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

Okay. Hi, everyone. Thank you for joining us. My name is Shannon Cross, and I'm the IT hardware analyst here at Crédit Suisse. I'm now joined by the CFO of Corsair, Michael Potter. And before we move to Q&A and a fireside chat, Mike has some slides and discussion he'd like to go through.

Thanks, Shannon. Nice to meet you in person. We've exchanged a lot of e-mails and such over the last little while.

Exactly.

Just wanted to quickly touch our product suite and sort of the general business conditions today and some of the interesting new products we've released recently. You can see by this graphic, we use this usually when we have new investors that want to know what we make. And we make pretty much everything involved in doing a gaming PC, with the exception of the GPU, the CPU and the motherboard. So everything else. So on the right of the slide, you'll see a very nice-looking gaming PC with RGB lights and well lit up fans and the cool the water cooling lines, memory all lit up, we make the case. Most of our cases have glass sides because our customer base likes to show off all the tech that they've bought. So they tend to be a glass case for aesthetic purposes. Then when you get on to the desk itself, you see a whole variety of other products we make. So if people put off and ask me, so what's the components business and what's the peripherals business for you? Well the components business is everything on the right. It's sort of the case and everything to the inside of it. And the peripherals business is everything that plugs into the computer itself, which is all of the items on the left. That's not necessarily plugged in because a lot of our gear is wireless today, but somewhere, there's a connection, and it's not inside the case. The main peripherals product lines are the HID devices, so headsets, mice and keyboards. And then we have a lot of the streaming gear that our Elgato subsidiary does, cameras, microphones, the Stream Deck, which is a very popular macro keyboard. We have some of the auxiliary stuff that we make like the ambient lighting. We have a small line of monitors right now. We actually made the gaming chair that you could sit in when you're gaming. And I guess, we have the gaming controllers that our SCUF subsidiary makes and those are doing quite well right now. The Call of Duty: Modern Warfare II release pretty much doubled the sales immediately as soon as that came out. It's a sign that how well connected software and the peripheral sales are. The component side tends to be affected more by technology trends, more the release of new GPUs than anything else, but CPUs or new tech or sometimes new games making you decide you want to build a gaming PC. So that's the general product line. So for gaming and streaming, we have pretty much everything you need, and we continue to expand our product lines there. In terms of general business conditions, most recently, it's been a story of over inventory in the channel. In 2021, in particular, there was a lot of extra ordering that happened, very elevated supply chains, very high demand time period and very unknown why the demand was coming because of during COVID. So our customer base ordered a lot of extra goods. It took a long time to get there because of the delays caused by the pandemic up to 13 weeks or more. So we built up inventory in the channel then. We think there's maybe $100 million based on our internal estimates of excess inventory. So excess revenue we got in the year before was maybe 2019 compared to demand. So this year, apart from Russia invading Ukraine and all of the disruption that caused in Europe and consumer demand there, it's been a story of bringing down the inventory in the channel. For the most part, we think we're there. In the U.S., we're seeing pretty good signs that sales in and sales out are matching. That means that there's not excess inventory in the channel that the end customer that buys from our customers and our customers' buying patterns are matched. There's been a couple of disruptions here and there. We do have some customers that take a big action at the end of one of their quarters or something. So they really stop orders almost anything, just to bring inventory down. But we think that's pretty much past us. We talked about that in our Q3 earnings results that we saw signs that it's back. We think Europe, by the end of this year, it will be pretty much cleaned out. Asia, it's a little bit depending on which pocket you're in and which country, but it's pretty much in good shape as well. So we do think that we're in pretty good shape right there. In terms of new product introduction and we're a consumer electronics company at our heart and to do well in consumer electronics, you need to release good products on a regular basis to excite your customer base and have them buy more. Some of the recent technologies have come out from Intel, AMD and Nvidia are quite power hungry and quite large. So we have the right gear to suit all that. We have very high-power power supplies, very consistent, good quality. We have large cases where all these big GPUs could fit in, no problem. And we have the right cooling solution so that they can perform at their maximum potential. Almost all modern CPUs and GPUs throttle if they get too hot, and our cooling solutions let them run at their full potential. So it's a really good suite of products. When all these came out, we made sure to remind all of our customer base that they are available. We just came out with a new Stream Deck. Stream Deck is one of our best-selling products by far. At the top, you can see the traditional Stream Deck lit up little screen buttons, makes it very easy, it gives you great glanceability. You just look at the device, you could see what the macro button does. Below those traditional buttons is 2 new innovations. One is the touch screen in the middle, you can actually swipe back and forth and as you swipe, you can change what the buttons are. So you can quickly change from one group of buttons to another group of buttons just by swiping back and forth. And then on the bottom, there's 4 dials, you can actually stack controls in the dials by pushing the dial, you can switch between it or by pushing the touch screen, you can switch between functionality. A lot of things that streamers do is very analog in terms of you want more volume, less volume, more of this, less of this. So the turning and knob right and left is really good. For video editing software, it's also quite good to have that sort of dial control. So it became very popular. It sold out almost immediately as soon as we released it. And obviously, we're making more and selling them as fast as we can make it right now. So a very innovative great product in the Stream Deck ecosystem. And this is just an example of -- we released microphones a couple of years ago, the first microphones that we released an interface for XLR microphones instead of USB, the standard microphone interface. And then we just came out with a new dynamic microphone very recently as well. This is another Elgato product, well received in the market, rounds up the suite makes it deeper, makes it more easy for us to compete and do well in that market space. And we've been doing that with all the new products we come out with. We tend to come with 1 or 2 new products when we release something and then we broaden it out over time. And we listen to the market and see what people really want for features and sets. One very important thing about the Elgato microphones. They have a tremendously powerful piece of software behind it called Wave Link, which is sort of like an audio control center for your PC. With the Stream Deck now, you can access the Wave Link software. So even if you're not using an Elgato microphone, if you have a Stream Deck, particularly the Stream Deck plus, you can go in there and use it. So that's an innovation and an opening up. It's probably one of the most popular requests we got is that I love your software as a way we could pay or use it separately and now buy our microphone or buy a Stream Deck and you get access to it. So that's just a quick introductory slides and I'll do Q&A now. Thanks.

