This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Welcome to the Turtle Beach First Quarter 2024 Conference Call. My name is Deedee 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 phone. Delivering today's prepared remarks are Chris Kern, Chief Executive Officer, and John Hanson, Chief Financial Officer. Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the conference is being recorded. I will now turn the call over to Alex Thompson from Investor Relations. Alex, you may begin.
spk01: Thank you, operator. On today's call, we will be referring to the press release filed this afternoon that details the company's first quarter 2024 results, which can be downloaded from the Investor Relations page at .turtlebeach.com, where you will 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 events and presentations 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 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 the publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, they will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with the county principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics through the company's recorded GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now I'll turn the call over to Chris Kern, CEO of Turtle Beach. Chris?
spk03: Thank you all for joining us today on our first quarter 2024 earnings call. I'm very pleased with our continued progress in a transformative year for the company. As expected, we have made significant progress on multiple strategic initiatives to drive profitable and sustainable growth. While we are in the early stages of integration for a recent acquisition of PDP, this infusion of additional talent and expertise has further energized our team, and we are executing to achieve both revenue and cost synergies. We look forward to maximizing benefits of our increased scale and enhanced portfolio in 2024 and beyond. First quarter revenue was $55.8 million, up roughly 9% year over year, which included incremental revenue contribution in the back half of March from our acquisition of PDP. We also realized improved profitability in the quarter, delivering $1.4 million of adjusted EBITDA compared to adjusted EBITDA loss of $2.8 million a year ago. As we've previously communicated, we continue to see year over year improvements in profitability through our portfolio optimization, skew rationalization, and platform product development initiatives, all of which are coming into full effect throughout this year. Following market gains that started in December of 2023, both the US gaming headset and gaming controller markets continued to climb with double digit year over year revenue growth in Q1. Per Cercana, combined console and PC headset markets were up 18%, and gaming controllers were up nearly 20% by revenue. Third party controllers exceeded revenue growth compared to first party controllers, driven by our new self-ultra controller and pre-sales of PDP models. We remain optimistic for continued growth in the gaming accessory markets and have an exceptional lineup of new Turtle Beach products launching in just a few weeks, and then again before the holidays. Q1 demonstrated that accessory sales at this point in the console cycle are growing as gamers remain highly engaged with a strong lineup of titles over the last year. We believe another contributor to market growth in Q1 was a result of a replacement cycle lift from pandemic era accessory purchases, especially with a new generation of accessories in the market that offer upgrades to technology and features. As mentioned in previous calls, we anticipated that pandemic era replacement purchases would contribute to gaming accessory market growth in 2024. Double digit market growth for key gaming category accessory categories in Q1 was a good indicator that these replacement purchases are underway, and we believe replacement purchases will continue to support market performance in future quarters. In our headset and PC categories, we proactively reduced channel inventory and promotional activity in Q1, ahead of our significant new headset and PC product launches in Q2. Channel load in for our new headsets and PC products is occurring now, and channel inventory is projected to return to normalized levels once the new load in of new products is completed in Q2. We are eager to bring these fantastic new products to our gaming customers and are confident they will deliver strong results for the business. Our new controller and simulation models, including the premium stealth ultra controller and Velocity One simulation products, drove Q1 share gains for Turtle Beach. Our revenue share of the US flight simulation market grew from 20% in Q1 2023 to 25% in Q1 2024, as reported by CIRCANA. With additional products in development, we anticipate continued share growth over time in simulation categories. Additionally, we are pleased with the extraordinary preorders and ongoing post-launch demand for the PDP Riffmaster guitar controller. The Riffmaster launch was timed to Fortnite Festival's recent update, which added guitar controller capability with the game. Demand has greatly exceeded our initial supply, and our teams are working diligently to expedite deliveries of additional goods. We remain highly focused on delivering value to our shareholders and gaming customers everywhere through launching our innovative new products, maximizing the extensive benefits from the PDP acquisition, and driving our initiatives for profit enhancement and growth. John will now take us through the financials in more detail. John?
