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?

Hey, thanks, Juergen, and good afternoon, everyone. As Juergen noted, we are pleased to report another excellent quarter, exceeding our internal guidance during the second quarter of 2021. Given the unusual quarterly dynamics in 2020 and 2021, we are providing year to date performance alongside our second quarter summary. This is also particularly relevant given our 93% revenue growth in Q2 of 2020, which far outpaced our peers. Net revenue for the second quarter of 2021 was 78.6 million. roughly flat to the $79.7 million in the record year-ago quarter. First half of 2021 net revenue was up 50% compared to the year-ago period, providing us with a great start to our year. Gross margin in the second quarter was 36.5% compared to 36.7% reported in the second quarter of 2020. Lower air freight costs and fixed cost leverage were slightly more offset by changes in business mix, a return to a more normalized level of promotional spend, and higher ocean and land-based freight costs. Operating expenses in the second quarter of 2021 were $28.3 million compared to $19.3 million in the same quarter of 2020. Our business is on track for 60% higher revenues than 2019 So a big driver of these increases are the resources and the infrastructure required to support our larger business. We're also productively investing in new product categories and marketing expenses were more heavily weighted to Q2 than normal given the stream of product launches we just discussed. Adjusted EBITDA in the second quarter of 2021 was $5 million. compared to 12.9 million in the year-ago quarter, reflecting the aforementioned OPEX to accommodate the larger business in our investments to expand our PC accessory business and enter new market categories. First half adjusted EBITDA was up 98% compared to the year-ago period. GAAP net income in the second quarter of 2021 was 1.7 million compared to 8.2 million in the year-ago quarter, First half 2021 net income was up 127% compared to the year-ago quarter. Gap net income per share in the second quarter of 2021 was $0.09 a share on 18.3 million weighted average diluted shares outstanding compared to a net income per share of $0.51 on 16.2 million weighted average diluted shares outstanding in the year-ago quarter. Adjusted net income for the second quarter of 2021 was $2.6 million or $0.14 per diluted share, compared to $6.8 million or $0.42 per diluted share in the year-ago period. Q2 includes the recognition of certain tax charges and credits, which we expect will flow through to a full-year effective tax rate of approximately 20%. Cash flow from operations was $12.4 million in the second quarter of 2021 compared to $31.8 million in the second quarter of 2020. A big driver of the change here is the intentional increase in inventory to ensure supply to our customers, which I'll discuss momentarily. Now, turning to the balance sheet, as of June 30, 2021, we had $56.2 million of cash and cash equivalents with zero debt. including no borrowings on our revolving credit line. That's a $35 million net improvement from the end of June 2020. Inventories on June 30, 2021 were $81 million, compared to $45 million as of June 30, 2020, and $71 million as of December 31, 2020. Now, last year's Q2 ending inventory levels were unusually low. to start, but our inventory increase this year was an intentional operational strategy to help ensure supply in light of semiconductor shortages, global freight and logistics bottlenecks, and other potential global supply chain risks. We have also seen and expect to continue to see retailers ordering earlier to help ensure their own supply. And now I'll turn the call back over to Juergen for some additional comments. Juergen?

