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spk00: 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?
spk01: 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.
spk04: 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.
spk02: Okay, thanks. Hey, guys. Good afternoon. First question on the second quarter sales guidance, expecting it to be flattish versus 1Q. Can you talk about some of the puts and takes there. And then separately, Juergen, can you address your commentary in more detail around the net positive contributions to EBITDA for the new businesses?
spk01: Thanks. Sure. So as we mentioned, Drew, in the prepared remarks, we expect Q2 to be roughly flat to up slightly to Q1. That's basically a result of the continued kind of economic pressures and overall gaming market weakness. which we expect to abate as we get into Q3 and then produce a very good growth rate starting in Q3 but then in Q4. And it really is driven by the surrounding macro, both gaming and economic conditions. On your question on positive net contribution margin, net contribution to EBITDA, So that's for the 100 million that we're targeting this year for the new categories. We've been asked that multiple times by investors, which is why we included the information today. Let me start with, we run these businesses in a fully integrated way. They're all gaming accessories. They all leverage supply chain, sales, many parts of marketing, and obviously all of the G&A functions. That said, we are able to and regularly look at the contribution margin of those businesses as part of our annual planning process. We do this so that we have a good sense of how our return on investment is tracking from these new activities, from these new categories. So in the way we do that is while many functions are shared, There are also dedicated resources for each of the businesses, in particular, parts of product management and engineering functions, as well as, obviously, dedicated marketing funds, website funds, those types of things to support the product launches, the brand, all that. So we assign all of those costs to the businesses, obviously, under their gross margin line. And we even, by the way, take, if we have accounting costs, that's dedicated to one of the businesses that's put in there. So we basically try to take all directly associated costs that we can identify and put them into the businesses. If that number is positive, which we expect it to be this year, that then makes a positive contribution to the rest of the business because the rest of the costs basically would not materially change if we didn't have those new businesses. That's how we do that calculation. It's pretty It's quite robust, and as I said, it is a core part of our annual planning process and the board's approval of our annual operating plan.
spk02: Very helpful. Thanks, Juergen.
spk04: And once again, if you have a question, you can press zero, then one on your touchtone phone. And our next question comes from Frank O'Granda. Frank, go ahead.
spk06: Hi, good afternoon, everyone. Thanks for taking my questions here. Juergen, you were talking about your guidance for the year and talking about consumer confidence being low. Can you talk about the business dynamics in Europe, perhaps? It's a 20% business for you, and we have some of your peers here talking about diminishing consumer confidence in the region as a result of the war.
spk01: Yeah, so as we mentioned, and I think we have over 20% of the business in international. I think it's closer to 30, Franco. The market in gaming conditions we're seeing are really spanning all of North America and Europe. Europe actually fared somewhat better in the overall gaming market year-over-year comps, and part of that is probably because of the stimulus checks they had additional benefit in the United States and while countries in Europe had similar items they may have had a bigger impact in the US so you know the trends we're seeing are really across the board including in Europe and we expect them to continue although you know as we commented to the extent that that and we believe this is happening consumers are holding back on purchases given concerns about inflation concerns about the war and all that that will typically produce some pent-up demand over time. As they wait and when they start feeling better, they will then, you know, eventually they'll need to want to upgrade their headset, replace their products, all of that. So, you know, we continue to have a view that the second half of the year, and particularly Q4, will benefit from a revival of the consumer demand, some pent-up demand, as well as the specific gaming market items like the new AAA launches, hopefully less constraint on council supplies, as well as our own new product launches, which will all be kicking in as we get into Q4, should produce very positive growth for the second half of the year.
spk06: All right. Thank you for all the color there. And you also talked about, obviously, the elevated inventory levels here and how they're expected to rise during the summer months. I guess, can you talk about the ASPs of those products in the inventory? Are those some that are, you know, across the range, similar to your portfolio, or are you focusing on some of the lower-end strike sales at the end of the year?
spk01: No, Franco, the inventory increase is driven by a couple of things. First one is shipping times are four to six weeks longer than normal. So no matter what you do, no matter what your target internal inventory levels are, are you just have to carry that much more inventory because it's all on freighters on the way over to the various countries. The second main driver is that we have a higher level of targeted weeks of supply in our own inventory. That's the inventory that's in the warehouses in the various regions. That inventory is what gets used to respond to increases in demand and basically provides a buffer That target level of inventory has been intentionally higher than normal because of the supply disruptions we've seen many times over the past two years. Factories will shut down. They'll be clogged up ports that even add to the shipping times, all of those types of things. So those are the two main drivers of the increased inventory. The inventory is very reflective of our overall portfolio versus somehow, you know, focused on specific products or price points because both of those impacts affect everything we're doing, not just certain products. And then lastly, yeah, that inventory level we expect to creep up a bit in the next two quarters. It's kind of normal as we increase the shipments in preparation for the holiday, but we do expect and have a focus on ending the year at a much lower level of inventory. As we dial back on some of the higher target inventory levels, as some of the supply, we expect some of the, you know, supply disruptions to abate over time.
