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spk05: Good afternoon and welcome to the Corsair Gaming first quarter 2022 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 a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to enter the question queue, please press star 1 on your cell phone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. With that, I would now like to turn the call over to Ronald Van Veen, Coursera's Vice President of Finance and Investor Relations. Thank you, sir. Please begin. Thank you.
spk09: Good afternoon, everyone. Thank you for joining us for Coursera's Financial Results Conference Call for the first quarter ending March 31st, 2022. On the call today, we have our CEO, Andy Cole, and CFO Michael Potter. Andy will review highlights from the first quarter and the business environment. Michael will then review the financials and our outlook, and we will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the 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 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 be issued after the market close today. With that, I'll now turn the call over to Andy.
spk01: Thank you, Ronald, and welcome everyone to our Q1 2022 earnings call. While we faced headwinds in Q1 with inflation, the continued Russia and Ukraine conflict, and high freight costs, we continue to see positive underlying growth trends in the gaming hardware sector. During Q1, GPU cards, which are the most expensive item in a gaming PC, were still at a high premium, roughly 150% of MSRP. And even with this premium, we saw gaming PC build activity slightly higher than pre-pandemic and pre-GPU shortage levels. Our component segment grew by 6% in Q1 22 compared with Q1 20, the last Q1 before the pandemic and shelter at home. The surge of activity that we saw during the shelter-at-home period does not appear to have caused a large pull forward in builds, more so an entrance of new gamers building for the first time. We expect the GPU cards will be back to MSRP in the next few weeks, perhaps discounted below MSRP. We expect that with GPUs becoming available and reasonably priced, we will see a surge of activity in second half of 22 and 2023. We see a similar positive trend with peripherals. While the market appears to be generally down some 15% to 25% compared to last year's peak, it is still substantially above pre-pandemic levels. Our peripheral segment grew 77% from Q1 2020 to Q1 2022, and as we outlined in our Investor Day presentations, we think that the peripheral market will continue to drive 20% to 25% annual growth. We also believe that with our ever-expanding IQ control software and innovative new products pipeline, we will continue to take market share. Having said that, our Q1 2022 revenue was lower than expected. We are seeing the effects of inflation now, particularly in Europe, which coupled with the Russia-Ukraine war has dampened consumer demand. This in turn has caused channel inventory to be higher than optimal, and we are working through that adjustment. It's important to note that we don't think inflation will affect the committed gamers who want to constantly upgrade their gaming setups. We certainly expect that inflation will affect casual or impulse buying at the entry level, but that is not a huge part of our business since we cater mostly to the committed gamer sector. We are therefore reducing our revenue outlook for the year to between $1.6 and $1.8 billion, Michael will go through a complete outlook in more detail later on. Many of our product lines showed great progress in Q1. We saw compelling growth in our Stream Deck products, our systems group, and our SCUF controllers. The Stream Deck is a central control center for the creators and streamers. Some of the underlying hardware technology behind Stream Deck comes from a company in Taiwan called iDisplay. which we acquired a 51% share of in January of this year. And this will allow a much closer working relationship between our companies and accelerate our roadmap around products using their displays. Our systems group, which comprises of gaming platforms like Corsair One, Corsair Vengeance, and our origin division of custom gaming PCs, did very well over the last 12 months. And we see that sector as a growing opportunity since while the bulk of our business is targeted towards gamers who want to build their own PCs, there are many people who do not have the time or skill to do that. And within our systems group, we have very skilled custom PC builders who are expert at building amazing gaming PCs. We launched our new PS5 SCUF controller late last year. And ever since then, the demand has been phenomenal, causing us to be sold out repeatedly. With our ever-expanding IQ control software, and innovative new products pipeline, we will continue to take market share. In Q1, we made further gains in market share for our components and memory categories, and we continue to hold the number one spot in every major category. Our Elgato line of creative products continues to do well, and we are making good progress in our new categories, cameras and microphones. We believe that our extensive software suite for Elgato products is one of the key reasons that creators are enjoying our new products. While talking about innovation, I would like to touch on a few products we have introduced in the past few months. First, the MP600 Pro LPX solid state drive. This is a high performance storage expansion product designed for the PlayStation 5, which adds to our product portfolio in addressing the console market. Second, our Corsair IQ5000T RGB case. This is a high airflow case with three RGB cooling fans and lighting strips controlled by a pre-installed IQ controller. This is a perfect platform for building an amazing RGB system using the latest high-powered GPUs and CPUs. Finally, during the quarter, we launched our latest capture card, the HD60X. This card supports VRR, which stands for Variable Rate Refresh, a new feature that is built into both the PS5 and the Xbox Series X. It also supports 1440p at 60 frames per second, as well as 1080p at 60 frames per second. I'll now turn the call over to Michael to discuss our financial results for the quarter.
