Turtle Beach Corp (TBCH) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach first-quarter 2016 conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Cody Slach. Sir, you may begin.

Thanks. Good afternoon, everyone, and welcome to Turtle Beach Corporation's first-quarter 2016 earnings call.

Before we get started, we will be referring to the press release filed today with details of the results, which can be downloaded from the investor relations page of our website at corp.turtlebeach.com. In addition, a recording of the call will be available on the investor relations section of the Company's website later this evening.

Please be aware that some of the comments made during our call may include forward-looking statements within the meaning of the federal securities laws. Statements about our 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 our operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements and risk factors contained in today's press release and in our filings with the Securities and Exchange Commission, including, without limitation, our most recent annual report on Form 10-K and our other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

We also note, on this call we will be discussing non-GAAP financial information. We are 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 our reported GAAP results in the reconciliation table provided in today's earnings release.

And now, I will turn the call over to Juergen Stark, the Company's CEO. Juergen?

Thanks, Cody, and good afternoon, everyone. Thanks for joining our call.

First, I will share some highlights of the business before passing the call to our CFO, John Hanson, who will provide details on our financial performance. I will then expand upon our operations and speak more about our raised financial outlook for 2016.

The momentum we established in our business at the end of 2015 has continued in the first quarter. Net revenue is up 22% compared to first quarter last year and our higher-margin new-gen headset sales increased 64% compared to the year-ago quarter. This continues to be driven by the robust sellthrough of our new-gen headset portfolio in both domestic and European markets. We believe we are well positioned to grow headset revenues and significantly improve profitability of the headset business, which we have articulated it as a key goal for the year.

We are also very excited about the anticipated launch of our Elite Pro Gaming Headset, Tournament Audio Controller, and Elite Pro accessories this summer. This line was designed to define the future of e-sports gaming audio equipment, delivering best-in-class audio performance for game sound and team chat, plus innovative comfort-driven technologies to help ensure players stay cool and comfortable under fire.

Recognizing this step change in competitive gaming audio accessories, OpTic Gaming, one of the most prolific e-sports teams in the world, selected Turtle Beach and the all new Elite Pro line as their official gaming audio gear of choice and recently won the eSports World Convention gold medal for Call of Duty using our gear.

I will have more to say about the upcoming launch and this new partnership in my closing remarks.

We experienced steady revenue growth in our HyperSound business in the first quarter, with a significant contributor being the March launch in Europe. The hearing healthcare offices that are fully trained and actively selling the product continue to convert prospects to customers at a rate of over 20%.

We continued to focus on refining the sales approach and more quickly scaling fully active offices, while carefully controlling the resources and cash burn. To that end, May is the American Speech-Language-Hearing Association's Better Hearing and Speech month, and we have organized a targeted media campaign to drive awareness and test various marketing efforts in two specific geographies, southern California and Florida's Gulf Coast.

While I will provide more context on our HyperSound business, as well as additional commentary on headsets after John's discussion of the Q1 financial results, we are very pleased with our Q1 performance, which is enabling us to raise our 2016 guidance, including a significant increase to a positive adjusted EBITDA. I will speak in more detail about our outlook, but first pass the call over to John. John?

Thanks, Juergen, and good afternoon, everyone.

Jumping right into the numbers, net revenue in the first quarter of 2016 increased 22% to $24 million, compared to $19.7 million in the same year-ago quarter. The increase was primarily attributable to a 21% increase in headset sales, due to continued robust sellthrough of our new-gen headset portfolio.

Gross profit in the first quarter increased 8% to $3.4 million, compared to $3.1 million in the year-ago quarter. Gross margin was 14%, compared to 15.8% in the first quarter of 2015. A 290 basis-point improvement in the headset gross margin was offset by intangible asset amortization costs associated with the launch of HyperSound Clear 500P.

Our higher-margin new-gen headsets contributed 86% of revenues in the first quarter, up from 64% during the same period in 2015.

As a reminder, we have recognized between $3 million and $4 million in each of the past five quarters in fixed costs relating to supply chain, logistics, depreciation, amortization, and stock compensation expense. The amortization portion is expected to modestly rise in each sequential quarter of 2016, primarily due to amortization of the HyperSound healthcare product. As such, consolidated gross margins are expected to be lower in the first half of 2016, due to fixed-cost deleveraging, as well as the seasonality of the headset business, but are expected to expand for the full year, driven by higher revenue during the holiday season.

