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

Good afternoon, everyone. Welcome to the fireside chat with Corsair Gaming. Thanks for coming to our Consumer Growth Conference. With us today, we have the pleasure of hosting the management team here, Thi La, CEO and recently announced Chairperson; and Michael Potter, CFO.

So with that, let's just jump right into it. Obviously, consumer interest, as of late, has been centered around the events happening in Ukraine and Russia and a little more recent but still on top of people's minds, the inflation -- the topic of inflation. So perhaps, I was hoping, Thi, you could walk us through your thoughts on what the company's position on those 2 topics are.

Yes. So this is basically the hot topic of the week, the month for all of us. So Russia right now is about 1% of our sales, and from a supply chain impact, it is kind of unclear with regards to the overall semiconductor market. We don't see any immediate impact. So that's something that you have to kind of wait and see. In terms of manufacturing facility, key partners, we don't have really anyone in Russia that we worked at that level. So there's no impact there. And the one thing that we do see out of that is just the currency fluctuations in Europe right now. As we all know, right, with the recent weeks, the euro dropped quite a bit. So the big question there is, what does that really mean from a spending standpoint, and that's something that we are monitoring very closely.

Absolutely. And then another topic that's on top of people's minds today, especially given your business, is really the impact of the supply chain constraints. They've been going on for 18 months now. Can you remind us what the current status of your supply chain is, and perhaps, what the status of the supply-demand environment for your products are?

Yes, that's actually a very good question. So the biggest shortage right now that we see in the market is GPUs as we always mentioned in the previous meetings. While we don't sell GPUs, it is really one of the most important products in the whole built your own PC cycle. And at the moment, the graphics card is still running at a pretty high premium. It's about 130% to 140% from MSRP. And I have one slide that just demonstrate that particular point, which I would like to share. And so I'm going to do that right now. Let's see if you can see it. Oops, sorry. Not that one. This one. Can you see this?

Now we can.

Yes. So this is basically demonstrating the trend of GPU pricing from January '21 to March '22. And at one point, you can see that the Nvidia price premium is reaching like over 300%, and the AMD Radeon RX 6000 was at 216%. And the supply was pretty much constrained, but as this purple line has become a little bit better over time, this premium is basically coming back down. So in the recent week, you see that this has gone from 180%-ish to now it's more like 140%. So this is a good indicator for us that by second half of this year, we will probably see a more normal situation and that's going to really encourage people to come in and start building gaming PC again.

And that brings up a really good point. I think this year, 2022, is set out to be one of the best years for the GPU market when it comes -- as it comes to GPU releases, right? We have AMD introducing RDNA 2; Intel coming out with their brand-new GPUs, possibly the RTX 4000 Series coming out later this year. How do you expect the increased supply from these new SKUs impacting some of these prices? And perhaps, does that mean that the supply-demand dynamic will be balanced enough where gamers will actually be able to get their hands on GPUs?

We do see that from a standpoint of the market is healthy, right? We know like every year, there are more people gaming. If you look at millennials and Gen Z, probably about 80% of this generation is like gamers. And we look at the number of hours that people are spending on gaming. It used to be like 3 hours per week from at least my generation to now more like 7, 8. And we see that ASP basically tracks the number of hours that you game. So while the number of gaming hours is -- continue to rise, then the ASP has gone up as well, up to like 130% from before. So this is very good to see that people are ready to invest once new technologies are coming out. So based on the chart that I showed earlier on, we predict that second half will be a much better time with premium on graphic cards coming down, new generations are coming out from Nvidia, Intel, AMD. It's going to pave way for lots of upgrades. And then from a gaming peripheral standpoint, people continue to upgrade their equipments to gain better and faster, especially when there are new game titles coming into the market. So we see a lot of new game titles that were delayed during COVID because of developers being at home, not getting their creative plan together. Now we see a number of games that are coming into the market, all very much like high resolution, high frame rate. And just like if you don't have a great rig, you cannot really play a great game. So that's all good. And from the rest of the supply chain standpoint, our available part to support the market is pretty balanced. What we've done is that we added additional inventory into the pipelines because of the longer lead time with the ocean freight. Other than that, nothing is going to stop us from actually taking advantage of the second half.

No, that makes total sense. And then on one of the interesting points that you brought up in your Analyst Day was that despite the fact that GPUs have been difficult to get a hold of at MSRP prices, your TAM has grown. Can you perhaps talk about what some of these drivers for the TAM growth has been over the past 18 months?

Yes. So I think that that's kind of back to the point that we went through just now. We see that the number of hours that people game has gone up a lot. And so when COVID happened, it basically injected a massive amount of gamers into the TAM, right? And at the beginning, when people are beginning to learn how to game, they buy like more basic equipment, right, low ASP products. And as they get better and better at it, then they will go through and increase their requirement. And so we see that as an opportunity to see like the refresh coming through.

