SteelSeries ApS (GN) Earnings Call Transcript & Summary

Hello. Welcome all to this conference call following our announcement this morning regarding the acquisition of SteelSeries. Thank you all for dialing in with such a short notice. Participating on the call will be Rene Svendsen-Tune, CEO of GN Audio; Ehtisham Rabbani, CEO of SteelSeries; Gitte Aabo, CEO of GN Hearing; Peter Gormsen, CFO of GN Store Nord; and myself, Henriette Wennicke, Head of IR and Treasury. The agenda for today will be a short presentation followed by a Q&A session. With these brief opening remarks, I'm happy to hand over to Rene.

Thank you, Henriette, and good morning to all of you, and thanks for joining this call. So today is a truly exciting day for GN, where we are now announcing the acquisition of SteelSeries. SteelSeries is a best-in-class company of premium software-enabled gaming gear and it's an ideal match for GN on our overall company proposition. So let's move to Slide 4. The strategic fit between GN and SteelSeries is very appealing. GN and SteelSeries share several competitive advantages, including strong brands, world-class designs, leading innovations and established go-to-market channels. Bringing SteelSeries into GN provides GN access to the very attractive gaming market through a very strong brand and a strong machine. In combination with GN's existing sound technology capabilities, this creates huge opportunities for driving value going forward. This acquisition is all about business scaling, and SteelSeries will continue to operate with its own identity, brand and execution strength inside of GN. GN takes over a well-oiled machine that has been taking market shares in recent years, and we gain access to a structurally growing market, supported by significant trends. This is what I call an ideal strategic fit. And with these overall thoughts, I would like to hand over to Ehtisham Rabbani, CEO of SteelSeries, for a snapshot of the company.

Thank you, Rene, and a big hello to all of you on this exciting day in the history of SteelSeries. First of all, I have to say I am enthusiastic about this announcement, and we are absolutely thrilled to become part of such a great Danish heritage company like GN. Let me give you a little flavor on SteelSeries and the nature of our business. We were founded in 2001 in a basement in Copenhagen to serve the needs of esports professionals. We are incredibly proud of what our little Danish company has accomplished over the years with the help of the smartest and most passionate talent in the business. We proudly call ourselves Steelheads. Today, we're a global pioneer in premium software-enabled gaming gear, but it feels like our journey has just started. We believe that we have multiple vectors of growth to continue building on our revenue base, which last year amounted to more than DKK 2 billion. 2021 is expected to be another exciting year, where we've already delivered strong growth in the first half of the year. SteelSeries has offices around the world and a broad-based geographical sales distribution. Main markets are Americas and Europe, which contributed 47% and 39% of SteelSeries revenue last year, respectively. The supply chain setup is very similar to that of GN Audio as we work with component suppliers and manufacturing partners. SteelSeries has, within its integrated software and services platform, a focused portfolio in the premium segment of gaming gear, including headsets, keyboards, mice and other gaming-related equipment. By 2020, we held about 7% market share in this space. At SteelSeries, our vision has always been to build a comprehensive platform for the enthusiast gamers that seamlessly connects the best gear, the best gaming products, the biggest games, the gaming community and esports, something that has all led to SteelSeries becoming one of the top premium audio gaming brands in the world. The SteelSeries brand is a preferred and recognized one in the gaming space, and we have, therefore, been able to drive strong strategic partnerships with elite esports teams, marketing influencers and content creators. Together with our innovating leading product portfolio, this has supported significant growth and market share gains in recent years. All this has led us to achieve a very important milestone being the #1 esports brand in the world. From 2017 until to date, SteelSeries has grown the top line with an impressive CAGR of 44%, which has been primarily driven by organic growth, while at the same time, managing to increase our EBITA margins. And with this brief overview, I just want to underline that I sincerely believe that we could not have found a better home for SteelSeries, and I look forward to continuing our fantastic growth journey together with GN. I really want to thank the GN Board of Directors, Rene and the entire team for this vote of confidence. We couldn't be more excited. And with that, I'm happy to hand it back to Rene. Thank you.

