Corsair Gaming, Inc. (CRSR) Earnings Call Transcript & Summary

Hi. Thanks for joining today. I'm Tyler Seidman with the Crédit Suisse Internet equity research team. And with me today is CFO of Corsair Gaming, Michael Potter. Thank you for being here today.

Thanks, Tyler.

So I think a good way to get up to speed on the milestones of your businesses, looking at the time line of your acquisitions, Elgato, SCUF, et cetera, can you run us through the major ones quickly and where that positions you within different parts of the market?

Yes. So I'd say that the major one and the best one we've done recently is Elgato. That brought us into the streaming market, and it's grown tremendously since we bought them, both the use of the Corsair channel and then the innovation of the Elgato team and their deep knowledge of the streaming space. So they're probably the most significant one we've done. We bought ORIGIN PC. That's actually done quite well for us as well, very high-end PCs, sort of the Ferrari or Maserati or whatever your favorite very high-end car analogy is of gaming PCs. If you really wanted to have the best performing gaming PC, but you didn't want to build it yourself, ORIGIN is a very, very good choice. And finally, we more recently bought SCUF Gaming. That's our first really solid entrée into the console market. They make very high-end, very high-performance controllers for both the Xbox and the PlayStation. That's done well for us. It continues to have a very good resonance amongst the users, and a lot of the very top gamers in the console space use their controller. So I think all 3 of them have been great for us. Elgato, because of the real strong software suite and innovation into streaming, which is a huge area. I think the other real key thing between ORIGIN and SCUF is they're both almost entirely DTC. So because of that, it's given us a lot of knowledge about how a good DTC platform works and what people that buy directly from you want. And that's helped us inside the Corsair and Elgato field and also to do some sales. Going forward, you could expect us to do more acquisitions if good ones come along, probably in adjacent spaces. So gaming and related to our existing product portfolio, maybe some vertical integration into our supply chain. There's a few key suppliers that maybe we can do more with to lower some costs and drive some more innovation. So we're looking there as well.

Interesting. And with the more recent acquisitions such as Gamer Sensei, can you tell us how those are developing and how you're integrating them into your business?

It's a little bit too soon to like say exactly how well it's going to turn out. It certainly is a very good innovative team again. We really believe that the training space is an important space to be into and to broaden into the software and services space is important. We expect, over time, this will be another way to explain why our products are good and get recommendations. If you think about it, if you go to most of the sports that use trainers, they quite often recommend gear to improve your performance. And this is a way: one, for people to learn how to game better; and two, to understand what Corsair gear could really help them do better. But again, we're building it slowly and methodically. So it's sort of like ask us again in about a year, and we should have a lot more details on how things are going.

Switching to the industry environment more broadly. Supply is obviously top of mind within many sectors right now. You have logistics bottlenecks, port delays and just a lot of headwinds on that front. Can you give us any incremental color on what the supply chain situation is like versus what you talked about earlier this month during earnings?

I don't think I can give you much incremental color on it. I mean if you follow the outside reports that track the cost of shipping, there was a decrease after Golden Week, but it's still quite high. And obviously, anything that was shipped before Golden Week, that's what you had to do to get into Christmas time. So that's really the cost that we would be bearing, so no real change there. Logistically, there's no sign -- that's a GPU shortage, which is impacting our component business a little bit more strongly, is being believed at all. If anything, if you look at the websites that track the prices of GPUs and what you have to pay for in the secondary market, those prices are still going up, probably seasonal demand. I mean maybe around Christmas, more people just want to do something. So they're willing to pay a little more, but the price has actually gone up. So we don't see any sign that reasonable-priced GPUs have sort of arrived.

Okay. Got it. And kind of staying on the supply topic, do you have any concern that orders impacted by the disruptions will be canceled or directed to somebody else? Or are you confident in component sales kind of bumping back up once the GPU situation is normalized?