Great. Thank you so much. Maybe as a sort of level set and how things have changed. Can you talk about your core customer and your core gamer? There's the stereotypical 20 to 30-year-old guy who lives in his parent's basement, but I know things have changed dramatically since those days.

You mean since I started in it?

So can you talk about who is gaming? Who's spending the money in gaming, which probably is almost more important? And how you've seen that trend over the last few years?

So I really think that the customer base has broadened out and it's no longer a story of new gamers entering the fold. I mean if you look at surveys of who games, everybody games. And as you go younger, every generation down Baby Boomers game x amount of hours, GenX more and all the way, the younger you are, the more hours you spend actually gaming and using your computer for gaming. So there's no shortage of gamers. What we're looking for now is gamers that are willing to buy gear to make the experience of gaming better by buying specialized gear for that. We think the white space for that is about 80% of people that game on their PC, have not spent any money on gear at all. Now that was 85% a couple of years ago. So one thing maybe the pandemic did was pull in. Some of those gamers have never spent before. So I think I would say young professional to middle age professionals for some of more expensive custom PCs, maybe they used to build PCs, but now they don't have time, so they prefer to buy a prebuilt one, somewhat more on the affluent side because our gear is higher end and more expensive. Some people are fairly casual. I mean, maybe there's a business person who buys 1 mouse or 1 headset every few years. It probably doesn't pay much attention to the brand, saw it in the Best Buy and picked it up or a Mediamark or something and bought it. And then there's our core customer set, they could easily spend $1,000 a year on average. It might be $2,000 or $3,000 1 year for a gaming PC and then a couple of extra things in the next year and then it averages out to about $1,000 a year. So our enthusiast customer base, gaming and being a PC enthusiast is their main hobby and they spend accordingly.