spk04: Thanks, Andy, and good afternoon, everyone. In Q1, we delivered net revenue of $380.7 million. well above the Q1 2020 pre-pandemic level of $308.5 million. This compares to $529.4 million in Q1 2021, which was a record first quarter for Corsair, led by stimulus checks and pent-up demand. Over 70% of the revenue decline in Q1 2022 versus Q1 2021 was in the European region, as we've seen European consumer sentiment drop sharply following the start of the conflict in Ukraine. We believe that the channel has reasonable levels of inventory of our products. Our channel partners are adjusting inventory levels based on their current and expected consumer demand and the decreased shipping times today compared to a year ago. This will cause short-term headwinds, but we expect inventory to be at normal levels during Q2. Turning now to our segments. The gamer and creator peripheral segment contributed $134.1 million of net revenue during the first quarter, a decrease of 23.7% from $175.9 million in Q1 2021, but still a healthy 76.8% above pre-pandemic Q1 2020 of $75.9 million. The gamer and creator peripheral segment net revenue contributed 35.2% of total net revenue, an increase of 200 basis points from 33.2% in Q1 2021. The gaming components and systems segment contributed $246.5 million of net revenue during the quarter, a decrease of 30.3% from $353.5 million in Q1 2021. primarily driven by a shortage of reasonably priced GPUs and supply and logistics constraints, was 6% above Q1 2020's level of $232.7 million. Just over half of this revenue came from memory products, which contributed $132.2 million. Overall gross profit in the first quarter decreased by 43.4% to $90.8 million from the record $160.3 million in Q1 2021. The decrease over Q1 2021 was primarily driven by reduced revenues, increased logistics costs, and a return to more normal promotional activity. Gross profit margin was 23.8%, a decrease of 650 basis points from the record 30.3% in Q1 2021, many due to significant increases in logistics costs, especially ocean freight, promotional activity, and lower absorption on reduced volumes. Sequentially, the margin was roughly flat, with 23.9% in the fourth quarter of 2021. We've also counted inflation effects by raising prices where appropriate and expect to continue such actions. And some of the more severe logistics costs headwinds moderated during Q1. The gamer and creator peripheral segment gross profit was $43.1 million, a decrease of 37.5% from $68.9 million in Q1 2021, primarily driven by a decrease in revenue in the same periods. increased supply chain logistics costs, and a return to more normal pre-pandemic level of promotions. Gross profit margin was 32.1%, a decrease of 700 basis points from the record 39.1% in Q1 2021, largely due to the previously mentioned supply chain and logistics costs and rebate levels. Sequentially, margin was up 220 basis points over the fourth quarter of 2021, largely due to a favorable mix shift towards our higher margin Elgato and Scuf branded products. This shows the durable strength of our diverse portfolio of products. The gaming components and systems segment gross profit was $47.7 million, a decrease of 47.8% from $91.5 million in Q1 2021, primarily driven by the decrease in revenue in the same periods and increased logistics costs. Gross profit margin was 19.3%, a decrease of 660 basis points from the record 25.9% in Q1 2021, primarily due to freight costs as well as some underabsorption associated with the lower revenues. Our memory products margin in this segment was 15.9% for the quarter. First quarter SG&A expenses were $76.1 million, a slight decrease of 2.2% compared to $77.9 million in Q1 2021, primarily due to a decrease in personnel-related costs. The impact of outbound freight costs due to reduced revenues was offset by increases in outbound ocean and air freight rates. Adjusted operating income in the first quarter of 2022 was $13.3 million, a decrease of $67.1 million from $80.4 million in Q1 2021. First quarter net loss was $3.3 million, of which $2.9 million attributable to Corsair Gaming Inc., or a loss of 5 cents per diluted share, as compared to a net income of $46.7 million, or 47 cents per