Q4 2024 Turtle Beach Corp Earnings Call
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Speaker Change: Greetings and welcome to the Turtle Beach, Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce Dr. Corne with ICR. Please go ahead.
Thank you, operator.
Speaker Change: On today's call, we'll be referring to the press release file this afternoon that details the company's fourth quarter and year-end 2024 results.
Speaker Change: The release is available on the press releases page of the company's investor relations website corp.turtlebeach.com There you'll also find the latest earnings presentation that supplements the information discussed on today's call.
Speaker Change: And finally, a recording of the call will be available on the events and presentation section of the company's investor relations website, the leader today.
Speaker Change: Please be aware that some of the comments made during this call may include forward looking statements within the meaning of the federal security's laws.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: The company does not undertake to publicly update or revise any forward-looking statements after this conference call.
Speaker Change: The company also notes that on this call it will be discussing non-GAAP financial information.
Speaker Change: The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAP.
Speaker Change: You can find a reconciliation of these metrics to the company's reported gap results in the reconciliation tables provided in today's earnings press release and presentation.
Hosting the call today, Chris Keirn, Chief Executive Officer.
Speaker Change: and Mark Weinzweig, Chief Financial Officer. With that, I'll turn the call over to Chris.
Speaker Change: Thanks, Jacques. Good afternoon, everyone, and welcome to our fourth quarter and year-end 2024 earnings call. I'm thrilled to report that we ended a record-breaking 2024 with a record-breaking quarter.
Speaker Change: We achieved our highest ever quarterly results in both revenue and adjusted EBITDA, underscoring the strength and resilience of our strategy, execution, and business model.
This strong performance was driven by several key factors.
Speaker Change: Our acquisition of PDP has been a game-changer, significantly expanding our product portfolio and market reach, and infusing the company with more amazing talent and expertise.
Speaker Change: PDP delivered an immediate positive impact on our performance at the time of the acquisition and the completion of our integration activities in Q4 continued to drive results.
For the fourth quarter, revenue was $146.1 million.
Speaker Change: Up 46.8% compared to the same quarter last year, driven primarily by incremental sales and retail distribution for PDP, as well as low single digit.
Percentage growth for Turtle Beach branded products.
Speaker Change: We were able to reduce our promotional spend as a percentage of revenue for the fourth quarter and full year on the strength of our next generation product launches in 2024, and we're pleased to see ASP increases as a result.
Speaker Change: This promotional approach also contributed to improved profitability that was achieved for the quarter and full year
Adjusted EBITDA for the fourth quarter was $35.7 million.
Speaker Change: A significant increase from $14 million in the same period last year.
Speaker Change: The substantial improvement, with our adjusted EBITDA growing at a faster pace than our revenue, reflects our ongoing focus to enhance efficiency and streamline our processes.
Speaker Change: As one example, we expect to realize more than $13 million in annual cost synergies from the PDP acquisition, surpassing our initial expectations of $10 to $12 million.
Speaker Change: These results underscore our commitment to driving profitability and operational excellence as we continue to optimize our expanded portfolio and organization.
Speaker Change: To that point, our relentless focus on operational excellence has yielded substantial improvements across the company.
Speaker Change: From supply chain optimization to cost management, our efforts have enhanced efficiency and profitability while positioning us for sustained growth. These efforts include preparations and mitigations for the impact of any new tariffs.
Speaker Change: With that, let's dive into a few takeaways from 2024 and the fourth quarter.
Speaker Change: Turtle Beach branded gaming headsets revenue share in the U.S. increased 270 basis points in the fourth quarter compared to the previous quarter supported by the launch of our new Stealth 700 Gen 3 premium wireless headset built on our next generation platform design.
Speaker Change: For the controllers and game pads category, Cercana data shows that our revenue growth in the U.S. significantly outpaced the market, with a 25% increase in retail sales for 2024, while the market grew about 2.5%.
Speaker Change: Notably our premium Victrix Pro BFG and Turtle Beach Stealth Ultra controllers ranked as the second and third best-selling third-party game pads during the year.
Speaker Change: Additionally, our Riffmaster Wireless Guitar Controllers, perfect for Fortnite Festival, continue dominating the music controller category with a number one share in the U.S.
Speaker Change: These repurchases were the largest in our history and underscore our confidence in Turtle Beach's long-term growth prospects and our dedication to enhancing shareholder value.
Speaker Change: As we move forward, we will maintain a sharp focus on capital allocation, ensuring that our financial strategies align with our goal of delivering sustained value and growth.
