Corsair Gaming, Inc.

Greetings, and welcome to the Corsair Gaming third quarter 2020 earnings call. At this time, all participants are in a 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 star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ronald Van Veen, Corsair's Vice President of Finance Investor Relations. Thank you, Mr. Van Veen. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Coursera's financial results conference call for the third quarter ending September 30th, 2020. On the call today, we have Coursera CEO, Amy Paul, and CFO, Michael Potter. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our predictions due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include reference 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. This conference call will be available for replay via webcast through Corsair's investor relations website at ir.corsair.com. Andy will begin with an overview of Corsair, followed by our third quarter highlights. Michael will then take you through a review of the financials before we proceed to Q&A. And with that, I'll now turn the call over to Andy.

Thank you, Ronald, and welcome to our first earnings call as a public company. It was great to meet many of you during the course of our IPO Roadshow in September, and we look forward to getting to know all of you better as we go forward. Now, as some of you may be new to our story, I'd like to spend a few minutes to take you through a brief overview of who we are, what we do, and the growing market opportunity we see in front of us. Please note that this overview will make today's call a little longer than what will be typical going forward. and then I'll provide an overview of our recent progress and performance, and then turn the call over to Michael for a financial review of the quarter. We are a leading global provider and innovator of high-performance gear for gamers and content creators. Our gaming gear helps gamers perform at their peak across PC or console platforms, and our streaming gear enables creators to produce studio-quality content to share with friends or to broadcast to millions of friends. We've served the market for over two decades, and most of our product lines maintain a top three US market share position, with several in number one positions, according to data from NPD Group and internal estimates. We have built a passionate base of loyal customers who build and upgrade their gaming PCs using Corsair components, and then use our peripheral products for gaming or streaming. Competitive gaming rewards speed, precision, and reliability. As in other sports, specialized high-performance gears such as gaming mice, keyboards, headsets, and performance controllers allow digital athletes to perform at their best. Modern games also require significant processing power to render high-resolution graphics and reward the speed and precision of user inputs, driving demand for powerful gaming components and systems. Further, in a world where the ability to create content is democratized and competition for viewer engagement is greater than ever, content creators, particularly streamers, are increasingly seeking ways to maximize the quality of their video capture and broadcasting, which requires specialized high-performance gear. Our solution is the most complete suite of gear among our major competitors and addresses the most critical components for both game performance and streaming. Our product offering is enhanced by our two proprietary software platforms, IQ for Gamers and El Gallo's Streamer Suite for Content Creators. These software platforms provide unified, intuitive performance and aesthetic control and customization across their respective product families. As gaming has gone mainstream, streaming has followed suit. games are now broadcast over the Internet at both the tournament level and by gamers at home. Today, 71% of millennial gamers in the U.S. watch gaming video content on streaming platforms for an average of almost six hours a week. Further, there are over 6 million committed streamers in the world today who fuel the over 12 billion streaming hours watched in 2019 alone. The global market for PC and streaming gear totaled $36 billion in 2019. Of that, 83% was spending from competitive and committed gamers. These are players who spend between $1,000 to over $1,800 on gaming hardware and accessories. These are our core customers. What's incredible is these competitive and committed gamers while accounting for 83% of spend, only account for 18% of the worldwide total of 524 million PC gamers in 2019, with the remainder being casual gamers who often do not yet own any specialized gear. This highlights the significant growth potential for our TAM. We see that the average spend of gamers is still fairly low compared to spending on other sports gears. and very concentrated at the high end. As casual gamers become competitive and committed gamers, their spending grows. If the average spend of this group of gamers were to significantly move up, then the market for gaming gear could grow by multiples. In gaming, where we see the biggest opportunity in market growth is in peripherals, because while most entry-level gamers will have access to a console or some sort of PC in their home, they will likely not have specialized peripherals. We have seen the peripherals growth exploded as teenagers play Fortnite or other online multiplayer games on PCs and laptops. Further, as more and more gaming is watched online, gamers aspire to emulate professional streamers, resulting in incremental spending on gear. Beyond success in gaming, these emerging applications represent a promising avenue for the continued expansion of the streaming gear market opportunity. So, moving on to our growth strategy, we intend to grow our business by increasing value to our customers, expanding our market opportunity, and further differentiating ourselves from competitors. We believe our brand name, high-performance gear and market position will allow us to capture a large share of this market growth. And we intend to continue to make significant marketing investments in leading esports teams, athletes, streamers, and social media influencers. Other key parts of our growth strategy include continuing to develop innovative, market-leading gaming and streaming gear. We intend to prioritize investment in creating innovative gaming and streaming gear and related software to enhance the customer experience by delivering cutting-edge technology. Secondly, expanding into new gear and services that grow our market opportunity. Since our inception, we have successfully entered a number of new gear categories, including gaming PC peripherals, streaming accessories, console