Yes. And then something we've been hearing from our end is that the source of the supply constraints, the tightest areas of the supply were at the trailing edge, the more mature nodes. As a result, we saw a lot of companies using some of the new designs for the product. So as you went along last year and you redesigned some of your products, did that mean that you essentially ended up upgrading your gear, your products? And then did that accelerate, I guess, the pace of acceleration for innovation for your products?

Yes. Actually, good question. So we launched about like 40, 50 products a year, and last year, we launched over 100. We have over 25, 26 product lines. So the ability to turn the product every 6, 8, 12 months is like natural to us. We have a pretty large R&D teams. And with shortages on some of these semiconductors, what it does is that it just makes us like qualified more sources just to make sure that we have all the options available. And from the standpoint of resources, yes, we have to increase resource, but from a standpoint of technical challenges, no. And from a standpoint of our procurement teams are trying very hard to make sure that they get all of the available options on the table, that's just like second nature to us.

Absolutely. And then -- so the refresh or upgrade cycle for a lot of gaming peripherals and gaming accessories has usually been 2 to 3 years. And now that we're essentially 2 years into the pandemic, think about that, it should be the time when people start upgrading their accessories, especially the ones that bought and right when the stay-at-home orders were first placed. Do you think -- or I guess, are you seeing on your end, some of these upgrades starting to come in? Or do you think it's going to be more of a gradual upgrade cycle from here on out?

Yes, we actually are starting to see the effect of growing ASPs in the recent months. And in looking back in terms of when people are actually coming in, especially beginner-level gamers, we expect to see the echo of that surge, the COVID surges, what we call it, in like second half of this year towards the tail end of it, and then a lot of it will happen in 2023. So for example, like during COVID, the top sellers would be like sub-$50 gaming headset. In the recent months, top sellers is more like $100 headset with a lot more features, and this is a very encouraging trend for us.

And then taking a step back and I guess looking more ahead, during your Analyst Day, you talked about several new growth areas, monitors, controllers and the like. I guess at a personal level, Thi, which ones are you most excited about for Corsair?

We actually looked at it more like from a market standpoint. So we participate in gaming market, built your own PC as well as streaming market. And probably the most exciting one for us right now is the content creators market. This segment is growing very fast, right, 15% to 20% CAGR, and massive number of streaming channels like the traditional like YouTube and Twitch. And then we have like some of the newer one like TikTok, right? It's all very much video platform that people wanted to create content and streaming content to share. And then, of course, with work from home, you've got like Zoom and Teams, every single one of these channel is asking for more video content, better content, prettier content and Elgato product portfolio just played right into this segment very well. And we're just at the beginning of this trend. So that's what's so exciting about it. So we started out by not thinking about, hey, let's just make light a light because we want to get into streaming. We started out by saying, how do we make this experience better? We are talking to 2,000, 3,000 content creators all the time, what can we do to make that experience better. And everyone said, I want to create like a single-person studio, I want to look great, I just have me, how do I do that? So what we do is, we said, okay, I'm going to create this control panel, which is what became the Stream Deck, the famous Stream Deck nowadays. And from there, you can actually fine-tune your video experience. You want to zoom in, you can zoom out. You want to talk like Darth Vader. You wanted to talk normal, or you wanted to have better lighting or dim lighting. Or I mean, you just wanted to kind of interact with your audience, like, hey, that guy just gave me a big tip. I'm going to quickly say thank you. All of this, you can just like click on a single button and all those actions happening on the fly. So then from there on we said, now we can bolt more stuff to it. And the fact that it's a software ecosystem, so it's not really easy to duplicate. We've been doing this for like the past 5 years, fine-tuning this platform. So we then build like, hey, let's add a camera, let's add a microphone, and it's all controlled by this. And so this is kind of like just the beginning. We have like such a limited set of product portfolio right now to support this ecosystem that I think that there are a number of years that we can benefit from this strategy.

Yes. And as a personal anecdote, right now, my lighting is an Elgato Light and then I have a streaming set up right here, control the lights behind me. You can't really see them, but yes, extremely useful even for non-streamers like me. So I imagine a lot of people get into the market like that and then upgrade and maybe even become creators like that.

Yes, that's right. We actually did a quick research, a quick poll, and out of like thousands of creators like yourself or streamers like yourself, the attach rate is very high. When people own a Stream Deck, they bolt on other stuff from Elgato. So very happy to see that result.

Yes, absolutely. I think it's one of the best in the market and rightfully so. And then I was looking into -- digging into a little bit of your software opportunity. During your Analyst Day, you talked about iCUE and how much that helps you retain people and perhaps even encourage people to go more deeper into the platform, right, by purchasing more iCUE-enabled products. So I suppose, what is your strategy around this around iCUE and then software, in general, as a part of your services solutions?