spk02: Hey, thanks, Chris, and good afternoon, everyone. As Chris noted, our first quarter of 2024 revenue was $55.8 million. That's an increase of approximately 9% compared to the year ago period, driven by increased sales of our controller and simulation products and incremental revenue from the PDP acquisition. Console headset revenue was down year over year as we intentionally reduced channel inventory levels in Q1 ahead of the launch of our new wireless headsets and rebranded PC accessories. We are currently reloading the channel to support the launch of these products in Q2. Gross margin in the first quarter was 31.8%, compared to 27.5%. That is a 430 basis point improvement from the year ago period. The increase resulted from lower product costs, promotional spend and return reserves, and is driven by the various profit improvement initiatives we have been executing over the past months. Operating expenses in the first quarter were 23.5 million compared to 20.6 million a year ago and include 5.0 million in costs related to the acquisition of PDP in March of this year. First quarter cash-based recurring operating expenses declined approximately 6% year over year, primarily driven by ongoing proactive expense management. Our first quarter adjusted EBITDA improved to 1.4 million compared to an adjusted EBITDA loss of 2.8 million in the year ago period. The $4.3 million year over year improvement is primarily driven by the revenue increase, margin improvement, and cash-based recurring operating expense reductions. Our first quarter net income was a positive .2 million or one cent per diluted share compared to a net loss of 6.7 million or 40 cents per diluted share a year ago. Turning to the balance sheet, at March 31, 2024, we had $17.8 million of cash and no outstanding borrowings on our revolving credit line. The company secured a $50 million term loan for the PDP acquisition and our net debt was $32.1 million at quarter end. Inventories at March 31, 2024, were $69.5 million compared to $65.2 million at March 31, 2023. And the increase resulted from the addition of $23.8 million in inventory for PDP, partially offset by a $19.5 million reduction in Turtle Beach inventory. Cash flow from operations was $27.3 million compared to $29 million at March 31, 2023. Free cash flow was $26.6 million. Our ability to generate strong free cash flow from revenue growth and operational efficiency opens the door for a variety of value creating opportunities. And now I'll turn the call back over to Chris for some additional comments. Chris?
spk03: Thanks, John. As I've mentioned, we are pleased with our progress to the first quarter of 2024. We've continued our focus on driving profitable growth and are excited about our upcoming product launches and the demonstrated success of our multiple profit improvement initiatives. From this, we are maintaining our full year 2024 outlook. Net revenues are expected to be in the range of $370 million to $380 million, with growth driven primarily by the acquisition of PDP, gaming accessory market growth, and our expected outperformance of gaming markets with compelling new accessory launches in 2024. Including synergies from the PDP acquisition, we expect ProForma combined adjusted EBITDA to be between $51 million and $54 million, which incorporates approximately nine months of operations from PDP. I want to thank our entire team at Turtle Beach for their excellent efforts and contributions, which have delivered a strong quarter to start this very exciting year. We have a lot in store for the remainder of 2024 and remain confident about our renewed growth strategy and execution for this year and beyond to drive value for our shareholders and gaming customers. And with that, let's turn to Q&A.
spk07: Q&A. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Mark Argento of Lake Street Capital Markets. Your line is open.
spk06: Hey, Chris. Hey, John. Just a couple quick ones for me. Chris, maybe you could could you just delve in a little bit more in terms of kind of the product refresh or the kind of the restocking in terms of inventory and some of the new products you guys are launching. That would be helpful.
spk03: Sure. Hey, Mark. Thanks for the question. Yeah, in Q1. So we've got coming up in Q2, we are refreshing our wireless lineup at that key $99 price point. So this is Stealth 600 and Stealth 500. We've announced that those products are going to be replaced here coming up in May, actually within a couple of weeks. And those are the most widely distributed products globally for wireless gaming headsets. So that's a significant amount of channel that we have to transition from the last generation into this new generation. So we saw that coming. If you remember in Q4, we had driven a good amount of promotions to get that inventory in a very healthy position. And then as we went through Q1, we turned off replenishments on those midway through Q1. So we expected to see that channel come down. We did that proactively. And we were also, to the with promotions running lower than last year, actually. So that is now complete. We're in the middle of reloading the channel now. And we've seen those channel inventory numbers here in Q2 return as expected to those levels. So we did have some transitional impact there in Q1 that will recover in Q2 as expected. Across the other categories, we're also launching new products in Q1 with a new race product, new flight sim products. And on the PDP side, that guitar controller has just been a fantastic surprise for us. We knew it was a great product, but the demand out there has been pretty exceptional. So a lot of good load-ins here coming in Q2 that we feel good about.
spk06: I appreciate the color there. And then, John, maybe in terms of the overall guidance, including obviously proforma for PDP, what does that imply backing out the business? What does that imply for the core here products? Is that flatish? Is it up a little, down a little? Should we just be thinking about the core growth rate on the legacy business?
spk02: Yeah. So thanks for that question, Mark. So the core business, certainly within our guidance, is expected to grow. It's going to be more to the single-digit, -single-digit range, which we signaled back in November that we felt that the core business still has that potential for growth. Obviously, with the cost improvements from the -sharp-focused cost initiative work that we've done, that's going to deliver much higher EBITDA than the business has realized in the past. And then you overlay PDP and their contribution, and that's how you drive to the $51 million to $53 million guidance for adjusted EBITDA for the calendar year 2024.