controllers, and prebuilt and gaming PCs and laptops. As the gaming and content creation landscape continues to evolve, we intend to continue to introduce new products and services to address our customers' new and changing needs and to grow our market opportunity. Next, leveraging our software platforms to sell more gear to existing customers. Our software platforms integrate and enhance our ecosystem of gaming and streaming gear which drives customer loyalty and allows us to successfully sell additional gear to existing customers, strengthening our relationships with end users by increasing direct consumer sales. Through our acquisition of Origin and Scuf in 2019, we acquired two companies whose sales are primarily generated through direct consumer channels. While sales from this channel are relatively small contributors to our revenue today, We believe direct consumer sales represents a significant avenue to drive growth by facilitating increased engagement with our consumers. And finally, we'll continue to grow market share globally. As a globally recognized brand, we have a footprint that reaches customers in more than 75 countries. We will continue to invest in enhancing our sales and distribution infrastructure to expand our leadership position in the Americas and Europe and we view Azure as a significant long-term opportunity. We are a clear market leader in the gaming PC components market, and we have a steadily growing market share in gaming and streaming gear. So with that as a backdrop, I'd now like to review our performance in the quarter. We are very pleased with our strong results in the third quarter, which exceeded our expectations, as we achieved net revenues of $457.1 million, a 60.7 year-on-year growth, and we achieved adjusted EBITDA of $63.7 million, which is a year-on-year growth of 184.9%. Looking at the business highlights, the market for gaming and streaming gear continues to grow from strength to strength. as people who are spending more time at home are learning how to play games better, how to stream content to their friends, and how to build high-performance gaming PCs. All of these things require high-performance gaming and streaming gear, and so we are massively benefiting from this trend. In fact, we hope we're helping drive this trend. What we learned from Q3 was that the surge in gaming activity which started in Q2 now doesn't appear to be a pull forward in sales. In other words, our growth in Q2 did not come at the expense of Q3 or Q4. Far from it, what we are learning is that the biggest part of the increased demand is coming from first-time buyers. In other words, gamers who have not bought gaming products before. This is evidenced by strong sales for entry-level products, which means new gamers and streamers are beginning to invest real money on gear to support their hobby for the first time. And there are many more gamers and streamers who have not bought any gear yet. As we mentioned before, most of the TAM at this point is spent by the top 18% of the market, with the remaining 82% of gamers mostly not having bought much of any gear yet. Our estimates are that in the U.S., where we have very good data, The incremental new buyers that have come into the market this year and started to buy gaming and streaming gear represent less than 5% of total US gamers. Our expectation is that all these new gamers and streamers who are buying our gear for the first time will come back in the following years to upgrade and buy more high performance products from us. Demand was strongly up in all product lines, most notably in the streaming and gaming segment where we grew by 129% year-on-year. But our gaming components and system segment also showed huge growth of 38% year-on-year and is now at a yearly run rate of over $1 billion. These incremental new gamers are not just buying peripherals. Many of them are buying gaming PCs or buying ready-assembled machines as well. During the quarter, we introduced several new high-performance products. These are all listed out in detail in the press release, but they include two new keyboards, including the K100 new flagship products, a new wireless mouse, a new haptic headset, a new range of cases, a new family of CPU coolers, and a new gaming PC featuring the new NVIDIA RTX 30 series GPUs. We expect to continue to launch new high-performance products at a blistering pace, approximately one per week, and use these new products to gain market share. Our new microphones started shipping in volume in Q3 and exceeded our sales expectations. More recently, we acquired the popular app called Epoch Cam, which allows your iPhone to be configured as a webcam and connect wirelessly to your PC or Mac. This is one of the most popular apps in the Apple Store in the photo and video category. This adds to our video solutions that we already have in the Elgato product portfolio. Our main product in this category today is our Cam Link 4K, which allows people to connect a high-resolution DLSR camera directly to a PC and stream 4K video. The Epoch Cam app allows your phone to be used as a secondary camera or for many people, can be the only camera they use for casual video interaction with others. We expect to continue to add to our streaming video solutions in the near future. And lastly, we have made two significant steps in our move into coaching and training. Firstly, we've partnered with Pipeline, which is a course-based education platform to help streamers improve their quality and increase their viewers. we'll be offering these courses bundled with our Elgato streaming products. Secondly, we just announced the acquisition of Gamer Sensei, which is one of the top platforms for connecting gamers with coaches to help them improve their gameplay. We believe that the coaching and training market around gaming and streaming is largely untapped, and we expect that eventually it should be a similar market size that we see in other sports and pastimes, such as skiing, golf, or tennis, where lessons are always or almost always part of someone's journey to improve their performance. In closing, I'm obviously very pleased with our strong third quarter results and our progress heading into the end of this year. We continue to execute on our strategic growth initiatives, and we remain focused on capitalizing on tremendous market opportunity before us. Our recent IPO was a significant milestone for us, Although we are very proud of all that we've achieved so far, we acknowledge that this is just the next step forward in serving our customers, employees, and shareholders. Thank you for your time and continued support. I'll now turn the call over to Michael to discuss our financial results for the quarter.