Thanks, John. We continue to see gaming as a market rich with opportunities and benefiting from multiple long-term tailwinds. The earnings presentation has a good summary of these trends. So as we advance our business, we're focused on executing our strategy to take maximum advantage of the tailwinds. As I mentioned, we're tracking very well. First, we're continuing to lead the $1.7 billion console gaming headsets category. With 10 of the top 15 revenue products in the U.S. and the ability to continue to drive innovation, as evidenced by the new Recon 500 headset, we see strong demand continuing. Moving forward, the fact that Xbox and PlayStation both announced record sales of the new consoles despite supply shortages has us excited to see how they will perform as those shortages recede. Second, we're rapidly expanding our Rocket PC gaming accessories portfolio and continuing to deliver compelling and unique products that will drive growth. I've already covered some examples of our progress, but here's an interesting fact that sums it up nicely. We closed the Rocket deal at the end of May 2019 and have already generated more than seven times the roughly 11 million purchase price in net revenues. and we're really just getting started. Third, we're entering new categories over time, organically and or through M&A. We'll soon launch the first of a coming portfolio of mic products with our acquisition of Neat Microphones, enabling the addition of 2.3 billion in global addressable market for streaming and professional mics. And organically, we've entered game controllers and gaming simulation hardware, as I described before, with another $1 billion in addressable market. Importantly, in the last two years, we've increased the markets that our products cover from essentially $1.7 billion to now over $8 billion. Back in 2019, when we announced the Rocket acquisition, I stated that our first goal was to reach $100 million in incremental revenues outside our core council headset business. As I mentioned before, we have a possibility to already hit that target next year, a year or so earlier than we had anticipated. In terms of how we see the remainder of the year playing out, again, we note the continued challenges on semiconductors and logistics that have been widely publicized, and we factored these variables into our outlook to the extent possible, given the very dynamic situation. Despite these challenges, and as a great illustration of a strategy that is working, we are maintaining our 385 million revenue guidance. While the semiconductor constraints are holding back several council headset products, our PC accessories and the new categories are focused to come in above our plans and make up the difference. So we're maintaining our revenue guidance at 385 million, growing 7% from 2020, where we posted over 50% growth. I continue to be very pleased that we're in a position to do this, given we outperformed the market and our peers significantly last year based on our rapid response to increased supply and excellent operational execution. In particular, this includes Q3, where we posted 141% revenue growth year over year and outpaced the rest of the market and our competitors in the U.S. Council Headset Sell-Through by a factor of more than three, just as a specific example. We're also reaffirming our EBITDA target of 50 million for this year and believe a 13% EBITDA margin target compares favorably to peers, particularly when considering our somewhat smaller size. We are maintaining our adjusted EBITDA outlook. While we're maintaining our adjusted EBITDA outlook, we are forecasting significant incremental ocean and land-based freight costs reflecting global shortages of containers, shipping bottlenecks, and capacity constraints on inland logistics. This will create significant temporary incremental costs, the extent of which will depend on how the freight situation evolves in the coming months and our ability to at least partially mitigate the impacts. On the flip side, we know these issues are impacting our industry and more broadly. And combined with semiconductor supply issues could result in competitive shortages, which may produce lower promotional spending levels. So we are holding our EBITDA guidance in light of the puts and takes. And as always, when there are unusual dynamics and operational challenges in our market, we strive to execute well as we've done in the past. For the second half of the year, we're expecting revenue to be approximately 213 million and adjusted EBITDA to be approximately 30 million. As I mentioned, we have seen and continue to expect retailers to order earlier and build inventory to ensure their own supply. This contributed to Q2 and will likely continue to cause 2021 to have unusual quarterly phasing, just like 2020 did, particularly in Q3, which given our significant outperformance of the market looked more like a Q4 than a Q3 last year. So we continue to recommend that investors focus on our progress towards annual results rather than trying to gauge by comparing individual quarters for two unusual years. That said, we estimate roughly 35% of our annual revenue to be in Q4. Of course, as always, the Q3-Q4 revenue splits could move around given high velocity of shipments late September and into October without impacting the second half totals. We are very pleased with where the company is positioned today, and we remain focused on our goal of driving 10 to 20% revenue growth rate over time while delivering category-leading EBITDA margins. Given how well we're tracking on our strategic and financial goals, we think that's a great formula for growing shareholder value. Finally, I want to thank our entire Turtle Beach team for another strong quarter that is a result of their continued focus and execution. Delivering products these days is filled with unusual challenges given the state of the world as well as the global supply chain situation, and I'm very grateful for our team's ability to continually overcome these challenges. I'm constantly impressed with the quality of our people, and their talent and dedication is what drives us forward. Operator, we're now ready to take questions.

