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

Good afternoon and welcome to Corsair Gaming's Second Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. [Operator Instructions] With that, I would like to turn the call over to Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you. Sir, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ended June 30, 2024. On the call today, we have our Corsair CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights from the quarter. Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company, but are therefore forward-looking statements. Our actual results may differ materially from our projections due to number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Note that until our 10-Q has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release we issued after the market closed today. With that, I'll now turn the call over to Andy.

Thank you, Ronald, and welcome everyone to our earnings call. Q2 is always the lowest revenue quarter of the year for us and this year is no exception. However, current macroeconomic trends and lengthened refresh cycles have caused this quarter to be weaker than expected. In our 2 business segments, the Gamer and Creator segment showed good growth with revenue up approximately 20% year-on-year. We've launched some exciting products over the last 9 months which have increased our footprint and market reach. This includes our K65 wireless keyboard, which quickly became best-selling keyboard in the U.S. according to third-party data in Q2. The gaming components and systems segment, which makes components used for self-built PCs and also full gaming systems was a different story. There we see market dynamics where incredibly exciting new games and gaming hardware technology is on the horizon, but not here yet, which is causing many consumers to hold off with upgrades or new builds. We saw a dip in this components market of approximately 15% year-on-year and on top of that, some ASP pressure and channel inventory reduction that altogether led to a year-on-year drop of 32% in this business segment. To expand on the market trends and conditions, it's helpful to put a 5-year lens on recent activity. We went through a surge of activity during the COVID lockdown, where a third-party data showed that the demand for gaming headsets approximately tripled and the self-built PC market approximately doubled. Two years on, having emerged from the lockdowns, the gaming headset market, which is the best indicator for peripherals, is now roughly double the size it was pre-COVID while the self-built PC market, which we can see from third-party data on cases and power supplies, is roughly flat to pre-COVID levels. Refresh cycles are clearly lengthening on high-priced items like $2,000-plus gaming PCs. We see GPU cards, which used to be on an 18- to 24-month refresh cycle have now moved to 24 to 30 months and some highly anticipated more complex games like Grand Theft Auto VI have been pushed to 2025, while others like Call of Duty: Black Ops 6 are now expected to be released very soon this year. We think that our historical view of a 3- to 5-year refresh cycle may now be looking more like 4 to 6 years in these current economic conditions. Also weighing on the market is the fact consumers are acting with caution and are getting used to July Prime Day. As a result, sales in the immediate months before Prime Day appear to drop. And as a quick preview, our Prime day sales in July were quite successful with most categories overperforming compared to last year. Looking at an overall view of the gaming market, we see that the installed base of gaming hardware post-COVID is at an all-time high. Gaming airs continue to rise generation-by-generation and incredibly exciting new games and new AI pack gaming technology are around the corner. In fact, the gaming hardware space looking into 2025 has never looked more exciting. AI continues to move into every piece of gaming hardware as we'll be able to use technology to make devices more adaptive and able to customize their settings to a gamer's playing ability. And we expect to see new generation GPU cards within the next 6 months. In our Gamer and Creator Peripherals segment, as I mentioned before, we are seeing very good growth with revenue up 19.6% year-over-year. This is the third successive quarter of high-teens percentage growth. We are benefiting from a slight improvement in the overall market, combined with our success entering new parts of the market, which will drive our long-term growth. We intend to continue to grow the Gamer and Creator Peripherals segment organically as well as with strategic acquisitions. We expect this business will become larger than our traditional components business within a few years. This year alone, we launched teleprompters, PC controllers and mobile controllers as well as many other innovative new products in the existing categories. We also recently announced our entry into the Sim racing market with products which we recently showcased at COMPUTEX. Separately, as we noted in today's earnings press release, we remain interested in the Sim racing brand Fanatec, owned by Endor AG. And though we were disappointed to see the company file for insolvency, we are still hopeful that we can acquire this company. Moving on to our components and memory businesses. We continue to dominate the market with leading market share in most categories. We intend to continue that trend while running these businesses as efficiently as we can from a cost standpoint, while we wait for the market to recover and return to growth. Overall, our long-term fundamentals remain strong and we continue to lead. We're positioned to benefit from a strong refresh cycle when the new GPUs launch later this year and we are excited about continued strong growth in our core Gamer and Creator Peripherals segment. Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead.