Thanks, Andy, and good morning, everyone. During the third quarter, we delivered net revenue of $457.1 million, an increase of $172.7 million, or 60.7%, compared to $284.4 million in Q3 2019. Our strong top-line performance was driven by strong growth across both the gamer and creator peripheral segment and the gaming component and system segment. We believe the strong revenue growth year-over-year is driven in part by the COVID-19 shelter-in-place orders as consumers spend more time working and gaming at home. The gamer and creator peripheral segment provided $161.6 million of net revenue during the third quarter, an increase of $90.9 million, or 128.8%, from $70.6 million in Q3 2019. This was primarily driven by strong growth across all product categories, in particular, sales of our Elgato-branded streaming products, in addition to the contribution from SCUF, which we did not own in Q3 2019. The Gamer and Creator Peripherals net revenue was 35.3% of total net revenue, an increase of 1,050 basis points from 24.8% in Q3 2019. The gaming components and systems segment provided $295.5 million of net revenue during the third quarter, an increase of $81.8 million, or 38.3%, from $213.8 million in Q3 2019. primarily driven by strong growth across all products, including our PSU, cooling, PC cases, and DRAM, due to the continued strong market demand. Our memory products contributed $141.3 million of this revenue. Gross profit in the third quarter was $127.9 million, an increase of $67.7 million, or 112.4%, from $60.2 million in Q3 2019, primarily driven by the increase in revenue in these periods, as well as the positive margin impact from sales of higher-margin scuff products and streaming gear. Gross profit margin increased by 680 basis points to 28% from 21.2% in Q3 2019. The gamer and creator peripheral segment gross profit was $60 million, an increase of $40.1 million from $19.9 million in Q3 2019, primarily driven by an increase in revenue in the same periods. Gross profit margin was 37.1% compared to 28.3% in Q3 2019. The increase in gross margin was driven largely by product mix related to the strong growth in sales of higher margin streaming products coupled with less promotional activities and the addition of higher margin scuff products. As Andy mentioned, We continue to see a mixed shift as gamer and creator peripherals contributed 46.9% of total gross profit in Q3 2020, as compared to 33.1% in Q3 2019. This is a great overall story and formula for continued overall margin expansion, as our fastest growing and highest margin segment also sits in our largest markets. The gamer components and systems segment gross profit was $67.9 million, an increase of $27.7 million from $40.3 million in Q3 2019, primarily driven by the increase in revenue in the same periods. Gross profit margin was 23%, compared to 18.8% in Q3 2019. This was due to product mix and less promotional activities. Gaming components and systems contributed 53.1% of the total gross profit in Q3 2020, compared to 66.9% in Q3 2019. Our memory products margin in this segment was 18.8% for the quarter. Third quarter SG&A expenses were $65.3 million, an increase of $25.5 million, or 64.1%, compared to $39.8 million in Q3 2019, primarily driven by SG&A expense from SCUF, an increase in outbound freight costs due to the increase in revenue, and an increase in personnel-related expenses. Third quarter product development expenses were $12.9 million, an increase of $3.4 million, or 36.5%, compared to $9.5 million in Q3 2019, primarily driven by an increase in personnel-related expenses and the acquisition of SCUF. Operating income in the third quarter of 2020 was $49.7 million, an increase of $38.8 million from $11 million in Q3 2019. Adjusted operating income in the third quarter of 2020 was $61.4 million, an increase of $40.5 million or 193.7% from $20.9 million in Q3 2019. Third quarter net income was $36.4 million or $0.40 per diluted share as compared to net income of $1.5 million or $0.02 per diluted share in Q3 2019. Third quarter adjusted net income was $48.5 million, or 54 cents per diluted share, as compared to adjusted net income of $10 million, or 13 cents per diluted share in Q3 2019. Adjusted EBITDA for Q3 2020 was $63.7 million, an increase of $41.4 million, or 184.9%. compared to $22.4 million for Q3 2019. Turning now to our balance sheet. On September 25, 2020, we completed the initial public offering of our stock at a price of $17 per share. We and certain selling stockholders completed the sale of 15.1 million shares, including 1.1 million shares pursuant to the exercise of the underwriter's option to purchase additional shares. The IPO raised proceeds net of underwriting fees of approximately $118.6 million for Corsair and $120.7 million for certain selling stockholders. $86.6 million of Corsair's IPO proceeds were used to pay outstanding debt. As of September 30th, 2020, we had cash and restricted cash of $120.1 million and $48 million capacity under a revolving credit facility, and total long-term debt of $376.1 million. As of September 30, 2020, consolidated total net debt was $259.9 million. Last 12 months, consolidated adjusted EBITDA was $168.9 million, indicating a consolidated net leverage ratio of 1.5 times. Last week, both our rating agencies upgraded the rating on our outstanding debt. We plan to reduce our debt load over time while preserving cash for growth. Turning now to the guidance for the full year of 2020. Total revenue in the range of $1,616,000,000 to $1,631,000,000. Total adjusted operating income in the range of $178,000,000 to $184,000,000. and adjusted EBITDA in the range of $187 million to $193 million. We also expect interest expense to be approximately $5 million per quarter, assuming we don't pay any debt. We expect to have an effective tax rate of approximately 20% to 22% for Q4 2020, and we expect our full-year weighted average diluted shares outstanding of approximately 91 million with approximately 100 million for Q4 of 2020. Overall, we are pleased with the progress we have made on our strategic initiatives and performance of the business. With that, we're now happy to open the call for questions. Operator, will you please open the line for Q&A?

