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spk11: Good morning and welcome to the Corsair Gaming's third quarter 2021 earnings conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star zero on your telephone keypad. With that, I'd now like to turn the call over to Ronald Vanveen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please begin.
spk06: Thank you. Good morning, everyone, and thank you for joining us for Corsair's Prudential Results Conference Call for the third quarter ending September 30th, 2021. On the call today, we have Corsair CEO Andy Paul and CFO Michael Pollard. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This goal, including the Q&A portion of the goal, may include forward-looking statements related to the expected future results of a company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to 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. I would also like to remind everyone that until our 10Q is on file, the Q3 2021 numbers are preliminary. This conference call will be available for replay by webcast through Corsair's Investor Relations website at ir.corsair.com. Andy will begin with a third quarter business highlights and a discussion on what we are seeing in the market, and Michael will then take you through a review of the financials and our outlook before we proceed to Q&A. With that, I'll now turn the call over to Andy.
spk03: Thank you, Ronald, and welcome to our Q3 2021 earnings call. During the third quarter, we delivered revenues of $391 million. and gross profit of $101 million, resulting in gross margin of 25.9%. While we continue to see solid demand for our products, our performance was impacted by a very difficult logistics and supply chain environment, particularly the availability of reasonably priced GPUs, and we believe it prudent to reset expectations for the year. Michael will walk through our financial results in greater detail later in our discussion. I'd like to spend a few minutes to provide an update on what we are seeing in the market and why we remain confident that Corsair is well positioned to navigate the current industry headwinds to deliver sustainable shareholder value creation over the long term. First, Corsair is the 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 fans. As gaming and streaming continues to become more mainstream, we believe Corsair is uniquely positioned with our comprehensive product suite to meet the needs of this rapidly growing market. We have maintained our market leadership across most of our product lines with our relentless focus on enhancing the customer experience by delivering cutting edge technology and creating innovative gaming and streaming gear and related software. Based on outside data, we believe that we gained market share in most categories in Q3. Since the start of 2021, we've maintained an astounding pace of innovation launching 113 new products, including the addition of several entirely new product lines, which we believe has greatly expanded our total addressable market opportunity. In July, we launched a new Elgato camera called FaceCam, designed specifically for streamers and content creators. We are encouraged by the great momentum that we've seen so far, and we are gaining market share very quickly. The global TAM for USB cameras is over $1 billion. In September, we debuted the Xeon gaming monitor, which features an ultra-slim 32-inch QHD screen with a combination of powerful specs, smart features, and thoughtful design that power users need. We're excited to enter this new and large market for gaming monitors, which we believe to be approximately $4.5 billion globally. Finally, last week, we announced our new DDR5 memory products. DDR5 is the latest technology standard for DRAM, which allows speeds of over 6,000 megahertz, a huge performance increase compared to DDR4, the previous standard. and both Intel and AMD are supporting this interface on their latest processors. We expect that this will encourage many gaming enthusiasts to build new PCs around this platform. We believe new product innovation remains an important driver of our future growth, and we will continue to invest to increase value for our customers. Overall, demand has remained strong for gaming components and gaming peripherals, In fact, recent market data shows consumer demand for peripherals at close to the elevated 2020 work-from-home levels. We also recently conducted a survey of the PC gaming hardware market with DFC Intelligence, and we found that the refresh cycle for building and upgrading PCs is shorter than previously thought, closer to one to two years rather than two to three years. The semiconductor shortage has caused graphics cards to be in very short supply compared to demand and has driven market prices of certain graphics cards through 150% to 200% of normal MSRP. This has caused gaming enthusiasts to hold back on building new high-end