Thank you, sir. During the question and answer session, if you have a question, please press star then 1 on your touch-tone phone. Our first question will come from Drew Crumb with Stifel. Your line is open. Please proceed.

Okay, thanks. Hey, guys, good afternoon. So, Juergen, you called out the – hi. You called out the semiconductor shortage having an impact on the business. Is there a way to size, whether it's the percentage of sales, what the company's exposure is to this, and when would you anticipate the supply-demand imbalance normalizing? And then I have a follow-up.

Sure. So semiconductors, as everybody knows, are affecting all electronics categories. It started in the fall of last year. I believe we've been quite on the ball in terms of responding, including changing out semiconductors in multiple products in advance of expected issues and literally giving ourselves more supply as a result. It's very tough to quantify because in some cases, you know, it affects the wireless headsets and powered products, essentially. A lot of our revenue are passive headsets and passive products, but it's hard to quantify because we've, to some extent, already been holding off on some promotional activities and constraining sales a bit, and we expect that will continue, basically, so that we can avoid stock outs in those categories rather than driving pulses of sales, for example, and then stocking out. We also, it's important to note, we've anticipated the supply constraint in the 385. So we're holding the revenue guidance that we had from early in the year and updated in the last earnings call despite the constraints and how that moves will then depend on how semiconductors proceed to come in and how logistics frankly also play out for the second half of the year. You also asked how long we expect it to continue. Yeah, right now we're expecting semiconductor constraints to continue into 2022, and that's we're planning accordingly, essentially.

Okay. And then my follow-up, you mentioned that you aspire to get to industry-leading adjusted EBITDA margins. Is there a specific number or range you can share with us on that metric?

Yeah, we started the year at 12%. 12% EBITDA margin we felt was a good peer comp for public company peers in our space. And our goal in our financial planning, which will continue going forward, is to try to hit that industry-leading or category-leading EBITDA margin while investing in the business to drive future growth. We upped it to 13% as we increased our EBITDA target in the last earnings call, and I think that's a very good range. We think that's a very competitive EBITDA margin. However, we do expect, as we continue to grow and get operating leverage over the coming years, that that EBITDA margin should modestly creep up over time.

Got it. Okay. Thanks, guys. Thanks, Drew.

The next question in the queue comes from Mark Argento from Lake Street. Your line is open. Please proceed.

Hey, Juergen. Hey, John. Just a couple quick ones here. An incremental $100 million in non-consul headset revenue, Juergen, that you were thinking you could potentially achieve in 12 months. Could you break that down a little bit for us in terms of the overall segments? Is it predominantly going to be PC accessories or... Do you think Mike and some of the other categories you've got into could actually move the needle as well?

Yeah, good question. So the $100 million, again, is kind of a great testament to a strategy that's working well. We hadn't expected to have a shot at that goal next year already, but given that the PC category is going very well, we've expanded the portfolio, consumers like the products, all of that, I would expect the majority of that to be in the PC category. That category's also got a year to two head start over the others. Mikes are new. That portfolio will expand next year. Controllers and flight sim are also new with the first products, both essentially single products right now in each of those categories. That portfolio will also grow in the coming years. So that will be the smaller part of it. But I will tell you that the controllers, we've increased our forecast for the year on controllers. We've increased the forecast for this year on Flight Sim, and I mentioned 15,000 email notification sign-ups on Flight Sim. It's just astounding, particularly given it's a $350 product, but it's a clear indication of a market that I think has continued to grow rapidly, especially when Flight Sim comes to Xbox, as it recently has. And so those could be meaningful contributors next year.

Great. That's super helpful, caller. Appreciate that. And then just more housekeeping, John, on the tax rate. You said you expect 20% for this year. Do you anticipate, is that kind of the new rate going forward, or does that bump back up in 2022?