Thank you. We will now be conducting a question and answer session. 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 two if you would 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 poll for questions. Our first question comes from the line of Ron Hall with Goldman Sachs. Please proceed with your question.

Yeah, hi guys. Thanks for the question and congrats on a great first quarter. I guess I wanted to start off, the problem doesn't seem to be demand, it's supply. So I wanted to see if you could talk a little bit more about the supply situation, what products are out of stock and what are your expectations for getting things back into stock and so on. And does that have any effect on your balance sheet or other financials? I guess probably not, but just to double check that. And then I'm just curious too, As we head into the holiday season here, what products are selling the best? I know, Andy, you went through a lot of the new products. What are the ones you have the highest hopes for? How are you doing in the different categories, do you think, from a share point of view? Just kind of curious what's going on competitively now that some of the new products are out there in the market. Thanks.

Yeah, hi, Rod. Nice to hear from you. So a few questions there. I think from a supply standpoint, I would say that much of the year has been supply constrained, and that's true not just for us, but with our competitors as well. So generally, if you've been into a Best Buy or tried to shop on Amazon, you'll see there's a lot of stock outs, a lot of empty shelves. Clearly, we didn't expect to grow 50% this year, right? So... So when we set our supply chain up and gave forecasts out, we didn't put them in at that level. So really what it comes down to is a lot of our complex products, peripherals that have got controllers in them, microcontrollers, et cetera, some of those lead times are starting to stretch out to as long as 16 weeks. Typically, even without shortages, we tend to sort of want to give 8 to 12 weeks of visibility to our supply chain. So the point is that sales in September, you know, the forecasts for those are made in May or June. And this was really, you know, Q2 was the start of people really focusing on gaming and streaming and buying gear. So that's a little bit of what happened. Clearly, you know, now we've got... much of the year you know under our belt we're pretty comfortable or a little bit easier to forecast what's going on and we're seeing that you know this is not a sort of a pull forward in other words it's not people that would have bought products in q3 that bought in q2 this is a big surge in gaming and streaming activity mainly from from new people coming into you know, discovering gaming and streaming for the first time. So now we've raised our forecast quite considerably in the supply chain and we're gradually moving the stock levels up. Now in terms of, you know, what products are selling well, we're pretty happy with all the new products that we've introduced. I think, you know, some of the brand new categories, we just went into the microphone category. We launched that from our Elgato subsidiary, I think in June, started shipping that in July. So Q3 was the first quarter of those shipments. We were really happy with the results of that. We had to double the supply chain almost instantly. Typically in Q4, the things that are more seasonal are those products that tend to be given as gifts, and that tends to be peripherals. As I always joke, you know, Parents don't tend to buy their kids power supplies and memory modules for Christmas. So we don't tend to see as much of a seasonal activity there. But I think, you know, out of all the product lines, you know, headsets is probably the easiest thing that gets given as gifts. So we usually see, you know, a higher number in Q4, you know, more seasonal nature. So hopefully that answers most of the question. Other than that, there's no issue on the balance sheet or... financials with the supply chain, we know all the numbers are bigger.

