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

Hey everybody. Thanks for being here. It's my pleasure to welcome Michael Potter, CFO of Corsair. My name is George Wang, I'm the [ mid ] analyst for IT hardware here at Barclays. So to start off, Michael has prepared a slide deck. He's going to run through it first.

Well, thanks, George, and thanks, everybody, for coming here. I actually met George for the -- in person for the first time just before this talk. So it's one of the benefits of going to a conference you get a chance to do that. So Corsair Gaming has been around for about 30 years now, very close to 30 years. And we have about close to 30 product lines we do now. So I don't know if it's one product line a year that Andy has targeted, but that's what we arrived at right now. We offer a full suite of products for PC gaming and streaming. And this picture tries to show all the different items. And I can actually make the joke now that we even sell the desk, the things are sitting on now. So we have a very good new product line of gaming desks, if you happen to be looking for that as well. Our business is sort of 2 big main segments. The first is components and systems. That would be the white PC that's on the right side of the slide. And it's basically everything from the case in is components and systems. And the stuff that's outside the case is our peripherals and streaming our business. And so next to the computer, you'll see a whole variety of different products. There's traditional peripherals, which is keyboards, mice and headsets are there. The Elgato products which are used for live streaming, so we say streaming, we mean live streaming or for recording for YouTube for streaming later, but that type of thing. We have gaming controllers. SCUF, which was an acquisition a few years ago, they traditionally made it for the console space, and we just introduced a PC gaming controller there. And then a few other different items there, including even the gaming chairs. For the revenue and margin trends, we had a big jump during COVID time. We're about $1 billion before COVID and then jumped during COVID and then came down afterwards. Gross margins for Peripherals and for Components & Systems. They sort of came down a little bit when business was weaker last year, but they've come back quite nicely. And the trend, and I'll talk about this in a slide coming up, if you kind of look past the bulge and talk about what the bulge really means, it's actually a very, very good story pre-COVID to post-COVID. And the most important thing to know about Corsair, if you're looking at an investment place to go into it, it's got solid growth with really good backing behind it. There's about 1.6 billion of casual PC gamers. This is somebody that every once in a while plays a game on whatever PC they have. And then there's about 160 million, this is globally, regular PC gamers. So somebody that plays the game a little bit more often on the computer, but in terms of the people that really spend money on gaming gear, it's about $28 million. So we talk about the white space we can grow into. Anybody that's used purpose-built, good gaming gear that likes the game, at least the 160 million people, it's important to them. They don't go back. About 50% of the TAM is spent by that small enthusiast group. So there's lots of possibility and lots of white space to grow our revenue into and a lot of people that haven't been fully introduced to exactly how good gaming gear could be. The number of gaming hours have really increased, and this is kind of like, if you ask somebody who's younger today, do you game? They look at you like you're from another planet, like why would you ask such a stupid question? And almost everybody that's younger, games. The amount of hours they spend gaming is fairly high compared to some of the older generations. Now I feel like Gen X and I certainly spend more time gaming in a week than what this slide shows, but maybe I'm somebody who is pulling the average up. But the -- as you get younger, people spend more and more time, and it becomes a main hobby and a lifestyle. It's not just like gaming. Being a gamer is part of how they identify. And this goes back to that discussion, this slide here, is talking about comparison to during the COVID period and not during the COVID period. So in Q3, this is total market growth, not Corsair. It basically was flat year-over-year for the first time since sort of the COVID bulge that ended and then business has flattened. But if you look from 2019 to today, there's actually been huge growth. So over 50% growth in our business from before COVID to after COVID. And we asked all the time, was COVID just a pull-in of your existing customers? And that definitely is not true because if it were true, we'd have almost no revenue today. And actually, our revenue is up 50%. So what it did do is bring a lot of new customers in and they're buying our gear now. And once they start buying our gear, that continues. So we're quite positive about that. We did a survey somewhat recently, David Cole and Associates did it. And we're sort of in the sweet spot for people that built their first systems in 2020, 2021, they're likely, this year and next year, in particular, to be building a new system. So that should be a decent tailwind for us. The top 20 games, like the games this year have required more hardware, which is pushed for more upgrades, which helps us, and they've had a lot more hours of gameplay for the games, and that means people are spending more time in front of their computer gaming, which also pushes people towards a buying decision. For our product launches this year, keyboards, mice, headsets has been broadening our existing product line. So really offering more options, mainly wireless and more radios. So headsets, we offer a lot more headsets with Bluetooth, that lets you use it with your phone or with some of the consoles. And for mice and keyboards, either wireless or in the case of keyboard, smaller form factors in wireless as well. So last year, when times were tougher, we didn't cut back on R&D and new product development at all. So we've had a really good release suite of new products this year. We're really looking at doing more customization, there's more margin and more possibility. The recent acquisition of Drop is a customized DIY keyboard. But even in our existing product lines, we offer very specific color patterns and ways to customize the look of our products. Brand new for us is the Elgato Marketplace. Elgato has a leading product called the Stream Deck, got about 2 million total installed base for that right now. It's only been out for about 1.5 months, and we got about 200,000 users already registered for Elgato Marketplace. You can buy apps to make your Stream Deck better and make it do even more. And we have about 250 outside developers that are selling products on it. We didn't really advertise or do much for the launch, and we're already over 10% of our installed base already. So that could be quite good for us. iCUE LINK is an example of the innovation Corsair brings. We really improved wire management and control with a microprocessor in each element. Makes building a system much easier and much more just like a clicking-together LEGO-type experience instead of being difficult to do. So it broadens out PC building to an even bigger base. And that is a very quick overview of a lot of new products, and I'll let George ask me his questions. I tried to go as fast as I could, so you'd have more time for questions.