Thank you, Ehtisham, for this brief overview. Let's move to Slide 6. By combining GN and SteelSeries, we are creating a unified force in serving the global audio market even broader. The acquisition means that we are adding another growth engine to the company with more than DKK 2 billion in additional revenue. This means more scale and a more diversified product portfolio. But most importantly, it means new addressable markets and opportunities to leverage our best practices across the combined business. And move to Slide 7. And let me give you a glimpse of the attractiveness of this market. The market for core gaming gear was in 2020 amounting to around $5 billion. The even broader gaming gear market, where SteelSeries is currently not prioritizing its efforts in large scale, is 3x bigger. The core market has seen substantial growth in the past year, supported by structural trends and the fact that gaming has become a more integral part of so many people's lives. Growth was obviously partly accelerated by the outbreak of COVID-19, but the market is expected to grow strongly also going forward from a higher platform. The market is driven by a number of key trends. And first and foremost, we expect to see a structural 5% growth in gaming users going forward driven by demographics and easier access to gaming for the broader population. Secondly, a considerable opportunity exists related to the penetration of gaming gear. As an example, the penetration of gaming headsets is currently estimated to around 10% only, and we do expect significant increases to this rate in the years to come. Lastly, the use of gaming gear and the general desire amongst gamers for the latest and greatest products we think will keep replacement rates high. All of these factors together make us comfortable that we will see a core gaming market growing around 7% to 8% in the medium to long term. And let's move to Slide 8 and the bright future of SteelSeries. And as illustrated on the prior slide, we estimate that the core gaming market is growing 7% to 8% per year. On top of this, we have seen a general trend of moving to the premium end of this market where gamers today are buying more higher-priced products compared to in the past, which is estimated to add another 2 percentage points to the base growth. Moreover, SteelSeries is currently expanding into new and more innovative product categories as well as continuing to expand across geographies. With the underlying core gaming market being very attractive, we are certain that SteelSeries is well positioned and will continue to outgrow the market in the years to come. And with that, I would like to hand over to Peter for the deal summary.

Thank you, Rene. Moving to Slide 9 and the deal summary. The acquisition equals an enterprise value of DKK 8 billion. Due to our very strong balance sheet, it will be structured as a 100% cash transaction utilizing the existing cash balance and a new bridge loan. The bridge loan is expected to be replaced with other debt instruments at a later point in time. We are immediately pausing our share buyback program in order to focus on deleveraging towards our capital structure policy. With continued strong growth in earnings as well as strong cash conversion, we expect to deleverage rather quickly and be within our targets again within a couple of years. We are naturally seeing significant scaling opportunities as we are utilizing our capabilities and track record in GN Audio. On top of this, we see significant revenue synergies when combining SteelSeries with GN's extensive global distribution footprint. As a consequence, annual run rate operational synergies of around DKK 150 million by 2022 is expected in addition to significant revenue synergies. We expect closing of the transaction by the beginning of 2022, subject to regulatory approvals and other customary closing conditions. Finally, let me stress that this strategic move is fully aligned with our strategy and our investment case is fully intact. We always look for growth opportunities and businesses that can supplement our existing business, and we are very keen to seek new growth avenues. SteelSeries fits our investment profile very well. And with this acquisition, we further cement our leading innovation and market positions. We add a new growth engine while we expect to deliver significant scaling opportunities to further strengthen our robust profitability across GN. And with this, I would hand over to Henriette.

Thank you, Peter. We are now opening for Q&A. For the sake of good order, I should mention that due to legal constraints, Ehtisham Rabbani, CEO of SteelSeries, will not be able to answer questions during the Q&A session. We kindly ask you to limit your questions to 2 at a time. And now over to the operator.

[Operator Instructions] Our first question is from Patrick Wood of Bank of America.

Perfect. I have 2, please. The first would just be curious on the synergy target and the thought process around there. Maybe a little bit of incremental color, if you can give us any, in terms of some examples of the kind of things you were thinking about. I mean, obviously, the back-office and finance type work is fairly obvious. But whether it's technological sharing or that kind of thing? Just curious, a little bit more color on the synergies would be great. And then second question. It is quite a different market, and it's -- you obviously mentioned content creators and sponsorships and that side of things. It's highly competitive on that side. I guess, brand equity is everything here. If you think about you guys versus Razor, and how are you thinking about maintaining and investing in the brand equity going forward from an OpEx perspective? Are you guys planning to put more money behind sponsorship work and working with content creators? Or do you think it's in the right kind of place as it is now?