All right. That's great. Thanks, Andy. Yeah, my daughter wants a power supply, but I guess she's a strange one. So anyway, thanks for the answers. Appreciate it.

Thank you. Our next question comes from the line of Matt Cabral with Credit Suisse. Please proceed with your question.

Yeah, thank you. Andy, you mentioned this in your prepared remarks. I think you even hit it on the last question. But I'm wondering if you could expand a little bit more on just how much of this year's growth you think is from new gamers that maybe have the potential to become more committed over time versus just the existing user base. And I know you said you haven't seen a pull forward impacting Q3, Q4. I guess as we roll forward to start thinking about next year, I'm just wondering how to balance the risk of, maybe some normalization from this year's surge in demand versus sort of sustainable underlying levels?

Yeah. I mean, obviously we, we don't have, you know, completely clear crystal balls, right? So the thing we can, we can see just from the mixed shift this year in particular is that there's a lot more entry-level products going out. And when we talk to our retailers, they tell us the same thing. In other words, it's, It's new gamers coming to the shops, people that have never bought stuff before, or people that are just discovering streaming. So that's encouraging. Even for experienced gamers that are upgrading, I think this is not a one-time thing, right? So what we see in general is, like any sport or hobby or pastime, if you have a little bit more time to spend on it or a little bit more time to learn, to get into it in the first place, that's not a short-term effect. So if, for example, your friends take you skiing and you like skiing, you'll probably ski for a while and continue to buy gear. And this is what we sort of expect is going to happen, at least we hope is going to happen, is that all these new people that have been introduced, or perhaps gamers that had never built a gaming PC before and now they've discovered how to do it, will now upgrade in the future. So We think for a lot of people this is the beginning of a long-term spend cycle.

And then a quick follow-up. Why don't you talk a little bit more about what growth in Elgato looks like in the quarter and maybe just more broadly where you think penetration of streaming gear sits right now and how much of the opportunity is within your existing customers versus maybe reaching a different audience than you typically sell to?

Yeah, we don't break out Elgato products separately, but I mean obviously we're really happy with that acquisition and I think we spotted a trend in streaming. The one thing we've learned about streaming in general is that when we first went into this, we imagined that everybody that was streaming was trying to be a YouTube star and would pay for their gear out of, you know, advertising proceeds. And so it would be like a sort of a small B2B. But in fact, that's not really what's happening. When we look at all the number of channels, the vast majority of channels, streaming channels, have, you know, less than 100 viewers. And so what it's turning into is more of a social sharing mechanism, sort of a bit like Facebook, where people are just in small groups sharing gaming content or whatever they're doing with their friends. And that means that we've got a massive opportunity in terms of the number of people that could start streaming. And the other thing that's happening is that for all of us, even if you're not a gamer or you don't want to be a YouTube star or stream at all, everyone's now getting completely familiar with video calls. I'd say 90% of the conversations I have now with people I'm using video rather than just on the phone. So as everybody gets more comfortable with how that works and how to set it up, I think we'll continue to see more and more people turning to video streaming gear. Thank you.