spk06: Got it. OK.
spk02: That's helpful.
spk06: All right. I'll hop back into the queue, guys. Appreciate the color. Great. Thanks, Mark. Thank you.
spk07: One moment for our next question. And our next question comes from Jack Vander Aard of Maxim Groups. Your line is open.
spk04: OK. Great. Great to see the strong results, guys, in reiterated outlook. OK. Can I ask a question maybe on the first quarter? Revenue was definitely stronger than typically, seasonally speaking. PDP contributed to that. Are you able to just touch on PDP was, I think, about $100 million run-rate business in terms of revenue? How much of that was related to PDP and maybe just directionally? Thanks.
spk03: Sure. Yeah. Q1, it was about 5.9, I think, was their 5.8 contribution. So we did get some benefit there in the back half of March. You're correct in the historic size of that business. And we see strong growth in the PDP business coming this year. That's included in our guidance. And so when you look at the core business, we were really happy to see the markets performing as well as they have for accessories. We talked about before that we're ending that phase of the console cycle now where you're getting into folks have bought plenty of great games last year. They were finally able to get a console last year. And now we're entering that phase of the cycle where typically you'll see accessory repurchases, and particularly with the pandemic replacement purchases coming from a few years ago. So we believe that's what's driving that strong lift in both headsets and controllers. And we were happy to see that in Q1. Pretty high double-digit growth there for the markets and also for our sell-throughs. So as an example, on the core business, we still saw double-digit sell-through growth. But with us taking the channel inventory down, that's why you see flattish results for the core business in Q1. That's a timing issue seasonally. We're going to see the benefit of that load in here in Q2.
spk04: Okay, great. That's really helpful color. And then maybe just in terms of there's another question on the product skew rationalization. Maybe just specifically, does the skew rationalization, does that, the entire process strategy, does this relate or include PDP as well? I mean, you guys just brought in the acquisition, but how much of that's the core Turtle Beach kind of console headset business versus, and maybe Rocket, but is PDP also involved in that? And then I'm just looking at the guitar has obviously been a massive success, but just in terms of revenue concentration across the PDP product portfolio, is it similar to the revenue concentration across your core business product portfolio? Sorry, it's a loaded question.
spk03: Thanks. Yeah, no, great question. And it's exactly what we're working through on the integration of PDP right now. We've got the benefit of PDP's business being very complimentary to our core business historically. PDP's done a great job over the last few years, are really leaning into those great licensing agreements that they've got, doing some great development on the controller front, using those partnerships that are already established. And that controller business fits very well with our historically strong headset business. And so the two combined, it's really a one plus one equals three kind of situation where we're getting the benefits of both. And so what we're working through now with the portfolio optimization and some of the skew it does include both because there are products that are out there that are complimentary between the two brands' portfolios and there's opportunities for us there to realize synergies not only on the cost side, but also on the revenue side as we talk through this with retailers. We've had a really great set of discussions with our retailers, a lot of excitement in the channel about this acquisition and what it means for the gaming category. Because it really, when you look at the consolidation happening in the category, this really puts us in a different range and a different scale when we're talking to retailers now being able to offer so many categories. As retailers also look at what they're doing with their category space for gaming moving forward. So we've been really excited about what we've seen so far. We're very early in integration obviously, but it's gone quite well.
spk04: Okay, I appreciate the update there. Maybe just one more. I'm wondering if you can just touch on a status update on the share repurchase program and just kind of the recent developments there.
spk02: Thanks. Yeah, so hey Jack, it's John. So as we set in an announcement here with Q4, we increased the size of the authorized share repurchase program. And so it's our intention to continue to pursue opportunities to increase the value for shareholders. And with a focus on capital allocation, and we said that we would be with that increase in the authorized share buyback that we would be opportunistic here going forward through the balance of this year. And that's currently the path we're on.
spk04: Okay, got it. Well, I appreciate the time guys. Thanks.
spk00: Thank you.
spk07: Okay. And our next question comes from Sean McGowan of Roth. Your line is open.
spk05: Thank you. Good afternoon guys. Hey Sean. At the risk of being that guy, I'm going to say, hey, I know it's the first quarter and I know that it's the smallest quarter and I know that not a lot of dollars move some percentages. But if we're talking about headsets being down in your shipments in the first quarter against industry numbers that look like probably better than I would have thought for the category. And even if you strip out flight sim, that would be an even bigger decrease in your shipments of headsets. How are you not raising the guidance for the year? Are you expecting a massive slowdown like in a second half?