A final point related to gross margin, we have managed down old-gen inventory substantially. At the end of the first quarter, we had only $2.7 million worth of inventory, net of reserves, a 71% decline from a year ago.

First-quarter operating expenses were reduced by 16% to $13.1 million compared to the year-ago quarter. The decrease was attributable to strong cost management in the headset business, which more than offset a modest increase in investment to ramp HyperSound Clear 500P sales efforts.

Adjusted EBITDA on a consolidated basis improved to a negative $6.3 million, compared to adjusted EBITDA of a negative $9.7 million in the year-ago quarter. The large improvement was primarily driven by strong new-gen headset sales and cost-reduction initiatives.

Adjusted EBITDA for the headset business improved to a negative $3.2 million in the first quarter, compared to a negative $6.7 million in the year-ago quarter. Remember, with revenues expected to increase the remainder of the year as we enter our peak selling season for headsets in Q4 and with better-than-expected gross margins and lower OpEx, we would naturally expect to flow through more EBITDA in the headset business in the latter part of the year.

Net loss in the first quarter was $12 million or a negative $0.26 per diluted share, compared to $10.6 million or a negative $0.25 per diluted share in the year-ago quarter. The year-ago quarter included a $3.4 million income tax benefit, or approximately $0.08 per share, versus a $0.1 million income tax expense in the first quarter of 2016. The tax expense versus the year-ago benefit was due to our recording a full valuation allowance against our deferred tax assets in Q3 of 2015 due to US GAAP reporting requirements. So, if you were to exclude the tax benefit from our first-quarter results last year, we would have reported EPS of approximately a negative $0.33 per share versus the negative $0.26 in Q1 of 2016.

Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $3.2 million, compared to $7.1 million at December 31, 2015. As a reminder, given the availability under our $60 million revolving credit line, we generally do not hold a large cash balance on a quarterly basis.

Outstanding principal debt at March 31 was $35.5 million, compared to $68.1 million at December 31, 2015. The decrease in debt was due to a $31.9 million reduction in our revolving credit facility, which was driven by receipts from strong holiday sales and the February 2016 follow-on public offering. The debt consisted of $0.5 million of borrowings under our revolving credit facility.

Historically, the outstanding balance fluctuates throughout the year. Recently, it has been close to zero in Q1 and then ramps up ahead of the holiday. At the end of the first quarter, the balance was close to zero on our ABL revolver, consistent with our expectations and goals.

Subordinated debt totaled $17.8 million and the term loans totaled $17.2 million. The addition of the term loans and subordinated debt in 2015 provide the Company permanent capital, reducing our dependency on the ABL revolver.

In addition, internally we look at cash plus Accounts Receivable, less Accounts Payable, as a measure of our liquidity. At a positive $6.5 million, this is approximately $9 million higher than the first quarter last year. Taking into consideration with our $6.9 million in cash and availability on our line of credit and our expectation to be EBITDA positive on a consolidated basis in 2016, we believe we have sufficient capital to fund our business plan. This is further supported by our spending management in the quarter, which we expect to continue throughout 2016.

Now I will turn the call back over to Juergen for some additional comments on the business and our updated outlook. Juergen?

Thanks, John.

As I mentioned in my opening remarks, strong sellthrough in our headset business continued in our first quarter. In fact, we experienced quite a strong finish to March. This strong sellthrough again outpaced sell in, resulting in lower channel inventory and a small amount of out-of-stock situations, which have since largely been resolved. As I mentioned on our last call, given all the work we have done managing down all the old-gen business over the past two years, it is nice to be putting work into chasing strong demand on next gen.

We experienced strong performance domestically and across Europe, and we continue to be the clear category leader from a retail standpoint, delivering excellent sales and operational metrics. These results were reinforced by recent domestic NPD data that shows Turtle Beach continuing to outpace a healthy, double-digit growing headset market in both retail units sold and revenue share. In fact, while the console headset market is up 19% in revenue during Q1, we gained 22% year over year.

In the UK, GFK and Chart-Track data shows that sellthrough on a revenue basis was up over 25%, significantly outpacing the market growth of 14%.

Looking at domestic data on a unit basis, while the console headset market is up 20%, we gained 31%. Please keep in mind, since we are the industry leader, these growth rates are on a much larger level of volume and revenue than any other player in the category.