gaming PCs that use our components. By our estimate, approximately 10% of our natural demand for our components and memory products in our gaming component segment was held back in 2021. We believe this should cause a bubble of pent-up demand, which will be released as GPUs return to normal MSRPs in 2022. We estimate the impact of the semiconductor shortage on our components business for 2021 is at least a $100 million revenue issue, and has made growth in the components market difficult in 2021. Although we still expect some growth, mainly from the fact that we have gained market share in components. Finally, we remain focused on strengthening our relationship with end users by increasing direct-to-consumer sales. We acquired Origin and Scuf in 2019, which are both direct-to-consumer, and we have continued to expand our direct-to-consumer channel with our other product lines. During the third quarter, direct-to-consumer was 13.1% of sales, up from 10% in Q3 2020, and we expect this trend to continue. We truly believe direct consumer sales represents a significant avenue to drive growth by facilitating increased engagement with our consumers. In closing, our third quarter results reflect a good demand environment against challenging logistics and supply chain conditions. We believe that as these constraints ease and GPUs become more available, we will return to our revenue and margin targets. While Q3 was only our second highest ever third quarter, it is notable that our revised full year outlook is in line with our initial expectations for the year, which we'd outlined during our Q4 earnings call, and well above our expectations during the time of our IPO. We firmly believe that Corsair remains uniquely positioned to capitalize on the underlying secular growth trends around gaming, esports, and streaming. We feel good about our continued investments in R&D and marketing, and the market reception of our new product introductions so far this year. We plan on having an analyst day very early in 2022, where we will discuss our product lines in more detail, including the new products we released since the IPO that have opened up a much larger TAM for us. We'll discuss our 2022 expectations then as well. 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.
spk05: Thanks, Andy, and good morning, everyone. During the third quarter, we delivered net revenue of $391.1 million, a decrease of 14.4% compared to $457.1 million in Q3 2020, but well above Q3 2019 pre-pandemic level of $284.4 million. Net revenue for the nine months ended September 30th, 2021 was $1,393,000,000, an increase of 21.6% year over year. As Andy mentioned earlier, our third quarter results were challenged by a very difficult logistics and supply chain environment. Logistics is slower than usual, with many shipping lanes taking over double the normal shipping times and at a much higher cost. At times, we're not able to purchase all of certain semiconductors that we need. Finally, GPUs are difficult to find at or near MSRP, and we believe that many of our customers are waiting to build new systems or to upgrade until pricing returns to more normal levels. We're trying to mitigate delays by building our inventory in our hubs closer to our markets, but it's been difficult to pass costs on to our customers. We estimate that the effect of increased supply costs have had a 2% to 3% headwind on our gross margin and resulting EBITDA percent during the third quarter and expect this to continue in the fourth quarter. Ocean freight of 40-foot containers, which historically would have been in the $3,000 to $5,000 range, have gone up three, four, even five-fold. Though we're seeing a slight easing in early October, we expect continued elevated freight costs for Q4. Because of this, our adjusted EBITDA in the second half of the year is expected to be 7% to 9% and 10% to 11% for the full year, compared to our planned 11% to 12%. Turning now to our segments. The gamer and creator portfolio segment provided $139.3 million of net revenue during the third quarter, a decrease of 13.8% to $161.6 million in Q3 2020, impacting by supply and logistics constraints. The gamer and creator portfolio segment net revenue contributed 35.6% of net revenue an increase of 30 basis points from 35.3% in Q3 2020. For the nine-month period, gamer and creator peripheral segment net revenue was $470.3 million, an increase of 35.3% year-over-year. We expect our gamer and creator peripheral segment to grow by about 20% this year, compared to 83% in 2020. We believe that our supply chain delays in 2021 have caused some loss of sales and growth could have been higher, perhaps by $50 million or an additional 10%. The gaming components and system segment provided $251.9 million of net revenue during the third quarter, a decrease of 14.8% from $295.5 million in Q3 2020. primarily driven by a shortage of reasonably priced GPUs and supply and logistics