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

Honor to have Michael Potter, CFO of Corsair. My name is George Wang. I'm the analyst of IT hardware at Barclays. So just to start off, maybe Michael, you can kind of run through the slide deck just to have an overview of the Corsair story.

Yes. It's not a very long slide deck. It's just to save George asking me the starting questions of who are we and where are we from. So this a quick showing of all the different products we make. Started just over 30 years ago, basically making high-end server memory. It was noticed by the overclocking and PC enthusiast community at the time that, that memory was really good to build very fast rigs that they're overclocking. And we just started serving that market more and more and have grown and quite expanded our product suite over the 30 years. So we sort of divide our business into 2 main groups. The first is Gamer and Creator Peripherals. That's pretty much everything you would plug into a computer. Now you don't plug our chairs into the computer, but it sits in front of the computer. So it's not inside. And we've done a fair amount of acquisitions actually in that space, which I'll talk about a little later. But we've grown both internally from things we've developed, and we've accelerated into a few areas like streaming and recently racing sim through acquisitions. The other part is the biggest part of our business, which is Gaming Components and Systems. That includes our Memory group. And that's -- think of everything inside the box, the case for the computer and inside goes into that group. To build a high-end gaming PC, we essentially make everything you would need, except for the GPU, the CPU and the motherboard. So those are the only things -- everything else in there to build your rig, we have. And we, of course, have a variety of different products. I wouldn't say we have any low-end products because that's not the market we serve, but we have a midrange to the high end depending on exactly how expensive or powerful system you want to build. One thing that's really key about Corsair is that we serve a really big growth market. So gaming and PC gaming and console gaming has been growing steadily. And as you kind of go through the generations, it starts getting silly if you ask anybody who's a little younger, I mean, I game. But if you ask anybody younger, do you game, they kind of look at you like are you dumb. Of course, I game. So there's a very big market of people, and they spend more hours during the week. So sort of as people are younger, they spend more hours and they grew up gaming. So it's a normal recreational type of activity. And that's really given us a pretty big white space to expand into. So there's actually the survey on how many people game versus how many people have actually bought gear. So the amount of people that bought gear compared to the people game is still relatively small. So there's a lot of room for us as awareness grows about what a difference the good peripherals make in your gaming experience. More and more people can buy and it gives us a natural market to grow into. As everybody knows, there's a GPU cycle. Now this has been kind of overtaken a little bit because of the AI applications, but originally it was designed for gaming. And there is a new GPU expected from NVIDIA sometime early next year. There's been no official announcement. But if you go to any rumor board, then it's very followed. So everybody is like hanging outside of board manufacturers in Asia and trying to get every scrap information they can. But expect to be very early next year. It's expected to be a launch. And what normally happens for us is that, that's an impetus for our enthusiast customers to build themselves a new computer. Because usually, there's enough of a generational change in capability with the new GPU, and it's an excuse and a reason to go build a new PC. And we tend to have a suite of new products all released right around it as well, always in mind that every generation seems to take more power and generate more heat. So a lot of extra innovations around cooling and such. So that's expected in early, early next year, and that should be a good tailwind for -- particularly for our Components and Systems business. The gaming and peripherals market is just steady growth. It's growing about 20% or so this year. We sort of expect that to be a 15% to 20% growth. And there's actually