As intended, our Recon series has driven very strong share gains in the under $50 retail price segment, explaining part of the difference in unit and dollar growth dynamics. At 43%, we also overwhelmingly hold the leading share in the largest price tier, the $50 to $99 segment.

Finally, we ended the first quarter with 41.6% consolidated revenue share domestic NPD data, up 110 basis points from the same time last year.

Among several other leading product positions, we continue to have the top third-party models in the gaming industry, as confirmed by NPD for the first quarter of 2016. Four of the top five selling third-party headsets are all Turtle Beach, and our XO Four Stealth continues to be the highest selling third-party headset, followed by XO ONE.

Launched in October 2015, PX24 is already the largest selling third-party PlayStation 4 headset so far in 2016, as measured by revenue, followed by Stealth 500P, our feature-rich wireless PlayStation 4 headset.

And that's not all. We have some more great stuff planned on the product front. As I mentioned on the last call, 2016 will be our first normalized year of product introductions since 2012. We expect to launch several exciting new products during the course of the year and, with old gen expected to be under 10% of sales in 2016, we expect to start improving profitability, consistent with the increased outlook we provided in today's press release, which I will speak to momentarily.

On the subject of new products, about a decade ago Turtle Beach pioneered the console gaming headset category. We have driven many of the major innovations in the category year after year. We are proud to say we expect to do so again in 2016 with our Elite Pro product line. This lineup includes the Elite Pro Tournament Gaming Headset, Elite Pro Tactical Audio Controller, and Elite Pro accessories.

Our Elite series of products including our existing Elite 800 fully wireless headsets, reflect the highest level in gaming audio quality and innovation. Elite Pro Wired Tournament Headset, Audio Controller, and accessories represent our all-new lineup of competitive gaming audio gear that is tailored to meet the demands of today's professional and aspiring players.

The Elite Pro headsets' journey actually began in 2013, three years ago. Seeing the consistent growth and popularity of e-sports, we launched a comprehensive scientific research program to deeply examine the needs of professional and hard-core gamers as it pertained to game audio, communication with teammates, and overall comfort. We studied every aspect of gaming headsets, including our own very successful models, to identify the sweet spots on weight, balance, fit, ear cup size, adjustability, and key areas of discomfort from long hours of use. We literally had gamers wearing headsets for hours with temperature probes in their ear cups to understand heat and moisture.

We then embarked on a ground-up redesign of the Pro Gaming Headset and spent almost two years making it perfect.

The result is the all-new Elite Pro Tournament Gaming Headset, a ground-up redesign of the competitive gaming headset that brings to market multiple first and only innovations in the core mechanics of headset design, weight, and fit. Not only does the Elite Pro Headset provide Turtle Beach's best-in-class game audio and chat performance, but it also delivers new comfort-driven technologies, including the ComforTec Fit System with multiple adjustment points for a truly personalized headset fit and feel, Aerofit Ear Cushions that stay cool in the heat of battle, and Turtle Beach's all-new patented ProSpecs Glasses Relief System that finally makes wearing a gaming headset comfortable for players with glasses.

Additionally, the Elite Pro Tournament Audio Controller, or T.A.C. for short, is the most powerful audio controller ever designed for e-sports, combining cutting-edge audio technology, like DTS Headphone:X 7.1 Surround Sound, and our amazing super-human hearing capability with incredibly powerful chat and microphone tuning tools.

The Elite Pro Headset T.A.C. and accessories are planned to launch globally this June and will be available later this month for preorder.

Through our new partnership with OpTic Gaming that I mentioned earlier, OpTic's championship Call of Duty, Halo, Counter Strike: Global Offensive teams have begun using the Elite Pro Headset, T.A.C., and other accessories. As I mentioned, OpTic Gaming's first event using the new Elite Pro setup was at last week's Esports World Convention, where they successfully defended as Call of Duty champions using our new gear.

The strong start to the year in our headset business and the coming launch of the Elite Pro line, as well as a few other yet unannounced headsets in the works for holiday, were key factors in our decision to raise overall revenue and EBITDA guidance for the year.

Before I turn to HyperSound, let me discuss two more macro-level items for the headset business that sometimes come up in conversation with investors. First, our view on old-gen consoles. A couple weeks ago, Microsoft announced their decision to stop manufacturing new Xbox 360 consoles, the old-gen console, as we call it. This was not a surprise to us and was anticipated in our internal plans. Microsoft will continue to support the platform in multiple ways, including selling all remaining consoles at retail and still supporting the hardware. This move further supports our expectation that old gen will take its last final plunge in 2016 and will be an immaterial revenue producer in 2017 and beyond.

