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

All right. Well, I think we're right on time. So it's my interest in getting started here on day 2 of the conference. Thanks, everyone, for joining us. And it's my pleasure to have Andy Paul, CEO of Corsair Gaming here with us today. to kick off the conference. Andy, great to see you.

Yes. Thanks for having me.

So Andy, I think one of the things that's a good way to start these activities is maybe just level set with the companies involved in a fair bit of a number of business lines and exposure to the broader array of computing and gaming out there. Maybe talk a little bit about your segments, the company as it currently sits today, and we can use that as a jumping off point to this conversation.

Yes, sure. Well, we have a company that's 27 years old now. And we've divided into 2 basic segments. One of those is primarily components that gamers use to build PCs. That's the biggest segment we've got now. And that's where we started the company making as some people know, making memory, our very high-speed memory and then we've expanded to make almost every component that goes into a PC. The other segment is peripherals, and that's a combination of gaming peripherals. We're talking keyboards, mice headsets and also streaming gear. So one of the companies we bought in 2017, was a company called Elgato that makes cameras, microphones, capture cards, all the things that you need to stream live gameplay. So those are the basic setups. Now we've got about 29 different product lines at the moment. We've done 7 acquisitions to -- before we went public and 5 after, I think, is the numbers. But -- so that's part of the growth strategy, is continuing to add companies. We think that there's a fairly reasonable amount of consolidation that's going to go on in the next few years.

Yes, if we take one more step back, if you think about those end markets, you're gaming exposure too. Talk a little bit about how you position the company to capitalize on the rise in gaming, the rise in streaming media, the rise of sort of changes in media consumption. And what do you think that means for growth for the company longer term?

Yes. Well, I think interactive entertainment has been growing steadily for years and a lot of that's to do with the basic technology of graphics processing. And so now we have games where the characters are almost life-like. And that's just drawn over the decades, more and more people into it. So I think we have now, the last estimate I saw we have about 1.6 billion people playing games at some level on PCs. And about roughly 30 million of those that we would call enthusiasts, that are buying -- spending extensive amounts of money, either building PCs or buying peripherals. So those 30 million are primarily what we've been targeting over the last 20 years or so. . Somebody who builds a PC to play games, we would class as an enthusiast. So that's where most of the players have been historically. Now we've also seen streaming emerge probably over the last 7 or 8 years, once Twitch got started and people could start to stream their own gameplay and really start to share their content. Now everyone calls it content creation, but it's really just about sharing. And we've seen content being shared way back. I mean, Facebook is a great example of that, right? So I think those are the trends in the market are firstly interactive entertainment is now huge. I always joke that asking somebody now in a survey whether they play games, somebody under 30 would be like asking somebody in the 70's whether they listen to music. It's -- everybody plays games. So that's a generational thing. Obviously, my parents, particularly are not playing a lot of video games, but it's steadily growing and there's still quite a lot of space to grow. What we find is the teenagers love to play games and they may not have a lot of money, so maybe they're playing on a console. When people get into their thirties, and they're still really actively playing games, now they're prepared to spend some money on it. And like any other sport, whether skiing or mountain bikes, once someone is locked into a particular thing they'd like to do, then they're prepared to spend several thousand dollars. And that's what it takes these days to build a decent gaming PC. I'd say most of the PCs that our customers are building are probably in the sort of $2,000 to $4,000 range by the time they put them together. And so that just gives you a sense of how big this TAM is. It's very different than the conventional PC industry where you've only got price points of $500 to $1,000 for a basic PC. And what I think we realize now, just looking at the pickup of the market is that there's no reason to have a PC unless it's for gaming or doing like a workstation because everything else you do on your phone. All the things that I used to do 20 years ago on a PC I'm doing on a phone now. So it's really become a specialized thing. And I think we realized when we started talking to investors about before the IPO, a lot of people were trying to understand how -- what's the difference between a gaming PC and a PC. And of course, now everyone's realized it's a completely different animal, and it's built to do a completely different task. So that -- so there's a generational thing that's driving gaming, more and more people are playing games and more and more people are spending more hours playing games. I think Starfield obviously just launched last night. Officially, although a lot of people were playing over the weekend. I think I've read that's a 200-hour game if you want to complete it. So a lot of hours involved. And people want to play with the right gear. The other thing that's sort of helped with this growth is that it's become a bit of a lifestyle thing. And that is that instead of an old PC that was just gray or beige, that's not what game PCs are about. So gaming PCs, when you're building them yourself, you can have a lot of customization going on. So a lot of these PCs are glass, glass sides, glass tops so you can see inside them. And that means there's a whole thing about making them look cool, adding LEDs. We've got one of the best software packages for driving and controlling those LEDs and a lot of the elements inside are very carefully finished. So it's not like sort of taking apart of an electronic box and it's all kind of dusty and everything in there. This is really like looking under the hood of a Ferrari or something. So gaming PCs, people are building them to look cool and obviously, to operate properly. I think the other side of the business, streaming and peripherals is a similar thing where people have now realized that the keyboard that you use for gaming or a mouse used for gaming has nothing to do with the keyboard or mouse that you might have used in the office. So all these things are starting to be specially designed. I can't imagine any gamer that's spent a couple of thousand dollars on a PC is going to play with a regular office mouse or keyboard. So every aspect of those devices down to the keys, the technology, under the keys, because when you're playing a game, either you're using the mouse buttons or the keys on the keyboard, you want a very, very precise point where the action happens. And obviously, for first person shooter games, that's critically important to know exactly when the firing is happening. So I think all of these things, headsets the same thing. Headsets for gaming have been designed because you're playing with other people a lot, so you want to be able to hear what's going on. You want to be able to talk to your teammates. So basically, this whole industry around gaming hardware has kind of developed into a very, very different type of hardware from conventional PC. So we all call it PC gaming but it's not really a PC anymore.