constraints. Less than half of this revenue came from memory products, which contributed $115.5 million. For the nine-month period, gaming components and systems segment net revenue was $923.1 million, an increase of 15.6% year-over-year. Gross profit in the third quarter decreased by 20.8%, to $101.4 million from $127.9 million in Q3 2020, which, as you recall, was a record third quarter result and is well above the Q3 2019 pre-pandemic level of $60.2 million. The decrease over Q3 2020 was primarily driven by increased logistics costs and reduced revenues. Gross profit margin was 25.9%, a decrease of 210 basis points from 28% in Q3 2020, mainly due to significant increases in logistics costs, especially ocean freight. For the nine-month period, this was $392 million, an increase of 25.8%. The gamer and creator peripheral segment gross profit was $48.6 million, a decrease of 19% from $60 million in Q3 2020, primarily driven by a decrease in revenue in the same periods and increased supply chain and logistics costs. Gross profit margin was 34.9%, a decrease of 220 basis points from 37.1% in Q3 2020. We continue to see an overall mix shift as gamer and creator peripherals contributed a record 47.9% of gross profit in Q3 2021 as compared to 46.9% in Q3 2020. This remains a great overall story and formula for continued overall margin expansion as our fastest growing and highest margin segment also sits in our largest market. For the nine months ended September 2021, Gamer and creator peripherals segment gross profit was $172.1 million, an increase of 42.3%. The gaming components and systems segment gross profit was $52.8 million, a decrease of 22.3% from $67.9 million in Q3 2020, primarily driven by the decrease in revenues in the same periods and increased logistics costs. Gross profit margin was 21%, a decrease of 200 basis points from 23% in Q3 2020, primarily due to freight costs. Gaming components and systems contributed 52.1% of the total gross profit in Q3 2021, as compared to 53.1% in Q3 2020. Memory products margin in this segment was 13.8% for the quarter. For the nine-month period, Gaming components and systems segment gross profit was $220 million, an increase of 15.3%. Third quarter SG&A expenses were $76.1 million, an increase of 16.5%, compared to $65.3 million in Q3 2020, primarily driven by an increase in outbound freight costs due to increases in ocean and air freight, offset by a decrease in volumes due to lower revenue, an increase due to expenses related to be a public company, and an increase in personnel-related expenses. Third quarter product development expenses were $14.5 million, an increase of 12.3% compared to $12.9 million in Q3 2020, primarily driven by an increase in personnel-related expenses as we continue to focus on bringing an increasing number of products to the market. Operating income in the third quarter of 2021 was $10.8 million, a decrease of $39 million from $49.7 million in Q3 2020. For the nine-month period, this was $112.8 million, an increase of 13.4%. Adjusted operating income in the third quarter of 2021 was $26.4 million, a decrease of 57% from $61.4 million in Q3 2020. For the nine-month period, this was $156 million, an increase of 16.6%. Third quarter net income was $1.8 million, or two cents per diluted share, as compared to net income of $36.4 million, or 40 cents per diluted share in Q3 2020. For the nine-month period, net income was $76.3 million, an increase of 26.7%. Third quarter adjusted net income was $16.3 million, or 16 cents per diluted share, as compared to adjusted net income of $48.5 million, or 54 cents per diluted share in Q3 2020. For the nine-month period, this was $110.2 million, an increase of 18.2 million, or 19.8%. Adjusted EBITDA for Q3 2021 was $27.6 million, a decrease of 56.6% compared to $63.7 million for Q3 2020, resulting in adjusted EBITDA margin of 7.1%, a decrease of 680 basis points from 13.9% in Q3 2020, Adjusted EBITDA for the nine months ended September 30, 2021, was $159.6 million, an increase of 13.6% year-over-year. Turning now to our balance sheet. We continue to convert our strong financial performance into an opportunity to further strengthen our balance sheet. In Q3 2021, we refinanced our long-term debt, substantially reducing the interest rate, doubled the available revolver to $100 million, increased the term, and reduced the total outstanding debt by $24 million to $250 million of face value. Our strong financial position has allowed us to adjust to the current environment by strategically increasing inventory and making longer-term supply chain commitments where needed. With this refinancing completed, we expect to continue to reduce debt over time on a more opportunistic basis, subject to business conditions and any need for additional growth capital. We expect the refinancing to save us approximately $2 million per quarter in cash interest expense. As of September 30, 