diluted share in Q1 2021. first quarter adjusted net income was $9.2 million, or 9 cents per dilute share, as compared to adjusted net income of $58.2 million, or 58 cents per dilute share, in Q1 2021. Adjusted EBITDA for the first quarter of 2022 was $15.4 million, a decrease of $65 million, compared to $80.4 million for Q1 2021, resulting an adjusted EBITDA margin of 4.1% compared to 15.2% in Q1 2021. Turning now to our balance sheet. We ended the quarter with $29.4 million of unrestricted cash, no draw on our $100 million revolver, and $247.5 million of debt at face value. We spent $4.4 million for CapEx, and $1.25 million for principal debt repayment. Additionally, we used $19.5 million in net cash to acquire a controlling 51% share of iDisplay as we continue to look for strategic opportunities to use the cash we generate. This is another investment in growth as we prioritize investments in new markets and R&D to bolster our product development efforts. Barring such opportunities, we look to bring our cash balance back to Q3 or Q4 2021 levels. In terms of the full year 2022, we are updating our outlook as follows. We now expect total revenue in the range of $1.6 billion to $1.8 billion, adjusted operating income in the range of $100 million to $120 million, and adjusted EBITDA in the range of $110 million to $130 million. We previously expected an approximately 45%, 55% revenue split for the first half and second half, and now believe the second half will represent a slightly higher portion. There are some changes in the additional modeling details underlying our outlook. We are seeing an adjustment of channel inventory to reflect the current demand. and we expect that during the balance of the first half, we expect sales into our channel to be significantly less than sales out to consumers. We expect channel inventory to be normalized in late Q2. We still expect gross margins to remain pressured by logistics costs, especially in the first half of the year, but we have started to see some improvements. We will continue to invest in new product development in order to maintain a vigorous release schedule. We will moderate other operating expenses in tune with the current business environment. With the Fed rate cycle in progress, forecasting interest expense is more difficult. Assuming no further debt pay down, we now expect interest expense of approximately $2 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, if any, is uncertain at this time. An effective tax rate of approximately 24% to 26% for 2022 and four-year weighted average diluted shares outstanding of approximately 100 to 102 million shares. There was an impact of approximately two cents on EPS in Q1 due to the accounting for put rights associated with iDisplay. There may be further accretion of this over the next several years, depending on performance, but it is unlikely to be even one cent in any quarter. To summarize, our underlying growth trends remain strong, and we are executing despite the macro headwinds impacting everyone. We expect the operating environment will improve as we move through 2022, which will flow through to our revenue growth, margin improvement, and increased operating cash flow. In particular, GPU prices have continued to moderate and we continue to believe that this will increase the demand for PC components as more gaming PCs are built. We continue to expect this will occur in the second half of 2022. With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q&A?
spk05: Thank you. Ladies and gentlemen, 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 and a confirmation tone will indicate your line is in the queue. You may press star 2 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 is from Mario Liu with Barclays. Please proceed.
spk02: Great. Thanks for taking the questions. So the first one's on the full year revenue guide. I know you guys just took it down by $300 million. I was just wondering if you can give us more color and kind of frame the upside scenario, especially with the GPU pricing coming down in the upcoming Intel GPU this summer. So any color you can provide in terms of, you know, how those catalysts are embedded in the new foliar guide? Thanks.