Yeah, at this point, I would expect it to bump back up to, you know, more to the 25% level here after this year.

Great. And then just one last one. In terms of the M&A strategy, it would historically have been more tuck-in acquisitions than organically grow, leverage the platform, your distribution. Do you anticipate, Juergen, that's going to continue to be the strategy, more tuck-ins, or would you look to maybe do something a little more chunky if you could find a good target?

I would say everything is fair game, Mark. If we can do things organically, we'll do it, as we have with Flight Sim and controllers. We hired a team that has decades of experience in those product categories. That's hard to find, though. And the rocket acquisition, which I would, for us, would be more medium-sized, I would say, versus just a small tuck-in, to be already at the point where we've generated seven times the purchase price and revenues slightly over two years in is a pretty good indicator of our ability to buy well and then leverage the acquisition. So we're not looking for really big stuff. If we can build a big business off the right team and smaller acquisition spend. But everything is fair game. And I'll reiterate a comment I made in prior calls. We're very selective. The team's got to be right The culture's got to be right. If they're existing products, they've got to be good quality and have a good reputation. And the economics have to be good and generate an attractive return for us to pursue any M&A.

Great. Thanks, guys. Congrats on a good quarter. Great. Thanks, Mark.

And the next question comes from Tom Forte with DA Davidson. Your line is open. Please proceed.

Great. Thanks. Congrats to the quarter to two semi granular questions in one more high level. So I'll start with the two. So you're going to, can you talk about when you talk about kind of the logistics inflation on how much of that is higher costs related to containers? And then on that front, do you think it's transitory or do you think it's permanent? I apologize. I sound like the fed there. And then the second is on the chip shortages or just the supply chain challenges. Directionally, do you feel like it's gotten better or worse between the first quarter and the second quarter?

Great, Tom. I'll address both of those. On freight, there are a variety of issues. First of all, China imports into the U.S. are up significant, or Asian imports into the U.S. are up something like 30%. So that's already a strain on capacity of shipping, of containers, and of ports. Second problem is that because ports are bottlenecked, ocean freighters are having to wait to get loaded and unloaded, and those ports are occasionally getting shut down by COVID or at least facing reduced capacity for periods of time. So that creates a waiting period, something that used to take six weeks might now take eight or nine weeks. That's an impact on everybody's business, by the way, because products don't get here as soon as you'd expect them. But that also ties up containers in essentially work in process inventory sitting on those ships waiting to get unloaded and reloaded. So those factors have driven in the last month or two a rapid increase in the cost of containers. That's a major, major factor. The second thing is that rail is also congested. So inland freight is highly congested to the point where rail yards are sometimes shutting So we're having, like many other businesses, to find other ways to get our containers into our warehouses. And we're doing that, but it's just more expensive. So we've tried to factor these things in to the second half forecast and the annual forecast. The situation's very dynamic. As usual, I believe we've got a team that is all over it and operationally working, have been working for months already, to find ways to mitigate expenses, to optimize inventory levels, all of that. So, you know, we've held our EBITDA guidance, knowing also, by the way, that there could be some advantages to the extent that competitors stock out and we outperform in supply. That could also drive a reduction in promotional levels and a positive, frankly, to EBITDA. That's on the freight and semiconductor.

That's on my follow-up.

Yes, semiconductors, Tom, have been relatively stable over the last months. We don't see it getting better right now. We are tracking to our expectations in terms of what we thought we would get we're getting, and we're continuing to exercise flexibility where we need it to actually swap out semiconductors, which is an engineering effort, by the way, in order to help assure continued supply.

Excellent. All right, so then I know it may be early, but when we think about the new class of gamers that entered the market during the pandemic, are there any important observations on behaviors, purchases, thoughts that they might be approaching the same way that's historical, faster rates than historical, just any high-level thoughts there?