Got it. And how -- do you find that customers like buy 1 product and then they come back and buy another and another or do you find people more sort of jump in and try to buy a full solution?

I think there's 2 bases of customers. And then as a third base of customer, which is streaming, which buys in a little different pattern as well. I think the average person who's just buying the first piece of gear will buy a headset. So they're playing Fortnite with their friends on their laptop and their friends yell at them about how terrible they are on audio with their computer speakers and microphone on the laptop, so they buy a headset. We're very well-known in the gaming community. So if they reach out to friends who game, there's a very high probability that somebody is going to tell them Corsair. So maybe they'll go buy a Corsair headset. That's sort of like that set of customers. Maybe then they'll buy a nice mouse. They say, "Hey, wow, it's so much better to play with this headset I'll buy a mouse as well." So that's sort of the piece at a time type of guys. The other customer base is really the enthusiast. So they all decide they want to build a new PC and then they'll buy everything. And I don't know how many people in the room have actually built their own PC, but the wiring is actually the most annoying part of plugging in all the wires. Building the PC is very simple. It's almost like LEGO. You just put everything into the slots, and that's it. But you have to wire everything, particularly all the fans and all the things with the RGB, they have all these extra wires. When you move up to a new generation CPU or GPU that requires more power and requires you to change out your power supply, there's a reasonably good chance you don't want to deal with redoing all the wires and you just buy a new one. Some people just want to upgrade the GPU. So maybe their experience and they buy a power supply that's more powerful than they need, and then they just unplugged the existing GPU and plug it in. But they tend to buy a whole bunch of things all at once. And there's an advantage to buying all Corsair because of the IQ software that controls the RGB and some of the other functionality all works together on all the components. It also works for the peripherals. So that's sort of the 2 different ways that happen. Streaming, I guess, you just use your laptop webcam and whatever odd microphone you have when you start. But very quickly, when you go in and you decide you want to get better at it and really do it. You find out that Elgato is by far the accepted brand with the best gear for gaming and streaming at the same time. So then you start buying the Elgato gear. And you just tend to broaden and as you make money or as you become more enthusiastic about it, you'll go from using some sort of a webcam to maybe a DLSR (sic) [DSLR] camera. And DLSR cameras, Elgato makes the interface that takes DLSR picture and brings it in via USB into the computer and allows you to do what you need to do on it. I think you start learning about all sorts of software like OBS and all the streaming suites that go together. Those people tend to be incremental, and they slowly add gear. You have to be fairly successful at streaming before you just go and spend $3,000 or $4,000 on a whole new gear suite. There's a fair amount of crossover between the 2 different groups. If you're doing media creation, particularly a lot of video editing, it takes a very powerful computer with a lot of memory and a good CPU and a good GPU to do that. So the same PC you can use for gaming tends to be pretty good for that function as well. I know a lot of people who travel around the work is -- I mean, I know a lot of analysts meeting in a place like this, it's harder because you go into so many meetings where people use smaller laptops. But we're actually working and doing spreadsheets, Gaming PCs have fast CPUs and good memory. They're actually great for excel and they create for a lot of the other functions. We're seeing spillover from our existing product suite, Stream Deck being such an amazing macro keyboard, we see instances all over the place. We see a lot of traders and such. If you have 10 Bloomberg screens that you're constantly switching to during the day, it's all programmed into one button, and you could see what it is on the button. So you don't have to memorize this button to this screen that button that screen, you can quickly switch between it. There's people who do accounting software that do a lot of repetitive entries to have it all programmed into the Stream Deck, and it's just a couple of key presses to do it. So we are seeing a broadening away from the traditional gamer market, although the traditional gaming market is still where most of our customer base is.

That's really interesting. How should we think about the competitive landscape? You've had HP become obviously more involved in the peripherals market. You've got other -- some of the OEMs getting targeting it. How are you positioned from a competitive standpoint? And then also, how does the competition impact what you're seeing in terms of pricing?

