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spk07: Third quarter of 2022 Earnings Conference Call. As a reminder, today's call is being recorded. Annual 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, please press Start then 0 on your telephone keypad. With that, I would now like to turn the conference over to Ronald Van Fien, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please begin.
spk02: Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's Financial Results Conference Call for the third quarter ending September 30, 2022. On the call today, we have Corsair CEO Andy Paul and CFO Michael Potter. Andy will review highlights from the third quarter and the business environment. Michael will then review the financials and our outlook. 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 our other SEC filings. Today's remarks will also include references 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 we issued after the market closed today. With that, I'll now turn over the call to Andy.
spk01: Thank you, Ronald, and welcome everyone to our Q3 2022 earnings call. I'm very pleased to report that we achieved a 10% sequential revenue growth, in Q3 2022 from Q2 2022, while continuing to deal with higher than normal inventory levels. Sales out levels from our channel to consumers were significantly above pre-pandemic levels in almost all product lines, and many were above the year ago level. As we have reported in recent earnings calls, this year has been marked by excessive inventory in the channel, especially in Europe. We continue to report and make comments on consumer sales from our channel, as well as our revenue from sales into the channel, to provide clarity on the progress we are making. For example, in the U.S., we have made great progress in reducing this inventory, and stock levels are now closer to a more normal level. The European channel inventory position remains elevated, but is also slowly normalizing. Our target is to reduce our worldwide channel inventory overhang by roughly $100 million from the start of 2022 to the end of this year, with a little left more to go in our creative and peripheral segment and our European channel inventory. As we mentioned in previous quarters, the self-built PC market has been held back over the past two years with high demand for graphics cards from crypto miners, on top of increased demand for computers during the pandemic, which had caused GPU prices to rise and in some cases to double. Now that crypto mining cannot use GPUs as effectively as before, there's been a decline in demand and prices are back to standard MSRP or below. Additionally, in recent months, there have been launches of new technology platforms for NVIDIA, AMD, and Intel, which looked to be accelerating demand in the self-built PC market as our enthusiast customers can now build a better and faster gaming PC for a lower cost than they could over the last two years. The added positive for Corsair is that gaming PCs built with these new platforms need faster memory, such as DDR5, larger power supplies with a thousand watt capability or higher and better cooling technology. all product categories that we are expert in and have attained a dominant market share. There have also been several recent games launched or updated that take full use of the new technologies built into the new GPUs, making them more immersive and more exciting to play. This is also helping to drive higher demand for gaming PCs and peripherals. In general, as we move through the second half of the year, we are starting to see the market recover from the lower demand seen in the early part of 2022. The US continues to be a strong market, and we expect Q4 to see continued growth in all categories. Europe is still tracking lower than last year, but has shown improvements, and we currently also expect growth in Q4 compared to Q3. Revenue in Asia for Q3 was approximately flat compared to last year. Let me now take a minute to update you on some of our Q3 product developments. In Q3, we began selling the Corsair Voyager A1600 AMD Advantage Edition laptop. This is our first Corsair branded laptop, and it combines AMD's latest CPU and GPU platforms with our software and technologies to create an unparalleled gaming and streaming experience. This laptop has been the highest single R&D investment in our company's history, entering the top end of the gaming laptop market.
spk00: We also launched a new 45-inch OLED bendable gaming monitor
spk01: developed in partnership with LG. This incredibly looking display can be adjusted from flat to curve by hand for different gaming use cases, and it's the first of its kind in the market. We expect to start shipping this monitor in the first quarter of 2023. Other launches in Q3 include our new K100 Air wireless mechanical gaming keyboard, and we announced full availability of PC components compatible with NVIDIA's latest 40-series graphics cards. In summary, while the market environment remains challenging, we are very encouraged by the recent activity in the self-built gaming PC market, and we expect elevated demand to continue as new lower-priced models of GPUs get launched in the coming months. Longer term, we expect a further benefit from the expansion in the gaming gear's market numbers of active consumers during the pandemic, which should drive a higher spending base over the next few years. We've made significant progress in driving down inventory levels, both in the channel as well as internally, and expect to reduce these levels further in Q4 as we move back to our normal targets. Let me now turn the call over to our CFO Michael Potter for details on the financials. Michael, please go ahead.