Speaker Change: Before turning the call over, I'd like to take a moment to acknowledge some important updates in our leadership team.
Speaker Change: First, I'm delighted to welcome Mark Wineswig as our new Chief Financial Officer.
Speaker Change: We're confident that he will be instrumental in driving our financial strategy and supporting our growth initiatives. Welcome aboard, Mark.
Speaker Change: John's contributions have been invaluable in steering the company through many significant milestones and challenges. We want to thank John for his commitment and leadership and wish him all the best in his well-deserved retirement.
Speaker Change: Mark will now take us through the financials in more detail and 2025 guidance. Mark.
Mark: Good afternoon, everyone. And thank you, Chris, for the warm welcome.
Mark: I am truly honored to join Turtle Beach as the new Chief Financial Officer. I am excited to work alongside such a talented and dedicated team and look forward to contributing to its continued success. I would also like to extend my gratitude to John for his guidance and direction during this transition period.
Mark: As Chris mentioned, our fourth quarter 2024 revenue was at an all-time record of $146 million, reflecting incremental revenue from the PDP business, our next generation products, and solid execution.
Mark: In addition to the strong revenue performance, our gross margin for the fourth quarter improved to 37%, a 500 basis point improvement compared to 32% from the year ago period.
Mark: Included in the cost of sales for the most recent quarter is a 3.4 million dollar charge related to a loss of inventory and transit.
Mark: Operating expenses of $30.6 million or 21% of revenue compared to 24% in the prior year, reflecting the improved leverage of the business from the higher revenue base. We continue to invest in new products and product line extensions to expand our product portfolio and grow our addressable market.
Mark: Most importantly, our fourth quarter adjusted EBITDA improved to an all-time quarterly record of $35.7 million compared to $14 million in the a year ago period.
Mark: For the full year, Adjusted EBITDA was $56.4 million compared to $6.5 million in the prior year. The significant increase in Adjusted EBITDA was driven by higher revenues combined with the cost containment actions taken providing strong operating leverage.
Mark: Now turning to the balance sheet. At year end, net debt was $85 million, comprised of $98 million of outstanding debt and $13 million of cash. The debt balance is comprised of $49 million outstanding under our evolving credit line and $49 million on the term loan.
Mark: One important item to note is that just this week, we nearly paid off the entire revolving line balance due to strong cash receipts.
Mark: During the fourth quarter, we repurchased approximately 162,000 shares at an average price of $15 per share, returning $2.4 million to shareholders through our share repurchase program.
Mark: For the full year, we repurchased a total of $27.8 million. Our current share repurchase program expires in April. In line with our continued commitment to return capital to shareholders, we are opportunistically assessing various potential share repurchase strategies.
Mark: Turning to guidance, we are expecting full year 2025 revenue to be in the range of $395 to $405 million.
This represents 7% growth at the midpoint compared to 2024.
Mark: We expect our full year 2025 adjusted EBITDA to be in the range of $68 to $72 million.
Mark: The midpoint for 2025 represents a greater than 200 basis point improvement in adjusted EBITDA margin and 24% growth compared to 56 million of EBITDA in 2024. Both of these would be record levels for the company.
Mark: As we navigate recent volatility in the retail market, we want to provide additional context on expected seasonality.
Mark: First, it's important to note that we typically see the majority of our revenues in the second half of the year, driven by the holiday season.
Mark: Finally, as Chris noted, we are actively monitoring the changing tariff environment. We expect this to be a dynamic situation for the time being. Our full year 2025 guidance includes the expected net impact of the tariffs currently in place.
We expect to provide further clarity in future calls.
Chris: Now I'll turn the call back over to Chris for additional comments.
Chris: Thanks Mark. We've never been more excited about the future of Turtle Beach considering the record quarter we delivered in Q4 and the new baseline of performance for the company in 2025 and beyond.
Chris: We've discussed how our strategic efforts could put us in a position to exceed previous highs lasting for the company During the battle royale surge in 2018 and the pandemic era in 2020 and 2021
Chris: Q4 demonstrated that our new run rates and scale have already surpassed those previous milestones. We're energized to expand on that success with a record 2025.
Chris: Our steadfast dedication to innovation, exceptional execution and growth continues to distinguish Turtle Beach as a frontrunner in the gaming accessories market.
Chris: We remain committed to driving expansion and complementary product categories and executing on accretive M&A to drive additional scale in our business.