Thank you, Michael. That's super helpful. Yes, just to get started, maybe you can kind of run through some of the Corsair story differentiation, kind of what you bring to the table versus other PC makers.

So the main thing that we bring is 3 decades now of quality and innovation. We really focus on what gamers and streamers need. So you don't see a lot of extra fluff, and make our products perform very well for a gamer, and we make it look good so that they feel good about using it. But we only put things in there that helps them do better and helps them win. Because we've been around so long and have such a good reputation for good products and good support afterwards. So if you have an issue or you want to augment to do more with your product, we have a big user community that's active, that suggests to people what they could do and then we also provide very good support. So that's probably the difference for us compared to other companies. It's our long track record of being a leader in this market and a leader in performance PC gaming and a leader in streaming as well.

Got you. If we were to take a step back, if you look at the kind of PC market, industry as a whole, like can you kind of run through some of the puts and takes and kind of how investors should, like a story, just from a kind of PC market standpoint? Maybe you can talk about across the component system versus the peripheral side of the story.

So I think, in general, just the growth, I mean PC gaming is a growth area, and gaming in general is a growth area. And it's an area that more people do and they spend more hours doing. And it's more of a -- almost a lifestyle or a sport choice. So instead of doing skiing, they PC game instead. So it's not just the actual -- like the functional part of the component, but how it looks and how -- what it sort of says about the person. So you want something and Corsair has it. It looks really good that functions really well. So I think that's a very key element of why. I think that the rest of it is just the white space that we've captured, the broad suite of products we offer and then the improving financial performance that we've had in that backdrop. You can see just a small amount of growth over last year. And not a lot of companies managed to grow over last year, but we did. And it doubled our EBITDA and moves us on a non-GAAP basis to profitability very quickly. So we have a very good company platform that provides these great products to the market.

Got you. Just in terms of what kind of external factors, like obviously, you guys are influenced by different factors. You cannot control, necessarily, in terms of the trip cycle kind of supply shortage [ versus ] cards and macro consumer spending. Can you kind of comment on macro, kind of what you are seeing? And if you go back over the last few years, maybe you can talk about just kind of cyclical versus [ secular holdings ], what goes there?

That kind of goes back to the second part of your question, which is sort of like how components and peripherals differentiates. So components and systems we have been competing in for longer, and we're the market leader in many cases. So last year, when we got the inventory under control, our competitors were a lot smaller. So what they did didn't matter as much to us. And that business came back to a much more steady stream growing business without excessive discounting in the marketplace. So that actually was a very stable business and growing business for us over the last year, and it was influenced by our one great new graphics card. So NVIDIA and AMD came out with a great graphics cards at the end of the last year, and that spurred new system builds. And the second was just more general availability of the graphics cards and other PC components compared to, honestly, it was much more a theory in cyber currencies and stuff that was influencing the availability during COVID. So once that sort of went away, when they changed the way they process it, things were much more available for our customers and they built more systems. In the space of peripherals, we're a leader, but we're not the leader. So we have a lot of market share we can gain, but we're also a little bit more subject to the outside conditions of what our competitors are up to. And unfortunately, our competitors did not react as fast as we did last year when things turned down, and they had more inventory for longer. They didn't slow down purchases fast enough. So when they went into the beginning part of this year, they were still excessively discounting compared to the normal discount in the first half of the year. We're a premium brand with premium pricing and we didn't have any inventory issues. We didn't have to sell things. So we didn't go in there and we purposely lost a little market share. Now that prices are stabilized, I think, and we have a chance to regain this market share. So on Components & Systems, maybe it's a 5% to 10% longer-term growth rate type of area. Peripherals, we think, is more around 15% for us. And that's because we can gain a lot of market share, and the market is still relatively new in terms of people buying gear in that space. So now that things return to normal, we think that maybe Q4 will be the inflection point where our peripheral business will finally grow year-over-year, where there was a lot of headwinds because of the inventory in the channel at the beginning part of the year. So that's kind of like the differentiation for it. We think there's more white space and more market share that we could grow in peripherals. So we have a higher growth expectation for it. It ties back the financial performance finally is that the margins are higher there. So as the margin -- as the amount of revenue grows and the percent of our revenue grows for peripherals, it will overall pull our margins up.