So this is Rene. Thanks for the question. So on the synergy first, I mean, we will come back once we have closed the deal obvious and talk more about this whole thing. There's a limit to what we can say now. But if you look at it from a margin point of view, it's clear that the first phase of synergy capture will be on the whole operations side. I mean we have -- as Ehtisham was talking about, we have alike supply machinery. We have alike logistic machinery. We are, to some extent, using the same outsourced manufacturing partners and so forth. So there is a broader platform to work from and some margin opportunity in that space, we think, with reasonably short notice. Then of course, there are some back-office, but that's not really the point here. It is a growth case, and it is about absorbing, you can say, a general cost to drive the leverage best possible with a bigger machine. On the technology point, you mentioned it's clear that actually, I think both ways not sort of early next year, but over time, there is a clear opportunity for technology leverage. There are things that thesis bring into the game that we don't have today. And of course, I guess, the overall audio platform that GN sits on across hearing and audio is strong and we think can deleverage over time into whatever next product raising comes here. So starting with really the -- scaling the machinery altogether. And then, of course, these other matters will drive synergies. On the brand, it's clear that we have -- we are taking over 2 things, a strong engine really understanding the gaming space and almost in the brains of the gamers. That's something we don't have. And this is why, of course, it's very important we find a company who can deal with that, but also a brand that have been super successful in positioning itself and drive credibility of the gear that's out there and build strong social media portfolio and so on and so forth. I don't have a guidance for brand investments in the years to come, but it's clear that we are not going -- we will not do anything to dilute this brand rather the opposite.

Our next question is from Martin Parkhøi of Danske Bank.

Just a question on the product road map because it has been obvious that SteelSeries was also, as you also mentioned, about to enter new segments in 2020 with respect to speakers and microphone. Will there be any change to that in the sense that Audio wants to add something to these product launches before going to the market? And then just on the cost synergies, you're saying DKK 150 million from 2022. But is that at the end of -- sorry, 2022. Is that the end of 2022? Or is that a full year figure? And how should we see it develop in '22 and '23? And then my second question is on -- does this change anything to the group structure of GN where today, you do not have a group CEO, but you have a CEO of each divisions. How will that be structured going forward? Would we still see this be under the helmet of you when you should have a third division?

I need to push the button here. So on the road map, I don't think we have a lot to say now. Of course, we have a good view on what is in the making, so to speak. I don't have a perspective on what we would try to effect. I don't think we have a lot activity we can contribute in the early days. I think on the road map side, more when we come a little bit further down the road, then we may have technologies that can be leveraged across the group. But I think the road map is if you look at the track record of SteelSeries, they have been able to announce very relevant products in a good flow and everything points to the fact that will continue. On the -- I'll have Peter talk about the synergies. On the group structure, no change. Ehtisham will report to me. And we are buying from Audio this entity, and that gives us the easiest access to the synergies and the operational consolidation. But in that setup, we will run SteelSeries as a separate entity, as I said, with its own identity, own brand, own execution on a long list of areas.

Martin, it's Peter. So on the synergies, of course, first of all, we need to close the transaction before we can truly start that journey. But we remain very confident. And of course, it's natural to expect at day 1 we'll not be able to deliver all of it. It will be by the end of 2022. But we'll come back with more details on the time once we can start that journey.

Our next question is from Carsten Lønborg of SEB.

Yes. Maybe a question for Rene, I guess. You talked a lot about the brand identity and that you will do your very best to only increase the attractiveness of the brand. So how will you, sir, on a day-to-day basis, make sure that the culture of SteelSeries is maintained that you don't end up with a lot of large cooperation KPIs being put lower ahead of these guys. Can you maybe share some thinking about how to give this period of gaming in SteelSeries? And then my other question is something that could sound a little bit negative, but it's not. But the market share of 7%, it has today founded in 2001. Why is it taking so long to get to 7%? And has there been an acceleration in recent years? Has there been any sort of defining moments in the company's history where new product launch significantly elevated the trend for the company or anything else you can pinpoint now?