Thank you. Our next question comes from the line of Mario Liu with Barclays. Please proceed with your question.

Great, amazing quarter, and thanks for taking the questions. I have one on streaming and one on the Folio Guide. So the one on streaming, besides the acquisition of Epicam, are there any other updates in terms of adding a video camera to the Elgato portfolio? Are there any streaming products that currently you think is still missing that you could potentially add over time? And then on the Folio Guide, You know, it's implying that fourth quarter, you're on your growth of 46% or 4% growth sequentially, which I believe is below the seasonal pattern historically of roughly 20% growth sequentially. So I guess, Michael, if you could provide more detail on what is embedded in the full year and 4Q guide, whether it does include some pull forward demand or if it's assuming that the number of new entrants coming to the market is still remaining elevated. Thank you.

Yeah, it was two parts of that question. I think, you know, I don't really want to comment too much on new products. Clearly, in the streaming world, video is a very important part of it. Now, one of the products that Elgato is most famous for is a product called a Cam Link, which sells for about $129. And that allows you to connect a very high-quality DLSR camera to your PC. And we saw a lot of those, surprisingly a lot of those. So that's what people at the high end tend to do. You know, the best streamers are not using webcams. They're using DLSR cameras. So we're already in that business. Epoch Cam was a slightly different application where we wanted to start exploring some of the mobile applications. And look, we're going to continue to invest in all streaming gear. We're trying to maximize our footprint there. So yeah, anything you could imagine that would make sense to do in streaming, we're probably already working on. Now, in terms of the Q4 cadence, you're absolutely right. Normally, Q4 is bigger than Q3. And obviously, this is a slightly different year. We've got stockouts everywhere. We've got to consider the effects of how much our supply chain can react. And it's already pretty stretched. And so that's how we've arrived at the guidance. As I said, we're not in a situation now where we are demand constrained at all. This is purely a supply driven back half of the year.

Thank you. Our next question comes from the line of Tom Forte with DA Davidson. Please proceed with your question.

Great. Thanks for taking my question. Congrats on the quarter. When we think about your long-term margin opportunity and we think about your non-gaming revenue, coaching being an example you gave, how accretive can that be versus maybe a traditional hardware model? And how should we think about your non-gaming revenue in general and how that may drive your hardware revenue as well? Thanks.

Well, when we've looked at coaching and training, what we've realized is that most other sports or hobbies or pastimes, however you want to phrase this, contain a significant amount of training revenue. In fact, many sports, the spend that people... have compared to gear and lessons can be 30% of the total revenue. So we don't know how big that can be. What's clear to us is that the existing market for training and coaching ranges from free lessons on YouTube to just people on the internet trying to help. But if you can imagine being a golf instructor and not being associated with a golf shop or a golf course or a ski instructor and not associated with a ski slope, it would be very, very difficult to get a lot of business. So we think that the right place for offering coaching and training or lessons is the same place as you go to buy your gear. So we'll have to see how that works out. We're pretty bullish about it. We're investing quite heavily. You can see we've made our first... Announced our first acquisitions and partnerships just recently. I'm sure there'll be more. So, yeah, that's how we think about it. Now, clearly, in terms of how that works with hardware sales, you can just imagine that if you're taking golf lessons and the golf pro suggests to you what clubs you should buy, you're probably going to take his advice. And so we expect the same thing. In fact, any... higher level of engagement that we can have with our customers is going to be beneficial.

Thanks for taking my question.

Thank you. Our next question comes from the line of Drew Crum with Stiefel. Please proceed with your question.

Okay, thanks. Good morning, guys. So, Andy, you recently launched a headset for the Xbox. Can you talk about the company's plans to expand your presence in the console headset category and any commentary you can offer in terms of general demand you're seeing with product tied to the console transition. And then separately, the 4Q guidance, at least at the midpoint, the implied adjusted EBITDA margin is 10.4%, if my math is correct, which would imply a step down from the 13.9% reported in 3Q. I just wonder if you could offer any commentary as to why that's lower on a sequential basis. Thanks.

