Corsair Gaming, Inc.

Good afternoon and welcome to Corsair Gaming's third quarter 2024 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, please press pound zero on your telephone keypad. With that, I would now like to turn the call over to Ronald Bonveen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please begin.

Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's Financial Results Conference Call for the third quarter ended September 30, 2024. On the call today, we have Corsair CEO Andy Paul and CFO Michael Potter. Andy will review highlights from the quarter. 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 other SEC filings. Note that until an order 10Q has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to GAAP financial information, is provided in the press release we issued after the market closed today. With that, I'll now turn the call over to Andy.

Thanks, Ron. In starting this earnings call, I'd like to say that I've rarely been so excited for Corsair's future as I am right now. Our business depends on four fundamental premises. First, the desire and ability of consumers, mostly gamers and creators, to build high-performance gaming PCs and buy peripherals in order to play the latest games or optimize their studio setup. Second, our ability to continuously bring compelling products to the market. Third, our industry partnerships with other parts of the gaming ecosystem, both from hardware manufacturers and game publishers. And lastly, our ability to have partnerships with retail channels who, for most of our brands, are where we sell our products. With those things in mind, let's get into some of the details, and then you'll see why I'm so excited. Let's start with the ecosystem. I think we all know that for any sport or pastime, the base platform is very important. Lots of snow brings out skiers, sunshine brings out golfers, mountain bikers and runners, and great games engage gamers. For the last two years, consumers have not seen many blockbuster games launching, but the recent Call of Duty Black Ops 6 launch in October was an overwhelming hit. Roughly two-thirds of our business relies on people building high-end gaming PCs in order to play the latest games at high frame rates. To build such a gaming PC, you need a high-performance CPU from Intel or AMD, and a high-performance GPU from Nvidia or AMD, those in the form of graphics cards from their board partners. The GPU is generally of most importance to gamers, and normally the graphics cards containing these processors are refreshed every two years. This year, however, that cycle extended to two and a half years. Latest industry speculation is that Nvidia will launch new cards in early Q1 2025, perhaps as early as January. This GPU launch, which the industry expects will use the same Blackwall technology as Nvidia's AI cards, has been eagerly awaited by the gaming enthusiast community. The expectation is that these cards, probably called 50 series, will be able to hit high frame rate gaming at 4K and possibly 8K with ray tracing enabled, supported by AI frame generation for smoother gameplay. I want to stress here that this is industry speculation. NVIDIA has not released any launch plans yet, and all partners, including ourselves, are under strict NDA. With that said, we will be showcasing at CES in January a wide portfolio of Corsair components that will be ready to power, cool, and house these new GPUs. You can imagine that with the industry initially expecting this launch to be in second half of 24, and now expecting it in Q1 25, gamers looking to build a very high-end system have been holding off building anything for most of this year. So while the unit numbers of components sold the self-built PCs are down perhaps 5% to 15% between the different geographies, a large part of the high-end market has been absent. And for us, that's resulted in a market that is mostly lower-end components where we tend to have lower ASPs and lower margins. We therefore expect a surge of high-end gamers to be jumping back into the market in early 2025. What does that mean for Corsair? The expectation would be for the PC gaming components part of our business, to show growth in units, ASP, and margins. And while we have high market share in these categories already, we would expect our new product launches to increase share further. Switching our attention to peripheral sales, which have a slightly different dynamic and price point, i.e. $50 to $200 ASP products rather than $2,000 to $3,000 for gaming PCs, we've done very well this year in terms of growth. In fact, year to date, we have shown 17% growth, which is well in excess of the data we see for recent TAM growth. But let's look quickly at the longer-term market dynamics. The gaming peripheral market has shown good long-term growth over the last five years. In fact, if we use the America's PC gaming headset market as a bellwether, third-party data indicates that there are roughly 80% more headsets sold in 2024 compared to pre-pandemic years. And simple math would suggest that means there are roughly 80% more active PC game players in the market. Now, as we all know, a huge number of new gamers enter the market during COVID lockdowns. And some will have abandoned gaming after return to work, but there are still 80% more headsets being sold. And for the first time since the COVID lockdown, we are now seeing the gaming peripheral market are starting to turn from negative year-on-year numbers to positive growth. So our expectation here is for our peripherals and creator segment to continue to grow well in the next few years. In terms of consumer spending, which is probably more of a concern for $2,000 gaming PCs rather than $100 peripherals, we saw some very encouraging recent data where Amazon reported record Prime Day sales overall, and we witnessed stronger hardware gaming sales during Amazon Prime period this year compared to the previous years. The retailers in general also appear to be encouraged by this data, and so we saw very good bookings activity in October as our channels start to lean in on inventory, both for the holiday period and also for the expected NVIDIA GPU launch. In summary, we feel better about consumer spending activity now than we felt for a while. Let's move on to products. We've launched some very exciting products recently, Our flagship headset, the Virtuoso Max with a price point of $329 is off to a great start and has encouraging reviews. We launched several small form factor keyboards, some with programmable hall effect switches that can offer desirable features such as rapid trigger and flash tap. We launched our Corsair custom lab where consumers can customize their desktop with peripherals offered in multiple patterns and genres. At Elgato, we also introduced our Stream Deck Studio that is powered by Bitfocus software, a hyper-customizable control service for probe broadcast systems. This solution will simplify complex workflows and will enable Elgato to enter a completely new part of the market. And we did not stop there. In September, we completed the acquisition of Fanatec, who is generally recognized as the leading brand for high-end components which are used in racing simulators. More on that later. Moving on to partnerships, both from an industry and retail standpoint, we have several very significant things to report. First, we are very proud to be selected as the exclusive launch partner for the Activision Call of Duty Black Ops 6 title. This is a multi-year, multi-product Call of Duty partnership, which will involve a strong collaboration on marketing activations and branded products. For the Black Ops 6 launch, we showcased Call of Duty themed products from many of our product lines, which are now available on our websites. According to Microsoft, last week's launch of Black Ops 6 was the biggest Call of Duty release ever, setting a record for day one players, as well as Game Pass subscribers ads on launch day. And unit sales on PlayStation Steam were also up 60% year over year. Lastly, we're also very pleased to report that we will have products in Apple stores for the holidays. You'll see more on this when the launch occurs. We continue to perform well at our biggest retailers, which in the US are Best Buy and Amazon, and we continue to make progress with retail expansion on a worldwide basis. Let me now give you some more details on our recent Fanatec acquisition. This is a company that has been a leading provider of high-end sim racing components for many years. In fact, the company is roughly 30 years old, same age as Corsair. Like many companies in our industry, the surge from COVID lockdown and resulting dip after resulted in excess inventory for most of them, but for Fanatec, it really stretched their financials. And unfortunately, at the same time, they had decided to build a new, very expensive headquarters. All of this led to excessive losses, excessive debt, and finally the banks took over. and we ended up buying the company out of insolvency. To give you some perspective on size, the sim racing market is roughly $1 billion and growing fast, according to industry data, and Fanatec's revenue in 2023 was in excess of 100 million euros, almost all of it coming from their direct-to-consumer website. With the sim community uncertain of Fanatec's business health while going through insolvency, Maintaining revenue became challenging. However, since the acquisition, we've been working quickly with the team there to put the Corsair business processes and systems in place so that we can stimulate and manage further growth and deliver great customer support. We anticipate that the integration process will take us roughly two quarters. The team at Fanatec is now very encouraged. They have a great team of product experts to bring world-class sim racing products to market. And now with Corsair backing, we are confident that this team will shine. We expect to add roughly $20 million of Fanatec revenue to our Q4 2024 numbers. And while it's too early to talk about 2025 numbers, we do expect to get them back to a growth path and back to a very profitable business. We expect to be able to grow Fanatec in several ways. First, channel expansion, where it makes sense. We do have many interested partners at the moment. Second, we can add to their lineup some sim racing products that Corsair independently developed. And last, with our other complementary product lines, we can offer complete solutions. All sim racing setups either need a PC or console to power the game and monitor and peripherals to view and control the setup. We have also seen quite a few professional sim racing setups using Stream Deck as a control panel. Overall, as I said at the beginning, I am very encouraged about our immediate future based on all these things mentioned. And with inflation steadily coming down, we would expect further growth as consumer spending confidence increases. This year, our EBITDA will end up at only 3% to 4%. This is not what we expect moving forward. And with the growth expected from our peripherals and components segment and from Fanatec, we should see EBITDA levels at double that for 2025. The post-COVID lockdown period has not been an easy one for us to forecast, and we hope from here on out the gamer and creator markets will return to consistent growth. Now over to Michael.