spk01: Yeah, so obviously we've given it a range. I would say the upper end of the range is assuming that we get good pickup from different GPU prices, and by the way, we've already started to see that happening, notably in the US, a little bit in Asia, where we see component sales ramping up as GPU prices get back to MSRP. And we're pretty convinced they're going to go below MSRP in the next month, certainly by the end of Q2. So that's baked in. We clearly have some softness in the market, particularly in Europe, that is baked in. I think we've assumed that that's going to continue throughout the year, but we don't think it's going to be as severe as it is currently because we have some channel inventory adjustments that we need to make. So I think we've taken all the data that we have available, everything we know today. Obviously, if nuclear weapons start going off, it's a different matter. But based on what we see today, we feel pretty good about that range.
spk02: Great. Thanks, Andy. And then just one, if I could, on the market share commentary, you know, despite revenues being down year on year, it seems, you know, your products are still outpacing the rest of the industry. So just curious, Andy, you know, product lines to call out in particular that has gained meaningful share over the last few months?
spk01: Well, I think every... If you think about our businesses in three-thirds, right? We've got memory and components, which is two-thirds of the business, and one-third is peripherals. In the components area, pretty much every category has gained market share. The two that are notably... more than we expected was the ones we've been doing for a while, which is memory, which is our first product line. And power supplies memory, we went from 60 in Q4 to 65 in Q1. And by March, we were at 67. So that took a huge jump up. And the same with most of the rest of the components. But those were the two outstanding ones. Other product lines that did well, we showed in our presentation that's on the website, Stream Deck did very well. That's not really a market share issue, because we pretty much have 100% market share. That's the device that only we have. And our systems business also did very well. Now, you could look at that as a market share, although clearly we have a small market share compared to everybody making gaming systems. But we were very pleased with that progression. And then lastly, we've got two new categories, which is microphones and cameras. where a year ago we had no market share, and now we've got a significant single-digit market share on both of those. So we're pretty happy with all of those categories.
spk06: Great. Thank you.
spk05: Our next question is from Rod Hall with Goldman Sachs. Please proceed.
spk08: Hey, guys. Thanks for the question. I wanted to start with the, go back to Europe and the inventory situation. I wonder, is there any differential that you see between peripherals and components? Is one worse than the other from a demand development point of view, or is it kind of the same in both cases? And then I got to follow up to that.
spk01: Yeah, so I think that what we've seen, Rod, is that the more casual impulse buy kind of things that are sub $100, tend to have been affected more in terms of consumer demand than the, let's call it the enthusiastic research products. So people don't seem to be holding back or changing their buying habits on $2,000 computers. That's much more driven by GPU and CPU prices. But yeah, the casual peripheral seems to be the thing that people have moved away from a little bit. So that's the first thing. Now, in terms of what that means for channel inventory, it's actually pretty similar. I mean, there's two different reasons for what's going on, but the excess inventory we've got in the channel is, I'd say, somewhat uniform across both categories. It's just a few weeks too high in both categories.
spk08: Okay. And then I wanted to – Logitech was talking about price increases recently. And I'm just curious whether you think, you know, there's flexibility to increase prices or do you even need to do that? I know that, you know, they're combating FX, which maybe it isn't as big a deal for you, you know, working in the other direction for you. But just curious what you're thinking on price increases given inflation and everything.
spk01: Yeah. So we've been at, obviously, this is not a new thing, right? Price increases because of the cost of containers increasing. We've been watching for a while and actually even before that with tariffs. So there's a few products we've got like chairs and cases where you don't fit a lot into the containers, which means the percentage of freight compared with the cost of the goods is quite significant. Some cases can be 20%. So those things we raised prices quite early on and we had to and everybody had to otherwise companies just making chairs would have gone out of business. So somewhat obvious In other categories, we've been somewhat debating last year whether to raise prices. We were pretty sure that freight costs would come down, and we're a little disappointed that they haven't come down yet. In fact, they tended to peak in Q4. And we're still seeing they're going to be elevated all the way through 2022. So we were reluctant to raise prices when we would then have to drop them again. But now we have started to raise pricing on a lot of components. And in the component categories, we have a leading market share. We're pretty sure that our competitors there will follow. They've been waiting for us to raise prices. And in peripherals, it's a bit more difficult because we've got two big competitors that actually are not raising prices in fact i think they've got a longer inventory position in the channel that we have and so there's a lot of discounting going on so i think that it's very difficult to us for us to raise prices in the peripheral categories without losing market share so we are raising them where we can um but but in some cases you know we can't the fx situation for us essentially means a price raise because we have most of our distributors in europe buying U.S. dollars, so then they need to raise prices so they don't lose money because of the exchange rates.