Yes. For components, we're pretty confident that, that revenue will come to us. This is just being time-shifted. This isn't a case where you can substitute. If you don't have the GPU, you're not building the new system at all. So you're not going to buy another power supply or another case from a competitor instead of buying ours because there's no GPU to build the system to begin with. If we had an issue in some peripheral, it might be a little bit different. If you really want a mouse today and you go into the store and you wanted a Corsair mouse, but it wasn't available for some reason, port congestion or whatever, and there was somebody else's mouse there and you just wanted to buy one, conceivably that would be something you would lose. But I don't think in the case of -- even in that, most of the time people that want our peripherals walk in with the idea to buy it. So there's more risk of it being perishable or being canceled or whatever on that side than on the -- I believe, the components are just pushed out. It's more of a time-shifted. When the GPU is available to the consumer that wants to build the system, they'll buy the GPU and then they'll buy all the product that they're planning. And if they were planning on buying Corsair products, they'd probably buy all that. And if it shifted out too long, we have brand new stuff that's even better in theory, because we are a consumer products company, so maybe they'll get an even better Corsair product when they build the new PC.

Got it. And kind of staying on the macro and switching to some of the COVID commentary. How has the lingering COVID Delta variant and working-from-home more broadly changed your expectations versus when we entered the year? Has your assessment of a risk of a pullback when we normalize changed at all. More specifically, as consumers spend more time outdoors, demand for Corsair products might diminish. So any thoughts on that?

I don't think there's any incremental change in our outlook on that. I mean we recognize that there's different activities that people can do. And if they want to -- they're going to spend some money on some things maybe today that they couldn't spend the money on 6 or 9 months ago. But if you look at the core market for gaming, it's still growing and people are still going to keep buying gaming gear. So we don't think that there's any real change at all in the incremental demand. And all of the external reports we follow and the news from our customers is saying that demand for gaming gear is still strong, so regardless of the backdrop that's happening. Right now, we don't really think there's going to be some big shutdown like there was at the start of 2020. So we don't see that type of environment coming back anytime soon. I mean, knock on wood, every day, there's some variant news or something on it, but we don't really see that as being a strong possibility or is not in our planning.

Okay. And just to kind of talk about the new variant that's out there, if the new variant ends up being serious enough to cause more lockdowns and they're probably going to be less severe than they were 1.5 years ago, could this be another potential catalyst for your business? Or have people already invested fully in their gaming setups?

I don't think people have invested fully in their gaming setups. I think there's a tremendous amount of white space that can be addressed. I think that the -- during the time when people were stuck at home, they spent a little bit more quality time of their free time gaming. And a lot of people made the decision that they were going to make anyways that now maybe they'll buy a better keyboard or a better headset or some better gear or they make that PC they've always meant to make. But I don't think these are people that were not gamers already that suddenly became gamers. So I think that it's increased the installed base of our products. It's increased the amount of gamers who spend money on gear. And I think there's a tremendously huge opportunity that people haven't spent money in gear that I'm not really concerned about that demand even being close to being satisfied. I think that the new people that came in maybe accelerated a couple of years of demand we would have got anyways. And because of the larger installed base, more people can see friends with better gear. And I think that will inspire them to want to buy things. So that's traditionally what's always happened in the past. When somebody decides, "hey, I want to buy a keyboard." And then you'll say, "Well, I've had this Corsair keyboard for 2 years. It's great. You should get the latest version of this because I really like it and I would buy the new version now if I was looking for a keyboard." So that type of word of mouth has always propelled more sales for us. And I think that's what's going to happen now. With all the new people that came in from the game-at-home, it's not really work-at-home for us, but from the game-at-home, time has passed.

Got it. And kind of shifting more to some more product commentary. Has COVID and work-from-home impacted the pace of new product development, either for you or the industry at large?

I mean I think it has. It's impossible to say that it hasn't been as quick or maybe as smooth as it could be, but we did come up with 83 new products this year alone. So I don't think that it's -- I don't think it's like COVID has stopped us from innovating and stopped us from releasing new products. I certainly know, and I'd better say this because I have to face the people in the office, the team that's responsible for the new product introduction all the way from getting the first ones to the manufacturing lines at our suppliers and then out to the people who do the reviews and the testing for us and talk about it, that's been tremendously hard. So I think there's been some disruption in developing products, but I really think that our team has really risen above those challenges to make sure that the reviewers get it and the market knows about it and we release it. Because I think if you look at all of the major product releases we've done, you see there's a lot of reviews that happened day 1, and that's really important in this enthusiast space. And we've executed quite well not only on the products, but getting the news out about them. So I think it's been okay.