2021, we had $100 million capacity under our revolving credit facility. total gap debt of $248.8 million, of which $244.1 million is long-term, and cash excluding restricted cash of $71.9 million. Turning now to our outlook for the year, the actual demand environment remains quite good. We believe that as supply and logistics constraints ease and GPUs become more available, we will be able to return to our revenue and margin targets. However, the various challenges we discussed earlier are constraining our performance. Therefore, we now expect our full-year performance to track more closely to the initial expectations we outlined during our Q4 2020 earnings call. For 2021, we expect total revenue in the range of $1.825 billion to $1.925 billion, representing growth of 7.2% to 13.1%. adjusted operating income in the range of $180 to $195 million, and adjusted EBITDA in the range of $190 million to $205 million. The additional modeling details underlying our outlook remain largely the same as we discussed in our prior earnings call, with the exception of a now reduced interest expense. For ease, I'll repeat them. We expect gross margins to slightly decrease year over year and operating expense to increase as well to support our higher revenue level. The need to continue to innovate at a larger scale and a full year of public company costs. Assuming no further debt pay down, we now expect interest expense of approximately $1 million per quarter. The $4 million patent trial win in Q1 2021 is not in our outlook. This amount could vary depending on what the judge rules. is subject to appeal and the timing of recognition of a gain of any is uncertain at this time. An effective tax rate of approximately 21% to 23% for 2021 and full year weighted average alluded shares outstanding of approximately 100 to 102 million. With that, we're now happy to open the call for questions. Operator, will you please open the line for Q&A?
spk11: We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Mario Lou from Barclays. Please go ahead.
spk08: Great. Thanks for taking the questions. The first one's on the fourth quarter revenue guide. I believe at the midpoint it suggests down 13% growth year-on-year. So just wondering if you could provide some color in terms of the year-on-year growth rate you saw exiting the third quarter in September or any early trends.
spk03: In October that you are saying that suggests for to revenue could accelerate slightly versus a third quarter Well, let me answer that question a couple of different ways Mario so I'm good to hear from you by the way, so I'm tracking the I'm tracking the velocity of performance gaming products pretty carefully and And we use as a bellwether for that keyboards and mice. We don't use headsets because a lot of headsets, you know, are not bought for the purpose of, you know, increasing your skills at gaming. And what we're finding there is the sales both in Europe and in the US are tracking to last year. So that gives us a good indication of the base demand for performance gaming gear. Now, as we mentioned in the release and the remarks earlier, the biggest issue we have at the moment, other than the supply chain, is that GPU cards are very expensive and very short. And so gamers that want to build a high-performance gaming PC are holding back somewhat because they don't want to spend $1,500 or $2,000 for a high-end graphics card. So that's really what's causing, and it's much worse today than it was in Q4 last year. So that's really what's causing the revenue outlook to be a little soft. It's not really related to the underlying demand. It's just the fact that you know, people can't get cards. If they can't get cards, then they won't be able to fill PCs and buy our cases and power supplies and memory and cooling products.
spk08: Got it. Thanks, Andy. And then just one on the DDR5 memory. Do we have any color in terms of the timing of that release in 2022? And if there is an increase in ASP, is there a range of magnitude of that increase and how that should flow to the memory gross margins?
spk03: Yeah, I think it's going to be a slow start. We've talked to the memory manufacturers. They're really not going to be in high production until second half of next year. So we'll expect a few people. And let me back up. So all the motherboards that are coming out will support DDR4 and DDR5. And so there'll be a few, you know, leading-edge enthusiasts that want to go DDR5, but there's going to be very limited quantities available. So I wouldn't expect to see anything until next year. And then we'll see how that works. There's no reason to think that ASPs will do anything but go up. But, you know, all that can be a... by the amount of memory people are putting into systems. But I'd expect the way consumers are allocating budget to systems, I think it's going to go up a little bit in memory just because of the added performance it can give.
