Turtle Beach Corporation

Our first quarter adjusted EBITDA loss was modestly better than expectations as we reported 5.7 million compared to adjusted EBITDA of 15.3 million in the year-ago period. The year-over-year variance and the modestly higher than expected gross margin result is primarily driven by the items I've covered above. Adjusted net loss for the first quarter of 2022 was 6.3 million or 39 cents per diluted share. compared to adjusted net income of $9.4 million or 52 cents per diluted share in the year-ago period. We expect our effective tax rate for the full year to be 25 percent. Cash used for operating activities in the first quarter was $13.3 million, compared to cash flow from operations of $21.1 million in the year-ago period. The decrease was primarily due to lower net earnings and working capital deployed to mitigate current and potential supply constraints. Turning to the balance sheet, at March 31st, 2022, we had $23.7 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line. Inventory at March 31, 2022, were $117.4 million compared to $59.1 million a year ago. Elevated inventory levels are a reflection of continued, significantly longer shipping lead times as well as intentionally higher target inventory levels to absorb COVID-driven supply chain disruptions that we've experienced many times over the past two years. That said, we expect inventories to build modestly during the summer, given seasonal load-in prior to the holidays, but be significantly lower by year-end. And now I'll turn the call back over to Juergen for additional comments. Juergen?

Thanks, John. As we said, we're pleased to have delivered first quarter results in line with our expectations, which again demonstrate our ability to execute well in a challenging macro environment. As I mentioned earlier, retail sell-through was down significantly in the 20s or even 30s percent year-over-year across council and PC accessory businesses due to the absence of stimulus checks and lingering stay-at-home orders that significantly contribute to heightened numbers in the first half of 2021. Additionally, as John covered, retailers have reduced their inventories throughout the first quarter and competitive discounting and promotions have been much higher than normal, particularly in the PC categories. Still, I'm pleased to note that our PC accessories business executed the plan in the quarter as did our overall business. We expect the overall gaming markets to continue to be challenged through second quarter, where we expect our revenues to be flat to slightly up sequentially from the first quarter. We continue to expect the second half of the year to show strong growth, particularly Q4, given the launch of new AAA games in advance of the holiday season, expectation of less constraints on council supplies, recovery in consumer retail dynamics, including some potential pent-up demand, as well as the impact of our expanded portfolio in council, PC, simulation, controllers, and microphones. all of which have exciting product launches coming yet this year. Given this, we are maintaining our full year 2022 outlook and expect revenue to be approximately flat, plus or minus 5% from record 2021 levels. Again, I'm pleased with the strong execution we've displayed in Q1, and there's a lot in store these next three quarters. Taking a step back, We continue to execute on a clearly defined plan to leverage the strong trends in the gaming market and capitalize on the opportunities ahead. The gaming sector remains the market to be in with a total addressable market of 180 billion that's expected to reach north of 200 billion by 2024. Our diverse portfolio and proven strong consumer demand for our products have extended our markets by over 7 billion in the past three years, and positioned us well for future success. Here are our key priorities. First, continue to lead the Council of Gaming headsets market where we have maintained market share of 40 plus percent in the U.S. for 12 consecutive years driven by great products, valuable innovations, a go-to brand, and strong execution. I'm very excited about our new wireless models, both those we've announced and those still pending. Second, continue to expand our PC gaming portfolio of headsets, keyboards, and mice, and grow our share in that 3.8 billion PC accessories market. The acquisition of Rocket mid-2019 for 11 million has enabled us to build a business that has nearly doubled each year since then, already generating more than 10 times the purchase price in cumulative revenues. When we pitched the rocket deal to the board, we said we expect it will accelerate our ability to build a sizable PC business by several years, and it's done exactly that. Third, drive continued growth in the gamepad controller, gaming simulation, accessories, and microphone categories that we entered in 2021. These products further expand the markets we serve and fully leverage the core competencies of the company. We have exciting new products coming in these categories later this year as well. And fourth, continue to identify and selectively pursue other growth opportunities. Our business expansion across product categories and geographies is performing well, and we continue to look for organic growth and acquisition opportunities to expand our addressable markets and drive growth in line with our 10% to 20% annual growth targets. We continue to target roughly a hundred million in revenues outside of our council headset business for 2022 and expect those new businesses to generate a positive contribution to EBITDA already this year. Obviously it takes investments to enter and grow new categories. And these investments have enabled us to go from roughly zero in early 2019 to over 70 million in 2021 in these new category revenues. Balancing these investments to fuel our growth over time while still delivering peer competitive EBITDA margins, like the 10% EBITDA margin last year, in line with a peer who is 5X our size, is a key point of focus in our annual operational planning and in how we strive to execute over time. The successful execution of that strategy has enabled us to significantly outgrow the council headset market. Expansion outside of council headsets also reduces our dependency on that market, which has a cyclical nature that has created annual growth rates varying from positive 71% to negative 22%. Our very large share of the council headset market makes it nearly impossible for us to move our top line significantly differently from the overall council headset market. Last year is a great example. The console headset market was down roughly 5%, but we were able to grow modestly. In addition, we correctly predicted that multi-platform gaming would become increasingly