spk03: Hey Sean. Absolutely not to the last question. Not expecting a massive slowdown. If anything, we're going to see the benefit and we already are seeing the benefit actually of that load in on the channel. So when you look at the headset's performance, we knew going into Q1 and we've included that in our guidance that we were going to be draining the channel to get ready for these massive launches that are coming up this month. So as that occurred in Q1, we still saw double digit sell-through growth in value in our US headset business for console headsets. So we still realized that growth year over year, but you see it in sell-through on the sell-ins side because we took all that channel inventory out, you didn't get the sell-in. We're getting that sell-in in Q2 because that sell-through was sustained through Q1 right up into the transition. So we're actually very excited about how that panned out for us because we were able to really reduce a lot of promotional dollars that we would typically have to spend there to clear inventory. A lot of that was already accomplished in Q4 for us. Remember, we kind of talked about that in the last earnings call. So no, we're actually feeling very bullish about the prospects of the gaming accessories market this year. And the guidance does not assume that the market continues to be as strong as it was in Q1. We had the market pegged at moderate growth for this year, kind of single digit increases. So the fact that we saw what we did in Q1 is a nice surprise. I think you'll see as we talked about the replacement purchases from the pandemic piece are going to continue to drive accessory upgrades. And the other thing that drives accessory upgrades is new tech. And everything you see coming from Turtle Beach and also from the PDP launches, they've got great new innovations in it. The product teams here have done a fantastic job of really presenting some new products here this year that we know are going to drive the market and drive our performance.
spk05: Okay, so you must have ended the quarter with inventories of headsets just at a very lean level. And so you're reloading some of that into the second quarter. Would you expect at the end of the second quarter you'd be kind of caught up to sell through? I mean, that would imply an unbelievably strong second quarter,
spk03: right? We will be back up to the normal levels of channel inventory. That's actually, we're almost there now as we're kind of midway through the quarter. Because a lot of that load-in is happening with those launches coming up in the next few weeks. So yes, we did actually end the quarter quite low on inventory. And we are seeing the load-in happen. So you hit it right on the head there.
spk05: Okay. A question for you, John. Is there anything, I mean, the gross margin came in a little bit higher than I thought. But that's good. Maybe that's because the sales did too. But is there anything in that quarter, mix-wise, or anything else that would be kind of unsustainably high, like that would have boosted it unsustainably?
spk02: No. The first quarter, for want of a better term, is pretty clean in that regard. And what we're starting to see coming through the P&L now are the cost improvements as our mix transitions into the new products. You're seeing lower costs, which we've been talking about now for several quarters, and that have been working their way into the P&L for us. So we did signal and guide to higher margins throughout the year. And you're starting to see that here in the first quarter. We do expect margins in the second quarter to be slightly, potentially a point lower as we complete this transition of both the wireless and, of course, the brand transition of Rocket to Turtle Beach. We do have some higher promotions planned in Q2 that will have a small impact on the margin percentage, but then that would quickly then improve back in Q3 and Q4, as now we're selling all of the new products that we've been working so diligently on over the last six months.
spk05: Okay. But would that cost issue that you just mentioned there in the second quarter, would that not be offset by the volume-related upside that you get to margin, or are you saying that we shouldn't expect the per-quarter margin?
spk02: Yeah, in terms of dollars, yes, but it's more of a percentage game. My comments were, I was talking more about the percentage. So we would expect slightly lower percentage, but certainly more dollars.
spk05: Okay. Two other questions for me. One is just, what do we make of the fact that there's still in the appendix of the presentation commentary about the Dutch tender that got canceled? Is that just to kind of tweak us a little bit, or is that a preview of something coming?
spk03: No, as announced, the Dutch tender has been replaced with the share repurchase program.
spk05: Oh, okay. It just has summary financial information following tender completion, so I didn't know if that was a preview of something to do. Nope. Okay. Last question. Is the 10Q going to be out today?
spk02: It should be. It's probably in the works right now. I don't know how far behind the SEC is backed up, but the Q will in fact be filed today.
spk05: Okay. Good looking for it. Thank you.
spk01: Thanks,
spk02: John.
spk07: Thank you. And as a reminder, if you have a question, please press star 1-1 on your touchtone phone. I'm showing no further questions at this time. I'd like to turn it back to Chris Kern for closing remarks.
spk03: Thank you, operator. And thank you all for your participation and interest in Turtle Beach. Have a great day.
spk07: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Disclaimer