Second, our view of international markets. As you may recall from our third-quarter call, the strong dollar impacted our international business last year in ways that are not captured by constant-currency calculations. The strong dollar raises market prices and compresses distributor margins in regions where our product costs are driven in dollars.

This was a major impact in Europe and was really the only major part of our headset business that did not perform to our expectations last year. In Q1, our European business showed growth of about 8% and tracked actually somewhat above our internal plans. And we are undertaking some changes to our distribution model, as I have discussed in the past, to be able to better and more directly manage our business in certain foreign markets in an effort to offset some of the impact of the strong dollar over time.

As a result, we remain committed to our international market and believe we have significant growth opportunities overseas. This includes a recovery in Europe, and over time we believe China remains a large untapped market that we will pursue as we achieve our goals of improving profitability in our core markets.

In general, we remain optimistic about our headset business; e-sports is taking off; Microsoft and Sony have made recent public statements about the possibility for multiplayer online games to be played across platforms; VR is coming as a potential great add-on to the console experience. So as we get clear of the console transition and anticipate improving our headset profitability this year, we plan to put some focus on expanding into PC gaming, particularly in China, as well as mobile gaming.

The gaming industry is indeed a great market to be in and even better to be a leader in.

Now moving to our HyperSound business. We experienced small but steady revenue growth trends in Q1, with a significant contributor being the launch in Europe. We continue to focus on training offices, which, as I mentioned, is proceeding more slowly and with more resources required than we had originally expected.

A challenge we underestimated is that many hearing healthcare offices are so focused on selling hearing aids that it is taking more effort and training to get them to integrate HyperSound Clear 500P into their daily office workflow, and we have limited resources and are carefully managing our spend, so we continue to refine the sales approach, test and experiment, and find the most effective route for scaling the number of fully active offices in a highly focused way.

To take advantage of Better Hearing and Speech month in May, we have dedicated marketing dollars to two geographies to test the impact of a focused marketing approach. This includes a combination of digital, radio, newspaper, and PR efforts in the southern California and Florida Gulf Coast regions. Viewers, listeners, and readers will be directed to our HyperSound website, which includes details on the nearest hearing healthcare office that offers the product.

Measuring our website traffic generated by these marketing campaigns and the flowthrough to office appointments will provide highly valuable data for future campaigns of this nature.

We're also working to expand our markets for HyperSound Clear and have made good progress.

In addition to the European launch in March, we released preliminary data from a clinical study we conducted that suggests HyperSound Clear has the potential to alleviate tinnitus. Commonly known as ringing in the years, tinnitus is the perception of sound where no actual noise is present. There are currently no known cures for most types of the condition.

Additionally, the American Tinnitus Association states that millions of Americans experience tinnitus often to a debilitating degree, making it one of the most common health conditions in the country. The US Centers for Disease Control estimates that 15% of the general public, over 50 million Americans, experienced some form of tinnitus, with approximately 20 million struggling with chronic tinnitus and 2 million living with extreme and debilitating cases.

Our study included 11 adult patients with chronic tinnitus, who we had listen to a selection of customized acoustic stimuli through HyperSound Clear 500P's work-in-progress tinnitus application. While sitting in the HyperSound Clear's directed audio beam, subjects in the study experienced impressive reductions in the tinnitus loudness and annoyance.

This early data is very exciting because it suggests HyperSound technology may also have the potential to help people manage chronic tinnitus. Again, these are early findings and there is certainly more research and product development to be done, but even preliminarily this is great news for the hearing healthcare market.

We recently previewed a prototype version of our potential tinnitus add-on feature at this year's AudiologyNOW! convention and expo, and it was received with great enthusiasm. We expect to file a 510(k) application with the FDA in the near future, and if we received clearance to market from the FDA, we expect to offer this potential add-on feature for an additional cost to the consumer, yet to be determined.

As I have discussed, HyperSound's entrance into the healthcare market is only the first type of application. That's a key point in our long-term view and why we continue to be -- to invest in the HyperSound technology. So the bottom line is we continue to be very excited about the prospects for HyperSound.