a good metric you can use to see how much the gaming market has grown. If you go from pre-pandemic to today, the headset market, the gaming headset market has grown about 70%. So that's actually a pretty good indication of how much it's grown in the last 4 or 5 years. There's been a lot of peaks and valleys and surges and inventory absorption and stuff caused by the pandemic. We're far enough past it now, and you can see there's been really solid growth in that. The other really good thing for Corsair in that space is that we don't have very high market share in the peripherals. We have good market share in some areas like streaming gear that Elgato makes, we have extremely high market share. But in general, the peripherals market, we have lower market share and highly regarded products. So we have a chance to expand much more rapidly in that space. The components and systems, we have anywhere from the 70s percent retail market share for gaming memory. And most of the other areas were between high 20s into the 40s in the main component space. So we're a little bit more around the growth of the overall gaming PC, whereas peripherals, we have room to grow market share. We've also been expanding the range of products we offer there. Recently, we offered -- we introduced this Call of Duty partnership. So the new Call of Duty Black Ops 6 game that just came out. We're actually a marketing partner. And we have capability within Corsair to put very easily like put color graphics and other extra details on our products. So for Call of Duty, you can get a full Call of Duty suite and not just like one mouse or something, but pretty much every single thing we do, you can get it on it. It's more of an awareness campaign. But for retail stores we're in, it lets us put a big banner, Call of Duty and then have our gear right with the banner and the extra attention. So it's been a successful partnership for us so far. And recently, we just had a couple of products we introduced in Apple stores. So a keyboard and a mouse has been brought into Apple stores. They really want a little bit more of a gaming connection with, I think, with the new Mac Mini launch. This picture here actually is a picture that they used to launch and introduce the Mac Mini. It's one of them that was in -- it's on the web page still. And you can see the little sailing ship logo on the keyboard. So that's one of our keyboards. So again, we're excited about that. And I think it's just a sign that when it comes to what is really a gaming gear company, Corsair is really top of mind in the market everywhere. And then just talking about some of our brands, so Corsair is the main brand and that's the one that's been around for the 30 years. Drop makes custom keyboards, and we bought them about, I think, 1.5 years ago. Elgato, we bought about 6 years ago. They make very high-end streaming gear. So if you talk to the people that are in the back running the audiovisual equipment at these conferences, pretty much all of them know about Elgato and particularly the Stream Deck product from Elgato. We just very recently bought a company called Fanatec. Fanatec makes very high-end racing sim gear. And you can't see it so much because I got my suit jacket on, but I was at the F1 in Vegas this year. And most of the teams, they have like fan experiences. They all use Fanatec gear. And we're not paying the teams to do that. That's pretty much because it's the best gear and it gives the fans the best experience. So we're quite excited about that. ORIGIN PC was an acquisition, again, about 6-ish years ago, 5, 6 years ago. They make very high-end gaming PCs. And SCUF makes very high-end controllers for PlayStation 5 for Xbox and now for PC as well. So very custom back paddles really helps the very competitive gamers do even better. So all of these brands are high-end aimed in high-growth markets and aimed at that more affluent and higher-end consumer. And then just quickly, like I said, we've been using M&A for a while, and I'm sure George has some questions about that and what we're looking at and such. And I talked about the Fanatec acquisition. I'll let George ask me a couple of questions about that as well. So -- but that's a recent acquisition. That's what one of their steering wheels looks like. And they're quite -- it's full force feedback and everything. So they're very, very nice. So that's the introductory slides, and I'll answer your questions now, George.

