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

Great. Well, good afternoon, everyone. My name is Mario Lu. I'm the Mid-Cap Internet Analyst here at Barclays. We have the honor today hosting Corsair. And here, we have Michael Potter, CFO. So Michael, thank you so much for joining us today.

Thanks, Mario. Happy to be here, I just have a few slides to go over in the beginning, and then I'd be happy to answer some Q&A.

Great.

So the first slide is sort of our summary slide. Quite often we get asked what products do we have and where do we come from? So it's sort of divided into 2 pieces. On the right of the slide, you see a very colorful nice-looking gaming PC. And from the gaming PC, you can see sort of in the middle, there's a whole bank of colors, that's the memory component. Our memory is very fast, can be over clocked and functions quite well on top of everything. It is that nice color, and it's where we started the company. So 27 years ago or so when Andy founded the company that was the first product. We kind of grown out from that memory. So inside the case, we've got the case, the power supply, custom cooling, CPU coolers, fans, storage and all that type of stuff all there. So that's the components part of our business. That's about 2/3 in total of our revenue. Everything else is the other 1/3 of our revenue. Pretty much anything that plugs into the computer is a peripheral. So headsets, mice and keyboards, those were all big product lines for Corsair and then the Elgato products that we bought a few years ago, Stream Deck being a fairly prominent one and quite successful for us. But the microphones, the camera capture card, which could be inside the computer or outside. That's all Elgato sort of products. And we have on the side, gaming controller, which is SCUF. And we even have a gaming chair and acoustic panels and lights in the background, all different products that help streaming very well. One of the other topics we get asked about a lot is what's going on with channel inventory today. We think going into this year, there is about $100 million into the channel more than was necessary. And through the year, sales in -- our sales to our customers have been about $100 million lower than the sales out. That's been correcting through the year. We think for the U.S. and the Americas market, it was mainly corrected by the end of Q3. By Q4, it should be pretty much equal for the whole world, could be a pocket here and there over a few things. We have a little bit too much inventory out there. But for the most part, it should be equal. That means that really our revenue this year, if everything had been more equal, would have been about $100 million higher without the impact of this inventory in the channel. That's one of the tailwinds we've been fighting during the year. A key thing for Corsair has always been our product innovation. So I have a few slides here of our -- some of our new products will come out recently. So the new GPUs and CPUs in particular, have been very, very heavy when it comes to power requirements. It's been a big step-up in power requirements of the new generation. So both our cooling solutions and our power solutions are more than equal to the task. Some of the new GPUs are quite large. They fit fine in our gaming cases. So overall, we're very well positioned for the marketplace for the new generation that's come out. Elgato just recently released the Stream Deck +. The innovations here are the knobs. So the knobs not only allow you sort of like the fine-tune things that you want that more analog control where you turn things left to right, brightness, volume, things like that. Also has a touch screen in the middle. That allows you to tap. Also you can swipe back and forth on it, and it'll change the buttons on the top. Buttons on the top are the standard macro Stream Deck buttons. A picture on each of them, so you can glance at your device and know right away what it is. This was originally designed as per the name, the Stream Deck name for streamers. So people that were doing Twitch or some other sort of like live stream type of thing. But it's become spread out more and more. It's a very good macro device anybody that has repetitive tasks where a macro would help, a lot of financial analysts, traders that are constantly switching between the same Bloomberg screens and such. That's a use case that has come up there as well. And finally, 1 of the other newer Elgato products as well is the Wave DX microphone. So we had a microphone with the USB power, the condenser microphone, which is the Wave 1 and Wave 3 microphones. We had an XLR interface, which allowed you to take any XLR microphone use the Elgato software and run on the computer and then this is the newest one. It's $99.99 and well-regarded dynamic microphone, good for podcasting and other things like that. So that's just a quick introductory slides to kind of give an overview of where we are. So I will pass it back over to you.

Awesome. Yes, that was a great overview. I think, starting from memory and all the way to the products today, you have a full suite, right? So just going off of that, what would you say when you compare Corsair to other competitors, say, a Razor or other peripheral like Logitech? What would you say does -- what factors kind of separates you from them on the peripheral side and also on the components?

