Turtle Beach Corp (TBCH) 2023 Q2 法說會逐字稿

Welcome to the Turtle Beach Second Quarter 2023 Conference Call. My name is Gigi, and I'll be your operator for today's call.

(Operator Instructions) Delivering today's prepared remarks are Nonexecutive Chairman of the Board Terry Jimenez, Interim Chief Executive Officer and Senior Vice President of Global Sales Cris Keirn and Chief Financial Officer John Hanson. (Operator Instructions)

As a reminder: This conference is being recorded.

I will now turn the call over to Alex Thompson from investor relations. Alex, you may begin.

Thank you, operator.

On today's call, we will be referring to the press release filed this afternoon that details the company's second quarter 2023 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 investors 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 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 has provided 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 Terry Jimenez, the company's Chairman of the Board.

Thank you, Alex.

I'm excited to be here today. And I'm very pleased with our Board and the management team's recent progress, energy and focus. As previously disclosed, the Board is conducting an extensive and well-organized search process for the permanent CEO position. We are focused on finding and appointing the best possible CEO for Turtle Beach shareholders, and the Board is moving forward with disciplined urgency. While the search is ongoing, we are pleased to have Cris Keirn, our long-time Global Head of Sales, serving as our Interim CEO. Since Cris's appointment effective July 1, 2023, the Board has worked extensively with Cris regarding the path forward, and we have full confidence in his ability to lead the company during this transition. We will provide an update at the conclusion of the CEO search process.

Next, I'd like to briefly comment on the Value Enhancement Committee of the Board, which continues to review any and all ways to drive value for our shareholders and stakeholders in conjunction with the full Board and the management team. Significant progress has been made to date. And the work of this committee and the management team and the full Board has given me a significant amount of optimism for the potential of Turtle Beach. We have engaged a new financial adviser at Jefferies. And while we are encouraged by the early engagement in that process, we do not have a formal update at this time.

While I'm proud of the progress to date, our work is not done and we will continue to drive a clear path to near- and long-term value creation. We look forward to sharing more developments at the appropriate time, and we appreciate your investment and support of Turtle Beach. I believe that the prospects and potential for Turtle Beach continues to get stronger every day.

With that, I will hand it over to Cris Keirn, our Interim Chief Executive Officer.

Cris?

Thanks, Terry. And good afternoon, everyone. Thank you for joining us to discuss our second quarter of 2023 results. And I'm pleased to be speaking with you as Turtle Beach's Interim CEO.

Before we review the results from the second quarter, speak about the balance of 2023 and provide insight into our accelerated initiatives, let me say a few words about my current role. Prior to being named as the Interim CEO, I've worked at Turtle Beach for over 10 years; and have a deep understanding of our business, our strengths and our opportunities ahead. In the last 7 years, I've led our industry-leading global sales team. And I'm passionate about driving best-in-class performance across our entire organization. We have an excellent team in place that is accelerating and focusing our efforts to grow revenues, lead in product innovation and strive for flawless execution. In my capacity as Interim CEO, I'm taking steps to drive our business forward. Importantly, we are driving several value-creating initiatives already underway that I will discuss later in the call. Not only are these opportunities significant, but many are expected to take shape as soon as the second half of 2023, positioning 2024 for tremendous potential improvement in the company's profitability.

First, a view on our second quarter results. The second quarter provided a number of reasons to be optimistic about our future, and we remain on track to meet our full year 2023 guidance of 10% to 12% revenue growth and between $6 million to $8 million of adjusted EBITDA. Recall that, as we stated in May, this 2023 adjusted EBITDA guidance includes headwinds of approximately $10 million in higher promotional spend and freight costs that we consider transitory and expect to normalize in 2024.

Our second quarter of 2023 reported net revenues of $48 million. Up 16% year-over-year, this revenue growth exceeded overall market performance by double digits due to share gains across key categories and geographies.