That makes sense. Just kind of segue into kind of the forward-looking kind of long-term model stays intact. You have the components also, you have the peripheral with higher, faster growth. And maybe you can sort of elaborate on accelerating the financial trend going forward, as various factors are getting normalized, kind of long term, you are looking at committing CAGR for the peripherals maybe kind of single to high single, mid-single to high single-digit for component systems. Maybe you can sort talk about kind of as we're lapping some of the headwinds with the COVID kind of bulge and things normalized, things should accelerate going forward.

I think that I talked a little bit about the reason why we can grow faster in peripherals. And obviously, that has a good impact on our financial performance. So if you just look at it, we were able to do more revenue a couple of years ago, with the base of spending in employees we have today. So for the next few years, as the revenue grows and we grew this year. So 2023 is, okay, growth has resumed and it should start trending over time to more regular PC gaming growth. We won't be expanding our OpEx as fast as the revenue grows. And the margin profile should improve. So we get more dropping to the bottom line more quickly. So we're quite confident we can get into low double digits EBITDA reasonably quickly as a percentage. And then we've been trying to get to low teens sort of a longer-term 5-years-plus-L type of thing. We talked about that a few years ago at the Analyst Day. So really, our growth rates -- our base growth rates for the industry and our targets overall for performance haven't changed very much. We got advantage of a lot of tailwinds of falling shipping prices and a more normalization of the channel over the last year. For the next few years, it's going to be capturing better ASP opportunities and really growing our higher-margin peripheral business, and that will keep lifting our gross margins overall. So that's sort of the backdrop on the financial things. The rest of it, I mean, we also can grow faster in a few areas through M&A, which I'll talk about, I'm sure, when you have a few more questions. But we do have a chance of growing organically. And we've got a very good track record in the past of good growth through M&A, small, but good M&A. So I'll wait until you -- I'm sure you have some questions on that near the end because I always get asked about that.

Got you. Yes, just it's a super good point in terms of the margin kind of shifting to the light and still whole portfolio shifts to higher margin peripheral business. It's one of the slides you alluded to, kind of the latest gaming type of releases, should they continue to drive kind of peripheral sales growth. So maybe can you double-click on the latest gaming title release, both so they have enough and also maybe a few more in the future, kind of how that sort of tied into faster and refresh for the peripherals?

Yes. So first of all, you need great games to actually want people to have great gaming gear. So it kind of is married, right? So if you have really good games and people want a game, they want to play them so they want to use the gear they have. What's happened this year is that the requirements to get the higher level of graphics and performance have jumped up a lot. Memory has pretty much doubled. It used to be 16 gig is enough, now they want 32. They want SSDs, so they're no longer loading from a hard drive, they want loaded from SSD. And the graphics hard requirement has jumped, which means the power and the rest of the system around it needs to be better as well. So that's been a trend for pretty much all of the AAA releases this year. I think the biggest performance push for next year is going to be the new Microsoft flight simulator, which is not enormous, and we don't make flight -- actual gear. But in terms of computer performance, that program has always really pushed the envelope for how powerful you need. This year, the other big trend for the games. I mean, I think the first big hit this year was Hogwarts Legacy and then Starfield was the latest one. All the AAA ones seem to have hit pretty well this year. They had a pretty good acceptance. Think Baldur's Gate 3 was a surprise hit. But nobody was like super surprised, it just did better than what people expected. There's just a ton of content in all these games. So people are spending 100-plus hours playing the game. So imagine if you have a keyboard or a mouse or something that you're not as fond of or you just have never bought one before, and you're spending a lot of time and one of your friends says, "Yes, you do a lot better with the gaming mouse." So that's what sort of drives the overall revenue growth that people spend a lot of time sitting in front of their computer playing the game. It's part of like -- they've devoted of that part of their life, it's important to them. So then they spend more money on the gear that goes with it. Sometimes you can point to a direct correlation, like when Fortnite came out a few years ago, headset TAM pretty much doubled, because everybody needed a headset so they could play Fortnite properly. The rest of it is just these great games, gorgeous graphics, good sound and you want the gear to go along with it to make your experience better. And you play 2 of the games that were good this year. It's 200 hours. I can't imagine somebody with a mouse they don't like spending 200 hours clicking away and not wanting to get something new.