Sure. So I know investors and analysts are always interested in our analysis insights into the console gaming headset market and we have done another survey like we do once a year to help frankly inform our own business forecasting and planning. As I mentioned briefly in the prepared remarks, the survey has shown high levels of gaming including these new gamers who have entered. The only modification I would say is that they're more weighted towards entry level products, which is not surprising. It's a little bit common sense. But the interesting thing is, and we're seeing this, frankly, with our wireless products being five of the top ten revenue-producing products in the United States first half of the year, that indicates a very high level of upgrading into these better products. And we think that the fact that these new gamers have come in at more entry-level levels creates good future opportunities as well. All right. Thank you, Juergen. Thanks, Tom. Thanks, Tom.

The next question in the queue comes from Jack Vanderaard with Maxim Group. Your line is open. Please proceed.

Great. Congrats on the solid results, guys, yet again. Thanks for taking my questions. So, Juergen, Just following up with that initial $100 million revenue target outside of your core console heads of business, I know there's already a question on this, but it sounds like you're going to hit that or you have a chance to hit that next year. So first I'd just like to say congrats. That's impressive execution. My question is, and I'm sure there's multiple scenarios that could play out here, but if you were to achieve that $100 million target by next year, what do you think is the most likely scenario that needs to play out Like, what is the X factor? Is it a breakout performance from the sales of the new flight simulator and Xbox controller product, or outperformance in your existing businesses or product lines, or does it require, like, another new product launch that's yet to be announced? What are your thoughts there?

Sure. So given how PC is tracking and our expectations for mics, controllers, and flight sim, there's no major kind of breakthrough that would be needed to come near or over $100 million next year. What we need really is for those categories to continue to grow and perform well as they have, particularly in PC where we have a track record and the controllers in Flight Sim to sell, I would say, to very reasonable forecasts. We could, especially in Flight Sim, we could find ourselves surprised with even higher performance than we've got kind of roughly penciled in for next year.

Excellent. Okay, that's helpful. And then just to follow up, if I could revisit your kind of long-term revenue growth target, your multi-year target plan, and separately, regardless of hitting that $100 million plus non-console revenue, it doesn't matter where the revenues come from, just is there any update on your outlook for maybe initially for 2022 and then just also that long-term revenue target? Do you remain confident? Do you stick with that? How's that shaping up?

Sure. So our long-term revenue growth goal is 10 to 20%. Through the end of 2020, we've delivered a five-year revenue CAGR of 17%. So we're tracking like right in the sweet spot. Our EBITDA CAGR, by the way, for five years is over 90%. So we're doing very well on our goals. Historically, we're not going to provide an update on 2022 yet. It's still too early, a lot to go in 2021. But we are certainly targeting to continue growth off of this year. And, again, with years that will be higher and lower and all that, but to continue to be in that sweet spot of 10% to 20% revenue growth.

Yeah, that's helpful. Helpful historical context. That's good to hear. That's it for me. Thanks.

Thanks, Jack. Yep, thanks.

Thank you. And the question is from Mark Yang with Oppenheimer. Your line is open. Please proceed.

Good afternoon, Juergen. Good afternoon, John. My first question is maybe can you give us more details on the investment in sales marketing this year, particularly around how much OPEX increase will be associated with the new products, the rocket, the microphone, and the new controllers?

Sure, Martin. So the OPEX will be higher this year, as we've stated in the remarks. The primary driver is the fact that the business is up a 60% run rate over 2019. And while the business grew a lot last year, you just can't catch up. You can't get people in place. You can't get infrastructure and resources and systems in place to handle a business that in two years has gone from You have $235 million in revenue to now track into $385 million. So that's the biggest driver. We don't break out, and frankly it would be very hard at this point to break out, other than specific dedicated marketing expenses, any of the rest of our business between the core headset business and the new categories because everything is run in an integrated way. Sales is fully integrated. Operations is fully integrated. Much of engineering. leverages multiple organizations. And so, you know, again, other than specific targeted marketing campaigns, it's, you know, given that this kind of growth and investing as we go is just a core part of our normal operations business, we can't really break it out.