Yes. So iCUE is basically the other ecosystem that we're building for build your own as well as gamers because it's actually creating the one-stop shopping for lighting controls as well as anything else around your system. And we don't stop there, right? So we said, okay, how about other partners? So today, we already can control like ASUS RGB, right, the motherboard, or we can control memory through MSI motherboards, for example. And so we actually have a very robust SDK, which is a software interface that allow people to build plug-ins, to talk to our iCUE software. And that way, they can actually expand it into doing more things with iCUE. So the plan there is to enable as many partners as possible. And then once you get into the iCUE ecosystem, it's very natural to create that upgrade path. The other thing that we're doing is that we have a lot of system integrators as customers also partners across the globe. So we created this iCUE certification program, where they can actually get marketing funding or offering and marketing iCUE fully built certified PC. The requirement there is very strong performance, great RGB lighting, using iCUE components, and then we can help them market those iCUE solutions together with them. And what's in it for them is that they can see a much bigger sales boost in very high ASP PC today. And they're happy because they've not been able to sell a $2,000, $3,000 PC before. Now with iCUE program, they actually are seeing good traction. So iCUE is now becoming actually such a strong brand by itself that based on recent surveys, like people are saying like, oh, you can actually sell iCUE as a brand by itself. So that's good to know.

Yes. No, totally. I see more and more iCUE popping up just a logo in the boxes and one that says, proliferation is there. And then even then, you're expanding your own market. You recently introduced the LC100 lights, which are very interesting. The first of the kind that I had seen. So yes, innovation is getting a long way there. And then another area that I was particularly interested in was the controller market, right, with SCUF. After the platform holders themselves, in my view, you're in the best position there, right, in the market, especially at the console side of things. Perhaps, I'm a bit biased. I just got my new SCUF in the mail the other day, but browsing social media really shows your dominance in this space. I guess, for you, what are some of the initiatives that you're deploying here at SCUF?

So we were very fortunate to acquire SCUF. SCUF has like over 100 patents on just paddle controllers, right? And if you look at like who in the market is like the one to make paddle controllers is SCUF. Not only they have the technology but have the brand as well. And the way we look at this is that because of that ability to -- with so many patents, we can actually design with a lot of freedom, right? So some people who has to come into this space and try to figure out how to work around our patent portfolio is very challenging. So we have a significant advantage there. Our team right now just focused on how do people interact with controllers, what type of games they play, how do they want to feel, and then the ability to customize this is actually a very strong point for us. We have a factory in Atlanta, and we have a factory in Taiwan dedicated to building custom controllers. So you can just go to our website, create your own controllers and you'll get it in a couple of weeks. So I think that that's also significant from our business strategy. And then the other thing is, from a go-to-market standpoint, we work with a lot of celebrities and influencers, very big one, right? And they gravitated towards us because they like the brand is one thing, they like the product, and they like to have us represent their brand on our products. And this is something very unique to SCUF that we've done for years. So from a word of mouth and just kind of like having that halo effect is pretty natural. And looking forward, we're looking at ways to add Corsair's technology into SCUF products, for example, like RGB lighting, right? If you think about it that way, and how can we use some of the iCUE stack to support SCUF controller for more customization from a consumer standpoint.

Yes. I know that RGB everything is a bit of a meme in the gaming world, but people love it, right? People still buy it and trust me, my set up has no less than 10 RGB products, so I can feel that. I did want to touch up on the services revenue and the services opportunity that you have. You acquired Gamer Sensei 1.5 years ago here. Can you speak to some of the learnings that you've had since you acquired them, trying to grow this services business? And what do you think needs to be done for something like this to really take off in this market?

So in this category, we definitely see the desire for first-level gamers to learn from the pro, right? I mean just like any sports, like golf or ski or anything like that. So that's -- that the need is there. From a learning standpoint, the platform that we operate on is -- definitely needs to be improved because the consumer journey is not straightforward today. So we wanted to kind of spend like some time to really kind of go into a 2.0 on our gaming training platforms. And then looking forward, someone like Corsair, how do we differentiate from other platforms out there. We have such a broad offerings today. So if you can say, well, why stop at training someone how to game, what if we train someone how to build the PC, how to stream, right, then we can add it on to this platform that is creating this one Corsair university or Gamer Sensei university, where people can actually go in and get a lot of services done. So that's kind of like the strategy for service revenue for now.

Yes, absolutely. And from a gamer standpoint, it makes sense. Me with a full-time job nowadays, I can't dedicate as much time as -- to practicing as I would like to, so service like this kind of makes sense. And then -- so let's go a little bit into the numbers here, putting you guys in the spot. You guys -- during your Analyst Day, you gave a pretty optimistic goal of $3.5 billion for revenues by 2026. Can you perhaps walk us through what you need to do to be successful and reach this target? And perhaps, how much of wiggle room is there for 1 or 2 things to not really take off?