With all that in mind, I would like to now address our financial outlook for the second quarter and the full year of 2016. Starting with Q2, we expect net revenues to increase 11% to approximately $25 million, compared to $22.6 million in the second quarter of 2015. We also expect headset gross margins to increase strongly from last year and consolidated margins -- gross margins to be roughly flat, including the impact of the HyperSound amortization.

We have reduced our operating expenses in recent quarters, which is expected to more than offset a modest increase in HyperSound investments, so consolidated OpEx is expected to be slightly lower than last year. As a result, consolidated adjusted EBITDA is expected to improve to negative $6 million, compared to negative $8.2 million in the year-ago quarter.

Net loss for the second quarter is expected to be approximately $0.23 per diluted share, unchanged from the second quarter of 2015. Recall the second quarter of 2015 included a $3.1 million income tax benefit, or approximately $0.07 per share, associated with our deferred tax assets. No such benefit is expected to occur in the second quarter of 2016, due to the full valuation allowance recorded in the third quarter of 2015.

For modeling purposes, we do not expect to be able to utilize our large accumulated tax assets for the foreseeable future, so no tax benefit should be assumed in the analyst models. Please keep in mind that our headset business is very seasonal, with roughly 50% of sales occurring in Q4, so margins and profitability are meaningfully lower in the slower quarters, like Q1 and Q2.

Onto the year, we are raising our full-year outlook and now expect net revenue to increase 1% to 8% and range between $165 million and $175 million. That's up from $160 million to $172 million in our previous outlook stated in March and compares to $162.7 million in 2015.

Included within these expectations is anticipated 18% to 23% growth, versus 12% to 16% previously, in new-gen headset revenues to $147 million to $153 million range versus $140 million to $145 million previously; a 60% to 70% decline in old-gen headset revenues to $8 million to $10 million, same as our last guidance; and approximately $5 million to $7 million in HyperSound revenues versus $7 million to $10 million stated previously; and approximately $5 million in other headset and accessory revenues. The slight reduction in the expected HyperSound revenue is due to the aforementioned slower-than-expected ramp in the hearing healthcare offices and the lower spend on sales and marketing.

We now expect to generate positive zero to $2 million in consolidated adjusted EBITDA in 2016, compared to an implied loss of approximately $5 million in our previous outlook. This compares to a consolidated adjusted EBITDA of negative $11.4 million in 2015, so obviously a sizable improvement, consistent with our stated priority to improve profitability and reach positive consolidated EBITDA.

Our 2016 EBITDA assumption raises our headset adjusted EBITDA to approximately $12 million, compared to $9 million in our prior outlook or roughly a 5X increase over 2015.

In our HyperSound business, we expect to hold our investment to below $12 million in 2016 as revenues and expenses scale. As we stated, we are working to spend within our means, including carefully evaluating our spend on HyperSound even if it limits resources we could apply to attempt to grow more rapidly.

Net loss in 2016 is expected to improve significantly to a range of negative $0.46 to negative $0.50 per share, based on 48.6 million shares outstanding, compared to a net loss of $1.96 in 2015.

For the remainder of 2016, with the product portfolio transition largely behind us, as well as the expected final drop in lower-margin old-gen headset sales, growing new-gen headset sales, and HyperSound Clear 500P now launched, we believe we are well positioned to drive topline growth and increased profitability.

Thanks as always to a fantastic team of colleagues at Turtle Beach for their continued contributions and dedication. Operator, we are now ready to take questions.

(Operator Instructions). Rob Stone, Cowen and Company.

I wanted to ask a little bit more about the margin profile for HyperSound and just if you could provide a little more color on the amortization piece, which is going to increase quarter by quarter for that, John.

Thanks, Rob. Yes, so relative to HyperSound, when we launched the 500P product, that started the amortization under US GAAP for the IPR&D for that product, and so it is approximately $1.1 million a quarter today and it will rise gradually quarter to quarter in 2016 to about $1.4 million a quarter by Q4 of 2016.

Okay. And can you provide the breakdown of non-cash items that were in the quarter and how those figure into your EBITDA guidance for the year? That is stock-based compensation, depreciation, and amortization.

Yes, so just let me make sure I have got the question. Associated with the press release, we have Q1 -- we have all the non-cash items reconciled, Rob, for Q1. And so, I think you are asking on a full-year basis -- what do the non-cash items look like on a full-year basis, correct?

Yes, so, make sense? Yes, so from depreciation on a full-year basis, depreciation and amortization are about $11 million for the year.

