Turtle Beach Corporation

Welcome to the Turtle Beach second quarter 2022 conference call. My name is Abigail and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star 1 1 on your touchtone telephone. Delivering today's prepared remarks are Chairman and Chief Executive Officer Juergen Stark and Chief Financial Officer John Hansen. Following their prepared remarks, the management team will open the call up for any questions. As a reminder, this conference is being recorded. I will now turn the call over to Alex Thompson. Alex, you may begin.

Thank you, Abigail. On today's call, we will be referring to the press release filed this afternoon that details the company's second quarter 2022 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 Beach Corporation's results to differ materially from management's current expectations. While the company believes that its 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 results 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 on this call it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now I'll turn the call over to Juergen Stark, the company's chairman and chief executive officer. Juergen?

Juergen Stark Good afternoon, everyone, and thank you for joining us. In the second quarter, we continued to launch and announce innovative new products, maintained our leadership and council gaming headsets, and further advanced our diversified product portfolio. While we executed on the business functions within our control, like many other consumer products companies, our second quarter results were impacted by the difficult macroeconomic conditions, which has slowed discretionary spending across gaming and many other categories. This slump in consumer spending also caused retailers to reduce purchases above and beyond the drops in demand for gaming gear and more than we expected. In addition, high gaming accessory inventories have led to increased promotional activities as retailers and competitors look to bring down inventory levels. In this challenging environment, we delivered net revenue of $41.3 million and an adjusted EBITDA loss of $12.7 million for our second quarter 2022. As a reminder, we had a near record second quarter of 2021, given the extraordinarily strong gaming market fueled by the pandemic and stimulus checks. Recall too that high freight costs, despite recent reductions, continue to flow through the P&L as we sell through inventory that incurred those costs. According to NPD, most major gaming categories of spend experienced declines. U.S. retail sales in our core category, council headsets, were down over 30% in Q2. PC gaming accessories fared a bit better, but were also down over 20%. Major European countries were down even more than the U.S., likely as a result of the strong dollar incrementally impacting consumers in Europe. As we have in the past, we quickly recognized the swings in demand in our markets and took concrete steps to navigate these higher than expected headwinds. As part of our mitigation efforts, we implemented hiring constraints several months ago and completed select reductions in our workforce. We have also taken actions to reduce other costs where possible and are continuing our diligent focus on managing expenses. Recurring Q2 OPEX is down 17% from last year's Q2, and we expect these actions will reduce second half OPEX by around 5 million. Of course, we are continuing to invest into great new products and portfolio expansion that has enabled our sustained leadership and council headsets and generated significant new revenues over the past years, consistent with our long-term growth strategy. We believe we are poised to come out of the market downturn even stronger, and although the challenging macroeconomic environment may continue for some time, we are confident that the gaming market will rebound, and when it does, we are likely to see pent-up demand and retail restocking that will create a period of stronger-than-normal growth. We then expect to see a resumption of the growth rates that have made gaming one of the best retail consumer markets for many years. I thought one NPD gaming analyst put it very well, noting that, quote, in the short term, these factors mean declines, uncertainty, and turbulence, but in the long term, the growth prospects in the video game industry remain as strong as they have ever been. Gaming has historically performed well in turbulent economic conditions, and gaming fundamentals remain strong. Millions of consumers have become gamers in the past two years. In fact, according to Newzoo, the number of new gamers added globally from 2019 to 2021 totals nearly 400 million, which is staggering. To that end, June research from Bank of America shows 26% of consumers surveyed have added gaming as a new hobby since the pandemic, and 60% have increased their engagement in gaming over the past year. Steam is showing a 12% increase in concurrent users for July year over year. NewZoo is forecasting a 5% increase in gamers for 2022 and continued growth in global gamers to over 3.5 billion by 2025, up 16% from 2021. Interestingly, a recent NewZoo survey of active console gamers showed an increase in intent to purchase a headset in the next six months from 46% last year to 51% this year. Historical trends would indicate that council headsets have an upgrade and replacement pattern that has been reliable, which should result in pent-up demand when consumer sentiment turns positively. Accordingly, we believe that the current decline in consumer demand for gaming accessories is temporary and will eventually rebound based on those continued strong underlying fundamentals. The retail inventory reductions that currently exacerbate the impact of the demand downturn do exactly the opposite when demand swings up. And freight costs have already started coming down, so those margin benefits will flow into the P&L in future quarters. So while we are focused on managing through the current environment, we continue to execute on our strategy to position us well for the future. We believe this is working well and will be in a good place when the market recovers. Looking at the console gaming headset market, we continue to lead the category by far as the number one U.S. console gaming headset manufacturer for 12 years running. In the U.S. per NPD, three of the top five best-selling Xbox headsets and five of the top 10 best-selling PlayStation headsets by dollars in the first half of 2022 were Turtle Beach headsets. We continue to produce the best and broadest line of console gaming headsets in the category, which is reflected by our clear leadership. We launched new models of our premium wireless gaming headset series with the multi-platform Stealth 700 Gen 2 Max for Xbox, which IGN recently named best Xbox series X and S gaming headset in their latest Best Gaming Headsets 2022 story. Our new line of wireless console headsets have captured significant share at the premium 150 to 199 price tier, which contributed to a nice jump in share in June for us overall. We have additional new console headsets coming soon, including at premium price points. Our Rocket line of PC gaming accessories also continues to expand. The new Burst Pro Air wireless PC gaming mouse is a symmetrical, wireless, lightweight, and visually stunning mouse. T3 recently gave this mouse a platinum award, calling it masterful gaming mouse. In addition, Rocket announced the Kone XP Air, the stellar wireless version of the recently released Kone XP. The wired version of this mouse was released earlier this year, was praised by GamesRadar for its incredibly comfortable design. The expanded Rocket portfolio also saw a nice increase in sell-through recently, including a very positive impact from our new inline display at Best Buy. The interactive display at Best Buy is a very exciting step in the development of our Rocket brand and portfolio. We're also excited about our lineup of gamepad controllers. We announced in our launching the all-new design for Xbox Turtle Beach React R controller, plus a new Arctic Camo colorway for the Recon controller. The React R controller is an even more affordable, high-quality controller with controls for game and chat volume balance, mic mute, and Turtle Beach's exclusive superhuman hearing sound setting for a competitive advantage. The portfolio of controllers will continue to expand in the back half of the year, including mobile and cloud controllers, as well as exciting additions in our flight simulation category later this year and in 2023. Our category expansion efforts continue to go well. Non-council headset revenues were 25% of our revenues for Q2 and continue to steadily increase as we expand our presence in PC gaming accessories, council controllers, and simulation products. We also proudly launched our Play With Purpose program, which advances our ESG initiatives and sets goals that are and will continue to be a core part of Turtle Beach business. Lastly, before I turn it over to John to discuss the financials, I'd like to briefly comment on the strategic alternatives process that we announced in May. I would refer you to the press release we issued today for additional details. But to summarize, the Strategic Committee of the Board with its financial advisor, Bank of America, ran a fulsome process which included outreach to a large number of potential strategic and financial buyers and received indications of interest to acquire the company from multiple parties. Not surprisingly, the uncertainty caused by the current macroeconomic conditions resulted in even those parties determining not to proceed further. Therefore, the Strategic Committee has determined to conclude the proactive outreach to potential buyers. Nevertheless, the Strategic Committee will continue to evaluate strategic opportunities consistent with the Strategic Committee's charter. Now over to John to cover the financials in more detail. John?