Thanks, Andy, and good afternoon, everyone. This quarter was particularly challenging due to the lower-than-expected demand in the high-end gaming components and systems market, where we have a leading market share. This had a significant impact on our profitability due to the lower-than-expected revenue and our operating cost base not yet being adjusted. It also had an impact on cash as we paid for inventory that has not yet been sold. However, as Andy discussed, we continue to expect a better second half due to normal seasonality and our new product introductions. To partially mitigate the near-term impact of lower revenue, we implemented additional cost-saving measures in July and we'll continue to reduce operating expenses were needed to better align with the reduced sales levels in the short term. In terms of the specifics, Q2 2024 net revenue was $261.3 million compared to $325.4 million in Q2 2023. For the first 6 months of 2024, net revenue was $598.6 million from $679.4 million in the year ago period. European markets contributed 33% of our Q2 2024 revenues compared to 34.3% in Q1 2024, while the APAC region was 10.9% of our Q2 2024 revenues compared to 13.8% in Q1 2024. Turning now to our segments. The Gamer and Creator Peripheral segment contributed $94.2 million of net revenue during the second quarter compared to $78.8 million in Q2 2023. For the first 6 months of 2024, gamer and creator peripheral segment revenue was $201.2 million compared to $167.7 million for the first 6 months of 2023. The Gaming Components & Systems segment contributed $167.1 million of net revenue during the second quarter from $246.7 million in Q2 2023. Memory Products contributed $81.8 million in Q2 2024 compared to $108.9 million in 2Q 2023. For the first 6 months of 2024, Gaming Components & Systems segment revenue decreased to $397.4 million from $511.7 million in the first 6 months of 2023, with revenue from Memory Products decreasing to $206.7 million from $240.2 million. Overall gross profit in the second quarter was $63.1 million compared to $82.8 million in Q2 2023, reflecting the lower revenue level and a 1% to 2% margin impact from fixed costs allocated over lower-than-expected volumes. Gross margin decreased 24.1% compared to 25.5% in Q2 2023. Overall gross profit decreased to $149.7 million for the first 6 months of 2024 compared to $168.2 million in the first 6 months of 2023. Gross profit in the Gamer and Creator Peripherals segment was $35.7 million compared to $25.5 million in Q2 2023. Gross margin was 37.9% compared to 32.4% in Q2 2023. We're pleased to see the continued rebound in this business and believe we're on track for further improvements, while higher sales volume continues. The Gaming Components & Systems segment gross profit was $27.4 million compared to $57.3 million in Q2 2023, reflecting the lower sales volume. Gross margin was 16.4% compared to 23.2% in Q2 2023. Our Memory Products gross margin in this segment were 11.5% for the second quarter compared to 14.6% in Q2 2023. Second quarter SG&A expenses were $70.4 million compared to $70 million in Q2 2023. Second quarter R&D expenses were $17.4 million compared to $15.6 million in Q2 2023. This reflects our investments in support of our expanded product line and new areas, including mobile controllers and Sim racing. We expect R&D to decrease in Q3 given the number of new products we have already launched in 2024. As additional color, we are executing on cost savings and took additional action in July, including the reduction of approximately 100 employees and will reduce some external expenses, which will lower operating expenses in the second half of 2024. We remain committed to controlling operating expenses while continuing to support growth in our Gamer and Creator Peripherals segment which has higher operating expense demands for R&D and marketing. GAAP operating loss in the second quarter of 2024 was $24.7 million compared to GAAP operating loss of $2.7 million in Q2 2023. Second quarter adjusted operating loss was $3.8 million compared to adjusted operating income of $15.9 million in Q2 2023. Adjusted operating income was $11.6 million for the first half of 2024 compared to $34 million in the first half of 2023. Second quarter net loss attributable to common shareholders was $29.6 million or $0.28 per diluted share as compared to net income of $1.1 million or $0.01 per diluted share in Q2 2023. On an adjusted basis, second quarter net loss was $6.8 million or $0.07 per diluted share compared to an adjusted net income of $9.8 million or $0.09 per share in Q2 2023. For the first 6 months of 2024, adjusted net income was $2.7 million or $0.03 per diluted share compared to $21.8 million or $0.20 per share in the first 6 months of 2023. Finally, second quarter adjusted EBITDA was a loss of $1.2 million compared to a gain of $17.8 million for Q2 2023. For the first 6 months of 2024, adjusted EBITDA was $16.8 million compared to $38.3 million in the year ago period. Turning now to our balance sheet. We ended Q2 with a cash balance, including restricted cash of $94.6 million. We continue to maintain a healthy balance sheet with sufficient cash to fund the development of our expanding product portfolio. We expect to further reduce inventory during the third quarter as we move into the traditionally stronger second half, which will also generate additional cash. In particular, we expect to set on inventory that we ordered based on higher expected demand. This is concentrated in components inventory, which has a longer technology refresh rate and we anticipate selling that inventory in the second half and turning it into cash in Q4 2024 and Q1 2025. We ended Q2 with $180.9 million of debt at face value and our $100 million working capital revolver remains undrawn and fully available. Overall, we expect liquidity to remain excellent for the rest of 2024, allowing us to be flexible as opportunities present themselves. In terms of the full year 2024, we are updating our previous outlook to reflect the market softness Andy discussed earlier. We now expect total revenue in the range of $1.25 billion to $1.35 billion; adjusted operating income in the range of $48 million to $63 million and adjusted EBITDA in the range of $60 million to $75 million. With that, we're now happy to open the call for questions. Operator, will you please open up the call for Q&A?

