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

All right. I think in the interest of time, we're going to get going on the next one. It's my pleasure to host the team from Corsair Gaming. We've got Thi La, CEO; Michael Potter, CFO, those are -- who are joining us here today. Corsair is one of the largest global providers and innovators of high-performance products for gamers, streamers, content creators, gaming PC builders and SIM driving enthusiasts. Corsair has built a full ecosystem of products that work together to enable everyone from casual gamers to committed professionals to perform at their very best. The company's portfolio of brands include Fanatec, Elgato, SCUF, Drop and ORIGIN. With that, let me turn the floor over to Thi for a brief introduction before jumping into the fireside questions. Thi after you.

Right. Thank you, Eric, for having us here, and thank you, everyone, for joining me today and as well as joining Michael today. I came into the position as CEO since July of this year. And before that, I was the COO as well as President for 15 years at Corsair. My background was from HP running P&L for gaming PC as well as monitor, and that was a $3 billion business. And coming into Corsair, I was able to bring a lot of that experience in to Corsair to help us grow. And we are looking forward to be able to share more about our strategy through this Q&A session.

Great. And I want to build on your background and how you ended up in the company. So you're now running the company as CEO. Talk a little bit about the key strategic priorities that you've set for yourself that you think are the most important things you want to accomplish when framed against the market opportunity in front of you.

Yes. We see Corsair is at an inflection point at the moment. We built a very good foundation based on DIY components, prebuilt PC, gaming devices and creative solutions for streamers and now we're ready for the next chapter. And for me, that would be three things. The first one is to accelerate product cadence, meaning bringing out impactful products to the consumers at a much faster rate. Number two is to unlock margin opportunities through operational efficiency, especially with AI capability and then also really step in on M&A synergy. And the last one is global expansion with a focus on Asia market as well as Latin America, both of which are underserved at the moment. But in parallel, we are also stepping up our direct-to-consumer business. By that, we can also increase our engagement with consumers as well as add to our margin portfolio. The most exciting part for me is new categories. We are investing into SIM equipment and services around that. And then the second thing is getting into new categories such as AI Workstation. Both of these are growth vectors for Corsair for a number of years to come.

Okay. I do want to build on that. You -- as a team, you've highlighted momentum around Fanatec and racing SIM products. Can you discuss the global rollout strategy? And more importantly, Formula 1 is at an all-time high from a popularity standpoint across multiple media formats. How does that factor into the excitement about the potential for the market opportunity there?

Yes. We are very pleased with the Fanatec acquisition. The receptions from channel partners as well as consumers were tremendous. We see Sim Racing at a $1 billion market and growing at double digit every year. And for us, Fanatec is now fully integrated into our ecosystem. And now we're rolling out globally. The accelerations or the popularity of the Formula 1 recently, we see that as an accelerant basically pulling the SIM driving category into mainstream. And what that really means is it just really drove up adoption rates from the enthusiasts. And looking into the holiday season, we are preparing inventory. We are building out bundle strategy, building out partnerships for marketing and also scaling our distribution channel, both from D2C as well as just the channel partners to take advantage of what we consider as probably a very hot selling season for the categories. Also, owning Fanatec gave us a position to go much deeper into SIM sports. And by that, I mean golf sim, flight sims, farm sims. And all these are basically performance and spectator sports. And we see this as the next growth categories for the enthusiasts for their pass time, right, for a number of years to come.

Okay. Interesting. So let's turn quickly to NVIDIA and AMD GPU launches. There is a refresh, rebuild cycle that typically comes with GPU launches that's tied to your components and systems business. Why don't you talk a little bit about how those launches feed into demand for your products and what you guys are seeing in the market today?

Yes. The NVIDIA 5000 series GPU launch as well as the AMD 9000 series launch contributed to about 30% growth of gaming components and systems segment in Q2 for us. We saw enthusiasts upgrading power supply, DRAM, cooling solution in order to take advantage of the advanced ray tracing technology as well as AI 3D rendering. And we're very excited about this trend because we forecasted the growth and it's here. And we look forward to seeing this momentum carry into the holiday season.