The U.S. console headset market is up 3.5% year-to-date, including growth in the month of June, which is a favorable sign for the back half of 2023 and for 2024. Our newly released Stealth Pro has already captured over 15% of the premium $200-plus price tier of the U.S. console gaming headset category during its first 2 months of sales in May and June, highlighting the power of the Turtle Beach brand. Stealth Pro garnered a variety of top review scores and accolades, including a 5 out of 5 from GamesRadar who called it a masterpiece. Outside of our core console gaming headset products, we are continuing to realize growth across other categories. As reported by Circana, our U.S. flight controller sales are up 27% year-to-date. And our share of the flight simulation category now exceeds 20%. More amazing products, including new simulation models and controllers, will be announced later this year; and we have meaningful reason to be optimistic about the growth runway in these categories.

U.S. PC gaming accessories markets have been weak and are still down roughly 12% year-to-date, but we gained share during Q2 in U.S. gaming keyboards and mice and achieved share gains in Europe across these categories. We expanded our Vulcan keyboard lineup with the launches of Vulcan II Mini Air and Vulcan II mechanical keyboards. And we are taking actions to ensure that, as the market normalizes, we will be better positioned to drive continued growth in our PC gaming accessories.

On this note, before I turn it over to John for his detailed review of the quarter, I'd like to spend a minute to highlight the initiatives we are driving that will create value for our customers and shareholders. Working closely with our Board and the previously announced Value Enhancement Committee, we have mobilized and accelerated initiatives for a variety of efficiencies that includes SKU rationalization, portfolio optimization, platformed product development for a range of cost improvements and more. We are pleased to announce today that these strategic initiatives are expected to contribute meaningfully to the profitability of Turtle Beach on a run rate basis. Based on the work completed to date, we now have line of sight to exiting 2023 with a run rate adjusted EBITDA in the range of $25 million to $30 million, in line with the 10% adjusted EBITDA target that we have previously identified as a baseline level of profitability.

While formal earnings guidance for 2024 will be provided early next year, as is consistent with our past practice and after we receive complete visibility on an important Q4, we felt it appropriate to highlight the clear opportunity that we believe lays before us and the work completed thus far that has gone into identifying and developing such opportunities.

I'll now pass it over to John to cover the financials.

John?

Hey. Thanks, Cris. And good afternoon, everyone.

For the second quarter, we reported revenue of $48 million, a 16% year-over-year increase compared to $41.3 million a year ago. The revenue increase was primarily driven by strong performance in console headset and simulation products year-over-year. Additionally, channel inventories have stabilized compared to the prior year, and this dynamic is aligning sell-in and sell-through versus last year.

Gross margin in the second quarter improved 560 basis points to 24.7% compared to 19.1% in the year ago period, driven by lower freight costs, warehouse costs, promotional credits; and business mix.

Operating expenses in the second quarter were $27.7 million compared to $29.3 million in the year ago quarter. Second quarter recurring operating expenses declined 8.2% year-over-year, which was primarily driven by continued proactive expense management. Over the past 6 quarters, our recurring operating expenses on an LTM basis have decreased $17.5 million or 19%.

Our second quarter adjusted EBITDA loss was $5.6 million compared to a loss of $12.1 million in the year ago period. The year-over-year improvement is primarily driven by higher revenue as well as proactive cost management initiatives. We are on track to continue generating adjusted EBITDA improvements throughout the year and expect to deliver positive adjusted EBITDA for 2023.

Adjusted net loss for the second quarter was $7 million or $0.41 per diluted share compared to adjusted net loss of $12.7 million or $0.77 per diluted share in the year ago period. We expect our effective tax rate for adjusted net income to be approximately 25% for the full year.

Turning to the balance sheet. At June 30, 2023, we had $15.8 million of cash and no outstanding borrowings on our revolving credit line. Inventories at June 30 were $67.8 million compared to $120.7 million at June 30 of '22. Cash flow from operations was $24.2 million, which was a $65.5 million improvement year-over-year on a year-to-date basis. We continue to be focused on optimizing inventory levels taking into consideration the current logistics market dynamics.