Yes. Thanks a lot for running through the slide deck, very helpful. So maybe kind of high level, as we head into 2025, as the calendar turns, can you talk about kind of the 3 or 4 priorities you guys are working on?

It's always the same thing. So introduce quality products that meet the needs of our customer base. So our customers want to game better or stream better or have a higher-performing computer. So everything we do is to make sure we introduce the features and the technology that they need in today's games and with today's hardware. So if the GPUs and the CPUs need more power, then we need to make sure we have a power supply that delivers all of that for them. And we got to make sure we serve our retail customers and etail customers well so that the supply chain is seamless so that our end customers can easily get our products. And that's always our priority. And then when we look at how can we make the company grow, we look at segments that look like they have very high growth and potential in front of them, and I'll use Fanatec as an example and get into some of the numbers around that. So we think that market is about $1 billion, the racing sim, the TAM. And Fanatec a couple of years ago in 2023 was a little bit over EUR 100 million in revenue, so a little bit over $100 million in revenue. So they had about 10% of that market. That market seems to still be growing and F1 and motorsports and such still gets a lot of attention. And it was an acquisition opportunity we got. They had a little bit of financial trouble, and they asked us to come in and help them and take a look at maybe acquiring them earlier this year, and then we completed the acquisition in September. Now because of the financial difficulty they had, these are very expensive gear. You can easily spend a couple of thousand dollars on just their gear alone with everything else if you want to have a pretty high-end racing sim setup. So the customer base was a little bit worried because obviously, if you're going to put that amount of money out, you'd be a little bit worried about the company is still going to be around. And they also had a bunch of customer service issues because they didn't have the resources and they were very distracted by the other things they're working on. Since we've taken over in September, we're working pretty hard and making sure that if you order something, it gets delivered quickly. We're trying as best as we can to up the response rate and cut the amount of time it takes and give more complete and better responses. So I can say if you go into Reddit and the other channels where you tend to get the people that are mad, they usually go there and really -- the amount of mad posts has come down. And even people that are a little bit mad about something and some shipping problem or whatever, they usually acknowledge that they actually did get a response, and it looks like we're on top of it. So we really think this Fanatec is another acquisition that we've done, similar to SCUF and similar to Elgato, which is a great opportunity for us to go into a market we've never been in before and then expand and really grow the company off of it.

Great. And maybe to level set, can you briefly talk about kind of summary for the September quarter earnings kind of the biggest takeaway, especially kind of long-term opportunities lie ahead for Corsair?

So September was a very typical Q3 for us. Obviously, we have a little bit of a Black Friday, Christmas selling season, particularly with some of our products that go into consoles like SCUF. And actually, Fanatec is a little bit weighted towards Q4 as well in general. So typically, Q3 ramps pretty -- and then September tends to be the biggest month. So July and August is a little smaller. And we had a very typical month, July and August, people are out on vacation and such. And I guess they're out touching grass and not playing as many PC games or console games. And then September, everybody goes back to school, fall is starting and everybody starts gaming again and the activity kicks up. So it was pretty much -- that's kind of what happened in it. And the news had come out a few months before that NVIDIA delayed their expected launch. So they had never said they were going to launch, but their normal schedule would have been September or October of this year. So they actually delayed it a little bit to early next year supposedly. So the market kind of adjusted to that, and then we saw reasonable results in September. Again, peripherals grew quite nicely for us and margins went up this year. They've been closer at 40% for most of the year, which is a nice uplift for us. So it was a reasonable quarter, and we expected normal seasonality for Q4, and we said that in the call. And we're really expecting next year, Andy talked about, our CEO, talked about this. I mean, in terms of EBITDA, margin and profitability, even this year where it's a little slower, we're still generating some profit and covering our expenses. So we really do expect next year with the uplift from the new GPU launches, a lot of that increased gross margin will come down to our bottom line and our EBITDA margins have a pretty good chance of doubling next year.

Great. Maybe you can talk about kind of what some of the value adds kind of Corsair bring to the table differentiates you guys from other traditional PC players.