And to kind of piggyback on the new product releases this year, I think you said 86 new product releases this year.

It's 83. But...

83?

I don't know, it could be 86 by now. The numbers are a couple of days old.

So how is this number tracking in terms of new product releases where -- this year versus where you thought at the start of 2021?

I think if you had gone back 2 or 3 years, sort of before the IPO, and you talked about the pace of innovation and new products were released, people would have been surprised that you even thought that, that's a number of new products. And these are like not like change the color of the key caps, but like new -- like actual new products. I think that we've been quite happy with what we've done. Every product is not a mega hit. But a good amount of them become quite good sellers for us and satisfy that demand that we saw when we designed it. So I continue to think it's going well for us.

It seems like since you've become a public company, you've put more effort and resources into marketing, specifically kind of shifting more to sponsoring of professional gamers and esports ads. Can you outline where the incremental marketing dollars are flowing to and what, if any, results you're seeing thus far?

Yes. I don't think, honestly, we've spent more money on the esports. I think that we sponsor a couple of major tournaments, and we've always sponsored a couple of teams. And I don't think we've really expanded that at all. I think we've spent a lot more time expanding the influencers and reviewers and making sure -- we've had new product categories. We've had to find new people in there. And then make sure that we have a very diverse group of representatives that hit a broader audience to bring more people into the Corsair tent so that more people will be interested in our products. So I've seen a lot more spending on that than I've seen spending on esports in particular. And some of our products have been fairly important to us and reasonably expensive. So like our monitors are fairly high end. And we've put out a lot of review units, for example, for the monitors. And even our webcam, our new Facecam was -- it's a high-end webcam. And we made sure a lot of people got that for the initial launch. So those sort of things are what's bringing the marketing cost up. That, and we have so many new products, and we're addressing so many new markets, we have had to expand the team and kind of drive as much as we can there. So that's where the spending has gone, not so much the esports sponsorship.

Got it. And then similarly, services and training has been a big recent push for you. How has that been coming along? And when can we expect a more substantial contribution from these areas?

Yes. We like to say kind of like watch that space. So I mean we're doing a lot of work behind the scenes with the Gamer Sensei team and others where things were done internally. There's a lot of DTC stuff, which I think we maybe will talk about a little bit later. But in terms of the software and services and training, I think we're fairly happy with the improvements we've made. And now we're rolling some of those out, and so we're incrementally growing off of that base. The company traditionally doesn't like just throwing money at an idea and hoping the advertising of the big marketing push kind of like hits. And we tend to be a lot more thoughtful and we'd rather have something that we've really thought out well and develop the infrastructure and put it out, and that's sort of the stage we're in now.

Got it. And kind of transitioning to iCUE. How much of a differentiator is iCUE for you at the moment, either from a platform loyalty perspective or from the data that you're able to collect on your customers?

So I think it's a good selling point. I mean once you've got a couple of Corsair pieces of gear, either a component or some peripheral, it makes sense to just buy more Corsair gear because it's all controlled by the iCUE software. I think some of the deals we've made like the Far Cry 6 integration, where if something happens in Far Cry 6 in the game, it's reflected in the RGB on all the different elements that you have that have our RGB as long as they're controlled by iCUE. I think things like that are just -- it's sort of like a bonus, like you've invested in Corsair, you've decided that our gear is good and our software is good, and this pulls you to do more. It has given us an insight to what type of other gear our customers have. We do get a chance with the right circumstances to bring in some of that information and help target what we do in terms of development or understand what type of PCs and what's there that's attached to it. So that's helped us as well. And that's fairly recent. We're still trying to use that data and form better products in the future. If you've never used iCUE before, I mean, it's a very good piece of software, both in delivering the drivers and the base infrastructure you need to run our devices at the full potential and really integrating that RGB experience across everything, so it's seamless and it just looks very nice.

And coming up on the direct-to-consumer sales point, how far along are you in your goal to bump D2C sales? Is that transition still active? Or are acquisitions the main catalyst here?