Additionally, in March of 2023, we announced that our Board of Directors approved the extension of our share repurchase program for an additional 2 years through April 9, 2025, authorizing the acquisition of up to $25 million of shares of common stock. During the second quarter of 2023, we repurchased 85,900 shares at an average price of $11.34, totaling roughly $974,000. At June 30, 2023, we had approximately $16.6 million remaining under the share repurchase authorization.

And now I'll turn the call back over to Cris for some additional comments.

Cris?

Thanks, John.

With unconstrained console supply and an exciting upcoming lineup of game launches, we believe the underlying positive trends in the gaming market will support increased accessories demand for the remainder of the year and into 2024. We remain committed to maintaining our leadership in gaming headsets and driving growth in adjacent categories. While we execute on these core pillars, we will continue to proactively manage our operating expenses to support our growth strategy.

As I said at the beginning of the call, I'm very excited to be working with our Board and our management team to deliver on our strategy, execute on our key initiatives and ultimately increase value for our shareholders. We have an amazing team in place to accomplish our goals.

Thank you to the entire Turtle Beach team, for all of your contributions and excellent work.

With that, let's turn to our Q&A.

(Operator Instructions) Our first question comes from the line of Sean McGowan from ROTH.

30 years of *1 is a little tough to shake from the memory, so I had to get back in. I had a couple of questions, if you don't mind. I'd like to get some clarity on exactly where the trade is and the restocking. And I wanted to start with this question. I think, Cris, you said that Circana says the category is up 3.2% year-to-date, but it's my understanding that it accelerated quite a bit in the second quarter. I mean you see more details than I do, but there was some choppiness at the beginning of the year. But I think April and May -- or rather, May and June, I think, seemed to be a lot stronger than that, so can you talk a little bit about that and just generally where we are in restocking?

Sure, yes. Great question, Sean. Thanks for the question. When you look at restocking, first on the markets: So the market for console gaming headsets is up 3.5% year-to-date. If you recall, it was 7.7% in Q1, so what we saw was a bit of a dip in April and May. And then it's back to growing in June year-over-year, which is a very good sign. Some of what you're seeing from that April and May -- and you're right in that accessories were up more in Q2, but a lot of that was driven from game pads. So controllers growth, accessories growth. A lot of that, I think, had to do with Tears of the Kingdom and that game release as well, huge release, great for the industry. So we are seeing back -- in June now across the board, including console headsets, back to growth there. On the question about the replenishments and how the retailers are kind of behaving, we are seeing normal replenishments at this point. It's very much back to sort of pre-pandemic behavior from the retailers. We'll have a few retailers here and there that may be a little more conservative and probably looking for a couple of consecutive quarters, but for the most part, we see good replenishments from the channel.

Okay, so we haven't really then seen days supply in the channel kind of catch up to its kind of normalized levels from the past. Is that correct?

Yes. For the most part, I would say that it has. We're seeing sell-through and sell-in match pretty well. And we have seen it really stabilize over the past few months where the channel is operating pretty much where the retailers, I think, have targeted to run.

Right. So the sell-in and sell-through is balanced now. That means, if you started the year at lower-than-normal levels of inventory, that would suggest that it's still kind of low. Like I thought we'd get to a period where the sell-in was actually higher than the sell-through because the previous levels of inventory were too low. Is that not the case?

Yes. We really haven't seen that to this point. We ended up -- I don't know about some of the others in the industry there, but we ended up at a really clean position kind of exiting last year. So we've seen pretty normal replenishment here this year without any kind of real impact from destocking or anything like that. I think, moving forward, we'd expect to see those replenishments continue. And as we see growth in the market, we'll see the benefit of that as well.

Okay, okay. I wanted to ask one other question before handing it off, and that is just to kind of clarify this sort of non-guidance guidance on the EBITDA. You're at 6% to 8% for the full year. When you say run rate, that's not meant to be interpreted as an estimate for '24, right? That's just the kind of rate at which you would end the year. And if you continue to make improvements and see growth, '24 would be higher than that, right?

