're actually very excited about how that how that panned out for us because we were able to really reduce a lot of the promotional dollars that we would typically have to spend there to clear inventory a lot of that was already accomplished in Q4 for us.
Cristopher Keirn: A lot of that was already accomplished in Q4 for us. Remember, we kind of talked about that in the last earnings call. So no, we're actually feeling very bullish about the prospects of the gaming accessories market this year, and the guidance does not assume that the market continues to be as strong as it was in Q1. We had the market pegged at moderate growth for this year, kind of single-digit increases.
Cristopher Keirn: We kind of talked about that in the last earnings call. So.
Cristopher Keirn: So now we're actually feeling very bullish about the prospects of the gaming accessories market. This year.
Cristopher Keirn: And the guidance does not assume that the market continues to be as strong as it was in Q1.
Cristopher Keirn: We had the market pegged at moderate growth for this year kind of single digit increases. So the fact that we saw what we did in Q1 is a nice surprise.
Cristopher Keirn: So the fact that we saw what we did in Q1 is a nice surprise. I think you'll see, as we talked about, the replacement purchases from the pandemic piece are going to continue to drive accessory upgrades. And the other thing that drives accessory upgrades is new tech. And everything you see coming from Turtle Beach and also from the PDP launches, they've got great new innovations in them. The product teams here have done a fantastic job of really presenting some new products here this year that we know are going to drive the market and drive our business.
Cristopher Keirn: I think youll see as we talked about the replacement purchases from the pandemic piece are going to continue to drive accessory upgrades.
Cristopher Keirn: And the other thing that drives accessory upgrades or new tech and everything you see coming from Turtle Beach and also from the PDP launches they've got great new innovations in the product teams here have done a fantastic job of really presenting some some new products here. This year that we know are going to drive the market and drive our performance.
Cristopher Keirn: Okay, so I, you know, you must have ended the quarter with inventories of headsets just at a very lean level. And so you're reloading some of that into the second quarter. Would you expect, at the end of the second quarter, to be kind of caught up to sell through? I mean, that would imply an unbelievably strong second quarter, right?
Speaker Change: Okay. So.
Cristopher Keirn: You must have ended the quarter with inventories of headsets, just steady at it very lean level and so you're reloading some of that in the second quarter would you expect at the end of the second quarter, you would be kind of caught up to sell through I mean, I would imply an unbelievably strong second quarter right.
Cristopher Keirn: We will be back up to normal levels of channel inventory. That's actually, we're almost there now as we're kind of midway through the quarter because a lot of that load-in is happening with those launches coming up in the next few weeks. So yes, we did actually end the quarter quite low on inventory, and we are seeing the load-in happen, so you hit it right on the head there.
Cristopher Keirn: We will be back up to the normal levels of channel inventory. That's actually we're almost there now is we're kind of midway through the quarter because a lot of that loading is happening with those launches coming up in the next few weeks.
Cristopher Keirn: So yes, we did actually in the quarter quite low on inventory and we are seeing the load and happened. So you hit it right on the head there.
John T. Hanson: Okay. Question for you, John, is there anything, I mean, the gross margin came in a little bit higher than I thought, but that's good. Maybe that's because the sales did too, but is there anything in that quarter mix-wise or anything else that would be kind of unsustainably high, like that would have boosted it unsustainably?
John T. Hanson: Okay.
John T. Hanson: A question for you John is there anything I mean, the gross margin came in a little bit higher than I thought, but I think thats good.
John: And maybe that's because the sales did too but is there anything in that quarter mix wise or anything else that would be kind of unsustainably high boosted at unsustainably.
John T. Hanson: No, the first quarter, for want of a better term, was pretty clean in that regard, and what we're starting to see coming through the P&L now are the cost improvements as our mix transitions into the new products. You're seeing the lower costs, which we've been talking about now for several quarters, and which have been working their way into the P&L for us. So we did signal and guide to higher margins throughout the year, and you're starting to see that in the first quarter.
John T. Hanson: No.
John T. Hanson: First quarter.
John T. Hanson: For want of a better term is pretty clean in that regard and what we're starting to see coming through the P&L now or are the cost improvements as the as we as our mix transitions into the new products Youre seeing lower costs, which we've been talking about now for several quarters and that have been working their way.
John T. Hanson: <unk>.
John T. Hanson: Way into the P&L for us so.