So there's 2 different things. So the first is the value add we bring to a lot of the acquisitions we did. So a lot of the companies we've bought have been somewhere between $40 million and $100 million worth of revenue. And when you hit a certain size and scale like that, the consumption you have and the management effort to handle your supply chain and handle your customer chain, the retail and e-tail chain, it's really all-consuming and you sort of like lose focus on your products and you start consuming a fair amount of cash just for the balance sheet, for the receivables and the inventory and everything. So I'm sure many people have seen growing from like $10 million to $50 million seems to happen pretty easily, there's always these spots like going from $50 million to $100 million is a lot harder. That's part of the reason. So we have a very extensive, very well-honed distribution strategy and distribution chain across the whole world. So when we acquire one of these companies, we very quickly bring them into our organization, and we use our strengths to get the products out to market. And it really makes -- it really takes a lot of weight off the management's shoulders and want some focus on product development and product design. And that's where we end up differentiating over time is that we have a very high focus on good quality products and products that actually have features that our customers need. Now we're trying to balance some of that out to make it a little bit better at a better cost point at the different levels because there's some lower -- like gamers that don't need all the features that you don't need to put every single feature in the intro keyboard. The gamers that really want every single feature that you can imagine in it, and that will be in the higher-end one. So I think over time, we've sort of honed that. And I can talk a little bit about sort of the peripherals growth. So peripherals as a market as a whole, although it grew that 70% in total for the headsets, this year was not a huge. We grew more than the market did in peripherals this year. And that's because a few years ago, we started really looking at our keyboards, our headsets and our mice and says, what do we don't have that the market really needs and wants. And we noticed there was a much bigger trend towards using wireless. So we're a heavy gamer company. Most real serious gamers never use wireless because the lag was too long, and they're always worried about the battery running out. But the technology and we had developed some of this technology had gotten so good for wireless that there was no real lag, there's no lag at all compared to plugging in. And the battery life tended to be a lot better today. So we really expanded the wireless capability across all of our different products there. So we have a lot more wireless keyboards, a lot more wireless mice. In the headsets, in particular, we put more radio types of radios in it. We noticed people like to use their headsets for their phone and for their PC gaming and maybe on a console. So we started adding those capabilities in the higher-end range of our headsets, so you can multitask with them. That -- and then for the size of keyboards, smaller keyboards with no 10 keys, and I know all of us use Excel, and we can imagine not having 10 key, but for gamers, you don't have much use for a 10 key. So 60%, 65% 10 keyless size are popular. And in Asia, those are particularly popular as well. So we introduced a whole range of smaller form factor keyboards and 10 keyless keyboards and wireless keyboards. And because of that, we're starting to gain much more traction in that market and kind of come from market share. So this isn't the gaming market went up and then we went up too. This is Corsair looked carefully at the product portfolio we had. We looked -- a lot of our company are gamers, and we're very active in the gaming community, and we listen carefully what our customers want. We took those elements together to build really good products. And then we're kind of getting the success out of that because of what we did there. So that's the internal development and sort of the innovation engine we have inside of Corsair, which is a little separate from the M&A approach we use.

Got you. Maybe you can talk about just the general state of consumer kind of a macro backdrop in terms of the inventory, the promos, just kind of where we are in the macro cycle in terms of consumer spend.

So this isn't a comment directly on Corsair's Q4, but all the data that came out after Black Friday said that it was a reasonable consumer event that people were out there buying. And in the gaming hardware, most of the indications were that the consumer seems to be there and buying. If you went to Amazon or any big e-tailer and looked, you would not have seen real crazy promos. So like a 30% off and maybe a couple of few SKUs that you put a 50% off to attract attention, that was there, but there wasn't a 70% off type sales. That's an indication like us, the industry as a whole had pretty reasonable inventory going into the holiday season. So we're not over inventoried. And we were a little over inventoried at the beginning of the year because we had thought that the components and systems business in that segment would be more robust. So we ordered some stuff in a little earlier. But by the time we're getting to now, that extra ordering we did at the beginning of the year is starting to work its way through and no longer any extra inventory. So I'd say looking at the POS reports and the inventory position from our main customers, it's tracking what you'd hope to see for this time, and it's doing pretty well. So overall, I'd say we entered Q4 in pretty good inventory position. And if we track to expectations, we should exit in reasonable good position as well.

Yes. If we look at the 2 specific business segments, especially the components and memory, one of the biggest catalysts for arguably for the Corsair story into next year is the GPU refresh from NVIDIA. So maybe you can talk about anticipated GPU refresh and how that would catalyze potential upgrade cycle in the memory business?