Okay.

Stock comp is approximately 4.8.

So, another question for Juergen. You are targeting a little bit less HyperSound revenue this year, given the challenges in training up the offices. How will you think about some sort of milestone or conversion rate or some other metric that will tell you when it is time to go ahead and open the sales and marketing spigot a little bit and try and grow the revenue faster?

Yes, very good question, Rob. So that -- we are doing something that I mentioned in my prepared remarks. We call it internally the May blitz, where we are -- we have a focused set of marketing initiatives in two geographic areas, southern California and Gulf Coast of Florida.

We have about 31 offices between those two regions, so doctors' offices, that have been fully trained and we are testing when we apply what we would view as a well-supported marketing campaign. Instead of doing it nationwide, we are testing a couple of different approaches, different media, measuring everything we possibly can -- incoming phone calls, Web hits. We even have differences between the two regions so that we can actually hone in on what are the most effective marketing vehicles, how much does it drive people to come to the website, people to click on where to buy, people that are scheduling office appointments, all the way through to people who ultimately buy.

And that will allow us probably by mid to later June, once we see the results of the May activities, to huddle up internally and say, okay, here's what works. Here's what didn't work so well. Where else could we apply the areas that worked within our limited resources and have a much better sense of how those investments would translate into revenue growth.

Okay. So it sounds like really a combination of developing better intelligence in HyperSound and then maybe reaching some threshold level of improved profitability in the business overall that would give you the -- and the cash flow to go more aggressively on HyperSound.

Exactly. And we still have -- the two key tenets are we got consumers to buy the product and love it, and we have got offices that once you can get them fully trained and working the right way, they are highly productive with the product.

As I mentioned on the last call, we are not a multibillion-dollar hearing aid company. We can't afford to spend -- send hundreds of people into the field, do all the training, and all that, so we're really working to find the most streamlined, effective way to get an office from a prospect to fully trained without having to do multiple visits and all that, and then how do we most effectively market the product to support those offices.

Great. That's all I had. Thanks.

Mark Argento, Lake Street Capital Markets.

Just wanted to drill down a little more on inventory levels. I know you guys were coming out of the holidays pretty lean in terms of inventory at retail. Could you talk about where you see inventories right now and how those build through -- up until the holidays?

Sure, so we came out of last year I think with $12 million, $12 million or $13 million, lower inventory levels year over year, part of a multiyear, very, very good executional effort to improve our internal processes and run the business with lower inventory, so that has really gone very well.

And then as -- all the way going back to the Q4 results, we have had sellthrough at retail that has somewhat outpaced sell in. And so in Q1, particularly in the middle of Q1, we had actually a fair number of our products that are on what we call allocation, where we are not able to fully fulfill retail needs and we are literally allocating the products to each of the retailers, and had a variety of stockouts.

We have very good internal processes to detect and measure sellthrough on a weekly basis, and so we caught this far enough ahead of time and started working on it even before we reached level of stockouts and started more product flowing into the business.

Of course, there are lead times with the products, and so we have now largely caught up where we are short. We still have some shortages and products on allocations and some stockouts, but we have largely caught up, and the results especially at the end of March continue to be very good, and so we still are in a bit of a chase mode, which we view as a very positive thing.

So we are looking at the rest of the year. Obviously, we have raised our outlook accordingly and now working to actually lean forward a bit on inventory, especially -- or only in the new-gen area, to accommodate revenue upside that we think we might get, just given the strong performance of the products. So that's the core.

And then, obviously, John mentioned $2.7 million of old-gen inventory. Boy, that's -- not to be underestimated the level of execution that has had to go into that. Remember, that was a couple hundred-million dollar business in 2012, and so it is something every month we pay very close attention to, how are those products selling, with the attempt to time it perfectly so that we don't end up with excess inventory. It will never be perfect, by the way. But we also don't cut off the products before the market has dried up.

And so, that's -- we continue to do that, and at $2.7 million on old gen, we feel pretty good about where we are.

I know in your press release you guys talked about taking some share in the quarter. Do you think you're taking share? Do you think other guys are in the same position where they are probably underinventoried, to a degree, and you are able to take advantage by getting product on the shelves a little more quickly, or what do you see from the competitive environment why your guys are able to take some share?

I would say a couple things. First of all, the share numbers will move around quarter to quarter. We don't get overly excited about a few points' move here and there.