Chris: I want to thank them for their contributions and a transformative and record year.
Chris: We remain confident in our strategy and focused on delivering value for our shareholders and gaming customers.
And with that, let's turn to Q&A.
Chris: Thank you. We'll now be conducting a question and answer session.
Chris: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we pull for questions.
Speaker Change: Thank you. Our first question is from Sean McGowan with Roth Capital Partners. Please proceed with your question.
Sean McGowan: Hi guys, thank you. Chris, could you possibly put any kind of a number around what you expect the impact to be from tariffs? Is it simply a reduction in sales? Is it an increase in cost? Or is it both?
Sean McGowan: Yeah, he Sean, it's a great question. It's something we've spent quite a bit of time on, you know, preparing for tariffs, looking at our mitigations and looking at what the future may look like for tariffs.
Sean McGowan: As far as putting a number on it, it would be in the range of several million of EBITDA if we were able to... If they came off tomorrow and tariffs didn't return, it would be a benefit of several million for us.
If there are additional tariffs.
Sean McGowan: You know, it's something that we it's a very dynamic environment and trying to estimate what might come down, you know, in that respect.
Sean McGowan: is something that we're tracking, and I feel very good about what the team has done from a mitigation standpoint and our preparedness for any new tariffs that may come down, but clearly not knowing what those might be, you know, could have an impact on our results.
Speaker Change: Okay, thank you. Maybe Mark for you a question on the on the margin. If we add back that inventory charge, I assume that's all in COGS. So does that imply that
Sean McGowan: Close margin in the quarter would have been 39%, and maybe more importantly, is that a level we should expect at this kind of level of revenue going forward?
Sean McGowan: Yeah, Sean, thanks for the question. So we actually put in today's release, we added in the Financial Outlook section, a part that actually talks about our go forward expectations for gross margins. We noted in there that we're now focusing on mid to high 30s in terms of gross margin percentage for the full year. Obviously, our gross margin is very much reflective of revenues. So, you know, we'll be very much back in load in terms of the margin percentage,
Central Margin Opportunity.
Okay, let me finish with a question about buybacks.
So, you know, if you look back
Sean McGowan: You've contemplated things like a Dutch or you've done some buybacks, I think the upper range, if I remember correctly, on the Dutch was around 15. So, you know, should we view this current prices as an attractive one? And would you consider doing something kind of big, big event like that?
Sean McGowan: Yeah, this is something that, you know, we're constantly assessing, you know, we are committed to look at how we can return capital to shareholders and we're going to be opportunistic about opportunities in that range.
Sean McGowan: You know, clearly, we believe that there's a lot of value here that is not being recognized in the current price. So we do feel that the stock is extremely attractive at the pricing that it is. So that factors into our decisions clearly. Very helpful. Thank you.
Thanks, John.
Speaker Change: Unknown Speaker I'm going to go ahead and get started. Okay.
Speaker Change: Our next question is from Jack Vander Aert with Maxim Group.
Speaker Change: Hey, guys. Great. Welcome. Welcome to Mark and congrats to John again. Thanks for taking my questions.
Speaker Change: So, Chris, maybe for you, can you just touch on your revenue outlook in terms of where you see, I guess, I guess, by product category?
Speaker Change: And then also, where you have the greatest visibility or maybe the greatest, the least visibility in terms of geographical regions. Thanks.
Chris: Sure. Hey, Jack. Thanks for the question. Yeah, when you look at the outlook, you know, we're, we're, I believe, taking a pretty conservative approach here based on what we're seeing so far in 2025.
Chris: We anticipated that we'd seen a bit of a stronger market at this point when we were going into the holiday. We did see a bit of a decline in the markets in December year-over-year.
Chris: We always talk about how Q4 sort of leads into Q1 performance, and we are seeing that in Q1, as we noted.
As you probably saw there in the release.
Chris: The markets in the U.S. for accessories for gaming were down, you know, pretty significantly in January.
Chris: And so what we believe is going to happen for 25 is that
Chris: We think it'll continue to be a bit softer here in the first half of the year, but we're very excited about what's happening in the back half of the year. Two main drivers there, you know, Nintendo has confirmed that at some point in 2025,
Chris: Nintendo Switch 2 will launch and that'll be a extremely positive.
you know, factor for for everyone in gaming.
Chris: And then secondly, as you know, GTA 6 is planned to be launched this fall. Those two factors are going to have a tremendous effect on the gaming accessories markets in the back half of the year.
