Turtle Beach Corp (TBCH) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach First Quarter 2017 Conference Call.

(Operator Instructions)

Before we get started, we will be referring to the press release filed today that details the company's first quarter results, which can be downloaded from their Investor Relations page at corp.turtlebeach.com.

On that website, you will also find an earnings presentation that supplements today's results.

Finally, 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 this call may include forward-looking statements within the meaning of the federal security 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 risk and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from those management's current expectations.

The company encourages you to review the safe harbor statements and risk factors contained in today's press release and in their filings with the Securities and Exchange Commission, including without limitation, their most recent quarter report on Form 10-Q, 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 forward-looking statements.

The company does not undertake to publicly update or revise any forward-looking statements after the date of 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 accounting principles generally accepted in the United States or GAAP.

You can find a reconciliation of these metrics to the reported GAAP results and 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 Chief Executive Officer.

Juergen?

Thanks.

Good afternoon, everyone and thank you for joining us.

Our first quarter results exceeded our expectations.

Despite facing the dual headwinds of a relatively soft industry sales and higher inventory levels at retail following the holidays, our revenue declined less than anticipated and we kept adjusted EBITDA flat with last year while improving net earnings despite the lower revenue level.

This was primarily driven by our decision late last year to transition HyperSound to a licensing model and our simultaneous reduction in operating expenses that were shared between the businesses.

We've also continued to drive supply chain and cost of goods improvements and diligently managed expenses in all areas of the business.

I can't say enough about the great team of talented people we have at all levels here.

Despite industry softness, we remain the consecutive year-over-year market leader in console gaming audio by far, with strong retail presence and partnerships across the board.

In fact, data from NPD confirms that 6 of the top 10 selling third-party gaming headsets in Q1 2017 were all Turtle Beach.

Of the 5 top-selling Xbox One headsets, 4 were from Turtle Beach and of the 5 top-selling PlayStation 4 headsets, 3 were from Turtle Beach, all measured by revenue.

The first quarter reflected the operation of HyperSound under its new licensing model with operating expenses wound down significantly.

We are still pursuing additional revenue-generating opportunities for this business, including licensing the technology for HyperSound Glass in other applications, but have reduced operating expenses to a point where they are expected to be immaterial to our overall business.

We are also continuing to explore strategic alternatives for the HyperSound business, but considering the expense reductions that have already taken place, we now have more flexibility in terms of the type and timing of any alternative we may pursue.

We continue to expect significantly improved adjusted EBITDA and net income despite somewhat lower sales in 2017.

We are excited about multiple new product launches that will carry us into 2018 with good momentum.

Before speaking more about our first quarter performance and our 2017 outlook, I'd like to turn the call over to John.

John?

Thanks, Juergen, and good afternoon, everyone.

Net revenue in the first quarter of 2017 was $14.4 million compared to $24 million in the first quarter of 2016.

The decrease was due largely to lower sales of marquee games during the 2016 holiday season, leading to higher-than-normal channel inventory entering 2017, as well as mid-cycle console releases and upcoming new technology introductions disrupting consumer purchasing behavior.

Higher channel inventory heading into 2017 has declined in Q1, but there will be some continued impact in Q2.

Juergen will provide more color on this in a few minutes.

Gross margin in the first quarter improved 140 basis points to 15.4% compared to 14% in the year-ago quarter.

The increase was due to cost in the year-ago quarter associated with the launch of HyperSound Clear 500P that did not reoccur, as well as the supply chain and logistics improvements in our headset business that Juergen just mentioned.

Gross margin in the headset segment was 19.5% compared to 19.9% in the year-ago quarter.

Supply chain cost improvement initiatives and a more favorable year-over-year new-gen product mix 92% versus 86% in the year-ago quarter was more than offset by approximately 250 basis points of fixed costs that were not absorbed due to the lower sales volumes.

Operating expenses in the first quarter were reduced by 22% to $10.3 million compared to $13.1 million in the first quarter of 2016.