spk04: Thanks, Andy, and good afternoon, everyone. We achieved 10% sequential revenue growth in Q3 in a challenging environment. This reflects our continued execution, strength of our market position, and sustained underlying demand. Gross margins were pressured by the recent sharp strength of the US dollars against European and Asian currencies, but recently currencies appear to be more stable. We have taken some actions related to the currency changes This should lead to gross margin improvements going forward. In terms of the specifics, Q3 2022 revenue increased to $311.8 million compared to $283.9 million in Q2 2022. This compares to $391.1 million in Q3 2021. Our channel partners continue to reduce their inventories in Q3 2022 to current and expected consumer demand and the reduced transit and lead times, thus removing much of the overhang from orders placed through the longer lead times and prior periods caused by the effects of the COVID pandemic. We also reduced our own inventory by about 15% quarter per quarter as we drive our inventory to more historic normalized levels. European markets continue to be softer than America's and contributed about 29% of our revenues, well below the historic average in the high 30 percentile, but up from the approximately 25% in Q2 2022. Turning now to our segments, the gamer and creator peripheral segment contributed $96.8 million of net revenue during the third quarter, up from $89 million in the prior quarter. and a decrease of 30.5% from $139.3 million in Q3 2021. The gamer and creator peripheral segment net revenue contributed 31.1% of total net revenue, a decrease of 450 basis points from 35.6% in Q3 2021. The gaming components and systems segment contributed $214.9 million of net revenue, during the quarter up from $194.9 million in the prior quarter and a decrease of 14.7% from $251.9 million in Q3 2021. Memory products contributed $115.2 million in third quarter 2022 compared to $115.5 million in 3Q 2021. Overall gross profit in the third quarter decreased by 29.4% to $71.6 million, with $101.4 million in Q3 2021. The decrease compared to Q3 2021 was primarily driven by reduced revenues. Gross profit margin was 23% compared to 25.9% in Q3 2021. We're starting to benefit from the cost actions we announced last quarter, along with the success of newer products we recently released, which we believe will have a significant positive effect on margins moving forward, some of which we realized in the third quarter. We're also encouraged by the improving supply chain environment, including a significant reduction in freight rates and supply chain lead times, which are rapidly approaching the same levels as they were pre-pandemic. There is typically a four- to five-month lag before these cost reductions are fully reflected in our P&L as our inventory turns. The gamer and creator purpose segment gross profit was $31.8 million, a decrease of 34.6% from $48.6 million in Q3 2021, primarily driven by a decrease in revenue and the supply chain logistics costs I just mentioned. Gross profit was 32.8% compared to 34.9% in Q3 2021. The gaming components and systems segment gross profit was $39.8 million, a decrease of 24.7% from $52.8 million in Q3 2021, primarily driven by the decrease in revenue in the same period and higher logistics costs. Gross profit margin was 18.5% compared to 21% in Q3 2021. Our memory products margin in this segment was 14.4% for the quarter. The third quarter SG&A expenses were $66.9 million, a 12% decrease compared to $76.1 million in Q3 2021. We continue to closely monitor all expenses while continuing to support our revenue-generating areas. Adjusted operating income in the third quarter of 2022 was $5.9 million, a decrease of $20.5 million from operating income of $26.4 million in Q3 2021. Third quarter net loss was $5.9 million, of which $6.2 million is attributable to Corsair Gaming Inc. This represents a loss of $0.09 per diluted share as compared to net income of $1.8 million or $0.02 per diluted share in Q3 2021. Third quarter adjusted net income was $7.6 million or net income of $0.08 per diluted share as compared to adjusted net income of $16.3 million or $0.16 per diluted share in Q3 2021. Adjusted EBITDA for the third quarter of 2022 was $10.1 million, compared to $27.6 million for Q3 2021. Turning now to our balance sheet. We ended the quarter with $61.7 million of cash and $245 million of debt at face value. with the $100 million revolver fully available. We spent $7.9 million on CapEx, which includes $5.7 million related to our new headquarters