When you take a step back, how do you think about the competitive landscape, who you're competing with in your different segments on the peripheral side, on the equipment for streaming side as well as the PC computer side.

Yes. Well, in some ways, if you step way back, what we found is that the product lines that have been in the longest, we have the highest market share. And so it's just a question of sort of over time, you can just grind away at your competitors. The 2 product lines that we have -- that we started the company with, I mean, memory and then after that, power supplies, which -- power supply seems a bit boring, but actually, it's one of the most important things in the gaming PC because you're powering the graphics cards and the CPU and everything. Those things we have, I think, NPD, which is the reporting giant that collects all the data from retailers. In the U.S., we have a sort of 73% market share in memory now, which means total ownership. I think the next guy is 15% or 10%. So we kind of own that market. Power supplies, we have about a 50% market share. And then pretty much it sort of goes down with all the product lines. We've got some -- like with Elgato, this company we bought, they started life making capture cards and it had like an 80% market share. They were kind of the guy, if you wanted to pull video out of a console and put it into a PC to then stream, they own that market. And then we've also got a product from Elgato called Stream Deck, which again is like 90% market share. It's kind of a one-of-a-kind thing. So I think in terms of competitors, we have very different sort of guys. We've got in the PC component area, most of our competitors are from Asia. And a lot of these companies are companies that at one time were in the PC supply chain and they just tried to make their products more sort of gamey or suitable for gaming PCs. But historically, those companies were supplying people like Dell or HP. Or the next tier too. We don't find that those companies have got very sophisticated marketing, people, so -- or organizations and so that's where, in the component area, we've managed to dominate pretty much in every category. Now when you move to the peripheral space, we have -- and so just to complete the thought there, almost everybody in the component space making what we make is quite small. So we're sort of 4x, 5x bigger than any of our competitors. Now there's obviously other giants in the component space like Intel, AMD and NVIDIA that we kind of treat as partners. We're not trying to be in competitive competition with them. When we go into the peripheral space, it's slightly different, we've got Logitech is probably the biggest competitor we have now, and they're doing both streaming and peripherals. Obviously, a slightly more conservative company, and so not so appealing necessarily to the younger set. And then we've got Razer, who is another company, private company now, they were public in Hong Kong that is the opposite spectrum. So Razer was a company started a little after us but was very aggressive in terms of marketing and kind of edgy. And so that was really appealing to sort of teenagers. And we're kind of in the middle in terms of brand perception, where it's a very, very solid brand and most of the people that are buying our gear have probably been doing that for 10-plus years. It's a very, very well-known brand. We've got a lot of a great reputation for sort of rugged and reliable products and products that are just designed to work for the purpose. So it's -- there's a lot of smaller companies that have jumped in over the years. And I think, as I was saying earlier, I think there is going to be room for consolidation. It's very, very difficult when you've got -- in the peripheral space, for example, you've got ourselves Razer and Logitech. When you go into someone like Best Buy, they typically only have room for kind of 3 brands. And so that's what you see, those 3 brands, Corsair, Logitech and Razor and then there's other people sort of around the periphery or on the bottom shelf. If you're a small brand, you'd never get into Best Buy, they just don't need you anymore. But that's the same with a lot of retail. Even Amazon, anybody can get on to Amazon Marketplace, but we probably do, I don't know, close to $0.5 billion a year with Amazon. So the leverage we've got in terms of actually having a conversation and changing the way they're thinking dwarfs any of the smaller competitors. So I think a lot of people that are sub-$100 million in either peripherals or the components space, you tend to be looking around for someone to buy them. So that's why we're able to do so many acquisitions.