The reduction was due to a continued focus on cost management across the business.

HyperSound-related operating expenses in the first quarter of 2017 were $0.5 million and are expected to decline further going forward.

Net loss in the first quarter improved to $9.9 million or $0.20 loss per diluted share compared to a net loss of $12 million or a net loss of $0.26 per diluted share in the year-ago quarter.

The improvement was primarily driven by lower HyperSound investments and the cost management initiatives across the entire business.

Adjusted EBITDA improved slightly to a negative $6.2 million compared to a negative $6.3 million in the year-ago quarter.

Now turning to the balance sheet.

We ended the year with cash and cash equivalents of $3.6 million compared to $3.2 million a year ago.

In addition, inventory was down 14% compared to the first quarter of 2016 with higher new-gen inventory more than offset by inventory and reserve reductions in the other inventory category.

Outstanding principal debt at March 31 was $34.4 million compared to $35.5 million on the same date in 2016.

The debt consisted of $14.4 million in term loans and $20 million in subordinated debt and we ended the quarter with a 0 balance on our $60 million revolving credit facility.

Historically, the outstanding balance of our revolver fluctuates throughout the year.

Recently, it has been at or near 0 in Q1 and then ramps up ahead of the holiday.

Taking into consideration, the full availability on our $60 million line of credit and our expectation to be significantly more profitable on a consolidated basis in 2017, which Juergen will discuss in more detail shortly, we believe we have sufficient capital to fund our business plan.

This is further supported by our continued business improvement initiatives.

Now, I'll turn the call over to Juergen for some additional comments on the business and our updated outlook.

Juergen?

Thanks, John.

To reiterate key takeaways from our Q1 performance, given the continued market backdrop, we focused on driving headset gross margin and expense management.

To that end, we accomplished these goals and exceeded all of our Q1 guidance targets.

We believe the fact that we improved EBITDA, net income, and EPS with 40% less revenue is a testament to our operational focus and tight execution in every functional area.

Similar to the last 2 months of 2016, our first quarter was impacted by the overall console gaming market slowing on a year-over-year basis.

We believe the lower sales of marquee games as well as the November 2016 debut of PlayStation 4 Pro and the yet-to-be-announced launch date of Xbox Scorpio continued to disrupt consumers' typical purchasing behavior in Q1, which is typically the lowest sales quarter of the holiday -- of the year for us.

As we discussed in depth last quarter, these factors drove a weak holiday season that resulted in higher channel inventory in retail.

Indeed through Q1 and also into Q2, retail sell-through of our products have exceeded sell-in and channel inventories have steadily come down as a result.

At this point in Q2, there are still areas of higher channel inventory, which are impacting our Q2, but in general, retail inventory levels are starting to improve and beginning to approach more normalized levels.

In addition to leading our market from a retail presence perspective, we believe we also lead in product quality and innovation.

In April, we announced our all-new RECON CHAT gaming headsets, a product we believe redefines what gamers should expect from a chat headset for Xbox One and PlayStation 4. The RECON CHAT was designed for gamers looking to replace the chat headset or earbud that comes with their console with the significant upgrade for a great entry level price.

Not only is the RECON CHAT lightweight and reversible, but it features a 40-millimeter over-the-ear speaker and Turtle Beach's glasses friendly design plus our renowned high sensitivity microphone and unique open ear-cup, which allows players to hear game audio from their TV or home entertainment system through both ears in stereo.

The RECON CHAT has an MSRP of $19.95 launched mid-April in the U.K. and select EU territories with good early sales results, and will launch next week in the U.S. at participating retailers.

We have a number of other exciting launches coming this year and are looking forward to revealing the rest of our 2017 product portfolio next month at E3.

In April, we appointed Greg Ballard to our Board of Directors.

Greg brings more than 3 decades of leadership experience in the audio, consumer electronics, gaming and digital entertainment industries.