So building on that, not only does technological advances typically build refresh cycle, there's also cycles tied to content. And we have a lot of AAA content coming across the gaming landscape, a lot of excitement building for Grand Theft Auto VI at some point, likely next year, along with a whole bunch of titles. How do you think about the content cycle away from just a technological cycle driving demand in the business.

Yes. So in looking at publishers' road map for Q4 and well into '26, as you mentioned, with highly anticipated titles such as GTA 6, we are very excited because we have seen in the past, exciting games drive sales for hardware. But we do also see that this is a multi upgrade cycle. So the GPU would go first as a priority because that is a pretty significant investment. And then all of the components around the GPU to make sure you have the best performance PC and then enthusiasts will upgrade all of the input devices such as keyboard, mice, headset, streaming gear in order to complete that setup. And this cycle is going to be over a number of quarters and it's going to go through the next couple of years. And then new GPU will be launched again, and then we'll start the cycle again. But the good thing about GPU launches is that it would bring in new titles because typically, both NVIDIA and AMD always work with publishers to make sure that they pull out the latest technology from the engine.

One of the questions I get a fair bit from investors, and I don't know if there's an answer to this today is how might this cycle look different than prior cycles? You have a GPU cycle on top of a very heavy content cycle. Is there any historical context you can give there in terms of how to even think about it? Or is it just we know how the momentum builds and it's wait and see, how it comes through in the environment?

I think that there were some baseline data that we use to project the growth because NVIDIA has always been launching every 2 years. I mean this cycle, they were late. So we see a bit of a delay in terms of that adoption. But the interesting part this time around is you have AMD coming into play. And usually, it's just NVIDIA and the GPU, right, the only GPU, but now you got NVIDIA and AMD. And AMD is playing very well at that sweet spot, the $799, $700 price band with a really good product, and they have their own cycle. So you will see that the cycle may change instead of every 2 years with 2 players, maybe every year, you have something to buy into. The titles itself, historical data, the famous Fortnite driving like massive amount of headset upgrade, right? So we are looking at the road map and say, well, GTA VI be driving the next Fortnite headset upgrade, for example.

Yes, it's going to be -- we have some big forecast for it, who knows how that will all play out, but I wouldn't take the under on many of those forecasts from what we could tell. I want to turn to the peripherals business. How would you characterize the competitive landscape right now in peripherals? How do you position yourself competitively to execute against what you see across that landscape?

So for us, in terms of -- if we look at the standard gaming peripherals market, yes, it's a very crowded market, and there are many players. But for us, we see ourselves as a little bit different than the crowd. Corsair has been around for more than 30 years, and the brand is well known for performance and quality. So when we built out our gaming solution, we don't just build a keyboard, mice, headset that can game very well, but we also integrate other solutions such as the Elgato Stream Deck that delivers productivity as well as increasing the convenience of your workflow. So you're not just getting a gaming device, but you're getting a well-rounded product, let's call it, a platform to support your everyday usage. And by delivering more value to our product road map, we see traction. We gained market shares in Q2, and we will continue to follow this path to really gain traction and sustain the momentum.

Okay. One of the most interesting things over the last 12 to 18 months as you guys continue to diversify some of your channel strategy, how you go-to-market with your products, how should we think about the mix of go-to-market strategy for the company evolving in the years ahead?

So the go-to-market strategy for us right now is if you look at global deployment, we are underserving in Asia market, for example. So this will be one of the key investment for us in terms of local influencers, local product line and also channel partners just to really taking advantage of what we consider as a very healthy market, but underpenetrated. And you will see us already working with a lot of partners such as Call of Duty and the recent Battlefield announcement for the beta together with Elgato launch. So these partnerships are going to be very important for us to continue to invest in.

Okay. Building on that, one of the themes that I think remains a little bit misunderstood from investors is there are elements of exposure you have to the creator economy, the type of equipment and the type of peripherals and the type of things that allow creators to build and scale what they do. Talk a little bit about your exposure to the creator economy, how that might evolve, how some of your product initiatives might be aligned with that economic engine going forward?