I mean the real thing that happens is that people build new computers. And if you look at most of the new CPUs want you to use DDR. So there's a transition from technology DDR4 to DDR5 over the last couple of years, and it will accelerate the push into DDR5. DDR5 we're strong in, and we have a very good position. So that will help us. The more computers are built, the more memory they get bought to build the computers. And for the most part, most games have moved to requiring 32 gig of memory. So if you want to have a higher-end computer now, you're really targeting 32 instead of 16. So there's an increase in the amount of memory going into the new systems as well. So all that, I think, work as a pretty good connection to making next year to have a very good potential of being great. You talked about consumer sentiment and stuff. I think at the beginning of this year, the economy was a little bit more uncertain. There was a lot of layoff news around last Christmas and going into the beginning of the year. There was no new GPU that was out on the high end. So I think there's a little hesitation in our customer base of buying really high-end gear or building a new PC. And at the time, everybody thought in September, there should be news on the new cards. So there was a little bit of let's just wait and see what's coming out -- the $5,000 now because who knows about my job a month or something from now. As the year went on, I think the economy sort of got more and more firmer footing. And then it looks like most of the Q4 data and the banks talking about it, it looks like that soft landing they're aiming at has actually happened. So that looks relatively positive and at least gives us a reasonable foundation going into next year. And then the new GPU launches always, I mean, it's -- some GPU launches are okay and some GPU launches are really good. But no matter what, it drives more system building and more excitement in the area. So it drives better business for us.

Just segue into the peripheral business, which is doing really well. I mean can you talk about kind of the higher-margin nature of the business, which could potentially contribute to a positive mix shift? And what's the kind of outlook for continued growth for the peripheral business into '25 from here?

So our highest margin products in that area are our Elgato products and our SCUF products. The Elgato products are sold through the same channel as all the other peripherals are. They don't sell as much direct. And the reason why they have a better margin profile is that they have a lot of software embedded with the hardware. So the software is extremely good and the hardware experience is good. And it's very hard for any of the competition to match the 2 of them. So they've been doing this for quite a while, and they're very focused on what the streaming community, streaming meaning like YouTube Live and Twitch and things like that, not streaming, I guess, like Netflix. And we've even broadened out our offering. So Stream Deck is LED buttons or LCD buttons on a little matrix that you can have a picture. So you look at it, you know exactly what it is. And it's very popular. It's growing in popular out of streaming. Like if you're happen to do tons of macros or a lot of Excel stuff, you can program them all into one key press and you can have a picture or a little word saying what it is. The other thing you can do is you can switch from Bloomberg screen to Bloomberg screen easily by just touching a button. Quite often, we use it to jump to the web page where we have internal reports for a reporting system. You don't have to find a bookmark or anything, you just program it in. We've even moved into the professional broadcast realm where we now have a rack-mounted stream deck targeted specifically to that audiovisual industry because there was a big demand, like we were looking at pictures and we're talking to people, and they had a whole bunch of stream decks scattered around their desk. And that's not really the form factor they're used to using. They used to having a rack-mounted piece of equipment in with all the other equipment. So we made one specifically for that and teamed with the biggest software producer in that area. So we came in, we -- Corsair wanted to enter the streaming market 6 or so years ago because we thought it was important for gaming. We used M&A to buy Elgato because they were the leader in that market. And then we empowered them to focus on product design and accelerate a bunch of the things they're doing. And that turned into like a great Stream Deck product who's done super well for us. It's also been an example of another type of M&A we've done. We've been willing to go into our supply chain. So the provider of the hardware for Stream Deck was a third-party company, and we now own 80% of that company. So we've used M&A not just to target new areas to grow in, which is Elgato and streaming, we've also targeted to get better control over the supply chain.

Yes. Can you also talk about the driver behind the expected EBITDA margin improvement for 2025, especially post the memory headwinds into '25 and also some of the operational efficiency. Maybe you can talk about kind of how you kind of drive the EBITDA margin higher?