spk08: Got it. Thank you.
spk03: But just to sort of conclude that, the last question, I wouldn't expect to see any meaningful effect on margins until very late in 2022 from GDR5.
spk08: Great, thanks.
spk11: The next question comes from Doug Krutz from Cowen. Please go ahead.
spk09: Can you talk about what you're seeing as far as the level of discounting in the market right now, and are there areas, other product areas that have been more aggressive or areas that have been less aggressive? Thanks.
spk03: Yeah, I'd say... You know, it really depends on the category, but we're not seeing in general a lot of discounting. And where we are, we're not necessarily reacting to it. I mean, in general, we're just coming off of a short supply situation and starting to, you know, have the channel filled up. So we don't see any need to, you know, to discount heavily. There are some categories where, you know, the demand is softer generally. post work from home. Now we're seeing people come back to work. But we don't really, you know, that's a pretty small percentage of our sales. So I'd say on an overall basis, yeah, I haven't seen too much discounting going on so far.
spk09: Okay, thank you.
spk11: The next question comes from Drew Crum from Stifel. Please go ahead.
spk02: Okay, thanks. Hey, guys. Good morning. A lot of discussion around new products in your preamble. Given the supply chain disruptions and logistics issues you're dealing with, how is that affecting the cadence of new product launches? Are you slowing the pace? And then I have a follow-up.
spk03: No. In fact, we've increased our spending on R&D and we're cranking out products like nobody's business. So I think we, what did we say, 113 this year so far? So well in excess of two a week. So we're keeping that going. And the supply chain delays... and now well understood, so it just means you have to plan longer, longer ahead. But, you know, that's not stopping the pace of innovation or products coming out.
spk02: Got it. Okay. And then, Michael, the adjusted EBITDA guidance would imply an uptick in margin for 4Q versus 3Q. Anything noteworthy to call out to explain that improvement?
spk05: I think the two main things are higher volume, so we get a little bit better absorption and a little bit better coverage of the operating expenses, and a slight easing in some of the logistics costs, at least at the beginning of the quarter. Those are probably the two things.
spk11: Okay. Okay. Thanks, guys. The next question comes from Tim Nolan from Macquarie. Please go ahead.
spk01: Great. Hi. Thanks. I'd just like to ask again about the supply chain issues. It sounds like you're saying the same thing you said last quarter, which was the issue is really that the shipping prices have gone way up, and also consumers are holding back on buying things. But just to be clear, it's not a matter of your inability to actually source the products and make them, just to be clear on that.
spk03: Well, that's 95% accurate. What we found over the last year is the products that have the highest semiconductor content, which of course are the highest ASP products, things like our flagship keyboards and wireless headsets with Bluetooth and standard wireless, those have been a struggle to keep on the shelves. We are now in pretty good shape, and that's been a fairly recent development. So, yeah, in general, we're feeling in reasonable shape. We've increased inventory to take care of the delays. The costs, obviously, are still a big issue. And, you know, they're probably now as worse as they've been. We do hope to see some reprieve, and we're certainly doing less air freight, but... Yeah, that's the situation. So it's not necessarily stopping us at retail other than a few products that are still a bit tight.
spk01: Okay. No, I know you've said before that you had your... Sorry.
spk03: Yeah. All of this is really dwarfed by the amount of PCs that are getting built, and that's really a situation with the graphics cards. So I mean, that's two-thirds of our revenue, right? It's from components and memory that go into gaming PCs.