[Operator Instructions] Our first question comes from George Wang with Barclays.

Firstly, just on the self-built DIY PC for memory components. You guys talked about kind of recovery pushed out in terms of the refresh are now 4 to 6 years, but still expecting GPU refresh in the next 6 months. Can you talk about kind of potential for further delay? Or you guys are quite confident it should be on the horizon? Just maybe you can give a little bit more color just on how you forecast potential downside or given the macro? Or do you think given historical presence and the data you are seeing should be relatively in short order?

Yes. So 2 things on that. One is, obviously, we're privy to confidential information from our partners that I can't share. What I'd say on the standard release of cards, the market is all kind of agreeing. The buzz around the market is that the new cards will come out either very late this year or early next year. So that's out there. Now what will that do in terms of buying activity? Clearly, the -- every 2 years up until now -- or every 18 months or 2 years, NVIDIA or AMD has launched new graphics cards. So if they launch in Q1, that would be more like 30 months. So that's a delay. Now the second thing is what do we expect that refresh cycle to look like? We are pretty convinced that a refresh cycle after COVID, where the PC component business basically doubled, has to be followed by an echo of that Q-surge. For an echo not to occur would mean that all the people that came into the market to buy -- new people that came into the market to build gaming PCs, which we think was almost the same number that previously existed, all those would have to go away and not ever upgrade, which is we don't believe that scenario. So we're pretty sure it's going to be a refresh, a strong refresh next year. And obviously, once we get into new graphics cards at the higher end where people are using these cards to build $2,000, $3,000 machines, that is much more where we operate and we have a high market share.

Okay. Great. Just a second quickly follow-up, if I may, just on the peripheral creator business, it's nice to see almost 20% growth year-over-year with nice margins. Just curious how sustainable it is? And from a high level in any latest updates in terms of the consumer as it relates to the peripherals? I mean, do you still see more white space to drive up the ASP over the next few quarters?

Well, yes. So actually, this is a very interesting question. And I'll take in a few different parts. Firstly, the overall peripheral business is twice the size of what it was pre-COVID. So if you look at the headsets, which is the kind of the bellwether of the gaming market, it's first thing gamers usually buy. The number of headsets that were sold in the COVID period tripled from pre-COVID, so 2019 to 2020. And at this point, it's still 2x. So that's a healthy market that's growing there in terms of number of people that are getting into gaming and buying gear. Now this year compared to last year, the market has been relatively flat. But what we've seen in general is that there is -- the market is bifurcating a little bit. And so there's a fair number of very low-end peripherals at low ASPs, which we really don't participate in. The ASPs from the major suppliers, you know who those are, those ASPs are typically going up. And so I think this is something that I talked a lot about in -- when we did the IPO that I thought there was a lot of expansion possible as people have been gaming for a while are happy to pay more for products with extra features. And that's the same we've seen in any enthusiast type products, whether it be skiing or golf, people as they get older by more expensive gear with better features.

And the next question comes from Colin Sebastian with Baird.

Andy, the comment in the release about the gamer and peripheral segment perhaps becoming larger than components over time, I mean, that was -- that's an intriguing comment. I guess, maybe if you could walk us through that dynamic in terms of maybe what you see as normalized growth rates in both sides of the business. And maybe how that's informing your product development as you think about the next few years? Then I have a follow-up.