Unknown Speaker And so, um, you're our over overall, uh,
The revenue for the year reflects that dynamic.
Chris: I think the second part of your question was around geographies and categories, so when you look at what Turtle Beach has been able to do over the last couple of years, we've been driving additional revenue in categories that are adjacent to gaming headsets.
Chris: And, you know, we've made a ton of progress there, particularly with the PDP acquisition, to where, you know, we believe 2025, more than a third of our revenues are going to be coming from non headset categories.
Chris: So, and that continues to increase for us and I do think over time you're going to see that approaching, you know, 40-50% of our revenues being outside of headsets.
From a geographical standpoint,
Chris: We have about, rough and tough, maybe 70% of the revenue domestically, about 25% in UK and Europe, and then Asia is a single-digit contributor to our revenue.
Speaker Change: Okay, great. I appreciate that. And then maybe just a follow up in terms of the adjusted EBITDA guidance.
Speaker Change: The 2025 EBITDA guidance appears very strong, you know, considering the revenue outlook. I appreciate the commentary around the gross margins, which are much stronger than previous years for sure, and sounds like it considers the tariff impact.
Speaker Change: So what about the operating expense line? Maybe if you could just provide some...
Speaker Change: sense of how that compares maybe seasonality-wise to the prior year and just, are costs coming down? Is there more non-cash add-backs? Any color there would be helpful.
Speaker Change: And we think there's continued opportunities there as we continue to drive.
Speaker Change: you know, sort of streamline our processes and look for opportunities to, to leverage that. So I think from a seasonality standpoint, it'll be similar to a run rate year, but on a much lower run rate level than what we've seen in the past.
Speaker Change: Okay, great. I appreciate the color there. I'll hop back in the queue. Thanks, guys. Thanks, Jack.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad.
Our next question is from Martin Yang with Oppenheimer.
Hi, thank you for taking the question.
Yeah, thank you for the question. Um, you know, the
Speaker Change: Right now, we are seeing some benefits in terms of just the strengthening market for us on the FX side. We have taken into account potential changes. We do not do any hedging or any type of transactions like that, but we have, in a sense, a natural hedge in terms of the amount of revenues that we have in different currencies. So at this point, we would say that it's something that we are looking at closely, but we feel
Speaker Change: Unknown Speaker 25 based on the results so far in the first three months of the year.
Speaker Change: Unknown Speaker The second question is on your view towards a second half weighted revenue outlook.
Speaker Change: Is there any reference points in history that led you to the Outlook? Is there any particular year that's ...
Speaker Change: Unknown Speaker I think it will give us a good comparison or is that based on, you know, conversation with retail customers, you know, any, any sorts of context.
Speaker Change: that led you to the second year, second half, I'll be helpful.
Thank you.
Speaker Change: Sure. Yeah, it's a great question, Martin. And it is such an important factor in how we're thinking about the year.
Speaker Change: You know, when you look at similar years, I would say it would be very similar to 2019, which is sort of our
Unknown Speaker Pre-pandemic.
Speaker Change: lower based on what we're seeing out there in the market right now, and that we would expect that loading would then come back in in Q3, Q4 timeframe. So, from a...
Speaker Change: As far as the factors that are leading us to that, you know, it is.
Feedback from our retail partners.
Speaker Change: and a lot of the gaming industry folks that are taking a look at what's going on in the markets right now.
Speaker Change: There's a lot of excitement around what the back half will look like.
Speaker Change: Unknown Speaker You know, the the expected launch here for switch to at some point, and, and what's going to happen with GTA six, that's a
Speaker Change: the anticipation around that game and we know what what normal large releases will do for us from an accessory sales standpoint, we expect that effect to be even greater when GTA 6 comes out.
Speaker Change: So those are really the main factors there, but I would look to 2019 with the adjustments to Q1 as sort of a bit more of a representative year.
Thank you, Chris. That's it for me. Thanks, Martin.
Sean McGowan: Thank you. Our next question is from Sean McGowan with Roth Capital Partners.
Sean McGowan: Hi, I just want to circle back on your comment again about following up on that seasonality comment. Could you just remind us, did you say 15 to 16% based on the midpoint of that range?
Sean McGowan: Yeah, yep, that's true. Okay, just wanted to clarify that. Thank you.
Speaker Change: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Chris Keirn for any closing comments.
Chris Keirn: Thank you all for joining our call today and your interest in the company and have a great day.