So thanks, Carsten, for this. I mean on the culture side, it's clear that this is a critical question you're answering. If we will strengthen this entity and somehow try to drive cross-company culture, of course, we would lose the asset value. So we will hand Ehtisham and his team because we are actually taking over a full management team and the key people across, give them the freedom to operate this machine as they have done. But of course, exploiting everything we can bring in terms of platform, whatever support is best leverage. But from a brand protection point of view, from the identity, from hiring gamers into the company and keeping them there, driving product creation with the gamers in mind and so forth, we will keep that separate. We have had this exercise actually ongoing for a while. So it's not that new. We acquired, as some of you know, a video company in Cupertino a while back. And here, we have had the same situation. We've had a highly innovative AI software-driven machinery sitting in Cupertino, which we had to marry with an industrialization machine, our rest of audio and of course, we could have destroyed the whole thing by taking, you can say, democratizing everything, but we have kept the innovation machine as it was and expanded that. And we have, you can say, sustained the strong capabilities of Audio when it comes to industrialization, distribution, manufacturing, supply chain and all that also there. So we have tried it before. This is a much bigger exercise. But I'm very confident that we can do this, and I have to say I look forward to see this going through over the next 2 years. We can do this. We know that. On the market share side. Thanks, Henriette. I mean the 7% is an average. The reality is that market shares are a little bit different in different parts of the world. The market share on headsets is higher than average. So that obviously means that market share on keyboards and mice is lower. And I think also I would say here that the market shares actually have increased significantly recently.

Okay. And the -- in terms of the outlook for the second part of the year, how should we think about that? Now we have the H1 numbers, but it would be nice to get some color maybe on Q3.

We haven't guided, but it's going well. Let's put it like that.

Our next question is from Veronika Dubajova of Goldman Sachs.

A little bit forward-looking, actually. So one, I mean, the gaming market did see some pretty significant COVID-related tailwinds through the last 12 to 18 months. I'm just curious kind of how you think about the sustainability of the revenues if we think about 2020. I think Logitech have commented -- not specifically for gaming, but I think they've certainly on their forward guidance indicated a little bit of caution in terms of growth and normalization of the market. So would love to get your thoughts on that. And apologies. My second question is actually going to be on the Audio business as opposed to the acquisition. But would just love to get an update. Obviously, we got the Hearing numbers yesterday, but don't get an update on the Audio performance in Q3. So kind of a 2-part question for me. One, are you still on track for the 5% growth that you expect in the second half of the year per the guidance? And if you can comment on the performance in Q3, that would be helpful. And similarly, I guess, just looking forward into 2022, Rene, would love to hear if your thoughts on the Audio growth outlook have changed at all through the last month or 2. We've heard some pretty cautious statements from [ demand ] there. So I would love to get your opinion on that.

Thanks for that. On the growth going forward, it's clear that the pandemic situation, like has happened in other categories, brought the whole business to another level. I think we -- when that is set, then I think we are still -- I mean, this 5% growth in gamer community is not our number. That's a general number out there. We actually -- everything we can see, we have listened to experts from left and right, tell us that is a very credible number. Given that and then also this premium effect that is out there with higher ASPs and so forth, there is very realistic to see that from a higher base, we can still drive this 7%, 8%, 9% growth, and that's what we are betting on. Like in any other business, we always try to be better than the market. We will try hard here as well to beat the market and the body language of Ehtisham is fine. So we will -- we think we can do that. But that is as much guidance we have at this point of time. Market growth seems to be there. We will try to build it. On Audio, there isn't a lot I can say. Actually, we are in silent period. We have promised each other that there is no new guidance from Audio, as you have seen. So -- and same goes for midterm and next year. So, I cannot -- we will be back in 3 weeks or 2 weeks or whatever it is.

Understood. But I guess, Rene, you haven't seen meaningful disruption from freight, supply chain issues, et cetera, that you would feel was worthwhile flagging on this call?

I have nothing to flag on this call. If we had, we would have flagged it yesterday.

Our next question is from Niels Granholm-Leth of Carnegie Investment Bank.

Congratulations with the acquisition. First question on the synergies. I presume that a large part of the synergies would derive from a coordination between third-party contract manufacturers in the Far East. But you also mentioned that there is an overlap between the contract manufacturers that GN and SteelSeries would be using. So where should -- where would the synergies then come from in terms of manufacturing? Second question would be on the net debt acquired. So how much net debt is included in the DKK 8 billion acquisition price?