spk01: Yep. No, I know you've called out before you were in pretty good shape supply chain-wise coming in. So I just wanted to make sure how things sit now. And then follow-up, you called out $100 million of missed revenues, basically, and some pent-up demand that's building. And I know you're not talking 22 numbers yet, but It sounds like we can't really call the timing of this supply chain getting back into normal, but I guess it spills into next year. How should we start to think about what demand looks like into next year? I mean, if underlying growth is X and then you add $100 million to that, is that the right way to think about where your real growth trend is going?
spk03: Yeah, yeah, I think so. I mean, it's very difficult to know exactly what's in consumers' minds. I mean, like I said, we think that, you know, we saw the growth last year, right? So about 70% increase in gaming hardware activity. In the US and that was across all product lines I'm talking market numbers now and then this year, you know, the PC builds are about level with 2019 so dropped back So you could argue that if there'd been plenty of GPU cards available You know the bills could have been you know, 50 70 percent higher if they match last year and So we're using a pretty conservative number where we think, you know, 10% is about the right number that we missed. And what we also don't know, of course, is how quickly graphics cards will get back to normal supply. There's two things going on there, right? One is the semiconductor issue because there are obviously a lot of semiconductors in those cards. And also the fact that you've got Bitcoin mining that's absorbing a lot of the supply, right? So, you know, hopefully both those things will ease next year and we'll see a pretty healthy market. But it's very difficult to say. I think the only way to think about it, you know, on a fact basis is the fact that with cards of $1,000 to $1,500, people are still building PCs at the same rate as they were in 2019. So, you know, how we model that for next year, we'll have to...
spk01: uh wait and see how we get there but uh we do expect there to be a big surge of development yes okay cool could i just squeeze in one more please and that's um you've got some interesting new product uh you know releases in categories you haven't necessarily been in before could you just give a little bit of color on how these are different um from and better than different from and better than competitors so i'm thinking the memory um the gaming monitor that you just mentioned and and like the elgato face cam how are these different better than your competitors products
spk03: Well, so let's take the Elgato camera first, the face cam. That has been designed from the ground up for streamers. Whereas, as you probably know, most of the webcams on the market were designed for pretty casual, you know, video conferencing. And that means, because the people at the high end of the market were using, you know, pretty expensive DLSR cameras. And with that, you get a whole bunch of different settings. You can adjust white balance. You can adjust exposure, et cetera. We built all of that into the face cam. And the settings, you know, are stored inside the face cam. So you can basically treat it like a DLSR camera. It's got a very, very fast refresh rate. So if you wave your hand in front of a face cam, you can see your hand moving. If you wave it in front of a standard webcam, you see a blur. So, yeah, it's been very well reviewed. You know, four and a half stars on Amazon. So people are really liking that, and we're basically making as many as we can. Gained quite a bit of market share already on that product, so... Pretty happy with that. The monitor is very new. We've just launched it and just started to sell it. Obviously, that's a big, heavy product. So we had to make a decision early on how many we were going to load into the channel. And, you know, we didn't want to get too aggressive. So that's really too early to say how that's going to go. But it's basically we picked the high end of the monitor market. So very high refresh rate, 32-inch monitor, built some really nice features into the mechanical parts of it for cable routing and camera mounts. So it's really designed for high-end enthusiasts. And then the DDR5, we've basically taken all the standard technologies that we put into our normal modules in terms of overclocking and RGB control and we've added those to a DDR5 platform. Now DDR5, the chips themselves are very, very fast and have got a huge amount of room for overclocking. So we do expect that that's going to excite all the enthusiasts. You know, in terms of differential, the main differential that we offer, as I said, is enhanced speed and really nice IQ control, which means the RGB lights sync with everything else. As you probably know, we have a massive market share now on memory, so we're almost at 60% market share. So we're not necessarily looking to differentiate any more than we already do.
spk01: Thanks very much.
spk11: The next question comes from Thomas Forte from DA Davidson. Please go ahead.
spk10: Great. So one question to follow up. My first question, I wanted to hear your current thoughts on the progression of your core gamer. Are you still seeing an acceleration in the timeline from mobile to console to build your own?