So I think 1 of the main differentiators is the broad suite of products we offer for gaming PC. They're very focused on the peripheral side of the business. We offer the full suite of the components, what you need to build a good gaming PC as well as the peripheral. So that's probably the #1 thing. The #2 thing is that we only do gaming. So somebody like Logitech has a much broader product line. They're not really as focused on gaming as we are. So all of the products we do relate to gaming in some way. So our keyboards, our mice and our headsets are made for gamers. We also tend to be a little bit more premium, we use better switches. We use more high-end components for it, strong aluminum frames, for example, very robust keyboard so you can pound on them quite hard. It will register all the key strokes and you won't break it. We also offer very fast pulling and other features that are very, very well wanted by the gaming group. On the streaming side, Elgato and on the controller side SCUF actually perfect fits for us that way, but both very high end appeal to the very dedicated gamer. And in the case of Elgato for streaming, their software behind the products is very good. So they're well known and well regarded for not only the hardware, but integrating the hardware into the streaming experience. So I think that's what differentiates us, that very tight focus on the gaming market and the longevity. So we know that quality and delivering consistency and delivering new and innovative products over a long span of time is really important. And we know that we can't disappoint your customers. So we focus very much on that. I think that's the key differentiators. Now Razor and Logitech are quite competitive in the peripheral space. In the component space, we tend to be the largest and strongest competitor. On the peripheral space, particularly the keyboards, headsets of mice, it is much more competitive.

Got it. And then just to follow-up on that. Can you talk a bit about just recent trends like Black Friday or levels of discounting, has that been higher or lower than what you expected? And what does that kind of tell you for next year?

Traditionally, Corsair is not a big discounter for Black Friday. We're sort of a premium product with a premium price, which you get really great features and build for it. So we do some promotion activity at Black Friday. But typically, our competitors are more promotional. A more casual person in the market maybe will go towards a lower price. So we tend to actually to lose a little bit of market share on peripherals typically during Black Friday because of that and then gain it back again once you get passed. I would say this year, we saw some of our competitors were discounting stronger and deeper than we had expected. We've been working on inventory for quite a while. It took a fairly large write-off in Q2, and we're taking action before that. So I think we entered the Black Friday selling season in a position where it wasn't necessary to be a very, very heavy discounter just to move stock. And we did note that some of our competitors were discounting much more than usual and in a broader suite of products. Now why that's the case? I don't know for sure. Typically, that means that they had a little bit too much inventory either in their own hands or in the channel or maybe both.

Right. That's interesting. So as we look to next year, what would you consider are your key pillars of growth into next year and beyond? Is it going to be new products? Is it the macro tailwinds? Is it the channel normalizing as you mentioned in your slides, what would kind of cause growth to accelerate into next year?

So the first one is what I mentioned is the clearing of the inventory overhang in the channel. So in theory, we should be able to do $100 million better just because our sales in and the sales out should be more carefully mailed, more closely matched. So that should help us alone. The other big sort of tailwind that we've right now is the product refresh cycle, particularly for GPUs. Both Nvidia and AMD have new GPUs coming out late this year and going into early next year. And they're markedly better than the previous generation, and they're much more reasonably priced because the cryptocurrency extra price on all the GPUs we've been fighting against for the last year is gone. So we're seeing the effect of that in our component business, and we're seeing the business rise against it. For the peripherals business, it's more matched to software. So for example, when Call of Duty: Modern Warfare II came out, our SCUF controller, like the daily sales rate, pretty much doubled the first day it came out. So those reviews came out, gamers were convinced it was going to be a good game. They -- if decided to invest and have a better controller for it. So that's a little bit more of a tie. Same thing with the headsets, keyboards and mice. You simply need to have better games. A lot of AAA titles were delayed from this year into early next year. So we think that will help there as well. I think that the only significant headwind that we see for next year is just a general economic condition. So we're not 100% certain on all different recession scenarios, what that will mean. But it certainly is somewhat of a headwind to fight against. Now people tend to stay home, not go out as much. That tends to promote more people gaming at home, which should be good. It's just a question of how much of a budget they have. And then finally, the other tailwind is the continuing war in the Ukraine. So since Ukraine was invaded by Russia, the sentiment in Europe has been much more depressed and energy prices and currency troubles in the region because of it have certainly made it harder for gamers to spend their money on good gaming gear.

Got it. Yes, that's pretty interesting where Call of Duty: Modern Warfare II did cause a spike in SCUF sales. Is there another derivative after that you think where headsets or other products will also gain traction or is it just SCUF for the majority?

I mean, SCUF is just an example of that direct link. Headsets in particular, tend to do better, any sort of a team game, any sort of an FPS team fighting game where you have to communicate with your teammates clearly, headsets tend to do well. Fortnite was probably the most recent clear example where headset sales skyrocketed once more and more people started playing Fortnite. Call of Duty is certainly a game. We're having a good headset help, so we would expect to see a benefit for that as well. I think going into early next year, some of the games are more demanding on hardware. That should help the component side. And anything that requires a better gaming gear experience to have that extra ability do well, should be pretty well as well. So we're more confident that we'll have a little bit of that tailwind from the new games. Now we haven't seen the new games yet. So they have to be released to be successful and be good. Gamers are pretty quick to turn the thumb down on a game that comes out that's not good. So you could wait with as much anticipation as you want. If a game comes out and doesn't hit the mark, it's not going to help you. So we'll have to see what happens there when those games come out. But we're expecting at least a couple of them to be hits and if they are, it should help us there.