Yes. That is a very good question. So the creator economy for us is about 250 million community exiting 2024. And Elgato has a very high market share, especially with solution like Stream Deck. You can imagine that we are the first company to deliver a single-person studio setup where you yourself can actually control lighting, microphone, videos and interaction with your fan base with just a simple device. And so we like the space very much. Now the question is how do you educate and onboard people a lot easier and expand our reach to get to more influencers or creators. So we built out what we consider as the flywheel. So the Elgato marketplace right now is providing plug-ins. It's providing content and because it is a marketplace, so many other makers can actually make content and add to the marketplace. So we have over 2,000 or more than thousands of downloadable content either paid or free. So that people can customize their setup exactly to the way they want. And this flywheel is basically, you download more content, the use case continue to expand, then people will buy more hardware. And the basket is very good in terms of margin and ASP for us.

Okay. Next, I wanted to turn to the tariff landscape. It has been one of the most dominant themes in the market environment this year, probably only outshone by AI to some degree. But there is still a lot of uncertainty around tariffs, especially in the semiconductor landscape. How do you think about your relative exposure to that theme? And how does it factor into the way you forecast the business going forward?

So for us, tariff continue to be fluid. And the formula for us doesn't change, though we expand our Asia supply chain to make sure that we have presence in a number of East Asia countries from a supply chain standpoint. And also, we added Mexico to the mix. So at this point, we feel like we're ready to flex our supply chain with very little effort in order to basically tackle any situation that we are dealt with. The impact in Q2 is small, $1 million something. And for short term, yes, we will see some small impact, but long term, it should not be an issue at all.

Okay. One of the other themes of this conference have been questions around the macro backdrop. There's been a bit of a more volatile picture depending on which kind of consumer you're looking at by income level and activity level, and there's been some -- a wide range of messages over the first 2 or 3 days. When you think about what you're seeing in terms of consumer demand trends, how would you characterize it by either geography or what people spend their money on or what you're seeing in your broader array of products?

So for us, we think that our customers, the enthusiast economy is fairly resilient because when you are investing in the hobby, it's most likely that you don't give up your hobby and do not think because things get a little bit more expensive. But what would happen if the macro economy is soft and maybe change the rate of the growth, instead of double digit, it may be single digit, for example, but the market itself is fairly stable. If you look at gamers, right, the number of gamers coming into the TAM every year is growing from Gen X, Gen Y, Gen Z, more and more people game every year. This is the data that is known to all of us. So there is no issues with the TAM growing. The question is how fast, not like it's just going the other way, right?

Okay. Well, I can tell you my 18-year-old son does everything he can to get more gaming money out of me. So he's been very resilient, right now.

Yes. Well, the good trend that we also see is younger generation like to game on desktop versus console. And this is good for us as well because we have very good market share.

No. And not to get into too much anecdotal, but I would think they take a lot of pride in what they've built on the desktop side, which I think dovetails very, very well with your business model...

We're happy to meet with your son.

That can be dangerous for me.

All right.

Happy to help, though. AI, obviously, has been the other dominant theme of this conference. One of the interesting angles is we've talked to a lot of CEOs and CFOs who've talked to us about how they've deployed AI internally in their companies. And I think what's come back to us is a general message of -- it's driving a lot of efficiency. It's allowing us to invest faster in growth. What has been your experience with deploying AI into your organization? And what sort of pathway are you on there?

Yes. So AI for us is a very key initiative. From my standpoint, if we don't make AI work for us smarter and more secure, then we will fall behind. So internally, we kicked off a number of programs already to drive AI to integrate into different business processes from supply chain, engineering, marketing and tech support, for example. So we launched our AI tech support platform about 1.5 years ago, and that added to efficiency and capacity that we never had before. And the best part is the customer satisfaction went up 10 points since then. And so this is a great success story that we're using as a learning experience to build out solution in the future for other part of our business. And then externally for our products, we are looking at AI as not just integrating AI for AI sake, but AI as native solution to increase the experience or to make the experience more useful for our consumers. We launched the Origin PC AI Workstation very recently and got very good reception. People like the fact that it's a very small form factor machine that is so powerful, and you can build your LLM models untethered. So that means that everything you have can be completely secured and you don't have to deal with potential hallucination because of maybe garbage data. And for other products such as the teleprompter from Elgato. You can actually use the prompter and it basically just follow you, pace with you. If you speak faster, it would go faster, you slow down it automatically knows that, you stop it will stop. And this is how we implement AI in a way that it is very easy to use, right?