spk08: And I guess promotional activity relative to that is, for you guys, not as much as what you see with some of the competitors. Is that true, or are you seeing it kind of come back and affect some of this stuff too?
spk01: Well, we've actually more recently started to dial back on promotional activities activity and i think that our you know this is this is a view that you have to take with some experience but our view is that when you go into a somewhat soft market um if you're not careful you um you discount and all you're doing is discounting to people that would have bought anyway um so we don't we don't think that we need to do a lot of discounting uh it's just going to take some time to work through the inventory
spk04: Great. Thank you. And, Rod, just to give you a quick insight on the FX, it's under 1% for the stuff we do sell in different currencies, and that's on the revenue side. Obviously, we have expenses in those regions as well, so our expenses also go down when the currency goes down. So the effect on the net profitability is even less than the 0.8% or so it is on the revenue side. So it's not a significant difference. part of our business. And we hedge the balance sheet exposure where we can.
spk08: Oh, great. Okay, that's very helpful, Michael. Thanks a lot.
spk06: Appreciate the answers. Thank you.
spk05: Our next question is from Drew Crum with Stiefel. Please proceed.
spk10: Okay, thanks. Hey, guys. Good afternoon. So, Andy, I think you suggested the peripheral category was starting the year down kind of 15% to 25%-ish. Does your guidance suggest the peripherals business outpaces the components and systems segment as it has the last few years? And related to that, you indicated that easing GPU prices will serve as a tailwind for the components business. Any company-specific or macro catalysts you see for the second half for the peripheral segment? Thanks. Thanks.
spk01: Yeah, so that's right. The GPU data, I think, is pretty obvious. I mean, that's something that we already see happening, and you can get on any forum and see people talking about how that's going to play out. The peripheral sector or segment, firstly, it is a seasonal business, right? So you do see typically Q3 and Q4 being much more than Q1 and Q2. And in fact, in some parts of the market, where it's more console-based or lower ASP-based, you see 50% of the business being done in Q4. So that's naturally going to happen. I actually think that what I see in Europe is a little bit of a shock factor, and I think people will recover pretty quickly, even though there's obviously inflation going on. But I don't know if you saw this news today, but in the UK, which was actually one of the most affected businesses that where the time went down, all of a sudden we're seeing record spending on leisure and travel in April. So people are going to shrug off, I think, some of these issues, but there's definitely a bit of a shock factor end of Q1 and going into Q2. So I do think the peripheral business will be a lot stronger in terms of the market, second half versus first half, yes.
spk06: Got it. Okay. Thanks, Kaz.
spk05: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Franco Granda with DA Davidson. Please proceed.
spk03: Hi, good afternoon, everyone. So, you know, there's a lot of rumors going out around GPUs coming out this year being very power hungry, at least, you know, relative to the most recent one. So I was curious to get some details around how the power of your PSUs have been training over the past year, and perhaps what your expectations are for the remainder of the year. Thanks.
spk01: Yeah, so that's a good question. And actually, it's something that's very helpful to us. It's not just power supplies, but it's also cases and calling fans are all part of the overall game of moving air through the system and calling the whole system. So I'd say over the last five years, we've seen a steady step up from an average of 650 watts to 750 watts to 850 watts last year. And 2022, 2023, the expectation is that most people will be looking at 850 to 1,000 watts required to power their systems. Now, what that means for us in the market is that the ASP is steadily going up on power supplies and steadily going up on cases. So we've actually seen those. If you look at MPD data, you can see the ASP of the market is steadily moving up from Cases goes from like 90 to 115, something like that. So quite appreciably moving up as the systems get more complicated and more power hungry.