Thanks, Niels. On the manufacturing side, you are right that the majority of the synergies in the step 1 would come from the supply chain across and there is some overlap on components and manufacturing, which you can say, will -- should trigger volume effects. There is also some sourcing differences. And I mean, we, of course, have analyzed this carefully when we have done the due diligence, what is where and how much. So you can say these -- we have high confidence that we can drive these synergies from the overall supply chain, logistics, transport, warehousing, components, everything you talk about here.

Niels, it's Peter. So the value, of course, is as also we stated cash and debt free, so the short answer is 0 to your question.

Our next question is from David Adlington of JPMorgan.

They're a bit bitty and technical, but maybe just some clarification around the first half growth rate would be helpful, please, if you've got that. And then secondly, just in terms of modeling. What should we be assuming in terms of the cost of debt? And is there any impact on the tax rate? I'm guessing that SteelSeries has got some brought-forward losses. And then just a bigger picture one is, in terms of this is another step towards kind of moving away from health care. I just wondered sort of your latest thoughts in terms of changing sectors in terms the way you allocate on the stock market.

So on the specific question on the first half, there was a 56% growth at SteelSeries in the first half of this year. And that's a number that has been disclosed at an earlier point in time. And so the last question, I mean, there is no moving away from health care in this company. We are very committed to get it here, so can somehow back it up. But this -- as we are in category expansions, of course, we are going after these growth domains. And you can say right now, they happen to be on the enterprise or specific consumer spaces like the gaming industry. So we have talked about this gaming for quite some time because it was a growth place where we were not present. It is not a discounting of parts of the company. It's an addition to drive a bigger company. Gitte, do you want to say something?

Well, I guess I can just echo what you said. Obviously, our business is to drive GN Hearing. That was the case yesterday. It's also the case today, and we continue doing that.

And it's Peter. On the interest rate, of course, timing is good when you -- with low interest rates, so you can certainly assume low single-digit interest rate.

On tax, tax implications?

So the question on tax was, sorry?

Yes, this is on tax implications. I'm guessing SteelSeries has got some brought-forward losses that [indiscernible] integrations with tax rate implication.

No comments on that one because we have not seen that. So no comments on that.

Okay. And then maybe just a follow-up on the index allocation. I mean at some point, I don't think that's within your choice to still stay where you are. Is there any point where you will be forced to move sectors?

So David, maybe I can comment on that. I mean, as Gitte and Rene have pointed out here, we focus on driving the business and growing the business and don't focus too much of the categorization here. So that, of course, is our main focus on what we can control.

Our next question is from Maja Pataki of Kepler Cheuvreux.

Yes. Most of my questions have been answered, but I would be interested to hear what your thoughts are on your ability not only from a financial perspective, but also from a management capability perspective to do further acquisitions. And whether this has distracted a bit from -- away from potential acquisitions in hearing.

It's Rene here. So maybe you can follow, Gitte. So I mean, you can say, of course, this is a sizable acquisition for this company. So it puts some pressure on leverage and therefore, also how we deal with this. However, I mean, bolt-on acquisitions has been part of our strategy all the time. And we have sort of found, say, we have this view, as we have talked about, that if you can find the right thing that is part of the future and not part of the past, we try to drive technology and market access and so on and so forth. And we are not at a point where we cannot do more acquisitions. Gitte?

Well, I can just echo what you just said. And I guess, I mean, both divisions are obviously cash positive. So it's still within our means that we can also do acquisition in hearing provided that they are relevant.

Our next question is from Oliver Metzger of ODDO BHF.

The first one is about your growth expectations per product category. So headsets seem to be more sophisticated, and am I right that keyboard and mice and controllers are more commodity? Second question is a pretty broad question on the definition of gamers. So most people game occasionally. So what's the typical path when does this population reach a point that a simple headset or a loud speaker is not sufficient anymore. So -- but also great to give me some comments on the underlying demographics of this first-time gamer and when they turn professional. So professional means they use equipment like from SteelSeries?