Yes. So the slides that we showed is a pretty conservative growth from our perspective. If you just look back in terms of what we've done so far. We're seeing that DIY categories or gaming components category, it's about like 8% to 10%, which is fairly conservative. And then for gaming and streaming, it's about 20% to 25%. We do that by entering into new categories through M&As as well as just gaining market share, which we've been able to demonstrate. And then the fact that the products are so diversified, it makes the variance a lot less -- or less vulnerable to variance. But I'm going to let Michael speak to some of these points as well.

Well, Thi, I think you hit it right. It's reasonably conservative. I mean we used outside service providers, noted industry analysts to give us the base growth rates for the different segments we're in. We looked at the product portfolio that you and your group have been driving, and we kind of fit it in. Didn't assume massive market share growth, assumed some, but not massive market share growth. And then said, okay, if this is the baseline with the white space available for customers to come from should result in this number. We also didn't assume any large M&A in that. So there's not like a $400 million or $500 million M&A number, but there's probably be a couple of tuck-in M&As, like Thi mentioned, where maybe we'll get specifics product that we don't have in our portfolio, and we'll accelerate the development by buying somebody versus developing it ourselves.

Absolutely. And while I'm happy here, one of the other points that you brought up on your Analyst Day was that now you're at the point where financial leverage has come down significantly over the past couple of years. So I guess has that changed your capital deployment strategy? And how should we think about that?

So I think that for capital deployment, usually, it's Andy here, but I get to say Thi. So when Thi finally brings a great M&A opportunity for me to spend money on, I'll happily spend money on it. Ronald is our treasurer, so we'll work together to help Thi do that. Unless a really good growth opportunity like that is brought to us, we're likely to keep paying down debt. So that's sort of what it is. Our debt is significantly less expensive. The dollar amount has reduced significantly in the last few years, and then the interest rate has actually gone down a lot as well. So there's not as much pressure to pay off debt, but there certainly is a pressure to grow faster. And I do know that Andy and Thi spend a fair amount of time looking at the different M&A opportunities that come our way.

Absolutely. And speaking about M&A opportunities and whatnot, you're obviously seeing tremendous growth within the gaming market, and this is your bread and butter. But how do you view growth outside of gaming? And then perhaps how does M&A fit into that strategy?

Great question. So today, we actually are already selling to some of the enterprise market through our distribution partners. With COVID, lot of increase around using our camera, using our microphones for work-from-home setup, right, and then the recent education market basically starting to integrate e-sports and game into their curriculum. So we have some activities around education, bringing Corsair gear into campus. So we're thinking of pushing into this direction in a much stronger way with more dedicated resource, but it's a bit too soon to comment. I mean, definitely, there's revenue and there's growth there, but probably, we will share more information at the later days. And I think that with our product portfolio, I think that there are just a lot of things that we still can consider from an M&A standpoint. So a lot of $50 million type of an opportunity, someone who probably already have like a sales force that dedicated to B2B would be a great thing for us to consider. So all those things are on the table.

Absolutely. And then so, obviously, the natural question would be, how big are you willing to go, right, in terms of M&A? But I guess an interesting and more interesting perspective would be, how little are you willing to go and really grow that out? So I guess how niche are you really willing to go into some of these new markets that you're looking into?

I think that it's all going to have to come down to, is there a need because we start from the customers' level and work it back, right, and then as part of the traditional ROI. So if it is something that is part of our core competency, which is pretty high at this point, and that we're serving a growing need that has great potential, absolutely, even if it's niche, right? So let's take the foot pedal that we launched recently. I mean no one thought about launching a foot pedal, but then we thought about content creators, and if you are musicians, it's actually quite natural keyboard players that you would use both your hands and your feet. And so why not transfer that experience into PC, so where we can allow people to actually using their hands and their feet as well and create some amazing composition on stream. So -- and all of a sudden, it's like a huge hit, right? We sold out immediately. People said, this is fantastic. Now is this really niche. It is actually niche, but it actually works because it is coming from the consumers that we service. So I think it has to have a balance is what I'm trying to say.

Yes. Absolutely. And I think one of your points has always been around brand awareness, right? So when you introduce some of these more niche products that carry the Corsair logo, I think people are interested already and will be willing to look into getting a foot pedal for gaming or even playing music. With that, I know that we're running up on time here. So I wanted to thank you all very much for attending. Thank you, Thi. Thank you, Michael, for being here. If you guys have any closing remarks, please go ahead. Otherwise, I think we're good here.

Well, thank you very much, Franco. It's great to meet you.

Great. Thank you, Thi, and then Michael. Thank you so much, everyone, and we'll keep looking forward to our next chat.

All right. Thanks.

Thanks, everyone.