Yeah, it makes sense. And can you comment on which product category do you or should we expect the most growth in your marketing or promotional activities?

Again, would be hard. I mean, in general, the PC category, because that's got three categories, headsets, mice, keyboards. It's a global business, including efforts we're putting in to growing that business, which are going very well in some key countries in Asia. So that would get the, you know, of the new categories, that one would get the biggest share, but the way to think about it really is each product launch needs to have some marketing behind it. That's why also we had somewhat higher marketing spend in Q2 than we normally would. We released a lot of new products. So when a product releases, you've got to provide marketing to communicate that to consumers and get the sales going. That's really going to be driven by the number of products in the portfolio that are launching at any given point in time. and everybody gets their fair share. On top of that are investments to continue to drive the brand development. So Turtle Beach brand gets some, that's well developed. Recon Controller and the Flight Sim will leverage that. Flight Sim we did under the Turtle Beach brand because it's gonna work on Xbox where very few flight simulation hardware actually work today. And we're a great, Turtle Beach is one of the top brands in council. Rocket Brand is getting marketing investment and will continue to get investment to grow that brand and awareness of the brand as kind of the foundation under which or on top of which we launch the new product. And then Neat is its own brand. Now Neat happens to be pretty well known among musicians and pro audio, but that's a brand that'll get some modest brand building marketing, again, underneath the specific product launches.

Yeah, got it. So I think in one of your early answers, you sort of alluded to a potential to scale back promotional spending if your competitors are seeing more severe shortages. Is there any other potential drivers for margin this year where we can see a potential lift?

Sure, so we're projecting the year to come in around 35%, so mid-30s, which is very much in our target range for gross margin. The mid-30s, you know, we've anticipated as well as we can the incremental freight costs, which will be in those. There will be incremental costs, but also the fact that Q1, you know, the year started very strong for everybody and with less promotional spend than normal. Q1 came in higher and with higher margins. So when you average all that out, we're tracking right in our desired target band. My comment about Q4 was related to the fact that we've seen in the past, last year for example, when products start to be short of supply, everybody runs less promotions. and there's an incremental benefit to the promotional level. We're not counting on that in Q4, but it certainly could happen depending on who's able to get what supply and the timing of that during Q4. So that would be a positive incremental margin contributor to help offset what we believe will be higher freight costs.

Thank you. Last question for me. Should we expect more entries into new product categories in 2022?

Well, we're looking, but I feel very good about the PC category controllers we have been looking at for quite some time. We wanted to wait until after the new consoles launch so you don't launch a controller that and find out it doesn't work on the new console, so we timed that very intentionally. Flight Sim came about literally from seeing the demo and understanding that that was gonna launch on Xbox, which means there's a whole new ecosystem and set of consumers that can use that platform. Once you're in Flight Sim, by the way, and now that we've hired a team that has a lot of expertise in that category, racing simulation is a natural extension. Same kind of products, same kind of connectivity, same types of manufacturers. So we do see, as we continue to expand the portfolio in flight sim, there'll be more products coming, the potential to add racing simulation, which by itself is another $600 million rapidly growing market opportunity. That would be a natural extension. On top of that, we continue to look at other categories that are adjacent to the ones we're in that use common retail and have common consumers and all that, but I don't feel a pressing need right now to try to get us into additional categories, but that doesn't mean it may not happen if we have an opportunity coming in the next year or two.

Thank you for our answers. Congrats on good results. Thank you.

Currently, this concludes our question and answer session. I would now like to turn the call back over to Mr. Stark for any closing remarks.

Thank you very much. We hope everyone is staying safe and enjoying the summer months here. We look forward to speaking with our investors and our analysts again when we report our Q3 in November. Have a great day, everyone. Thank you.

Ladies and gentlemen, this will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.