spk03: That's very helpful. Thank you. And then can you talk about the performance of the Corsair C9 monitor now that it's been out for over two quarters? And can you also talk about any correlation that you're seeing between the demand for the monitor as GPU prices go down? Thanks.
spk01: yeah so i think second part i'm not sure how much correlation is going to be directly where people are building the system and then rushing out and buying a new monitor um obviously the first time uh buyers perhaps they will the monitor we have is is very high end we wanted to start at the high end and and probe the market and you know overall we've been pretty happy with the results we weren't planning to sell a huge volume these are six, $700 monitors. So we wanted to get in the market and start to get, you know, our brand established with monitors and we've done that. But, uh, you know, a lot more to come on that, uh, on that front. This is just the first product we launched.
spk06: All right. Thanks, Andy.
spk05: Our next question is from Doug Kretz with Cowan. Please proceed.
spk07: Hey, thanks. Um, If I think back to January and your analyst day, you gave some long-term guidance that was predicated on kind of assumed industry growth rates. And I assume that your feelings about those long-term growth rates haven't changed. I guess the question is, after sort of the gyrations of the last two years, what do you think the right baseline is to apply those growth rates off of? Is it this year? Do you think that this year is depressed and you're going to get kind of a year of above-trend growth going into 2023. How should we think about that?
spk01: Yeah, that's a good question. I think we are now coming to the conclusion that given the inflation going on and the war in Europe, that 2022 is clearly not going to be a growth year for the market. And that's obviously reflected in our outlook. Now, it's a little early to say – what that means in future years. I actually think that 2023 is going to be a big growth year because firstly, we're going to be past crypto mining. We're going to have new GPUs and CPUs out and some pretty good games coming. So I think that's when there's going to be a big growth. If you think about our model, we set an average of 8% to 9% on components. And actually, if you look at the last If you look at pre-COVID or pre-shelter-home-to-post, that's about what it's been running. But yes, if we start at this year's baseline and move forward, I'd say there's a fair chance that components are going to grow faster than that. The other thing is that we baked in a 1% market share gain, and I think we've already done more than that in this first quarter already. So I think we are surprised at how much more market share we can gain in the components area. Peripheral-wise, yeah, I think the market growth is there just because it's all predicated on new gamers coming in and the market expanding. But I think, again, it's going to be a growth off this year. Bear in mind that we're already... or something up from Q1 20. And the market, you know, we're pretty much in line with the market. So there's still, and I think we modeled that at a 20 to 25% overall market growth. So there's plenty of growth available in the market. But yes, it'll probably be based off this year that's likely to be, based on what we're seeing now, perhaps 15 to 20% down compared to last year.
spk06: Okay, thank you.
spk05: Once again, ladies and gentlemen, if there are any additional questions, please press star 1 on your telephone keypad. There are no further questions at this time. I would like to turn the call back to Mr. Andy Paul for any closing remarks.
spk01: All right, thank you. Well, look, in closing, I just want to remind everybody we have three pillars of growth, which we outlined at our investor day, and they remain firmly in place. Firstly, long-term market growth in gaming and content creation is expected to grow at a fast pace. And looking back, we can now see clearly a surge in activity during the second half of 2020 and the first half of 21 during shelter at home. We do believe that the majority of this surge is from new hardware buyers, and we think they will continue to buy over the next three to five years. Secondly, we continue to take market share in most categories. This was highlighted by the fact that we, in the markets we track from external sources, we have number one market share in almost every category of components that we sell that allows gamers to build high-performance gaming PCs. And we're in the top three in almost every peripheral category. In fact, in our components area in Q1, we gained market share even further in our two biggest categories. Thirdly, we continue to enter new categories by both organic development and by acquisition. And in the last 18 months, we entered three new markets, microphones and cameras for content creators and monitors for both gamers and content creators. We certainly face some short-term headwinds from inflation and European consumer confidence and the resulting higher-than-desired channel inventory levels. However, we think this will be overshadowed by a return of gaming platform builds as GPU prices return to normal levels. Thank you for your time and continued support, and thank you for joining us on the call today.
spk05: This concludes today's conference. Thank you for your participation. You may now disconnect.
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