So I think it's both. So one, obviously, SCUF and ORIGIN have bumped up our DTC because they're both almost entirely DTC. So by definition, it jumped. I believe -- but if you look at the growth in revenue we've had in not in those 2 in the last couple of years, we've kept up or done a little better in most cases in DTC as well. So we've grown that tremendously. Now what you don't see, although recently you're starting to see more and more of this, is that we brought in a team a while ago to specifically to work on improving our DTC infrastructure and how we face the customer with it. And you'll see some innovations, stuff like extended warranty. So now when you buy a product from us using DTC, you get an opportunity to buy extended warranty as well from us. And that's -- it's a good product to offer our customers. You also see suggestions, you bought this, have you considered these other few things. These are all things we never had that's a little bit more of a traditional DTC thing. And then a combination of the new team that we brought in to help us and the experience from ORIGIN and SCUF all working together has allowed us to innovate and offer better products so that we can drive more business from it. Again, we're not satisfied where we are now, but Andy is pretty hard taskmaster for a boss. So I don't think that he would say, you could grow the 20% you [ tended ] to and he'll say, "Well, look, how easy that was. Why didn't you grow 22%, right? So I certainly know that we're going to do a lot more in DTC.

Awesome. And could you clarify once again where you'd primarily be looking for M&A. Is it still primarily to break into new markets like SCUF with the controllers or Elgato with streaming? Or are you also looking to bolster markets where you're already strong?

I think we can do both. We really look at adjacent spaces that an acquisition will greatly accelerate our ability to enter that market. And where the team that we would acquire is a team that fits well with Corsair's culture and the way Corsair views serving customers with the really high, high-quality products that satisfy them. So if we want to enter a market and an acquisition is a chance to do it as part of that greater gaming space, it's something we certainly would look at doing. We're not going to expand -- I don't think there'll be some surprising out of left field. We're now going to, I don't know if Andy likes boats, we're now going to start making boats or something. That's not the type of acquisition we look at. We're going to -- we have sailing ships in our logo. So maybe it's adjacent. But I think that you'll see things that are connected. Like you look at the product suite we have, you look at where the market has gone, and it will make sense to you. We are looking at the supply base. I mean we buy a lot of products and there's a lot of innovation in our supply base. And in a few cases, we're willing to acquire some of those suppliers and bring them in more firmly into the Corsair fold. We do think that it's a chance for us to increase the pace of innovation and to lower the cost overall for the company by doing that. So we are looking at a few opportunities there. We continue to look at software and services. There's actually not a lot of candidates out there in that space. But we still continue to look to see if we could find something that could again jump start what we're doing. So very active on that. And if they don't come up with good M&A ideas, I can always pay down more debt. So I mean it's -- every quarter I look up, nothing else to spend the money on, then I am paying interest, although Ronald and my treasury team did a good job in the last few months of really lowering the interest expense. So it's a lot less pressing to pay down 1.25% debt than it is almost 5% debt. So I feel a little bit relieved on that, that we paid down a bunch of the expense of debt and then we lowered the cost of the existing debt. So that puts us in a good position.

Got it. And then -- sorry, I'm jumping around a little bit, but on your last earnings call, I think you mentioned that September was closer to typical seasonality on the ordering trends. Anything changed from September to now? Or are things still getting back to more normalized seasonality?

Yes. So normal seasonality in Q3 as you start off lower, like typically, the first month of the quarter is the lowest one, and then it starts growing and growing. The growth wasn't quite -- I mean you look at the results, the growth wasn't quite as fast as we hoped. But when we got to September, it finally started jumping up to what you'd expect for more lead into Q4. I can't really comment. I mean we gave a forecast for Q4, right? So I can't comment on the performance there right now. But I've looked at some of the preliminary reports for Black Friday and such. This is the first actual real Black Friday in 2 years. I think last year, with the shutdowns and all of the shortages and the other stuff that was going on, it wasn't quite the same. Looks like more physical stores open. They're doing a lot of comparisons to last year and to 2019. I haven't seen anything that is surprising. I think it's kind of happening as people expected to see, and that looks okay [ rather than ] as an external factor.