important, driving a blurring of the lines between console headsets and PC headsets. Good anticipation of these factors was part of the drive to acquire Rocket in 2019 with the strong capabilities and skills in PC accessories significantly accelerating our ability to produce and take share of the market with compelling PC products. These category expansion efforts therefore not only worked out well financially, but also have a favorable impact on our strategic positioning. While there will always be periods of economic downturn, gaming market weakness, or operationally difficult environments, like we've seen multiple times over the past decade, Gaming is and remains a great market to be a leader in. Our successful efforts to maintain our strong leadership and council headsets while significantly expanding our product market categories have us positioned well for the future, both in terms of participating with the long-term tailwinds in gaming and also in continuing to grow revenues. And our ability to operate with a very high level of productivity at well over a million dollars in revenue per employee means growing revenues is the best way to grow earnings over time. In combination with our strategic and operational goals, we're delivering on the long-term financial goals that we regularly communicate. Specifically, we strive to deliver 10% to 20% top-line growth over time, and notably our five-year revenue CAGR is more than 16%. Generate peer competitive EBITDA margins while investing for growth, targeting 10% and growing over time as we gain operating leverage via revenue growth. And leverage our strong balance sheet to provide flexibility to pursue organic or acquisition-based investments to support our growth strategy while keeping an eye on opportunities to return capital to shareholders as we've done historically. Before I open up the call to Q&A, I wanted to address some questions we've received about the board's approach to strategic alternatives given disclosures we made in our letter to stockholders on April 25th, 2022. I believe for a while that the public markets don't value us properly. I also believe that there is more volatility in the stock price than there should be despite the way we've consistently run the business and delivered on results. The board has been fully aligned with this, which is why we've stated many times that the Board continues to be open to strategic alternatives that maximize shareholder value. I've also stated that we don't need any external prompting for this, and we don't. To that end, the Board and I have extensive experience and openness to strategic alternatives. In fact, we have engaged in banker-led proactive outreach processes to potential acquirers on three separate occasions in the past five years. In the most recent of those efforts, we retained a banker in late 2020 to engage in outreach to third parties, outreach that started in early 2021. In the spring of 2021, we made the decision to switch bankers and engage Bank of America to continue our outreach efforts. Since that time, we've engaged with the most logical potential strategic buyers, as well as select financial sponsors. Given our experience with two prior rounds of outreach, we know the most logical prospects well. Along with our financial advisors during this third round of outreach, we have been in contact with 29 potential acquirers, signed 10 NDAs, and held nine management meetings. Throughout the course of this extensive engagement that began early last year, we received feedback from prospective buyers and their advisors. In a number of cases, we heard that they were unable to move forward because we had too much reliance on council gaming headsets and the cyclicality that comes with that. I mentioned council market growth rates historically of plus 71% to minus 22% earlier. We had received the same feedback in the prior two rounds of outreach, which is one of the many reasons we pursued our value-creating diversification strategies. In the prior two rounds of outreach, we reached an outcome that resulted in bids that would not have been attractive to shareholders. In both cases, like today, the stock price was low based on overall market conditions, and we subsequently drove higher value for shareholders than the bids offered. The reality is that the best way for us to create value for shareholders, including in the context of a future transaction, is to continue to execute our strategy while remaining open to engagement with potential acquirers. Our extensive experience reaching out to prospective buyers now in three rounds is also why, among other reasons, we believe publicly announcing a formal sale process is not advantageous and may not result in the best deal for our shareholders. It is also not advantageous to disclose the status of these types of discussions However, we are doing so now based on shareholder feedback, seeking to understand the Board's view regarding strategic alternatives. As is always the case, there are no guarantees that discussions of this nature will result in a transaction. The Board's openness to value-maximizing opportunities also included our full and good faith engagement with Dunrail, where we tried repeatedly to establish their financing and make their bid real and actionable. Despite our efforts, Dunrail could not or would not verify their financing, unlike credible potential buyers. Additionally, it is important to note that feedback from multiple prospective acquirers has been that Dunrail's dissemination of false and misleading information about the company, which started mid-2021, has unfortunately deterred and discouraged them from advancing discussions with us. It should now be fully clear that this board, including myself, has been and continues to be fully open to strategic alternatives if they can create shareholder value. And as mentioned, we continue to believe that the best way to create value, whether it's standalone or by a strategic alternatives, is to drive the execution of our strategy to grow and diversify the business and increase earnings over time, exactly as we've done and will continue to do. I again want to extend my thanks to the entire Turtle Beach team. We're very pleased with our start to 2022, and our team continues to keep us in a position to meet and exceed our long-term goals. Their dedication, productivity, and strong execution drives this business forward. Thank you to the collective Turtle Beach team. With that, let's turn to our Q&A, sticking to the quarter and the business.

And if anyone has a question, you can press 0 then 1 on your touchtone phone. Once again, if you have a question, it's 0 then 1 on your touchtone phone. And our first question comes from Drew Crum. Go ahead.