Okay. Well, let me try to bring Michael into the conversation as well. We've talked a lot so far about growth initiatives, product, where we're going from that standpoint. bring it together for us in terms of the priorities around how to tie investments in the business, back to margins, back to how capital is allocated inside the company.

Well, I'll be saying the same sort of thing about growth because that's what we've been talking about so far. So the first priority for us for deploying capital is growth. So we can either deploy it internally for product development or R&D or to develop internal capability to deliver new great products or we can look at M&A. And we've been successful in M&A in the past. I mean a lot of the companies that you and Thi were just talking about came into the Corsair family through M&A. We've been selective. We really try and get the products that enthusiasts really like and leaders in the field, somebody who's very high quality that fits into the Corsair brand and the way we run the company, and we're ready to deploy more capital that way if there's more opportunity. The second thing is obviously paying down debt. Now it's not as big a priority today as it's been in the past. Before the IPO, we were about $550 million or more million worth of debt. Today, we're about $125 million and that's got extended very recently for 5 more years. So there's no near-term pressure to do anything. If we don't have a great thing to spend on for growth in the short term and we have excess cash, we can always pay that down more. So that's in a very good position to be in there. Finally, it's just -- we talked about tariff and all the different situations that are going on. It's good to have a little bit of reserve and a stronger balance sheet because we have to be able to react and be able to weather small storms if something comes up. So we've really tried to make sure that if we need to invest in a little bit of extra inventory because we're moving from one location to another location to mitigate some tariffs, we can do that, and it won't disrupt our operations. So we've been quite careful and very, very methodical in the way we've done it the last few years.

Yes. And I don't want to put either of you on the spot, but -- so it sounds like that's a continuation of those priorities going forward. And when you think about M&A, how do you think about what the decision process is around M&A? Not to say like what you would do, but what typically are the types of situations that would get in front of you where you have to make a decision about this would be an accelerant of our business. This would amplify what we're trying to do. Just to better flesh out or inform some of the capital allocation decision behind M&A.

Yes. So if you look at our strategy at the moment alongside creators, economy and gaming and sim sports. So anything along that line that bring margin contribution will be a great add to our business. Anything around AI technologies that helps those experience will be a great add. So it's a combination of maybe smaller tech acquisition or maybe larger investment into a healthy business that definitely complementary to what we're doing. We are considering all of those.

Okay. I know we only have a few minutes left, but I do want to look out over the longer term. I want to direct this to you. But also, if Michael wants to come in, that's fine as well. But just what are -- we talked -- we started with your priorities for the medium to long term. Bring it back to, if we're having this conversation in 3, 4, 5 years, which I hope you're here in 3, 4, 5 years, we're having this conversation.

Yes, I hope so too.

What would we be looking back and saying were your biggest priorities to execute against and how you're aligning strategy against those priorities?

So for us right now, looking forward, we need to really focus on products and products, meaning building out the entire experience for SIM equipment and also taking AI native for a lot of the products that we are working on right now and really push that forward very quickly. So 2, 3 years from now, you will see us as being that innovative house with a great product family. And we wanted to position us as not just that gaming company or that DIY company, but more a platform. So the ecosystem of making everything working together well is very important because I'm giving you an example for you to get on a Sim Racing rig, not only you're driving with all of the SIM equipment, but you need a PC to drive that, you need keyboard, mice and headset to control the experience for us to step in and sell that entire ecosystem and making it super easy to step in, sit down and just work is a differentiator. And then the other thing is scaling our D2C business, but also thinking about AI as an opportunity to make that entire journey super fluid. And building in customization, personalization and created that extra benefit for consumer to buy directly from us would be one of the key focus and global expansion. Global expansion is important because the way we think about the world, you got America, Asia and Europe, you can count all of the other continent. But in general sense is we are concentrated in Europe -- Western Europe and North America in terms of revenue distribution with a smaller contribution from Asia and Latin America. And if you think about us being able to open that up with good margin, the scale is pretty good. So global expansion is another thing that we want to focus on.

Okay. A lot to execute against. We look forward to continue to get updates from you.

Yes.

Please join me in thanking Corsair Gaming for being part of the conference.

Thank you all. All right. Appreciate it.