Got it. And maybe just to help frame it better for investors. If we think about these 2 large catalysts in terms of new game launches coming down potentially next year as well with Call of Duty and then also the increased supply of GPUs that's being pit against a potentially weaker consumer backdrop. How do those 2 combat each other? And how should we think about it?

We haven't actually given any guidance for '23 yet. We'll do that when we release our Q4 earnings in early February next year. So I don't want to get into too many specifics. I kind of gave the main tailwinds and headwinds on my explanation there, and I'll sort of leave it at that for now.

Fair enough. So prior to the pandemic, esports is actually a pretty large topic, right? But it did stall because of COVID and limiting in-person tournaments. Has that had any impact at all on the Corsair's business or is that just an extra marketing channel for you guys?

So esports players like the [ talkers ], they're not even our customers, right, because they get the gear for free from the different gaming gear companies, very often in promotional type of situations. So for us, actually, influencers are more important to us more directly than esports players themselves. Now some esports players have a good personality and are very good influencers. And what gear they use carries a lot of extra weight. Esports also gives a backdrop where having good gaming gear makes sense and investing the time to be a better gamer makes sense. The actual esports itself, we've actually slowly, but surely pulled back on some direct marketing and advertisement at it, focused only on a few key events and teams and areas of it. Because we didn't find it really resonated as much with our general customer base, it does make a difference for streaming, and it encourages more people to stream overall, so that does long-term help for Elgato business.

Got it. And just a follow-up on the streaming question. Can you talk a bit about how that industry has trended over the past couple of years? Like have you seen your products like the Stream Deck, like how that has performed because of streaming and what growth do you envision in the future?

So the streaming business when we bought it till today has grown tremendously. I mean, when we bought Elgato, it's doubled, tripled, quadrupled in size compared to when we bought it. So it's tremendous growth there. There was a lot of growth during the pandemic time. I think some of that was not so directly for streaming as in Twitch or YouTube or something like that, but more people at home having to do Zoom or Teams or some big part of their work environment or a school environment. So they bought microphones and lights, and green screens and other things to make that better. But the overall trend to more hours watch the streaming continues to go on. The innovation and product release for Elgato continues to be quite good. I mean, since we bought them, they've released the Stream Deck, they've released the microphones, they've released a whole suite of lights. They released a camera. They released a few other peripherals of lighting and acoustic panels and such. So I certainly think there's a lot more room for innovation and integration and growth should continue to be quite good.

Got it. So shifting to the supply chain, you did talk about the channel inventory normalizing potentially by 4Q or certainly by 1Q next year. For those not too familiar with the story, can you kind of walk us through what happens in terms of inventory levels in 2022? Are you still on pace for that normalization by 1Q?

I think the main thing that happened was the supply chain disruption during 2020 and 2021. Essentially, lead times for shipping greatly increased. I mean, everybody saw the pictures of ships backed out for miles have been in ports into the U.S. and Europe. So it went from a 6-week, maybe a 7-week shipping time from the Asia supply base into our main markets to 13. And then it takes an additional 6 weeks plus in the procurement cycle before it's ready to ship. So basically, people are making guesses a couple quarters into the future. And both us and our customers were not particularly great at guessing that far into the future without being to extrapolate on current sales. Your tendency, particularly in the hyper demand where you're missing sales we didn't have inventory during the pandemic time is to order more. Because if you got to wait 13 weeks until the next ship shows up, it's better to get a bigger initial shipment in. I think systematically that built up extra inventory in the channel. I don't think demand was too dislocated, but the purchasing patterns of our customers and, then us reading the signal and ordering from our supply base was elevated. In the beginning part of this year when Q1 was below our expectations, we started looking at our order pattern, and we started cutting fairly dramatically earlier in Q2 and then through Q2. So we took action as fast as we could. Since then, shipping times have come down closer to 6 weeks. The cost of shipping has come down a lot, which is a good margin tailwind story for next year. The planning horizon then is shortened. I think our customers started correcting the inventory as well. When they correct the inventory, you get an air pocket in orders, and that particularly pressured Q2 and it was some pressure into Q3. We're not really seeing that. We get anymore. We get POS data from pretty much all of our customers. So we can see the point of sale, we can see the rate of sales they're making to their end customers, and we're tracking that. And now in the U.S., our sales in are pretty close to sales out. So that's a sign that inventory is in balance and they're ordering based on the actual demand. Europe, we're still selling a little bit less in than out, particularly in the peripherals area, but that's more in balance than it was. And just trending, we expect that to be pretty much behind us by the end of this year. So I think that will lift a big sort of planning uncertainty off of our shoulders and just a shorter planning horizon to really help. However, the story of the lower shipping cost makes a huge difference. So I always tell people because we haven't given guidance for next year, but everybody always asks what's going on in 2023. And so I find that if you look at it this way, I said that we have about $100 million less revenue this year because of over inventory last year. And that should be corrected by the end of the year. So let's assume that the headwinds and the tailwinds all balanced, and we just have that $100 million extra revenue. So you add $100 million to our revenue this year, margins should be up 2% to 3%. So EBITDA margin because some shipping is in SG&A and some is in cost of goods sold, just because of the shipping costs being so much lower. If promotional environment is better next year, you can get up to a 1% increase in EBITDA margins as well. So between the 2 of them, you're looking at a 3% to 4% EBITDA margin improvement on essentially flat sales, which would be up slightly because the inventory headwind is gone. So that kind of gives you a framework and a backdrop. We see that even in a relatively flattish year next year, our profitability should be to increase reasonably well.