I think it's clear that the -- I mean, 2 things. I guess the esport phenomenon in general is growing, and it's growing not only with young people, but actually also with -- I would almost say people my age. But perhaps -- but also grown-ups and people who have been playing for many years. So -- and that drives a sort of premium category in this space. SteelSeries has been focused on e-sports and the higher-end gamers and the intense gamers for all his lifetime, in a sense and in that sense, brought a lot of credibility around that. While that is the case, obviously, the company has exploited the fact that there is also a mid-end -- mid-range of products where you can say more casual gamers or newer gamers and so forth operate, and this is a sizable space where it would be silly not to play. So I think a little bit like this. We have the same strategy in Audio. We lead the market with Hero products and strong engagement with the purpose. And then we drive, of course, also lower ASP -- lower price point products into the market under this tack. And in that sense, these 2 strategies are alike in a sense. But of course, they are very different. So we need to let them live their own life. On the growth, actually, the -- first of all, on the technology sort of creating audio products, of course, we think is a high-value thing. But the reality, of course, if you are in this space, then mice and keyboards are actually quite complicated and products with a significant technology barrier, if you master it. So in that sense, you can create also a competitive edge in this space, and that's what SteelSeries has done.

Our next question is from Mattias Häggblom of Handelsbanken.

We talked about culture before, so this I guess, to some extent, is related to that. So what portion of SteelSeries is currently owned by its management team? And anything you can share in terms of retention program and thoughts about how to keep the key employees within SteelSeries with you. You mentioned the CEO and the team joins, but how will they be incentivized? Will that differ compared to the rest of the group?

So we don't have any specific commentary on that for now. I -- my personal view is that the most important point is that people, like this team, get the right and the best jobs. How we will do retention schemes and so on, we will, for sure, look into that, but I don't have any commentary on that for now.

Our next question is from Issie Kirby of Redburn.

Firstly, on SteelSeries' margins and the quite impressive margin progression since 2017. Can you comment on where its margin sits relative to peers and where you could expect those to go, including the synergies under GN Audio? And then also comment on the gross margin profile of the business? And then secondly, could you comment on how the devices under SteelSeries are currently being distributed to split perhaps between online versus physical retail?

So on the margin question, I don't want to dive into that in a lot of details, but I can say that the fact that SteelSeries have managed to exploit the premium part of the market has also helped drive solid margins -- or relatively solid margins into the -- relative to the market in general. . And of course, that, in combination with the scale benefits that we talked about a little bit earlier here will help us take this even further. But a lot of good work has already happened in the space. And it is a matter of category, but of course, also how you drive the supply chain and that whole platform machinery and they have done that well. On the distribution, SteelSeries is distributed through a sort of network of direct touch with the retailers' distribution partners in less populated countries, not populated but less -- countries with no local presence and an e-commerce. I don't think we have disclosed the e-commerce share of this business, so I cannot. But it is meaningful.

Okay. That's great. And then just a follow-up on the synergies, the point of confirmation. The DKK 150 million is purely cost synergies. You mentioned you were also looking, obviously, to obtain some revenue synergies. Is it possible at this stage to quantify the scale of the revenue synergies you expect between the 2 businesses?

We have not disclosed or have a -- we have a view on revenue synergies, obviously, but let's -- we need to get past the closing and somehow into coming together, then we can start talking a bit more about that.

Our next question is from David Adlington of JPMorgan.

Just backing up your -- what you said earlier about the growth in the first half. It looks like first half was essentially flat on the second half of last year. Is that right? And if so, what's caused the slowdown such as a competition?

Okay. So I think the answer is -- the simple answer is seasonality, basically. I mean, like it is the case in our consumer business here. So yes. Did that answer your question?

It does. I mean it's a big slowdown. So sequentially, just how much seasonality do you normally see in the business?

I think what I tried to say is that the second half is the strong season in this space, like in other consumer businesses. And the first half growth, of course, is up against the first half of last year or the year before. So it is a flattening quarter-over-quarter but driven by seasonality. So it is a strong growth in the first half.

There are no further questions at this time, so I'll hand back over to our speakers.

Thank you, Rene. Thank you, Peter, Gitte and Ehtisham for the call. And thank you, everybody, for taking the time. See you -- talk to you later, and have a good day.