in Mopedas. We expect that this elevated CapEx level is mostly behind us. Barring strategic investment opportunities, we look to bring our cash balance further up over time and resume reducing debt on a more accelerated basis. In terms of the full year 2022, While we are starting to see signs of improvement, we are slightly adjusting our outlook to reflect the continued challenging market environment and the headwinds I discussed in my comments earlier. For the full year 2022, we now expect total revenue in the range of $1.325 billion to $1.375 billion compared to $1.35 billion to $1.45 billion prior. Adjusted operating income in the range of $20 million to $30 million compared to $35 million to $50 million prior. And adjusted EBITDA in the range of $35 million to $45 million compared to $50 million to $65 million prior. With the Fed rate hike cycle in progress, forecasting interest expense is more difficult. Assuming no further debt pay down, we expect interest expense of approximately $3 to $4 million per quarter, an effective tax rate of approximately 15% to 20% for 2022, and full-year weighted average dividend shares outstanding of approximately $98 to $100 million. To summarize, we're starting to see signs of improvement, but the market remains challenging. We're starting to see the benefit of cost reduction actions we previously took, and we're closely monitoring all expenditures while continuing to support our product and revenue generation. We believe that we're being prudent with OpEx, trimming where needed while continuing to invest in product development and marketing to support existing and future product revenue. We're also carefully managing working capital as we enter the expected higher revenue second half of the year. Inventory levels are normalizing and freight costs are coming down, which will have significant positive effect on margins moving forward. We've started to see some of this benefit in Q3 and expect another few percentage points margin improvement this year and into 2023. Finally, the uptick in demand for self-built gaming PCs from new GPU launches and the downturn in cryptocurrencies that Andy mentioned reducing non-gaming demand on GPUs It's another positive for us moving into Q4. With that, we're happy now to open the call for questions. Operator, will you please open the line for Q&A?
spk07: Thank you. Ladies and gentlemen, we are now at the Q&A session. If you'd like to ask a question, you're welcome to press star and then 1 to place yourself in the question queue. A confirmation turn will indicate that your line is open. you may press star two to leave the question queue. For participants using the speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. Our first question comes from Drew Crum, Osterfall.
spk05: Good afternoon. So just your comments around reducing channel inventory going forward, how much is that? based on the change in consumer demand or behavior and how much is that stimulated by promotional activity you intend to use through the holiday quarter? And then I have a follow-up.
spk01: So if we're talking about how much channeled inventory has been reduced based on consumer demand versus promotional, let me answer that in a different way. The increase in inventory was caused by, you know, over ordering from the channel, coupled with in some parts of the world, especially Europe, a slight reduction in consumer demand after the Ukraine war. So that's been the main the main effects. Now, the reduction has mainly been just shipping as per normal, we've done a little bit of promotion, but not excessive amounts, I'd say. And Andy, go ahead. Yeah, so in other words, the way to think about it is that obviously we've shipped into the channel less than we normally would have done so that the sales out to consumers consumes some of the inventory.
spk05: Got it. Okay, and if I heard you correctly, there's more inventory, more of an inventory overhang with the gaming peripheral business. When would you expect that to normalize?
spk01: Probably, really the only thing left is there's a little bit of an overhang with game peripherals, and it's mostly in Europe. And we'd expect that to resolve itself by Q1. Okay.
spk05: Okay. And then, Michael, just, you know, on gross margin, you saw sequential improvement in 3Q versus 2Q. With the cost action that you outlined, the contributions for new products and some relief on supply chain, Is it fair to assume the business experiences further gross margin improvement in 4Q? And where do you think that leaves the business for the year? Thanks.