Yes, that's very helpful, great. So in terms of a lot of tech companies are actually making a lot of head count reductions, right? So curious to hear in terms of Corsair, how -- you guys stand on this topic. How should we think about OI margins even beyond '23?

So we made a few small trims this year, not a lot, but we did do a couple of trims, so not in the levels that some of the people in the news that you see. So we adjusted spending down on head count. We also just across the company curtailed nonessential spending. So you sort of left 2021, feeling fairly good. 2021 is a really strong year. A lot of people had plans to do more marketing, more activities, a lot more extra things. We pulled back a lot on those different plans we had and kept the spending down as much as we could balance with the lower revenue. So you'd see that our operating expenses have not really increased during the year on an absolute basis and actually have ticked down a little bit. So that's an example of we're trying to manage that as carefully as we could. We also did an offering recently and raised a good amount of cash close to $80 million worth of cash from the offering. So that gives us a pretty good war chest that's on our balance sheet right now. If things next year are a lot worse than everybody is expecting it to be, it's not so benign, then we'll be in very good position anyways because we'll have enough cash. We can continue to invest in R&D and deliver new and interesting products for our customers. If things are better than what we expected or even the same, we can make decisions for growth a lot faster. So we can look at small M&A and execute on it earlier in the year rather than later because we have that cash buffer. And like I always tell Andy my boss, if you don't really bring great M&A ideas to me, Ronald and I would just run into our, our IR, VP and also my Treasurer, we're just going to pay down debt. So that's kind of the plan we have for next year. So I think that we're well positioned to fight very well to innovate and deliver great products to our customer. And then our customers will be happy and that should help the company.

Great. That makes a lot of sense. Yes, just lastly, to round out the talk. We just wanted to ask, are there any topics you feel is still misunderstood with regarding your company that investors should be more aware about or anything to clarify in terms of topics that are misunderstood?

I don't think there's a big misunderstanding anymore. There was a lot of questions about was the pandemic surge all pull in from your existing customers? I think it's pretty clear now. If you look at 2019 and 2022, 2022 is so much above 2019 that if '20 and '21 will all pull in, it would be impossible -- for there will be any rise. So what really happened was, is that there were a bunch of new customers that not bought gaming gear before, bought it for the first time during then. So we used to get almost every single meeting was just questions around that. Today, I think most people understand, no its just growth in the gaming market in general has lifted it. The rest of it there is people are, just wanting to ask the same question that everybody has in this environment is the worst really behind you or -- do you see growth coming in the future. And right now, from what we see, Q2 looks like the trough for us, so Q2 of this year. And we feel that a lot of the sort of pandemic supply chain dislocation because of shipping time if that's behind us. Now we still got to compete well and continue to release great products and excite our customer base. But at least we don't have to fight as many of these issues anymore, and that should be behind us.

Got it. Well, I think we're out of time for our Q&A, but is there any questions in the audience that anyone wants to ask, feel free to raise your hand. If not, in terms of the products that you showed earlier in terms of the slides, like what would you consider the ones that you are most excited about or…?

I think the -- kind of like the backbone of the company for so long as the component. So like that first slide with -- we're ready for this new generation, we have everything you need to build a great gaming PC. That's just a normal sort of thing that the company has had. I think the Stream Deck + is very exciting. I think the addition of the knobs and the touch screen that you could swipe and switch easily. People that stream and use a Stream Deck are quite excited about it's had great success and great uptake. I think the product we get the most questions about these days are the bendable monitors. We just announced we're taking reservations for the first release of that sort of towards the end of the year, and we listed the price of around $2,000. So I think that's the 1 product that's gotten the most sort of like around buzz. There's really large monitor that you catch straight or curve it depending on what use you want. So you're not stuck with either straight or curve no matter what you're using it for. So I think that's just another example of a great Corsair product that's exciting our core customers, which are both creators who seem the like the screen straighter and gamers who like the screen more curved.

Got it. Well, I have to check that out. So Michael, thank you so much for joining us today.

Thanks, Mario. Good to see you, again.

Thanks.