Got you. Just staying on topic of peripherals. And I think so more sort of medium and longer term, kind of maybe you can talk about the kind of software services attached, kind of higher margin and also maybe some of the growth levers driven by Stream Deck and kind of B2B upside over the medium term?

So traditionally, the software, which is usually drivers and extra functionality that comes with the product and the computer hardware space has come with it. So when you buy a keyboard, if there's extra software you need to run like control the RGB, that's expected to come with it. So we have very good software that's well regarded. So that helps make the user experience better, and it's not an irritant to buying. In this case of something like the new Envision controller, the game controller that SCUF has, it's a PC gaming controller, it doesn't even work on consoles. It just works on PCs. Has a lot of macro functionality and extra buttons you can program, and the iCUE software that we've had to program and use our gear in the past works with it. A lot of people are not used to having software that's that good and that fine control. So they use our controller and they go, "Wow, I can almost replace the keyboard and mouse with this controller because all of the extra functionality I can do." That's an example of -- we have this great iCUE software that pulls all of our products together, synchronizes all the lights, makes it easy to use the features. You add a product like the controller on top of it. And we have this great software base, we can use it. Elgato is an even better situation. So when we bought Elgato a few years ago, I think it was like 40 software engineers and 1 hardware engineer because really for audiovisual, the software is the most important part of the product. That's why they can command higher margins because it's very hard for other people to have that base of great programmers that can make the really, really good gear. For the Stream Deck, it's a sort of a super macro keyboard is the easiest way to explain it. It's a very powerful macro-driving product with an LCD button. So you could see visually what each button does easily and remember quickly. You could actually write apps and it -- apps could easily be just icons on the screen or you can write like very well-written macros behind the scene that control Adobe Premier or Adobe Photoshop or Twitch or something. People are willing to pay for that because it really makes your life easier. We created a marketplace where if you develop the software, you could sell it. And some of the software we've developed, we can also sell. And it's just a question that we have about 2 million of Stream Decks out there. We want to get that to 5 million as quickly as we can because we think it will increase the base of people that will need these apps. Now there's 200,000 people already signed up for the store, and there's about 50,000 any particular week that are in there looking at stuff and kicking the tires and maybe buying stuff. We don't know how big it will be. Whether it will be called $1 million worth of revenue or $50 million worth of revenue, it's really hard because it's so new and it's something we haven't really done before. But we do know that it will increase the desirability of the Stream Deck product. And if it does become a hit, more and more developers are going to want to come in and it's sort of a virtuous cycle where the more developers offer good products, the more people want to buy the product, the more people want to buy the hardware that drives it.

Got you. That makes sense. In the last quarter, you guys called out channel inventory normalizing, much less promotions. I think that's a super strong data point kind of -- what are you seeing kind of heading into next year 2024? Do you think that, that should continue with much less discounting, kind of higher ASP, less promotional environment can be additive to the margin and the kind of overall dynamic for the industry?

Yes. So based on the discounting percentages that happened and how broad the discounts were during Black Friday, it looks like the peripheral space is back to normal. So there's always some specials during Black Friday, it's traditional, and it's what you do for your customers, who are the retailers and e-tailers, you provide some specials to kind of like draw people in. There wasn't crazy activity. Last year was very, very super low discounts, very broad. This year is targeted and not so low. So I think that's a sign. Now only one of our competitors really is public right now, and they've publicly said that they believe their inventory is finally under control, and the other one is not public anymore. We only can guess what's happening from the market. So I think peripherals, we're in much better shape overall. Now we were in great shape already, but now overall, the whole market is in better shape. That gives us the ability to realize the right pricing and to attract customers because we don't have to discount excessively to keep our higher prices still in range, and we don't damage our brand by excessive discounting. So we're quite -- we're much happier and I think we're in a much better position because of that.

Yes, I would be remiss not to talk about the capital allocation, as you alluded to earlier. Just maybe you can talk about with excess cash flow kind of as sort of these things normalize and how do you balance kind of doing some bolt-on acquisitions like Drop recently and also maybe paying down incremental debt?

