Turtle Beach Corporation

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach second quarter 2021 conference call. Delivering today's prepared remarks are Chairman and Chief Executive Officer Juergen Stark and Chief Financial Officer John Henson. Following their prepared remarks, the management team will open up the call for any questions. Before we go any further, I would like to turn the call over to Alex Thompson of the Gateway Investor Relations Turtle Beach IR Advisor, as he reads the company's safe harbor that provides important cautions regarding forward-looking statements. Alex, please go ahead.

Thank you, Michelle. On today's call, we'll be referring to the press release filed this afternoon that details the company's second quarter 2020 fund 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 on 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 Beats Corporation's results to differ materially from management's current expectations. While the company believes that 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 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 and other periodic reports which identify specific risk factors that also may cause actual result or events to differ materially from those described in our 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 this call will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States, or GAAP. You can find a reconciliation of these materials 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?

Juergen Stark Good afternoon, everyone, and thank you for joining us. I'm pleased to be with you to discuss our excellent second quarter performance. in which we delivered strong financial results, unveiled significant product launches, and entered into two new gaming product categories. And I'm especially pleased to note that we delivered record first half results and confirmed our guidance for 2021, which would result in 7% revenue growth and build strongly on our record year in 2020. We're also tracking very well on our long-term growth strategy and our financial objectives. Our Q2 revenues were $79 million and adjusted EBITDA was $5 million, both substantial beats to our guidance. In fact, we delivered the second highest Q2 in the company's history, only outdone by Q2 last year when the gaming market saw an unprecedented surge in demand related to the stay-at-home orders and our strong execution enabled us to outperform the market and our peers. The gaming market continues to grow, increasing demand for quality gaming products. Our recent gamer survey reinforced this trend in gaming levels with many new gamers entering at lower price points. This suggests strong future market opportunities for product upgrades, particularly for us with our comprehensive portfolio for all levels of gamers. Our survey also indicated that the overall replacement cycle has remained consistent. We've closely followed these trends and positioned the company for further value creation by innovating and launching new products across our gaming headsets, PC accessories, streamer and pro microphones, as well as entering the two new market categories that I'll cover shortly. Returning to the market, NPD reported that for the first half of 2021, across North America, five of the top 10 selling console gaming headsets were our Gen 2 Stealth 600 and 700 line of wireless headsets. And 10 of the top 15 headsets by revenue were ours. We've been the leader in console gaming headset category for more than a decade based on delivering an expansive portfolio of great headsets with a steady stream of innovations and industry firsts that has made us the go-to brand for console gamers. In the second quarter, we continued this with the launch of the Recon 500 gaming headset. This product delivers unprecedented sound quality at every frequency with our patented Eclipse dual drivers, essentially a woofer and a tweeter in each ear cup, and a groundbreaking wood composite acoustic category. This is an innovative addition to our popular Recon line, and the Recon 500's multi-platform technology and affordable price at $80 is a great choice for gamers looking to elevate their gaming audio experience. We believe it's also a perfect upgrade for the millions of Recon 50 and 70 users. We also announced Rocket's all-new SynProAir premium wireless gaming headsets. which has become our top wireless offering among our award-winning PC brand. The SynPro Air further elevates the perfect mix of Rocket's German design and engineering with Turtle Beach's audio expertise and patent technologies, and it's our best PC gaming headset yet. Our progress in expanding our award-winning Rocket portfolio of PC accessories and gaining share in that $3.5 billion market is going well. NPD reported, that U.S. sales of PC headsets, keyboards, and mice rose approximately 40% in the first half of 2021 versus 2020. Rocket sales grew by approximately 200% during that same time. These numbers really illustrate the impact of our expanding line of PC accessories as high-demand products like the all-new Kone Pro PC gaming mice, the Magma membrane and Pyro mechanical keyboards hit retailers in the quarter. We're really excited about these fantastic products. We also secured additional gaming partnerships to support our Turtle Beach and Rocket brands, first renewing and extending our partnership with the popular Call of Duty challenger team, Team War. Team War will continue to use Turtle Beach's Elite Pro 2 gaming headsets as well as the new Recon 500 gaming headsets. Our partnerships include rising NBA star Emmanuel Quickly, who will exclusively sport Turtle Beach headsets when off the court, and we added NBA star Grayson Allen as a Turtle Beach gaming ambassador. We're now proud long-term partners with GLSEN to support LGBTQ plus gamers. Diversity and inclusion have been important parts of our culture, and we've continued to add initiatives in this area across the company. The partnership with GLSEN is a great recent example. Next, our Neat Microphones team announced the long-awaited King B2 analog XLR microphone, which has fans very excited. Neat is already well-known amongst musicians and recording artists, and the release of the King B2 is the first of multiple all-new analog and digital USB microphone products launching this year. We're entering the $2.3 billion global market. microphone market with the best team in the category, and we're excited about redefining the level of quality and performance in streaming and acoustic microphones at multiple price points. In addition to adding amazing new products across our existing product categories, we announced our entry into game controllers and flight simulation hardware. The entry into the console controller market is a natural fit for us, given how strong our brand is with console gamers. They know we deliver great products that make gaming more immersive and our gamers more competitive, and we've done that with our new controller. We've designed it to integrate our unique and patented audio capabilities to enable millions of our Recon headset users to upgrade their audio experience while playing with a great controller. Of course, the controller works with any headset, but our Recon headsets have a huge installed base. The controller includes our exclusive and patented superhuman hearing capability, which a recent study demonstrated as providing significant competitive advantages in games. Superhuman hearing helps gamers win. The reaction has been very positive, and the controllers have received rave reviews. We estimate that the market for third-party gamepad controllers is roughly 600 million, so that's a big opportunity for us. We also announced our entry into the flight simulation controller market with our Velocity One flight system for PC and Xbox. I commented on our earnings call a year ago that I believe that the level of realism on the upcoming PlayStation and Xbox consoles would be a step change improvement and drive high demand for the new consoles. Indeed, that has happened, with both consoles setting records despite semiconductor constraints. PCs also experienced a step change in realism with the new graphics cards that launched last year. Simulation games for flight and racing benefit greatly from these advancements to the point where it can be difficult to notice a difference between reality and simulation. Once we saw the pre-release demonstration of Microsoft Flight Sim 2020 early last year and learned that it would also be coming to Xbox this year, the opportunity was clear. So we assembled an expert team with deep experience in the category and chartered that team with producing a groundbreaking, all-inclusive flight sim controller for Xbox and PC, which I'm glad to say they've done. And the flight simulation category, frankly, was ripe for a better product, so I'm confident this will prove to be an excellent move. Over 15,000 email notification sign-ups already is certainly a great start. The flight simulation controller category adds another $400 million in addressable market, and that's not including future products, which will branch into racing as well. Together, these two new product categories add a billion dollars in additional market for us to attack. So when we look at it all together, in just two years, we've significantly grown our rocket PC accessories portfolio in revenues since expanding into the PC category. Adding to that is our exciting portfolio of neat microphones launching this year, and now by expanding into the large game controller and gaming simulation hardware markets, I expect we could approach or even be over $100 million in revenues outside our historical core council heads of business next year. We are well on the way to being a gaming accessories leader, leveraging our decade-plus of delivering high-quality gaming products with cutting-edge technology and innovations. I'll provide some thoughts on how the gaming market, our excellent progress on our strategic and financial goals, and how we expect the rest of the year to play out after John covers our Q2 results in more detail. John?