spk03: Well, it certainly looks like it. I think we've mentioned before that the gaming hardware is growing faster than software, which is growing faster than the number of gamers. So there's a steady acceleration of people that game moving into performance hardware and building gaming PCs. So we didn't see anything different. And it's roughly three to one in terms of the pace of growth. So yes, we're seeing a steady movement. One of the things we just did recently was a survey among PC gamers. The interesting thing is that almost 90% of PC gamers also play on console, also play on mobile. So I don't think it's not quite the situation where people are migrating from one to another. They're just doing more things. But as far as we can see, once people can afford to build a gaming PC, they'll go ahead and do it.
spk10: Great. And then my follow-up question is, I think in the press release you talked about the ability to take price or times where you felt like you couldn't take price to adjust for some of this inflation. Can you talk about your product portfolio and your ability to take price within different segments?
spk03: Sorry, it was a bit muffled. Are you asking whether we're able to pass on cost increases in the form of price increases?
spk10: Yeah, Andy, if you think that there's certain segments you – operate in where you feel like you can take price versus others where you feel like you can't take price?
spk03: Yeah, I think that in the – yeah, it's quite simple, really. I think in the categories where we've got big, healthy competitors that are more like us, I think most people are waiting on prices. So, you know, keyboards, mice – typically those prices we're not seeing being raised. The companies are simply absorbing the costs. With our smaller competitors that we see with our components, and let's be, you know, if we get this specifically down to things like chairs, you have to increase prices, so otherwise people will go out of business. So, yeah, where we've got smaller competitors, we are seeing prices go up. to reflect that to a certain extent. So we've got some mitigation against the cost, but in the peripheral areas and the streaming areas, we haven't seen people passing on a lot of costs yet. I think everyone's sort of waiting to see how quickly the shipping costs go back down. I mean, it's sort of inconceivable to think that container prices would be $15,000 forever. So we're pretty sure that eventually, otherwise, we'd all start up container companies So I think that's probably going to reach pretty quickly.
spk10: Great. Thanks for taking my question.
spk11: The next question comes from Rod Hall with Goldman Sachs. Please go ahead.
spk07: Hi, this is RK on behalf of Rod. Thanks for taking my question. Andy, I wanted to follow up on underlying demand. Could you give us more color on how you track that, which areas were strong? And I think you also mentioned some categories were softer. And Michael, to follow up on the pricing question, why is it harder to pass on the price increases given that demand is still strong?
spk03: So let's take the second one first. I think that... It's not necessarily hard to pass on price increases mechanically, but in a competitive environment, like I said just now, you've got larger competitors that have healthy balance sheets, and the notion is that these shipping costs will ease within a year. A lot of times, where you've got products that are very heavily entrenched in retail, There's no point, you know, asking a retailer to raise MSRP by $10 and then taking it down again in six months. So that's where we, you know, we tend to not see price increases. The other products, you know, things like cases and power supplies and chairs and everything, yeah, in general those prices have been rising up. In many cases we've got situations where our retailers buy containers from us you know, FOB in China, and they're incurring the cost themselves. So that naturally tends to lift prices up. The first part of the question I missed. I'm sorry.
spk07: Oh, I wanted to ask on underlying demand. So how do you track that, and which areas are stronger and softer?