Yes. Well, look, first thing, this has always been our plan. And just from the pure math of it, we have very, very high market share -- well, let me start at the growth numbers. So we've seen historically because we've been doing this for a long time, right? We've seen historically 5% to 10% market growth on the gaming PC market. In other words, those people building $2,000, $3,000 gaming PCs. But we've seen 15% market growth on peripherals and this is over the sort of a 10-year period. Now that's obviously been shaken up a little bit by this explosion in COVID and now we're on the back side of it still. So that just gives you a sense of the market dynamic. And so we're still seeing generational shifts of people doing more and more gaming. In other words, Gen Z gaining more than millennials, millennials are gaming more than Gen X and the sort of thing. So there's more and more people gaming. And the entry point is always a headset or a gaming keyboard. In terms of white space for us, we have a very, very low market share in peripherals and we have very high market share in components. So what that means is that we would expect, as things move forward, we obviously try and get more and more market share. But realistically, we will grow at or slightly above the growth rate of components because we already have an extraordinary market share. With peripherals, we have so much space to grow that it wouldn't be out of the question for us to double that size of our business in a few years. And on top of that, this is where we're doing all the acquisitions. So we're looking around at all the small companies that are in the peripheral space or the enthusiast space. And in general, there's a lot of sub-hundred million dollar companies that we can absorb and run much more efficiently than they can on their own. So that's kind of the game plan. So a combination of organic growth and acquisitions, I think, will grow that. We're already at this point. This year, we already expect that we'll make more gross margin from our peripheral segment than our components segment. And so that's where we are putting most of the resources in. It obviously takes a lot more R&D and marketing to be successful in the peripheral space where the products are much more complicated. There's a lot of microcontrollers we have. So that just gives you a sense of where we're allocating both acquisition dollars and OpEx dollars to grow that segment.

Okay. And then, Michael, I guess, in terms of understanding the pathway back to growth, maybe the shape of Q3 versus Q4, I guess, looking into Q4, what are the indications you're seeing around demand, your ability to meet that demand and then perhaps the role that promotions will play in driving retail sell-through this year from what you're able to gather at this point?

So we continue to expect to have the normal seasonal effect with the second half bigger than the first half and around the same sort of numbers we've talked about in the past. I mean, roughly, you could say 55 back half, 45 first half approximately. Usually, Q3 accelerates off of Q2 and then Q4 is even bigger. So that tends to be the pattern that we see. We don't expect anything particularly different this year. In terms of supporting growth, I mean, in my comments, we certainly have inventory ready now. So it's not a shortage that we have there. New products, whenever they get to the market and sufficient amounts to support demand as well. So I don't think it will be an issue for us to support demand for the second half of the year.

[Operator Instructions] Our next question comes from Drew Crum with Stifel.

So on the peripheral segment, Michael, anything to the step down in gross margin in 2Q versus 1Q? And is 40% -- the 40% you achieved in 1Q too optimistic for '24? And on the Sims racing products that you launched back in early June, any early read, just the receptivity you've seen for that line? And then I have a follow-up.

I'll let Andy talk about the Sim racing products a little bit. But just in terms of margins and things, somewhere around 40% is achievable. Q2, normally, we just have lower unit volumes. So there's a little bit less fixed cost absorption. A little bit of mix difference as well in the second quarter, but it was otherwise relatively similar to the first quarter, which had the 40%. Promotional activities usually step up during the Christmas selling season in Q4. But we haven't seen anything abnormal. I mean, the indications from the Prime data just passed is that people will discount, but they weren't extreme like they were in previous years. So it was more like normal discounting that was going on. I'll let Andy talk about the Sim racing product.

Yes. And I'll tell you also, Drew, what we've spent the last couple of years retooling most of the base technologies in our gaming peripherals. So our keyboards today are looking quite different from the keyboards of 2 or 3 years ago when the trends were slightly different. And one of the things we really concentrated on was how to get the cost structures right so that we could get back to target levels. So that's the first thing. Sim racing, the -- as you probably know, we brought out a -- we showed a prototype essentially at COMPUTEX of a chassis. Everyone saw it, loved it. That's not due to go into production later. And I think as you know, we're also in the process of trying to acquire this company Fanatec from Germany. So we're all in on Sim racing. And I think next year is going to be a big year. But that market is strong, growing, all the fundamentals are there. This is something where in an environment where people's budgets are a little bit stretched, it's actually a lot cheaper for people that like racing to do Sim racing at home and practice on tracks rather than take the car to the track. And that with the Drive to Survive success and F1 success in the U.S., there's a lot of people now getting into this hobby. So very exciting market.