So we're pretty new to the peripheral space compared to our core components products. Only in the last 10 years or so, that we really start going into peripherals. That is a much more competitive market. Now we have very competitive good products that are well accepted by the gaming community, but other companies like Logitech and Razor are quite formidable competitors, and there's a fair amount of marketing spend that goes on in the background there. So the base margins are higher, but there is more G&A and marketing support that's needed for that. HyperX was a Kingston brand that HP bought. I think that HP is able to use our cloud of being a very big seller of printers and laptops and PCs in some of the bigger box stores to kind of push their products on to the shelf and gain some shelf space. But their actual products themselves very serious gamers, it tends not to be the one they think of when they think of that. So it's certainly another competitive for us, and it's just more sign that you got to focus on the right product suite with the right features and end market it well. We find that influencer marketing. People who use the product are enthusiastic about it, they go and make videos and talk about it is the most cost-effective way. And it's the way that seems the most real to our customer base, that people use it, do a review, say what it's good about it. We get a lot of feedback from that review community. And we've been doing this since you used to go to hardware forms and you'd find yourself in a hardware forum and you tied back and forth on a hardware forum well before all this YouTube and these other stuff came along. It just sort of extended into YouTube being one of the ways we market. I see our products, particularly Elgato products, all over the place. I mean, you see look at an Academy Awards presentation, and they always scan to the back with the decks of all of the audiovisual equipment. And you start to see Stream Deck showing up. And we see our microphone showing up a little bit more often as well. So that is actually quite nice to see. And you see more and more examples of that. Usually, the people that -- when you're sitting in the green room for a Zoom conference, we're chatting with the tech as we're waiting for the analysts and people that come, always that tech knows our stuff. He buys Corsair stuff, builds their own computer and they use a bunch of Elgato here as well. So we do see a sort of very big broadening and knowledge of our gear and that's helping.

Is Stream Deck something that could be extensible and expand it into other product categories or could it be its own product category over time?

I mean it's core. It's a very nice macro keyboard with a very good interface. I mean the LCD button interface is very good because you can see what they are by looking at it. The software behind it is quite sophisticated. You got to have multi-actions and anybody has ever tried to use macro programs. It's a very powerful macro program. There's a lot of plug-ins, where a lot of the base functionality for programs is there. We're going to be having a lot more direct integration with Zoom and teams working directly with them to make the Stream Deck itself more powerful. There's a store where everything on the store right now is free, but there's going to be stuff sold on the store soon, where you just click on the settings button on your screen on your computer screen, and it pulls up a whole variety of different pre-done plug-ins. There's also icon pack. So if you're not particularly artistic and you want to have the buttons look a certain way, you can get them as well. So it's very extensible. It's used very much in the streaming community because Elgato is a streaming company and they came up with it. It's all the original, so the plug impact they put out were for OBS and Twitch and all those sort of things. But more and more people are discovering what you can do with the Stream Deck and sort of extending out the use of that. I mean if there's one product, I think that somebody is kind of interested and then it doesn't consider themselves to be a gamer, but one to try a course here, a product I say, we then buy a Stream Deck. If it's not a headset, go and buy a Stream Deck and explore it and it will make your life a lot easier for a lot of the functions you do.

And you launched your first branded laptop during third quarter, and obviously, the PC market is sort of staggering along right now. So I guess -- I know it's early, but what has the reception been like? What are you seeing in terms of product placement?