spk04: I mean, the difference in freight rates alone is it kind of works through the inventory. That's a couple, like two to three percentage points over the next quarter or two improvement. And we'll get a little bit more from economies of scale with the higher revenue. So without taking into account what the final market sentiment is, you know, we should get a few percentage points increase. With inventory levels going down, it should put us in a better position as we enter next year. Got it.
spk05: Thanks, guys.
spk07: The next question comes from Mario Liu of Barclays.
spk06: Great, thanks for taking the question. The first one is on seasonality. There's been a lot of moving parts in the business over the last couple of years and just worldwide in general. It looks like the midpoint of the fourth quarter guide is up 20% queue on queue. Is there a framework we could use in terms of how we should think about seasonality into fiscal 23? Thanks.
spk01: Well, hi, Mario. I was looking at this this morning. The thing is, if you look at the last five years of history, the Q3 to Q4 cadence is anywhere from 15% to 30% up. So we are roughly in the middle of that. But the other thing I would say is that the seasonality is based on consumers. And so our sales into the channel in Q3 was clearly lower than sells out to consumers from the channel. And Q4, that difference should be a little less. So that's why we'd normally expect to get a little bit of a pickup in revenue just because of the fact we're adjusting inventory less. And we'd expect somewhere 20% to 25% lift from just consumer activity based on history. And we don't see any reason that that's going to be less. because all the new technologies and platforms have just launched from NVIDIA and Intel and AMD, there's a good chance that that's going to be even higher. But that's where to think about it. Now, 2020, I wouldn't imagine should be any different from that, the average that I just told you about. But Q1, obviously in the near term, there's a fair chance that Demand's going to be strong because we're still seeing new platforms launch. So we had the 4090 just launched a couple of weeks ago, which is the $60 graphics card, top of the line. And then in two weeks' time, we've got the 4080 being launched. And then I think the 4070 will come out in Q1. So there's a lot of launches that are going to drive people with different budgets to start building.
spk00: Great. Nicky?
spk07: Ladies and gentlemen, just a reminder, if you have a question, you're welcome to press star and then one on your telephone keypad. The next question comes from Franco Grande of DA Davidson.
spk03: Hi, I'm William in for Franco Grande. How should we think about the margin profile? Hi, how should we think about the margin profile for some of the new products that are coming out or that have came out like the laptop or the flex monitor?
spk01: Well, I would say that we're trying to bring new products out typically at higher margins than the equivalent products in the last few years. And that's obviously what every company does, trying to make more and more margin. The monitor itself, you know, I don't want to get into specifics of that particular one, but you can imagine that obviously products like gaming PCs and monitors are typically going to have a lower margin than some of our other components and peripherals.
spk03: A second question. Some of your peers have introduced products catering to cloud gaming. What is your current stance and outlook on the cloud gaming market?
spk01: Well, we think it's marvelous. The more people that play games, we think is the better because what we've seen is that people that play games at an early age on phones through the cloud eventually migrate to a PC platform. So we see the biggest effect that cloud gaming is happening today is in that entry level and mobile sector. We don't typically spend a lot of our resource on roadmaps in those areas in the entry level. but we're certainly looking at it. So I think, you know, I don't see a huge opportunity for us in terms of revenue in the short term, but longterm we expect, uh, more people gaming is going to drive them into buying better PC platforms.
spk03: Okay. Thanks for taking the questions guys.
spk07: Thank you. Ladies and gentlemen, just a final reminder. If you're not asked a question, your rocked wrist star, and then one on your telephone keypad. Gentlemen, we don't seem to have any further questions on the lines. Ladies and gentlemen, that concludes today's question and answer session. I would now like to turn the conference over to Andy Paul for closing remarks.
spk01: Thank you, everyone, for joining the call today and for your continued support. If you have any follow-up questions, please contact our communications department, and we look forward to updating you next quarter. Thank you, and have a good evening.
spk07: Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. And even I'll disconnect your lines.
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