Yeah, sure, take those in two parts. So headsets is an interesting one. It turns out that over the last few years, a lot of retail and e-tail have been merging headsets, in other words, console and PC, because at the low end where you've got a three-pole jack plug connecting, the interface is the same thing. So historically, the notion was that it's good to have licensed products because for a lot of people, especially in the holiday season that are buying gifts and may not quite understand the interfaces, it's easier to have a package with Xbox on it, and you can only do that if you have a license. So it's really an experiment. You don't have to do that. In fact, the biggest guy currently specializing in... in console headsets, doesn't necessarily use licenses on most of their products. It's a bit of an experiment, but we certainly ship quite a few headsets into the console space. It's being bought for console use. Now, what we expect during the transition, I think that we're seeing that more with our SCUF subsidiary, which is making controllers that are 100% going into high-end consoles. I'd say this year, due to the price points and the limited availability of the new Xbox X and PS5, we don't expect the transition to be quite as severe. Most people knew that Xbox was compatible forwards and backwards, and there's a certain amount of compatibility on PS5 versus PS4 as well. So we don't expect it to be so severe, but we'll find out. You won't really know until people start shopping in Black Friday in December. I think the other part, do you want to take the EBITDA?

So for the EBITDA, the difference, first of all, Q3 obviously was a lot stronger than we expected. So when that happens, you tend to overachieve because your OPEX is sort of what you expected and everything else is higher, so that helps. But specifically for Q4, if you look at the gross margin lines, A combination of higher air freight because bigger demands in Q4 and a lot more than expected demand in Q3 means we've got to air freight more things for our customers. And obviously, there's a little bit more promotional activity traditionally in Q4 than in Q3. On the OPEC side, if you think this is our first quarters of public company, so there's going to be some increased public company expenses there compared to prior quarters. We're also spending more on product development for new products coming out next year. We're sort of accelerating some spending there and a little bit extra marketing spending around some branding and other initiatives we're doing. So that's the main components of the difference between actual Q3 and the implied forecast.

Got it. Okay. Thanks, Chris.

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Doug Kruitz with Cowan & Company. Please proceed with your question.

Hey, thank you, and good morning. Big week for gaming, obviously. The new consoles are shipping, and one of the things that reviewers have consistently said about the PS5 is that the haptic feedback controllers are quite impressive. I was just wondering with your SCUF line, is that something that you'll be able to do at some point with the SCUF controllers? Is that something you're planning to do? And how important is that, you think, to being able to maintain your dominant market share position on PlayStation with SCUF? Thanks.

Yeah, thanks. Good question. Turns out that most of the people that are pretty competitive on console turn the haptic off. And so for people that are really trying to concentrate on... you know, in gameplay. It's kind of annoying. So that's the first thing, but we'll have it. Most of the products that Scuf makes today are modified versions of the, you know, PS4 and Xbox and will be modified versions of PS5. So we can keep or lose any part of it. Normally, we basically allow people to take the whole haptic... module out of the hand grips and a lot of people do that. So it's, you know, we don't think it's a big deal, but we'll have it anyway.

Okay, thank you.

Thank you. Our next question comes from the line of Tim Nolan with Macquarie. Please proceed with your question.

Hi, thanks. A couple questions. One, another follow-up on the consoles coming out. I wonder if it's possible, hopefully quantitatively, but at least qualitatively, maybe to pull together some of the comments you've made thus far and just give us an idea what the console launches of xbox and playstation 5 will mean for your growth i.e incremental peripheral sales whatever that might be um and then secondly i might have missed this but um is it possible to provide a number on uh call it an organic growth number for q3 because i know there are some acquired revenues i guess scuff was in there just what was an organic growth figure for q3 please

Yeah, okay. Well, we'll come back to the organic growth in a second. In terms of console cycle, you know, this is the first one for us. And actually, you know, we've watched all the different companies around this space for quite some time, you know, notably Turtle Beach and Mad Catz when they were around. So we've seen this, and it's always quite different. But I'd say in general... What tends to happen with consoles is that when the new consoles launch, people spend money on the console. And in the following year, people start buying more accessories for it. Now what I think is going to be, and usually the console comes with one controller, so the first thing people tend to buy is another controller. So that's what we would expect. Certainly we would think that next year would be a stronger year for SCUF than this year. But having said that, this year was pretty good because there's a lot of people playing games at home. So I don't know if that really answers the question. It's tough to get super granular on that because it's just too early in the cycle. I will say the numbers that are being talked about for PS5 and Xbox X seem pretty supply constrained. So I think there's going to be a lot of people still buying PS4 and old Xboxes for a while. And the same thing with accessories.

