Turtle Beach Corporation

Good morning, ladies and gentlemen, and welcome to the Turtle Beach Second Quarter 2020 Conference Call. Delivering today's prepared remarks are Chairman and Chief Executive Officer, Juergen Start, and Chief Financial Officer, John Hanson. Following their prepared remarks, the management team will open the call up for any questions. Before we go further, I would like to turn the call over to Sean McGowan of Gateway Investor Relations, Turtle Beach's IR Advisor, as he heads the company Safe Harbor that provides important cautions Sean, please go ahead.

Thank you, Andrew. On today's call, we will be referring to the press release filed this morning that details the company's second quarter 2020 results, which can be downloaded from the investor relations page at corp.turtlebeach.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 in the investor section of the company's website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. 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 on reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K 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, and 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. And now I'll turn the call over to Juergen Stark, the company's chairman and chief executive officer. Juergen?

Good morning, everyone, and thank you for joining us. I hope you're all healthy and well. The 90 days since our last earnings call have certainly been among the most unusual any of us have ever experienced. So many routines have been disrupted, so many things we took for granted have been suspended, so many plans put on hold. Against the backdrop of so much uncertainty, one of the clearest and most powerful developments has been that people are playing video games more than ever. Both to stay entertained and to socialize with their friends. Our sales in the second quarter were almost 80 million. Not only a record for the second quarter, but more than 30% higher than our previous record of 61 million for the June 2018 quarter at the height of the Battle Royale driven gaming surge. So let's talk about this powerful increase in demand for everything related to gaming, including hardware, software, and accessories for both consoles and PC, and how we were able to not only capitalize on this increase in demand, but to once again outpace the market based on the strength of our products and brand, as well as our supply and retail execution, enabling us to produce record levels of sales and profits for the second quarter. and as a result, we are significantly increasing our outlook for the full year to 300 million, which would be a record revenue level for us. Our continued strong performance and council headsets together with the investments we are making to drive growth in new market segments like PC make us believe that we can even exceed that record revenue level next year. We think you'll agree that gaming has been and continues to be one of the best, if not the best, consumer category in which to be a leader. According to the recent study from NPD Group, three out of every four people, or 244 million people in the U.S. play video games. That figure is 32 million, or 13% higher than it was in 2018. Comscore recently reported that the number of U.S. households with a council increased by 31% in May 2020 versus May of 2019. And that time spent on gaming was up 133% in May of 2020 compared with May of 2017. Of course, gaming and gaming accessories have been a good growth market over the past years. but the stay-at-home orders and loss of many other forms of socializing and entertainment have driven a dramatic increase in gaming. And on top of that, gaming headsets work great for and are being purchased for non-gaming purchases like video conferencing for work, school, or socializing. Note that the growth is not only happening in console headsets but across our entire product line as I'll expand on a bit later. One of the things that is so noteworthy about this growth is how unexpected it was. The year-to-date growth figures mask the fact that many gaming categories were down in the first two months of the year, consistent with our initial forecast. We expected this to be a year where console headsets would be down for the first nine or 10 months of the year, we had been calling it an air pocket, as consumers prepared for the launch of new consoles from Sony and Microsoft. Instead, the air pocket has turned into a turbo boost and turned 2020 into a year where we think we will see record sales. And we believe some of these trends will drive longer-term market growth, not just a one-time surge, similar to the way the 2018 Battle Royale surge drove a sustained increase in market size. Based on our extensive analysis, including consumer research we've completed over the past month, we see three drivers of the tremendous surge in demand. Category one, existing gamers are gaming more, and that's translating into purchasing of gaming accessories across our entire product line. While we expect a portion of these purchases may be pull-forwards, We believe that the increase in gaming in general could drive a sustained long-term increase. Category 2. Lapsed gamers and new gamers are gaming and gaming with headsets. This adds to the installed base of gaming headset users, which, if they continue to game with headsets, which history indicates is likely, can drive a long-term increase in the size of the market. Category 3. Non-gamers are buying headsets for working, schooling, and video socializing at home. Gaming headsets work great for this. Some of them are then also using headsets for gaming. To the extent that these work in school from home trends continue, this is a new source of demand for our headsets. Our analysis leads us to believe the impact of each of these three factors is roughly equal across the three categories. so each driving roughly one-third of the incremental demand over the past months. Categories one and two would drive increased demand across all gaming categories, not just gaming headsets, which is why we are seeing increases across all of our product categories. This decision to boost their initial production order for PlayStation 5 from six million units to 10 million units by March of 2021. And all three categories could drive sustained incremental demand. I think it's important to note that our strong sales performance is not just driven by the growth in the industry, but also by our ability to respond to it. Most competitors in our product categories are benefiting from the demand surge, but they are not all reporting growth rates as strong as ours. This is driven by a couple of factors. First, as soon as we noticed the uptick in demand back in early March, we immediately worked with our factories to increase production. Within a matter of weeks, we were able to triple the output from these factories and then within a few more weeks, we were able to achieve roughly five times the planned factory output. Then we had to get the product into our local markets, which was an enormous challenge given the drastic reduction in available air freight capacity. We spent over $4 million extra to do this, but as John will outline, this was very worthwhile financially, and we know that our retail partners value our efforts to get them supply as well. And finally, our team worked around the clock with our retail partners to make sure we were putting the right amount of product in the right locations. All this while the retail dynamics, who was open versus closed, online versus offline, et cetera, was shifting constantly on a country-by-country basis. As I said earlier, it's not just console headsets that are driving our growth. We are seeing very strong growth in our PC accessories as well. In the second quarter, the U.S. market for PC gaming peripherals, which is headsets, keyboards, and mice, was up 123%, and retail sales of our PC products were up more than 280%. In fact, we've exceeded the market performance in each PC product category in the US and across the board in most of our major markets. We executed extremely well across all these dimensions and that enabled us to outpace the market in console headsets and PC gaming accessories in our largest market, the US, and many of our other markets. With that in mind, I'd like to again thank our incredible team globally for the great work over the past five months, particularly given all the adjustments each of us have had to make to accommodate working remotely and all the other challenges of the stay at home orders. With that, I will turn the call over to John to review our financial performance, after which I will come back with some additional comments about what we see for the balance of the year. John.