spk06: All right, thanks for all the call here again.
spk04: And if anyone has a question, it's zero then one. Our next question comes from Mark Argento. Mark, go ahead.
spk03: Hey, Juergen, hey, John, just a couple quick ones. I know you had talked a little bit about the new categories and hopefully being even out positive. On the gross margin side of the house, are those products typically run at a higher gross margin than the traditional console on a normalized basis? Or maybe help us think through how the gross margin of some of those products shake out.
spk01: You know, across – thanks, Mark, and nice to have you on – Across the categories, it's pretty comparable. You know, we have console gaming headsets that vary in gross margins, you know, with a target of mid-30s overall, which is driven by the type of product it is, the price point that it's competing in, all of that. And the same would apply to the new categories. There are a range of gross margins in there, but on average, they're
spk03: similar or within a few percentage points of the the council gaming headset business great that's helpful and then just one quick follow-up you think about um hardware availability so console hardware availability as we transition you know through this next cycle um you know what What do you have baked in your model in terms of expectations for availability of PlayStation and Xboxes throughout the year? And if supply chains loosen up and more hardware is available, how could that impact your business?
spk01: Sure. Our expectation is that the supply constraints will abate significantly by the time we get into holidays. We don't expect shipping times to go down a lot or anything like that. The abatement or expected improvement in performance on supply on Xbox and PlayStation is mainly driven by the fact that we've all been in this environment now for well over a year. So our lead times for ordering semiconductors, all that, they're crazy high, but They're no longer impeding our supply because we're used to it and we put the orders in well in advance. And we expect that Microsoft and Sony will be doing the same thing. And as that takes effect, the supply constraints should ease. We can't predict it for sure, obviously, but that's certainly what we're assuming in the numbers. And I think that's a reasonable assumption.
spk03: Great.
spk04: Thanks, guys. Thanks, Mark. Yeah, thanks, Mark. And our next question comes from Martin Young. Go ahead, Martin.
spk05: Thank you for taking my question. Hi, Juergen. I have two questions for you. First, can you maybe talk about any potential read on impact you have from the China shutdowns in the second quarter? Do you see any lasting impact on either of you or your direct suppliers or customers?
spk01: Hi, Martin. Yeah, very good question and very, very timely. We have a fantastic operations team, and that team has managed to work around the constraints and the disruption. So we have not seen anything major. It's always a risk, by the way, if shutdowns happen for an extended period of time or something like that. one of the exact reasons why we carry somewhat higher level of inventory than we normally would because those risks are still out there. But I really have to say kudos to the operations team for managing, and it's been a highly volatile market now for two years.
spk05: Got it. Thank you. And another question on maybe your interpretation of where channel inventory is at. You sort of alluded to retailers are Reducing inventory in 1Q, how does the channel inventory look like to you now, especially comparing to historical levels, for instance, in 2019?
spk01: Yeah, overall, the channel inventories did come down quite a bit in Q1, exactly as we expected. That, by the way, you always have a double effect on sales, like company revenues. When the market is declining... You have decreased sell-through, which affects revenues. And then you have retailers that are reducing their inventory to stay at the same target level weeks of inventory. And you have the exact opposite effect when the market goes back up. They not only need to supply increased sell-through, they need to also increase their inventory levels to stay at six, nine, 12 weeks of inventory. So we definitely saw the reduction part of that happen in Q1. And the channel inventory levels are overall are at a reasonable level for the market sell-through that we're seeing right now. And again, we did see those channel inventories come down a lot during Q1, as I suspect they have for other participants in the market as well.
spk05: And do you expect that to be down further in the second quarter?
spk01: I think it's hard to judge, by the way, because part of the question relies on whether retailers, how they react to the market trends. Historically, they have, in some cases, overreacted, like cut back inventory too far in a downturn, put too much on in an upturn. So we don't know for sure. But their inventory levels for the current level of sell-through are pretty reasonable. So, you know, beyond that, we can't really anticipate what they might do.
spk05: Got it. Thank you for the insight.
spk04: And that concludes our question and answer session. I'll now turn it back to Juergen Stark for closing remarks.
spk01: Thank you. We look forward to speaking with our investors and analysts again following Q2. We appreciate your interest in the company and your support as fellow shareholders. Thank you.
spk04: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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