In terms of the organic versus inorganic, organic growth was about 51.7%. It's about 9% lower. So if you take out the items that we had in 2020 that we didn't have in 2019, growth would have been about 9% lower. So consistently... For us, our growth has been driven heavily by our own products, or if we bought something a couple years ago, our ability to ramp up and move that better to our channels. So hopefully that answers your question.

Yeah. One follow-up, just to clarify on consoles. The only peripheral outside of SCUF that we sell that is largely used by console players is headsets. Obviously, you don't use a keyboard and mouse for the console. And the ASP tends to be much lower on consoles. They're typically much simpler. Most headsets are just a jack plug going into speakers, so very little electronics in them. We really can't tell when people are buying those at retail whether they're buying them for console or PC, because it's generally the same product. So as I said earlier, we did see a fairly big surge this year of entry-level $30, $40 headsets. whether that's by people playing console or PC, or in fact both, it's difficult to tell. We have seen in terms of the surveys that there's a vast crossover. In other words, something like 70% or 80% of people that are PC gamers also play on console. So it's difficult to, the market is not one or the other.

Yep, that all makes sense. Thanks a lot.

Thank you. Our next question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.

Great, thanks. Congrats on the IPO, again, and a strong quarter to kick things off. I wonder how much crossover in sales you're seeing between gaming and streaming product consumers, if that's something you're able to measure, and if there's a reinforcing or beneficial impact there as streamers purchase gaming gear and vice versa. or are they somewhat distinct? And then secondly, looking further ahead in terms of the direct-to-consumer offering, can you talk about how e-commerce fits into that and the roadmap in terms of marketing or technology upgrades required to capture more direct traffic and sales? Thank you.

Yeah, well, let's take those questions in reverse order. So firstly, we just went live yesterday with our CRM system. Traditionally, we've been a channel system, channel company, as has Elgato. So, you know, other than sort of chat on forum and tech support calls and that sort of thing, we haven't known too much about our customers. But both Scarf and Origin are 100% direct to consumer, and we're trying to ramp up our direct to consumer as much as we can just to get higher engagement. So we're going to learn a lot more as all that data flows into our CRM system. We'll be able to see what people are doing you know, individually on the website. We can also see, to a certain extent, what products they own through our IQ systems. So, yeah, direct-to-consumer is important because, obviously, we've got the opportunity to, you know, not just sell one thing, but, you know, sell an array of products. Now, in terms of crossover, you know, it varies. There's a lot of people that are streamers that have never built a gaming PC. And so the historical customer base is a little bit different. A lot of streamers are not particularly technical people. But there is some crossover. And we're finding more and more gamers want to stream and share to their friends. So I would say when we bought El Gallo, the estimates that probably 95% of the people buying streaming gear were streaming live gameplay. As you probably know, the majority of, over 90% of the traffic on Twitch is gaming. But we are starting to see, just from social interaction and talking to people, that there are a lot of people buying streaming gear for non-gaming activities, whether it's broadcasting, cooking, makeup, fitness, those sorts of subjects. But obviously those are people that historically wouldn't have been buying our gear.

Thank you very much.

Thank you. We have no further questions at this time. I'd like to turn the floor over to Andy Paul for closing comments.

Yes, so thank you very much. Look, Corsair, we are at the forefront of a massively growing market centered around gaming, esports, and streaming. And with our unparalleled brand and quality of products, we think we're uniquely positioned to take advantage of this exploding market. Today, the global and passionate community of gamers and streamers is engaged in the relentless pursuit of better performance, and we're proud to be a leading provider and innovator of high-performance gear for this new era of entertainment. We are committed to giving gamers and streamers the tools they need to play their best game, produce their best content, and have fun doing it. Thank you for your interest in Corsair, and thank you for joining us on the call today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.