Understood. Looking back as a way to look forward, the pandemic obviously pulled forward a lot of penetration in gaming, a lot of refresh cycle around equipment and gaming. Talk a little bit about what you went through during the pandemic? And how should we be thinking about what it means for the refresh cycle for the broader industry -- the further we put the pandemic hopefully in the rear view mirror.

That's a good question. Well, I think the first thing to say is that the market size is substantially bigger now than 2019. right? So if you think about what normally would happen with a pull-forward situation in the market, you'd have revenue or people buying things in 2020 that would have bought in 2022 and '23, but instead pulled forward. So you'd get a normal pull forward, you'd see a boost in sales, followed by a trough and we haven't seen the trough. So what we've seen is a huge increase. Now by the way, what that means is when you actually go through and do the math is a lot of new gamers coming into the mix. So it wasn't just pull forward, there was an acceleration of sort of the market in terms of new people buying things for the first time. We saw that mostly in peripherals. So I think work from home or people staying at home was probably the biggest increase in kids having headsets. Because people didn't want to listen to their kids playing games when they're trying to work. So a massive increase in that market. I mean there was more than 100% growth in 2019. And today, that market -- the market for peripherals, say headsets because headset is roughly half the peripheral market, the keyboards and mice being about the same size. But that market is about 50% bigger than it was pre-pandemic. So I think we've now got -- now if we didn't have inflation and interest rates rising, I think we would already be in a steady growth looking back to 2019 and steadily growing. As it is, I think the inflation and rising interest rates obviously has some effect on consumer spending, even in gaming. We like to say that the gaming interaction entertainment is kind of recession proof. And certainly, it appears that way. I mean, we're on track, as you know, from the guidance, increased sales from last year with a lot of people in consumer are not that fortunate. So the market is -- there's an underlying growth going on. Now the interesting thing is if you look at all these new gamers that came into the mix in 2020 and 2021, there's going to be another sort of an echo, if you like, of that one refresh cycle later, when the refresh cycle for most of those components and peripherals, we're looking at is about 3 to 4 years. So 3 or 4 years after '20, that's now and next year. So I think that's also going to help with growth and help combat the fact that there's certainly some people if they've just had their mortgage reset, they are going to be a little tight on spending.

Yes. Understood. Well, maybe let's double-click on that because I think there's 2 dates in there that are persistent in the investment community. One is that gaming and with it, all that comes with it in the long tail is somewhere between recession proof and recession resilient, but then you also have this refresh cycle. Just educate us or remind us of the comments you made on the last earnings call about the current state of the consumer and what sort of variability good and bad you might be watching for consumer behavior towards the end of this year?

Yes. Well, we saw -- I mean, during this year, we've had Prime Day, which was very good. Overall sales of our performance in Prime Day was great. So that was very encouraging because that was one of the things that we look for. We've got another Prime Day coming up, as you probably know, in October, so 2 Prime Days this year. Obviously, it's too early to know what people are thinking about for the holiday season. We're pretty bullish about it. And the reason is all the great games coming out. I mean one of the things that happened with COVID and with work from home is the collaborative work wasn't as efficient. And so now you see all the companies that need to be grabbing -- pulling people back in the office. But that had an effect on games. There's a lot of games that got delayed from '22 into '23. And so now we're seeing all these things come out. And this year, we've had an amazing run. Hogwarts. We've had Diablo IV, Starfield coming out today. And then Baldur's Gate was huge. So all these games get people more interested. It's like what happens to the ski industry when there's a lot of snow at Tahoe, people rush out and buy new skis. I think that's going to be the thing that really drives this year and offsets any negatives from the fact that people are tight on spending. The other thing I would say is that for people that are enthusiasts that are building PCs, that's the last thing that they're going to not do. I think people would rather just maybe not take the family out to dinner so often and spend money on gaming. So I don't see big effects. We certainly haven't seen any effect yet of interest rates affecting spending on gaming. But it's just difficult to try and know how much pull-forward effect there is or a pull forward means people who have built a gaming PC last year or in '21, are not going to do it again until next year, or refresh until next year. But overall, we're feeling pretty positive about the growth prospects. I mean if you think about most industries that I look at for the moment, people are looking at sort of negative growth from '22 to '23. And we've noticed that as we go through the year, we've seen -- like in peripherals, we saw about a 15% drop from peripherals sales in Q1 compared to Q1 last year. I'm talking about overall market. And by the time we got to the middle of the year around Prime Day, it's about Level. So we're tracking at the moment a flat market. And I would say, based on that, I think it's going to be ahead of last year by the time we get into the holiday season.