Correct. It's not our guidance for 2024. What we're saying is, on this year's guidance of $265 million to $270 million for net revenue, we expect to be exiting the year at a run rate of $25 million to $30 million in EBITDA. So obviously we have a lot of year left. We're over 60% of the year [is left in the back half here], so very important. Q4, we obviously would need to see how that turns out before we would want to guide revenue for next year, but we're cautiously optimistic on how that's going to be turning out. But -- and we'll be guiding in our normal time frame next year once we have that visibility.

Our next question comes from the line of Drew Crum from Stifel.

I just wanted to ask about the adjusted gross margin in the quarter. It appeared to slip sequentially from 1Q. I know you called out some headwinds, but did those intensify in 2Q? And how should we anticipate those trending in the back half of the year? And then I have a follow-up.

Yes. So sequentially they did decline slightly, and that was really due -- it's timing-driven. And we do expect margins to continue to improve in Q3 and Q4 as per our prior guidance.

Okay, okay. And then your console headsets, I think, are typically on a 2- to 3-year cycle. Given the influx of new gamers during the pandemic, are you starting to see these consumers come back to your product?

Yes, it's a great question. And we keep a really close eye on that replenishment cycle. Historically it's been about that 2-year mark. And I believe [some in the list] you're starting to see in the console gaming headset area is folks starting to replenish based off of those pandemic purchases. As you know, the pandemic purchases are quite high. And so we think that that's a potential tailwind for us as we go into the back half of the year here and get into 2024.

Okay, Cris. [And maybe if I could just] slip one more in here: I think previously the market forecast was to be flattish to up slightly. Just given some of your commentary to date, I know that you mentioned the PC accessories segment was a little bit softer, but have you changed that outlook? Are you still forecasting flattish to up slightly, or has that improve based on performance to date?

Yes. I think we're still holding that view from overall, all right? What we're seeing is that the mix of that is moving around a little bit, which is fine. That's something that's -- happens all the time between the categories, but we think that PC has a good chance of recovering here in the back half. If you look at some of the upcoming game releases -- I know Baldur's Gate 3 just released last weekend. It sounds like that game is going very well. We've got a few others coming up. Call of Duty just officially got announced today, along with Counter-Strike 2 coming up, so there's a lot of good PC releases in the hopper that we think are going to help that category as well as console headsets being -- tracking pretty much where we had expected it to run.

(inaudible) must be having difficulties opening next question there.

Our next question comes from Andrew Northcutt with Oppenheimer.

This is Andrew on for Martin. Really just wanted to talk about the SKU rationalization. It would be great to know what product lines or platform in terms of console versus PC are getting the most [product] rationalization and why. And then are you guys removing new products under development right now?

Andrew, yes, great question. To provide some clarity there: We're not going to talk specifically about certain product lines just due to competitive reasons, but I can tell you we've gone through and looked at our portfolio. We've taken a data-based approach to look at consumer demand and also margin profiles across the business. And we believe we can get some really strong efficiencies by streamlining that a bit and still support all of our growth strategies. So we won't provide any details at this point on specifics, but it's a pretty significant effort underway to go ahead and to streamline that portfolio.

Our next question comes from Sean McGowan with ROTH MKM.

Yes. Would you mind giving us a little bit more color on some of these nonrecurring business costs that were posted in the quarter? And I guess, more helpfully, what can we -- will you expect to see more of that continuing in the year as the year goes on?

Sure, Sean. It's John. So in the quarter, in terms of EBITDA, $4.2 million. And of the 2 -- $4.2 million, approximately $2.9 million was related to the CEO separation, so going -- as we're -- the balance was related to proxy/activist-related costs and expenses. So as we're going forward, we would certainly -- in light of we're through the annual meeting, the -- and the proxy/activist work has certainly slowed from where it was, we would expect those numbers to decline here in the back half of the year.

And I am showing no further questions at this time. I would like to turn it back to Cris Keirn for closing remarks.

Thank you, Gigi. I just wanted to thank you all for your participation and interest in Turtle Beach. And have a great day.

And this concludes today's conference call. I hope you all have a great day. Please disconnect.