Yes. So the first use is like cash for us, we look for growth. We are a growth company. So the first thing we think about a way to use the cash for, it's always going to be growth. For M&A, we're very straightforward with what we want to do with M&A. We're very good at buying smaller companies that have a great product and they're slightly profitable, but they can't grow fast enough because they can't get to the channel. So we're really good at taking a company like Elgato, who had amazing products and then bringing them into the channel and getting them very broadly distributed through Amazon globally, to bigger customers like Best Buy or MediaMarkt or Dixons or whatever we happen. So we're very good at taking the company of that size and making them broader and bigger. So we focused more on revenue synergy than cost-cutting. We find that cost cutting in a small company, I mean, you save a little bit of money, but it doesn't move the needle anywhere near as much as this revenue synergy does. Drop was kind of interesting. They had a good DIY keyboard, which our customer base, so we're in that space, liked. But they also had very good D2C software platform. I mean they were set up to be a broader D2C company. A lot of money had been spent and the team there gained a lot of experience in running that. So for a very little investment, compared to what was originally spent on them, we're able to bring that technology and the team in-house. And we also had this product, DIY keyboard, which we could get the revenue synergy on. So they were slightly unprofitable, which I talked about during the Q3 call. So Q3, Q4, it's about $1 million EBITDA headwind for us each quarter. But once we get past that, should be neutral and then growing reasonably quickly. And we've got this great team of very experienced people. Otherwise, for capital allocation, we spend very little on CapEx. We're very asset-light. We use ODMs for most of our manufacturing. Even our factory in Tao, which we do make products, very little spending on actual CapEx. Most of our CapEx investment in the last few years has been software platforms actually, not physical hard CapEx. So we don't spend a lot of money on that. So obviously, if we don't have an M&A opportunity today, and we're not spending a lot of money on CapEx, and we have enough cushion in case the world isn't as good as we hoped it would, so safety is taken care of, then we'll pay down debt. And we've actually -- I mean, we started off before the IPO with about $500 million of debt. Now we have just over $200 million worth of debt, and our net debt is almost 0. So I think that's something that we could save interest cost on, but we're in a pretty good position. So we don't have to be super aggressive to pay anything down.

Got you. So being a global company like Corsair, maybe you can talk about Europe. And obviously, Europe kind of as a percentage of revenue kind of around the 30s, give or take, some of the nuance associated with Europe versus North America. So maybe you can talk about your sort of mindset and strategy in other regions outside of the U.S.

So traditionally, we were close to 40% Americas, 40% Europe, 20% Asia, rough numbers. I mean we varied a few percent around that. When Russia invaded Ukraine, there was a big drop in Europe. U.S. is fairly stable. At the time, Asia was somewhat stable as well, but there was a big drop in Europe. Europe has come back. So the economies have strengthened, the initial shock of the invasion has kind of worn off, and it's come back. It's not quite where it was, but it's come most of the way back. If anything, Asia has been the weaker area right now. The economies in some of the big markets there are just not as strong. Coming out of the COVID, the very high COVID restrictions and stuff, the economies are suffering a little bit there. But we also noticed that in terms of who's willing to spend money on good gear, the ASPs in the U.S. and Europe, people are willing to spend money on that. A lot of the more developing markets, people are not willing to spend as much money on items. So whereas the total user base is higher, the amount of people willing to buy gear is lower. So we've actually grown -- even when people already thought it was saturated, we've grown very fast in the U.S. market because it's not actually saturated. There's so much white space and they're willing to spend so much more money. We've put our marketing and our product development efforts there. That said, there are a couple of markets in Asia we are targeting over the next couple of years. We're making a few product tweaks to meet some of the localization. Each market has particular desires for what they want a keyboard or our mouse or something to be. So we're making sure we have a good enough products so we can compete very rigorously in some of the very key markets there. So Asia should be good for us, but the U.S. and Europe are going to drive more of the growth.

Yes. So we have 1 minute left. Just curious if we have any questions from the audience, we can pass on the mic.

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I mean if you're bullish on gaming as a whole, everybody needs equipment to gear -- or gear to game on. And in terms of the company that's got the right products, it's been around for a while, and you can do research and see for a long time, we've been a leader. Corsair is a very good choice there. I mean there's a lot of reasons why gaming is a little bit more recession-proof. If you stay home, you tend to spend more time games. There's a lot of good reasons to like gaming just as a sector. But if you want hardware exposure, there's not a lot of choices. And for somebody who concentrates pretty much only on gaming, it's really only Corsair that's, I think, the choice you can make right now that's any size and scale and broad.

Thank you, Michael, for being here, and taking some time out to speak with us.

Well, thanks a lot, George, and it was nice to meet you in person.