Got it. Zooming out from the current state of the consumer, when you think longer term, how should we be thinking about the growth inputs in the business of peripherals versus components? Because beyond just even the growth piece, it also has a component of driving mix shift into your gross margins as well. .

Yes, that's right. Well, I think the -- both have got a massive amount of white space, quite honestly. I think just because of the price points, how many people there are that are going to decide to suddenly spend $3,000 on building a gaming PC. We've typically pegged that market in other words, the self-built PC market at a 5% to 10% growth per year. And I think it's reasonable to expect that in the next couple of years and further on out, there's plenty of market availability. It's just the amount of people that have to step up and decide to spend that sort of money. Now the easier market, which is peripherals because most peripherals, you talk about $100 ASP, and in fact, entry level, $50, so very easy to get into. I think that's got a much high capability. Historically, that was running at about 15% a year. And then as I said, in -- during the pandemic, 100% growth, I would expect that to return to a 15% growth. And streaming is a slightly difficult one to say because there's a lot of people that bought streaming gear for teleconferencing, just Zoom and Teams and stuff in the last couple of years. And we don't really know when someone buys a camera, exactly what they're going to do with it. But we do think that's a continuing growing trend A lot of it depends on what platforms are available and how easy it is to make money. I mean obviously, everybody 2 years ago, we talked to teenager, everyone wanted to be a YouTube star. And I think now people have realized that a lot of them are not going to make any money. So -- but it's still a great something to do to share video content with friends. So I think the peripheral in general, peripheral market across that area, I think 15% is the historical numbers, and I wouldn't see any reason why it wouldn't change long term. As I said, there's when you think about a 1.6 billion gamers, and we think about 150 million people are actually buying peripherals now. There's a huge white space. And obviously, a lot of that in Asia where you've got low ASPs. But what we've seen in the last few years, the biggest growth has actually come from the U.S. and from Europe. And even there, there's a massive white space. So I noticed -- I think in 2020, I saw an incremental 6 million headsets sold compared to the previous year. And that's out of the estimates, I mean 200 million gamers in the U.S., something like that. So you see there's a lot of white space available.

Okay. Speaking of the streaming side, you did -- you have the stream product, you've announced the Stream Deck marketplace. Maybe talk about how you think that could evolve in terms of an opportunity for you at the company.

Yes. Well, I think it's super exciting, right, because we've now enabled -- and the marketplace just so everybody understands, is we've created very much like an Apple marketplace where we're allowing developers to put Stream Deck plug-ins onto the marketplace. And very soon, we'll be switching it on so that they can actually sell, at the moment it's all free. But we'll have people sell products and then we obviously take a cut of that revenue. So that gives us a whole new stream of revenue at obviously very high margins. The applications of Stream Deck are still very much untapped. I mean when Stream Deck was launched and the reason it was called Stream Deck, it was designed as an extra programmable keyboard. And for those of you that haven't seen a Stream Deck, it's a device that's got a number of keys. Under each key is an LCD display, and you can program that to have any icon you want. So for example, you may have one button that says Live on Twitch and there's a little twitch logo and just press that and off you go. Another one could be lights on/off, another one could be mic mute, and so if you're streaming, you want to be able to quickly glance over. You may have one button that just says, thanks for the tip mate, if someone tips you in the stream, and it automatically just sends a text. Now that's for scheme streaming. What we found is there's a lot of other things that people like to do. So for example, Teams, we just did a collaboration with Microsoft on Teams where we now have a Teams plug-in so it has all the things you'd expect to have in conferencing. So raise your hand, share, Zoom and go live on Zoom, join a meeting. So these are all just simple tasks that it's -- sometimes when you're on a Zoom call, you're trying to share and everyone's scrambling around trying to find the buttons and windows, much easier to press a button. So we've had people do pretty extensive plug-ins for Adobe for some of the creative suites. We've even got sort of an accounting wiz that's done XL macros on a Stream Deck. So I think what we've realized there is we've been super successful in game streaming and now we're trying to roll it out to both SMB and other specialist consumers that are doing some sort of creation or complex task.