So the reception has been generally good. Actually, I have one with me, and I was showing it to some of the people at our table, like the keyboard is a mechanical keyboard with mechanical switches. So like, just a feel of in on it -- It's like nice. The aesthetics are nice. The camera built into it is very good. It's an all-AMD platform. So for our very core enthusiast group, they go very driven by benchmarks and Nvidia mobile GPUs, beat AMD mobile GPU. So they will say, well, it's expensive, but it's not the best, right? Because it doesn't have the highest number. For more gamer creators, it's certainly is doing well. I think if anything, it's kind of expensive right into like maybe there's going to be a recession. And it's our very first one, so we loaded a bunch of things into it to see how it worked. We certainly have more in the wings that we'll release over time. And like all of our products, we tend to release something very high end, interesting that cause people to talk about it and then we kind of broaden it out as we go. The Wave microphones we released were $170 each, but the dynamic microphone, we just released is $99.99, for example. So same thing with the laptop. We'll have a more general suite. And we'll have Intel and Nvidia solutions as well. So I think it's okay, but it's not a smash hit for sure.

How should we think about PCs over a 5-year period? I mean do you see this as being a significant business line and source of revenue or is it sort of just a nice to have?

Yes. When we first -- when we bought Origin PC, it was more going to be a way to reach out to that enthusiast community to want somebody to build it, and they had the reputation of being the best. I mean, they were former [ Alien ] where people didn't want to become Dell people, I guess. So they did their own company and then they joined with us, and we're a gaming company. So it's a little different, I guess, working for Dell. So that did well, and then it started doing better than we expected than our own internal line of PC, which is the vengeance line, also did pretty well. During the pandemic, we got an extra boost because we can get graphics cards, whereas maybe the general community couldn't get them at reasonable prices. So we're able to take advantage of that. So it's like less than 10% of our revenue type of business, but it's a nice business now. It's growing quite well. Origin has grown well since we bought it. I mean, not the level that Elgato really exploded since we bought it. But Origin's grown quite well. It's a good market, and it sells to our core customer base and it's basically somebody that wants a gaming PC that doesn't want to build it themselves. And you can get a preassembled ready with all the software loaded with quality Corsair components in it, ready to go, quite aesthetically pleasing and good. So it's good. The other good part about Origin is that we do a lot of direct-to-consumer sales there, like most of the Origin PC sales are direct-to-consumer. So SCUF and Origin are both 100% direct-to-consumer essentially. And that's helped us learn what we need to do, and that's one of the areas of investment we're doing within Corsair is more digital marketing, more infrastructure so we can sell and contact our customer base more directly. There's always been a layer between us and our end customer. Our customer is in Amazon or a MediaMarkt or a Best Buy and they don't give every single little parameter. I mean that's one of their competitive. They don't give all the information to you. So we only hear about it from feedback directly to us or maybe software downloads to try and figure out what's going on. If you sell directly to the customer, then you can market an e-mail and you have more relationships. So we're investing more into that area to expand and do more there.

And I guess when you think about overall pricing in this environment that we're in right now. And your products have a premium because they are focused on gaming and sort of specific markets. How much promotional activity do you think you're going to have to undergo to try to drive demand? I guess what I'm trying to see is like elasticity of demand, is there an underlying level that people just go and buy gaming and then you're kind of, going to have to try to find the upside to it or is this a situation where if you're aggressive on pricing, there'll be a significant market opportunity open up?