And then -- sorry, I'm jumping around a little bit. As you look into 2022, are you confident in the new product rollout? I know we talked about the 83 or 84 new products in 2021. Is your goal to exceed that level in 2022? Or how do you think about the new product releases in the upcoming year?

Yes, I don't think we actually have a numerical target for the number of new products we plan on releasing. For each of our major products, I mean, we have to refresh the products with innovative features and we have to have the items in the products that the customers want. You can't like rest on your laurels, not in a consumer electronics, not in a tech consumer electronics company. So there's an expectation that there's a reasonably rapid refresh of all of our products. But I don't think -- I've never been in a meeting where we decided that 106 is a number to aim for, and we'll put a bonus number based on 106 because we're willing to kill a project as well. I mean not everything we design and develop actually makes it to market. It goes through different phases, and it gets closer to when it's time to come out. If we think it's really not something that's going to make as much of a difference as we thought it would when we originally came up with it, we're willing to stop the product as well. And some products, we try and we try a new market, we try a new idea. Sometimes, we don't quite hit what the market is asking for. Sometimes, we're a little bit ahead for maybe in a year or 2, they'll better understand what this is and be more bought into it. So I think, if anything, you're going to see more investment into it. As our revenue has gone up and our number of products has gone up, we have to invest more into R&D. So I don't know how -- what the number of products will be, but I know that we're going to be investing more into what we need to do to come up with more of it.

Okay. And as we look towards 2022 and we fast forward to December this time next year, we're back at this conference, what do you think we'll be talking about in terms of Corsair's accomplishments over these next 12 months?

I mean I think, one, I really hope that we're really significantly past COVID by then, just because it gets a little tiring to always have to deal with all the restrictions and things that go around it and also the questions about what does COVID mean and is this a pull in or is this a bubble like all the questions around it. I think that we can focus and have a discussion more directly on just a tremendous growth in gaming and how well-received Corsair gaming and streaming gear is and how the market rate and the revenue for it just keeps going up and how that we have these really strong secular tailwinds behind us. It will be obvious that we're a strong growth company for years to come, and that white space is still ample and that we'll keep drawing more and more people into -- buy our gear and keep doing better. So I think that will be great. I also hope maybe we'll have a champion of -- have some game up here, and we'll have a demo. Our products are a lot better when you can physically see them. So it was very enjoyable actually to come to this conference and be in a conference in person and have an in-person meeting. It's very different than doing Zoom meetings for the last couple of years. A lot of our products, we'd like to have like Analyst Days where people come over and do a bus tour and come by our new office and actually put their hands on our gear. It's really hard to explain how much different the mechanical keyboard feels or how much better our headset sounds with the technology we put into it or all the different things we can do like what all the streaming gear and how well it makes you look on a screen until you're sort of sitting there and using it. So I'm hoping that's the type of stuff we'll be talking about next year is really the strong trend towards more gaming using better gear and not all of these external factors. Not that I've ever had a year in my life where there wasn't some news to talk about, but not quite to the same degree it's been the last couple of years.

Got it. And does -- are you looking forward to any particular product next year? Is that controllers? Is it keyboard? Is it streaming? Like what gets you excited for the year ahead?

Working with the team we have, it's very exciting every day to go in. I mean the innovation that happens and just seeing the feedback from our customers. And just -- like we won an esports award last week, I think. And this wasn't something we sought out and did. It's just a sign of how authentic Corsair is and how we make gaming gear. We make great gaming gear because we get recognized by the industry, we get recognized by reviewers. So that's the type of stuff that like I'm looking forward to that we'll just keep growing and doing well. We got a great group below Andy and Thi. There's a really great group of product marketing people. And they work very hard every day to understand our customers better and to get the best products into their hands. Our quality and supply chain team is strong. Despite all the disruptions for logistics and all of that, I mean, we got a core group of people that work every day, and a lot of containers are getting shipped. Despite all of the problems, we're still -- we're delivering, and we're delighting our customers every day. So hopefully, with less distractions, we can spend even more time delighting them and growing our revenue and growing our profitability.

Got it. Well, I think we're kind of bumping up on time. So thank you so much for coming. Really appreciate it.

Well, thanks very much, and I look forward to being here next year as well. Thank you.

Thank you.