I mean that's a relatively simple math exercise. We cut about $10 million or so worth of expenses. This year, we saw in the middle of the year, we took some actions to reduce our expenses. Then we expect -- so our expense base entering next year should be quite reasonable. And then we're expecting revenue to go up because of the GPU launches and other things, and we're generating EBITDA today. So if we don't expand our OpEx that much, and we have to expand OpEx somewhat in the peripherals area because it's much more marketing focused and you need to -- and we have some pretty tough marketing competition there. So you have to be able to fight against them. But even with that, the extra gross margin from the extra revenue should fall more and more to the bottom line. So that will bring the bottom line EBITDA up fast because we're already covering all the expenses.

Yes. Maybe we circle back on the Fanatec acquisition you kind of touched on it in the slide deck. Maybe you can double-click just on some of the thoughts behind the Fanatec and expected accretion.

Yes. So we've been interested in the racing sim market for quite a while. I mean we've talked to you about it quite a few times in the past. And we've looked at all the major players, including Fanatec in the past, and there was never really an opportunity to do an M&A execution. So we had started developing the products ourselves internally. And we actually had a rig, the frame that you attach everything to, so you can sit in. We actually had one of those developed and we launched it at Computex this year. And then the Fanatec opportunity came up. And then we did what we normally do in Corsair. We worked really hard on it. It made sense, and we closed the deal. We worked hard also. I mean my coworker, Ronald, is here with me. So Ronald is also Treasurer as well as doing Investor Relations and other things. So we've really kept a strong balance sheet. So I've always had a reasonably decent sized cash balance. And I get asked, what are you going to use this cash for? I always say, well, we're going to pay down debt, which is very low now compared to where it was a few years ago. But really, it's there for growth and opportunity. And then when Andy comes and says, okay, this is an acquisition we want to do because we're very carefully shepherded our resources on the balance sheet through up and downtimes, it's available in there. So we were able to close on it using just our internal cash that was available and then execute on it, and we should exit the year in a pretty good position as well. So that's sort of the reasoning around that. The rest of it, racing sim is a high-growth market. It's reasonably good margins, and they sell directly to the consumer. And Fanatec is a leader, like the higher-end leader in that market. And that's a perfect philosophy and a brand that matches with the rest of ours. So that's why we went towards it. We haven't been specific about what we expect for next year. It will take probably next quarter, in the first quarter of 2025 to finish some of the integration things we're working on. And hopefully, then the market will see that it's in really good hands and then more of the revenue that was a little worried will start coming back. And we do have an indication that in '23, they were over EUR 100 million in revenue. So it should be a nice acquisition for us.

Maybe before we wrap up, we have a couple of minutes left. Maybe you can kind of talk about what's the sort of biggest point in terms of misunderstood about the Corsair story?

I think it's a little bit of a niche story in some ways. So it's part of the gaming story and gaming is a growth area, but it's hardware for gaming, so gear for gaming. It's not like the movie hit type of thing where you can -- you go and you see the box office receipts or whatever was released and you get some hype before and then you see a week later if it's really selling well. So the computer games industry, you get steam and all the reports of how well stuff went in retail. For us, we're much more empowering the ability to play great games. And because of that, I don't think people realize exactly how strong we are in the market, how good the components and systems business is and how we have really dominant market share there. And then you get a cycle where the GPUs get delayed and the economy is a little slower at the beginning of this year and it depresses the components and systems revenue for a short period of time. And then there's so many companies that everybody can look at, people kind of say, okay, I'll come back and look at them again when times are better. Well, we really think times are getting better now. So Andy has mentioned in the call, he's never been more confident about the future as he is right now. And even through a tougher 2024, we still did the Fanatec acquisition. I think we're super well positioned, and I think we'll really benefit from this GPU launch.

Great. Thanks for your time for speaking at our fireside chat. Again, it's Michael Potter, CFO for Corsair. Thank you.

Thanks, George.