So we've always been a premium brand and compared to our competitors and particularly in the peripheral space, we've not relied on discounting as a main marketing tactic. We tend to price things based on the feature set. We do some promotion during Black Friday, just because it's kind of expected by our customer base. You have to provide some specials so they can draw people in. But traditionally, we lose market share in Q4 because we don't go after the casual people that are driven just by some special price or something that pops up. I think we noticed the inventory buildup earlier than some other people in our industry, and we took more aggressive action earlier in the year. So a bunch of the promotional, the direct promotional things we did, we already passed it. Black Friday, all the NPD and the other news reporting I've seen says it looks like it was pretty good and that electronics and other such things did okay and gaming did okay. So there was a lot of worry that Black Friday would not be good, and it looks like now, it was actually pretty decent. Now the real question is to how many orders come in afterwards. I mean that's our customers selling what they already bought all of us. So now it's a question, are the shelves empty enough? Is there enough demand that they keep buying our products. So it's always an interesting time right after Black Friday, where our sales guys are chasing the extra orders. I think we're in pretty decent shape overall. Paradoxically, we're in one of the best times ever to build gaming PCs. So if all this inflation and price, because cryptocurrency really raised the price of GPUs well above retail price for so long. I mean you could say, okay, Nvidia at $1,600 for the $490 and they're $1,200 for the $480, it's too much like, I guess, you got to talk about something on YouTube to get clicks. So there's a lot of -- but that 39 it was $3,000, so if it's only $1,600, you can actually get it at retail, you weren't paying that as a gamer before. You were waiting. So now sort of the floodgates have kind of open. So yes, the price has moved up from the prior generation, but compared to the artificial premium you were paying recently, the prices have come way down. So I don't think there's been and maybe there's a little bit in the background price pressure on some of the components things. We don't see a lot of it, but there's some. But the shipping cost has come down so much. So yes, you pay an extra $0.35 for materials in the case, but then you pay $1 less to ship it. Well, whatever extra component price you're paying, you're saving a lot on the shipping. I mean, shipping was $20,000 a container, and it's down below $3,000 now. So we ship big bulky power supplies, cases and things like that, it makes a big difference. So I think -- it's actually the pricing environment for gaming PCs is actually good. I think the concern about recession, when recessions happen, people tend to stay home and maybe they get a new TV so they can enjoy their new TV, they also stay home and tend to play games. And that's something they don't go out and go to restaurants to go on vacations, but they still spend a little bit more on gaming gear because they're not going out anyways. It's not that expensive compared to a trip. So it actually usually is an okay time for the gaming environment. So I think we're well-positioned as best as we can. Now the consumer confidence in Europe is still lower, and we certainly have seen less elevated demand in Europe than we are in the Americas right now. So it's better today than it was in February, March, but it's still not recovered back to where it was. So that's sort of the last thing that has to happen is Europe has to come back a little stronger for us to be sort of firing on all cylinders. Otherwise, very interesting new products have been pretty well received. We have a great new bendable monitor coming out that people are quite excited about. The Stream Deck product line continues to do very well. All the background Black Friday news says it's a good Black Friday. So I think we're -- we kind of exited Q3 and went into Q4. It's sort of like we hoped it would after a disappointing first half of the year.

How do you think about M&A? Just -- I think maybe this will be the last question, but I'm just curious, how do you balance internal development versus what you can find externally? I don't know if we are going -- if we are in a recession, in theory, the cost to acquire some of these capabilities may be down. So how are you looking at corporate development and where you might spend your dollars?

So we've used that M&A recently to go into areas where we had no products like that. Elgato is a great example. We didn't have any streaming products, and they were the leading in that product group and they wanted to work with us. So that was like an M&A type acquisition. We just recently put some money on the balance sheet. So if things are really tough next year for some reason, then we have extra cash, and we can keep innovating and doing R&D and marketing like we have to. If there are more like people think it's not really that severe and more mild, we have cash to go pursue M&A. So it would be an area we don't do anything in. And just some examples, and this is not an active M&A type of thing, but we don't have any gaming controller like sim controllers, racing, flight sim. We don't have any of those products. So that's an area maybe we can do some M&A mobile gaming and gear around mobile gaming, particularly as cloud and mobile gaming intersect a little bit. We don't really have any of that developed in house. We could do it ourselves, but we might be to accelerate our ability to enter that market with a Corsair product faster if we did M&A. And I always tell Andy, it's like if you can't come up with really good ideas, I'm just going to pay down debt. So it's sort of like a little bit of a fire under I'm saying, let's go keep innovating and find ways to deploy our capital. And worst comes to worst, I'll just keep chipping away at the debt like I have in the past. So that's been a pretty successful dynamic for us.

Great. Well, with that, I think we've come to the end of our time. Really appreciate you being here. And I'm sorry, Andy, unfortunately injured his back, so he was unable to join us today, but we wish him the best, and look forward to keeping in touch with you.

Thank you very much.