What we do get excited about is the largest share that we took was in the below $50 retail price point, and that's about 35% of the total market. Just as a reminder, the $50 to $99 segment is about another 45% of the market, so those two tiers make up 75% to 80% of the total market.

And the last set of products that we launched, this is on a 2-1/2 year portfolio plan, was for the more bargain sub-$50 price point, and we took a ton of share there. And so, that's what drove the modest increase in share.

And with the Elite Pro launch, one of our targets literally since 2013 is to start to reinvent the gaming headset category from the top down for the most demanding, competitive gamers. And we expect that now, once we launch during the course of the year, to help us at the higher-price tiers. We, obviously, we -- in the mid-price, we dominate that market share anyways.

Great. Well, congrats. It looks like a great start to the year and hopefully that tailwind continues. Thanks.

(Operator Instructions). Eric Wold, B. Riley.

Just want to (technical difficulty) in inventory. Obviously, you have done a great job getting your inventory down while still working to at least satisfy the demand that is out there. What are you seeing out there in the channels from other competitors, other manufacturers, of what they're doing with old-gen inventory, levels of demand in the markets, and how long you think that will linger? I know it is less than 10% of your sales this year, or expected to be, but in terms of where the demand is in terms of possibly impacting other sales.

Yes, good question, Eric. So, one key point is I mentioned we do very regular analysis, and it's not just of our inventory level; it's of the inventory level of the key retailers. And when you have a market that's going away, a key factor is the fact that the channel will work their inventory level down to zero before we work our inventory level down to zero, right?

And so if you don't comprehensively look at both, you will end up with the guy holding the bag with inventory at the end of this.

So our expectation is that brick-and-mortar retail will be largely done and out of old gen going into holiday. There might be a couple exceptions, and we know of a few, but you can work under the principle that that old-gen section of products will be repurposed at retail, and we started planning for that back in Q4 already in 2015 and our discussions with retailers are showing that's the most likely game plan.

And that all-gen product, though, will continue to sell; online channels will continue to have it and it will have somewhat of a long tail, but with obviously most of the volume then gone by the end of Q3.

Okay, and then one question on HyperSound. For the conversions you have seen so far as you launched, north of 20%, what has been the experience you have seen in terms of what the customers' intent was? Do they come in there -- would they have walked out with nothing if HyperSound wasn't there? Did they trade away from a hearing aid? Did they -- some buy both? What have you seen in terms of how this impacted consumer behavior?

Yes, so most of the trained offices are targeting HyperSound at two kinds of, call them, patients. One is happy hearing aid owners. These are people who come in regularly for what is called a clean and check. There are types of hearing aids, especially the really small in-the-ear hearing aids, that actually don't work very well with the TV. They don't have any kind of transmission capability, and those patients are a very good prospect for HyperSound, because they can either keep their little tiny hearing aids in and watch TV or even take them out.

And then, the other really -- the real sweet spot, frankly, for these offices longer-term economically is the fact that -- and we have talked about this before -- that the hit rate on hearing aids is not that high. So a typical practice will have a below 50% conversion rate of somebody who comes in, gets their hearing tested, is confirmed to need a hearing aid, and less than 50% of those people will actually buy a hearing aid. And on average for the industry, it takes seven-plus years for someone to eventually, on average, come around and get a hearing aid. All kinds of reasons for it, by the way.

And those lost customers, essentially, are the perfect prospect for HyperSound, right? And we think, and I personally strongly believe, that if a person doesn't buy a hearing aid who isn't hearing all that well and then you sell them a HyperSound unit, you will, number one, have generated revenue from that customer and, number two, you have a customer who is, in our opinion, more likely to get a hearing aid.

And the analogy that I use for that is imagine you have blurry vision, like I do when I don't have my glasses on, and now you give me a pair of glasses, but I can only use them when I am watching TV. Well, I am going to be really noticing the fact that I take them back off and then I go outside and I can't see the leaves on the trees and all that kind of stuff. I am more likely to come back in and say, hey, I want a solution for outside, too.

So that's -- and there are offices that are figuring this out now. They can improve their hit rate, generate revenues, and keep a customer that is actually potentially more likely to come back and get a hearing aid without waiting the average seven-plus years.

Got it. That's such helpful. Thank you.

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

Great. I just want to thank everyone again for joining the call, and we look forward to speaking with our investors and analysts when we report our second-quarter results in early August. Have a good day, everybody.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.