John T. Hanson: We did signal and guide to higher margins throughout the year and Youre starting to see.
John T. Hanson: Youre starting to see that here in the first quarter, we do.
John T. Hanson: We do expect margins in the second quarter to be slightly, possibly a point lower as we complete this transition of both the wireless and, of course, the brand transition of Rocket to Turtle Beach. We do have some higher promotions planned in Q2 that will have a small impact on the margin percentage, but then that would quickly improve back in Q3 and 4, as we now sell all of the new products that we've been working so diligently on over the last six months.
John T. Hanson: We do expect margins in the second quarter to be.
John T. Hanson: Slightly.
John T. Hanson: Potentially a point lower as we complete the transition of both the wireless and of course the brand the brand transition of rocket to Turtle Beach, we do have some higher promotions planned in Q2 that will have a small impact on the margin percentage, but then.
John T. Hanson: That would quickly then improve back in Q3 and four.
John T. Hanson: As now we are selling all of the new products that we've been working so diligently on in the last over the last six months.
John T. Hanson: Okay, but with that cost issue that you just mentioned in the second quarter, would that not be offset by the volume-related upside that you get to margin? Or are you saying that we shouldn't expect it in the second quarter?
John T. Hanson: Okay, but would that would that cost issue that you just mentioned there in the second quarter would that not be over well over <unk>.
John T. Hanson: Offsetting by the volume related upside that you get to margin or are you, saying that we shouldnt expect dollar.
John T. Hanson: Yeah, in terms of dollars, yes, but it's more of a percentage game. My comments were, I was talking more about the percentage. So we would expect a slightly lower percentage, but certainly more dollars. Okay.
John T. Hanson: Yes, the dollars.
John T. Hanson: In terms of dollars, yes, but it's more of a percentage game.
John T. Hanson: Comments were.
John T. Hanson: I was talking more about the percentage. So we would expect slightly lower percentage, but certainly more dollars.
John T. Hanson: Okay.
Sean Patrick McGowan: Okay. Two other questions for me. One is, what do we make of the fact that there is still commentary in the appendix of the presentation about the Dutch tender that got canceled? Is that just to kind of tease us a little bit, or is that a preview of something coming?
John T. Hanson:
John T. Hanson: Two other questions for me one is just what are we making the fact that there is still in the appendix of the presentation commentary about the Dutch tender that got canceled was that just to kind of tweak us a little bit or is that a preview of something coming.
John T. Hanson: No, as announced, you know, the, that's, that tender's been replaced by the share repurchase program, so.
Speaker Change: No that's announced.
John T. Hanson: Thats tender has been replaced with the share repurchase program.
Sean Patrick McGowan: Oh, okay. It just, you know, it says summary financial information following tender completion, so I didn't know if that was a preview of something to come. Uh, nope. Okay, last question. Is the 10-Q going to be out today?
John T. Hanson: Yes.
John T. Hanson: Okay.
Sean Patrick McGowan: Summary financial information following tender completion, so I didn't know if that was a.
Sean Patrick McGowan: A preview of something to come.
Sean Patrick McGowan: No.
Speaker Change: Okay last question as you think youre going to be out today.
John T. Hanson: It should probably be in the works right now. Don't know how far behind the SEC is backed up, but the Q will, in fact, be filed today. Okay, good luck looking for it.
Speaker Change: It should be.
John T. Hanson: It's probably in the works right now.
John T. Hanson: How far behind the FCC has backed up but.
John T. Hanson: The Q will in fact be.
Sean Patrick McGowan: Okay, good looking forward. Thank you. Thanks, John.
Speaker Change: <unk> filed today, Okay Youre looking forward. Thank you.
Speaker Change: Thanks, Sean.
Operator: Thank you. And as a reminder, if you have a question, please press star 11 on your touchtone phone. I'm not taking any further questions at this time. I'd like to turn it back to Chris Kern for closing remarks.
Speaker Change: Thank you and as a reminder, if you have a question. Please press star one on your Touchtone phone.
Cristopher Keirn: I'm showing no further questions at this time I would like to turn it back to Chris <unk> for closing remarks.
Cristopher Keirn: Thank you, operator, and thank you all for your participation and interest in Turtle Beach. Have a great day!
Cristopher Keirn: Thank you operator, and thank you all for your participation and interest in Turtle Beach have a great day.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
Operator: Okay.
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