Turtle Beach Corporation

Good afternoon, ladies and gentlemen, and welcome to the Thoreau Beach First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And if you require any further assistance, please press star 0. Before we get started, We will be referring to the press release file today that details the company's first quarter 2020 results, which can be downloaded from their investor relations page at corp.turrobeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the investor section of the company's website later this evening. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities law. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe hardware statements and risk factors contained in today's press releases and its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K, most recent quarterly report on Form 10-Q, and other periodic reports. which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. I'll turn the call over to Juergen Stark, the company's chairman and chief executive. Juergen?

Good afternoon everyone and thank you for joining us. We hope the short delay allowed more of you to join the call at the beginning here. We are pleased to report results for the first quarter of 2020 that exceeded our expectations for revenue, margins, and profitability. During these unprecedented times, in addition to being a source of entertainment, Gaming is providing a way for friends to stay connected. On top of that, as schools closed and moved to distance learning and most offices required workers to work from home, many are finding our headsets well-suited for two-way school or work communications. These factors combine to increase the demand for our headsets resulting in a stronger than forecasted quarter and an increase in our outlook for the year. Before I talk in more detail about our results for the first quarter and our outlook, I want to thank our incredible employees for how quickly they've adjusted to work from home and the great job they've done keeping all parts of our business productively moving forward. Like others, we prioritize the health and safety of our employees and have had them working remotely for the most part since March. We haven't missed a beat despite the challenges of adjusting to work from home. Adding to the challenge was an incredible and unexpected increase in demand for our products, combined with an extremely volatile retail environment that has been changing on a region by region, week by week basis. This has required working double time to analyze market trends, update forecasts, manage supply, expedite shipments, and cover a number of markets where demand and volume suddenly became much higher than normal. Quite simply, our team has done a phenomenal job and I couldn't be more proud of each and every employee for how they've managed through these challenging circumstances. Turning to our results. Those of you who were on our fourth quarter earnings call back in early March, which was only two months ago but seems like years ago, will remember that we expected industry sales of council headsets to decline roughly 20% year over year during the first three quarters of the year and then pick up in Q4 and into 2021 after the anticipated launches of the new councils from Sony and Microsoft. That view was based on patterns we have seen over the past council upgrade cycles exacerbated by the much earlier than usual announcement of these next-gen councils. We continue to believe in those trends for the console gaming market, but the stay-at-home measures have changed the pattern. Consumers are spending much more time gaming and retailers are reporting higher than expected sales of consoles as well as of gaming software. In addition to favorites like Fortnite, the recently launched Call of Duty Warzone has done extremely well as a new social multiplayer game. Nintendo's Animal Crossing which allows voice chat has also done phenomenally well. We believe customers are also using gaming headsets for two-way communications while learning and working at home. These factors have led to a sudden and steep increase in demand for gaming headsets starting mid-March. In fact, according to NPD, U.S. Council gaming headset retail sales hit an all-time high for the month of March, higher even than March of 2018 during the Battle Royale-driven market expansion. This partially offset the expected year-over-year decline in January and February, resulting in U.S. Council gaming headset sales being down only 4% year-over-year for Q1. In addition to the better than expected sales levels, we also saw a significant increase in our market share. You might recall that we have had the number one market share in council headsets for more than 10 years, and that our share routinely exceeds the share of the next three competitors combined. We saw an increase in our share based on the popularity of Fortnite in 2018, partially, we believe, because we did a better job Thank you for joining us. and over 200 basis points for the quarter. I mentioned that the market experienced a sudden and steep increase in demand in March. While that combined with our large share gain put us in a position where within a matter of days, many areas of the company were operating at peak volumes. In March, as measured by revenue, all six of the industry's top six selling models and eight of the top 10 models were from Turtle Beach, with the Stealth 600 for Xbox continuing to be the best-selling console headset for the third straight year. We believe the results continue to be a testament to our strong brand, excellent products and our execution at retail, particularly in times like this where retail, supply chain and operational execution can make such a big difference, both to us and to our retail partners. Like in 2018, during the Fortnite Battle Royale market increase, we are extremely focused on doing everything possible to secure increased supply of products for our retailers and our consumers. Given the amazing job our retail partners have done adjusting to the dynamic retail environment over the past months, they deserve every bit of effort we are putting into this. Note that I'm providing some color on the US Council headset market since that's the biggest portion of our business. All of our major markets across council and PC, headsets, keyboards, and mice saw growth in consumer demand in March. And in most geographies and product categories, our sales outperformed the market. So as John will now cover, our first quarter financial results exceeded our expectations across all key financial metrics. and the strong market demand has continued into Q2. I will come back with comments on a revised outlook for 2020 after John provides details on Q1 results. John?

Hey, thanks, Juergen, and good afternoon, everyone. Net revenue for the first quarter of 2020 was $35 million, or $35.1 million on a constant currency basis, compared to $44.8 million in the year-ago quarter. Sales in the first quarter of last year were still being driven to record levels by the Battle Royale surge. While down versus last year, our sales in the quarter were about 5 million or 17% above midpoint of our guidance range driven by record-setting retail sales in March as Juergen described. Gross margin in the first quarter was 30.8% compared to 33% in the first quarter of 2019. Thank you. Thank you. Thank you. Thank you for joining us. Net loss per share in the first quarter of 2020 was 25 cents on 14.5 million weighted average diluted shares outstanding compared to net income per share of 9 cents on 16.3 million weighted average diluted shares outstanding in the year-ago quarter. Adjusted net loss for the first quarter of 2020, which excludes transaction and integration costs incurred related to the acquisition of Rocket, was 3.4 million or 23 cents per diluted share compared to adjusted net of 2.2 million or 13 cents per diluted share in the 2019 period. These results significantly exceeded our guidance for adjusted net loss per diluted share, which was a range of 81 cents to 73 cents. Adjusted EBITDA in the first quarter of 2020 was a negative 2.7 million compared to positive 4.3 million in the year ago quarter, adjusted EBITDA was significantly better than our prior guidance of negative 6.5 million to a negative 7.5 million. Cash provided from operations during the quarter was 17.5 million. This continued strong cash flow allowed borrowings against our revolver to remain nominal in spite of the cash outlay last year for acquisition of Rocket, reducing our cash interest expense. Regarding our reported taxes, the full year tax provision for 2020 is expected to be in the range of $1 million to $2 million, depending on actual results for the year, with the higher provision corresponding to the higher end of our guidance range. And now turning to the balance sheet. At March 31, 2020, we had $8.7 million of cash and cash equivalents, with $0.3 million of outstanding debt under our revolving credit line. This compares to $10.2 million of cash and cash equivalents and zero outstanding debt under our revolving credit facility at March 31, 2019. As of today, we have over $10 million in cash on hand with zero outstanding debt. Inventories at March 31, 2020 declined to $39.3 million compared to $44.4 million at March 31, last year. Thanks, John. The environment continues to be highly dynamic.