spk03: Yeah. Yeah, yeah, sorry. So, yeah, very straightforward. Look, we collect NPD data in the US. We collect GFK data in Europe and many parts of the world. We do various surveys. And, of course, we see what's happening at the point of sale. So we've got a pretty good line on that. And as I said earlier, what I tend to focus on is performance products. Those products that people are buying to improve their gaming performance. um and we see those uh those rows by 70 from 19 to 20 and they're currently holding at the same levels as 20. so which is pretty remarkable um because i think we all were a little nervous that perhaps that was a one-time surge that would relax back when people went back to work but that hasn't happened um now we don't know what the true underlying demand is of um gaming pcs for people building them, but just think about it. If prices are pushed up to 50% to 100% over standard MSRP, you can imagine that the demand is well in excess of the supply. And the current build rate in the US and Europe is about the level of 2019. So we know that it's somewhere in between 19 and 20 levels. um could be more than 20 quite honestly but i'd expect it's more likely closer to 20 if graphics cards were at the normal prices so that's basically how we're figuring it out and you mentioned that some categories were softer in underlying demand so you say some categories uh i thought you mentioned i think that um Yeah, sorry, it's a bit muffled. Yeah, no, I understand the question. Yeah, when we look across all the different categories that we're in, you can see that products that we used for work from home and perhaps not gaming, so webcams, for example, those are a bit softer. We're not really in that market, but we're looking at it because we just launched a camera, right? And some of the streaming products, you know, like lights and... things that were bought by people, not just gaming. So we've seen that ease a little bit. But in general, all the things that are related to performance gaming have remained steady.
spk07: Great. Thanks, Andy.
spk11: Once again, if you have a question, please press star, then 1. The next question comes from Colin Sebastian from Baird. Please go ahead.
spk04: Great, thanks. This is Dalton on for Colin. I had two questions, if I may. The first, can you talk a bit about how the supply chain constraints are impacting the gaming components and the gamer and creator peripherals differently? So it sounds like there's no more of a connection to PC build cycles and that demand getting pushed back for the component side. But How much of the gamer and creator peripherals demand is tied to that kind of new PC build cycle? And, you know, are you seeing, you know, is it a matter of inventory constraints in both segments there? Or just kind of wondering, you know, why we're seeing the same declines in gamer and creator peripherals as the components, you know, if underlying demand trends are still healthy there?
spk03: Um, yeah, so I think it's a complicated question. So firstly, those two segments are disconnected, right? I mean, people don't tend to build a game PC and then at the same moment buy a new keyboard and mouse. So those things are asynchronous. And yeah, the component we've got, I mean, there's no problem with supply in, let's say, 95% of our of our components. We're still short on things like, you know, very high wattage power supplies, but in general, we're in pretty good shape. And it's more of an issue of, you know, graphics card prices that dictates that. But that has no effect on the volume of gaming peripherals. So as I said, there's some other categories that are a little bit lighter in demand. We've also got our SCUF subsidiary that we bought a couple of years ago. We're still going through the transition of PS4 to PS5. And so that's a little bit of held back sales with that, but that should rebound in 2022.
spk04: Okay, great. Thanks. And then you previously commented on some of your supply chain lead times. You know, I know we talked about the shipping cost increases recently, but what are you seeing in terms of lead times versus normal? And as you're looking ahead to planning to 2022 and this increase in demand, How are you thinking about kind of planning inventory ahead of that and are you stocking up ahead of that in order to be prepared for when GPU supply chains normalize a bit?
spk03: Yeah, well, think about it two ways. In terms of finished goods, we've increased inventory two different ways. One is you calculate your inventory needs on the refresh reload time. So that's had to go up a little bit. We also have probably six weeks of inventory in containers on the water extra compared to last year because lead times have in general gone from six to 12 weeks in terms of container shipments. So that's how we deal with it. In terms of raw materials with our subcontractors, yeah, we have many situations where microcontrollers, a lot of the semiconductors we use are on anywhere from six to 12 months lead time So in those cases, we've just bought ahead. So I'd say we've got a pretty good handle on the supply chain in this case. It does mean that, like I said earlier, there was a question on new products. We have to plan a little bit further ahead for volume. But at least we know where we stand now.
spk11: This concludes the question and answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.
spk03: Okay. Well, I'd just like to thank everybody for attending the call. Thanks very much for your interest. We're obviously looking forward to a very exciting next 12 months, and we look forward to seeing you again.
spk11: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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