Okay. Understood. You talked a little bit earlier about how mix shift can have a flow through into margins. But looking longer term, maybe talk about your longer-term margin targets in terms of where you want to get to, how much of it are elements of inside your control versus elements of mix and growth that are a little bit outside your control? How to think about the trajectory to those margin trends?

Well, I think that the -- obviously, we've had a -- from a margin standpoint, it's been a difficult 2 or 3 years because we've had all sorts of supply chain issues, incredibly expensive containers, just bringing things in from China. Most of that has been resolved now. So we're back to kind of a normal cadence. What we -- the expectation is that in the components area, on a gross margin basis, we should be able to run up to sort of the high 20s. And in peripherals we should be able to get into the mid plus 30s. And so that's why, as you say, in the mix shift, as we -- because peripherals as a market is a high-growth market. As we increase the amount of our business that's in peripherals compared to components, we'll just steadily see the margins go up overall. And our OpEx at the moment is we've got sales force around the world. We've got marketing people. So the OpEx does not need to go up conventionally, so we should be able to deliver a higher percentage EBITDA.

Okay. Yes. You talked earlier about M&A. Maybe in the last few minutes, we have just elements of helping people understand how your M&A strategy fits in to the broader goals around growth and competitive intensity in the industry, and then we'll dovetail into talking about wider capital allocation. But start with M&A and what you've learned from what you've done and how the M&A strategy continues to evolve?

Yes. So when we look at M&A, the first thing we're doing is thinking about which markets we want to get into. And then which product lines. So if we don't have a product line we've got 2 choices. One is to go from scratch. And that can take a while. We've found that it takes a few years to get credibility in the market and go through all the kinks and get a really successful product out. Or you can buy your into it. And the advantage of doing that is you also the smaller companies kind of have an acquihire effect where you're hiring the product experts as well as the brands. So that's the first way we think about it. And pretty much everything we've acquired has either been to expand the product catalog, or we also are thinking about direct-to-consumer. So we've historically been a channel company with the sales through in this country, Amazon and Best Buy. It used to be Fry's but of course, Fry's is a bygone. Most of the companies we're buying now are 100% direct-to-consumer. And a lot of that is because of the size of them, if you start a new company now in hardware, then what you do is you sell direct-to-consumer and you sell through Amazon Marketplace. And so what that does is it increases our direct-to-consumer business a lot more. And the reason that is important is that having a direct connection with the customer is super important, obviously, for marketing purposes and just for feedback. You don't really get a lot of direct-to-consumer interaction through Amazon. I mean they don't give you maintenance and everything. So that's super important for us. And we've also [indiscernible] with the setup we have, I mean we have expert sales and marketing people throughout the world. Usually for a company that we buy, the first thing we'll do is look at the product portfolio and say okay, let's figure out which product we want to put into Best Buy or Amazon and we can do that just mechanically. Small companies, if you are under $50 million of sales, it's difficult to even get a meeting with Best Buy or Amazon. And so yes, so that's where we can really help them.

Okay. So in the last few minutes we have just bringing it all together, when you look out over the next 12, 18 months, what are your key priorities in terms of either allocating capital, executing on the business and sort of navigating through the broader environment you see in front of you? .

Well, look, we're cash flow positive. We're profitable pretty much every quarter. I think we've had 1 quarter last year where we weren't profitable going through inventory adjustments. So cash flow is pretty straightforward. And it's quite simple. We either use cash to do M&A or we pay down some of the historical debt we've had. And at the moment, we're doing both. We don't -- what we found is it's easier to do small M&A and have them be successful, and I'm talking about sub-$50 million purchases. And so we can do that comfortably out of cash flow at the moment. Unless I get to the point why I find more M&A opportunities than we have cash, but I think we have $150 million of cash on -- sitting there at moment. So that's basically the 2 things we're looking at. And obviously, as we grow, we'll generate more cash and pay debt down faster and hopefully do it at the same time.

Okay. So we're clear, well, Andy, thanks so much for being part of the conference. Please join me in thanking Andy and the Corsair Gaming team for being part of the conference this year.