This includes 11 years of experience in audio and consumer hardware as a board member or CEO with DTS, SONICBlue, Pinnacle Systems and 13 years experience in gaming as a board member, CEO or senior executive with Warner Bros., Glu Mobile, THQ and Capcom.

In addition to this relevant experience, Greg has a rich background with smaller companies and entrepreneurial efforts.

It was very evident from our discussions that he has a strong passion for audio and gaming, and we are very pleased to have him on the team.

Looking further into 2017, we continue to expect sales to be skewed more toward the second half of the year compared to 2016.

As I mentioned, the market has remained slow so far in the second quarter, particularly in the U.S., although we have recently begun to experience some better year-over-year weekly sell-through numbers.

We remain confident in our outlook for the full year, driven by new product introductions as well as a solid lineup of expected new game launches in the second half of 2017.

For example, Destiny 2 is slated to release this September and both Call of Duty: WWII and Star Wars: Battlefront II are expected to launch in November.

We anticipate sales of these games to be quite large and to drive strong headset attach rates.

Our focus on expense discipline should also allow our second half sales strength to be leveraged into significant product growth.

With this in mind, for the second quarter of 2017, we expect net revenue to range between $17 million and $18 million compared with $29.4 million in the second quarter of 2016.

This reflects the lingering impact of the soft 2016 holiday retail gaming sales environment and related headwinds discussed earlier, as well as a slate of exciting new product launches planned for us in early third quarter.

We believe these launches will impact Q2 sales as we pull back on the to-be-replaced product sales in preparation for those launches.

Adjusted EBITDA is expected to improve to approximately negative $5.5 million compared to negative $6.3 million in the second quarter of 2016.

Net loss for the second quarter is expected to improve in a range between $0.17 and $0.19 per diluted share compared to a net loss of $0.86 per diluted share in the second quarter of 2016, which included $0.63 per share non-cash goodwill impairment charge.

Excluding this charge, net loss was $0.23 per diluted share in the second quarter of last year.

We are reiterating our financial outlook for the full-year 2017.

We continue to expect net revenue to range between $155 million and $160 million compared to $174 million in 2016.

A few key assumptions to call to your attention.

This reflects an approximate $6 million to $7 million year-over-year decline in old-gen headset sales, bringing our old-gen business to essentially 0 in 2017.

We expect new-gen headset revenues of approximately $149 million to $154 million and approximately $6 million in other headset and accessory revenues and no material revenue from HyperSound.

We expect gross margins in 2017 to be comparable to 2016, reflecting lower operations costs and continued cost of goods improvement, but some loss of operating leverage due to the lower revenue levels.

We expect again significant to -- again significantly improved consolidated EBITDA at an estimated $10 million to $12 million for 2017 compared to $4 million in 2016.

HyperSound is expected to have a roughly $1 million negative impact on EBITDA, which is factored into these estimates.

(technical difficulty)

To summarize, DFC's latest March 2017 estimates forecast Xbox and PlayStation unit sales slowing slightly about 4% and the installed base rising 17% this year.

We assume attach rates will rise, leading to mid- to high single digit growth in the overall console headset market.

While not accounted for in our outlook explicitly, we think new hardware launches could also boost sales, particularly because they enable lower pricing of the economy models of Xbox One and PlayStation 4.

All in all, assuming good sales of marquee game titles in holiday period, we see a very strong holiday season for our headset business.

So we remain very optimistic about the long-term growth trends in our business and look forward to reporting our progress as the year unfold.

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) At this time, I'm not showing any further questions on the phone lines.

I would like to turn the call back over to Mr. Stark for closing remarks.

At this time, this does conclude our question-and-answer session.

I would like to turn the call back over to Mr. Stark for closing remarks.

Thanks.

I just made the closing remarks, but let me reiterate here.

So I want to thank everyone again for joining.

We look forward to speaking with our investors and analysts when we report our second quarter results in August.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

You may disconnect your lines at this time.

Thank you for your participation.