Got it. Okay. And then on the components business, you did discuss the new GPUs launching late in calendar '24 or early calendar '25. What is factored into your guidance for '24 at this point? And does the timing have any bearing on 4Q? Or does it not matter? Is the sale of your products coincident with the launch of the GPUs? Or is there a lag effect?

Yes. It's a complicated question. What tends to happen, what I've seen in the past is that as soon as the specs are out and people understand what the future looks like, then people make buying decisions. And there's actually a lot of people who wait until we see the specs of the new cards and then perhaps go back and buy the previous generation because it's a much better deal. So there's a little bit of that. You get most hesitation in the market before any of the specs come out and this is the situation we're in now, where everyone's got the idea that -- I mean, just because the technology that's used in AI chips is going to move on to GPUs. Everyone's pretty anticipating great things from the new cards. But that tends to drive it. Now there are a lot of people and we saw this during COVID, the first thing people tend to do is they buy a case to start the build. And some of these builds -- some people spend a weekend doing it. Other people spent 3 months. So -- and the last thing you tend to put in is a graphics card. So yes, we would expect to see people sort of as we get towards Q4, once the specs come out and once people decide, okay, now it's time for me to build a new machine, there's a good chance that we can start selling cases and some of the other products before then.

[Operator Instructions] Our next question comes from Doug Creutz with Cowen.

Just looking at your Components and Systems margins, I think they were the lowest they've been in about 5 years. Could you talk about -- elaborate on that maybe and talk about what kind of margin recovery you are baking in for the rest of the year?

Well, I think there's 2 things. I mean, Michael mentioned this earlier. There's a certain amount of fixed overhead that we have that applies to margins that with a much lower revenue base, it does move them down. But yes, we are having to retool some of these products, especially in the power supplies and in some cases -- in some issues cases to meet the current trends and demand. So there's a little bit of inventory clear-out of old products in Q2. So yes, I would say, I would not expect the margins that we're seeing in Q2 to be repeated in 3 and 4. I would think we do much better.

There's also a little bit of a shift to lower ASP products for us if we make lower margin percent on the lower ASP products in general and higher margin percent on the higher ASP products. So as we move closer to the end of the year and the newer graphics cards start driving more of the buying pattern, the ASPs should move up again and that should help margins as well.

And the last question comes from Aaron Lee with Macquarie.

Maybe a quick one on the competitive environment. Can you just comment on what that looks like currently? Have you seen any competitors behave irrationally, just given the softer-than-expected market conditions in the first half?

Well, the major competitors know in general, I mean, obviously, there's always somebody that discounts heavily, but we just went to Prime Day and we didn't see anything insane. I will say that on a general basis, the -- there's a lot of new brands showing up from the factories in China where China is definitely a weaker market than it was, higher unemployment, economic situation is a little bit worse there. So there's sort of empty factories that need to be filled up. And we do see quite a lot of new brands showing up, especially on Amazon Marketplace at fairly reduced prices. So that's the main thing I'd say. But this is where I was sort of talking earlier a little bit about ASPs of headsets. We are seeing that the market is somewhat bifurcated. So there's a big chunk of very, very low-cost peripherals out there now. And then in general, the major manufacturers, ourselves, Logitech, Razor, et cetera, are managing to raise ASPs and do pretty well.

Got you. That's helpful. And then a quick follow-up. You recently announced a partnership with TD Synnex, which I imagine is geared towards peripherals, maybe something like your Elgato products. So correct me if I'm wrong there, but can you just talk about that partnership and what it can mean for your business?

Yes. It's really around our B2B group. So we've got a small B2B group where we're seeing demand from broadcasters and universities and that sort of thing. Yes, the most promising product lines that we are selling -- actually, the most things we sell out of that group are systems, complete PC systems and Elgato gear. And adding TD Synnex, we added CDW last year. And so this is just putting together the whole channel so that business can grow.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you, everyone, for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department. And we look forward to updating you next quarter. Thank you and have a good evening.

Thank you, everyone, for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department. We look forward to updating you next quarter. Thank you and have a good evening.