Turtle Beach Corporation (TBCH) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. We welcome you to the Turtle Beach Corporation's Second Quarter 2026 Conference Call. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to Jacques Cornet from Investor Relations team. Jacques, you may begin.

Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon that details the company's second quarter 2026 results, which is available on the news page of the company's Investor Relations website, Corp. turtlebeach.com where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available in the Events and Presentations section of the company's Investor Relations website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. The company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including without limitation, the annual report on Form 10-K and other periodic reports which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, it will be discussing non-GAAP financial information. company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP, you can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and the presentation. Hosting the call today are Cris Keirn, Chief Executive Officer; Andrew Clipsham, Interim Chief Financial Officer. With that, I'll turn the call over to Chris.

Thanks, Jacques. Good afternoon, everyone, and welcome to our second quarter 2026 earnings call. During the second quarter, we continued executing against the strategic priorities we've outlined throughout the year. We expanded our product portfolio, advanced our brand transformation, returned significant capital to shareholders through share repurchases and prepared Turtle Beach for what we believe will be a stronger demand environment in the second half of 2026. Revenue for the quarter was $56.4 million, essentially flat year-over-year. Continuing the trends we discussed on our last call, retail partners remain disciplined in managing inventory through much of the quarter with further reductions in channel inventory through the first half of Q2. As the quarter progressed, however, we began to see encouraging signs that retailers have now stabilized inventory ahead of what we expect will be a stronger second half of the year. We believe the combination of historically low channel inventory, improving early Q3 sell-through trends and the industry's upcoming content releases create a favorable setup for the second half of the year. Together, these factors prepare the business for a return to growth during the back half of 2026. One of the defining characteristics of Turtle Beach in 2026 and has been the pace of innovation across our portfolio. We are delivering a significant increase in new product introductions this year, and we're encouraged by the early performance of those models. The launch of Stealth Pro II our new flagship headset, added share in the premium price tier for U.S. gaming headsets, supported by our new brand initiatives and building on the exceptional preorder demand, we mentioned in our previous call. We also recently announced the industry's first officially licensed wireless gaming headset for Nintendo Switch 2, further reinforcing Turtle Beach's leadership in gaming audio and our collaborative partnership with Nintendo. In addition to this latest audio innovation, our new Nintendo Switch 2 controllers and incremental retail placements drove year-over-year U.S. share growth in Nintendo controllers for the quarter, building momentum for Turtle Beach in this key growth segment. More importantly, these launches with more to be announced strengthen our leadership heading into what we believe will be 1 of the strongest gaming content calendars in years. Looking ahead, Grand Theft Auto V remains on track for its confirmed November launch while Call of Duty Modern Warfare 4 has been confirmed to launch in October. Rather than simply benefiting from the increased demand these releases have historically generated, we've spent the past several quarters aligning our product road map, brand investments, retail distribution and operations to proactively set up Turtle Beach for the anticipated increase in gamer engagement. With GTA 6 launching first on consoles, we believe Turtle Beach is particularly well positioned given our leadership across console gaming accessories and the timing of our newest product introductions as the market strengthens. Capital allocation also remained an important area of execution throughout the quarter. Following the refinancing of our credit facilities in May, we repurchased approximately $25 million of our common stock during the second quarter. Those repurchases reflect our disciplined approach to capital allocation and our continued belief that the market does not fully recognize the long-term value of Turtle Beach. With approximately $31 million remaining under our current authorization -- we will continue balancing opportunistic share repurchases with investments that support long-term value creation for the growth opportunities ahead. Given our confidence in our new product pipeline, the strength of the second half gaming release calendar and our expectation that channel inventories will rebuild toward more normalized levels, we are reaffirming our full year 2026 guidance. Before turning to the financials, I'd like to introduce Andrew Clipsham, our recently appointed Interim Chief Financial Officer. Andrew has been with Turtle beats for nearly 8 years and brings more than 20 years of global financial leadership experience. Throughout his time with the company, he has played an important role in strengthening our financial operations and supporting many of the strategic initiatives we've discussed over the past several years. I'm pleased to welcome Andrew to his first earnings call as interim CFO. With that, I'll turn it over to Andrew to provide additional details on our second quarter financials.

Thank you, Cris, and good afternoon, everyone. It's a pleasure to be joining you today as Interim Chief Financial Officer. Second quarter revenue was $56.4 million, which is broadly unchanged from $56.8 million in the prior year period. While retail inventory levels remained below historical norms through much of the quarter, we began to see improving retail ordering patterns as we move through the period. Gross margin for the quarter was 38.8%, an increase of 660 basis points compared to 32.2% in the prior year quarter. Gross margins benefited from approximately $4.3 million of a total $8.2 million of tariff refunds received during the period. Excluding onetime items, our underlying gross margin profile continues to reflect the benefits of the structural improvements we've made over recent years through product mix optimization, supply chain initiatives and disciplined pricing actions. For the balance of the year, we continue to expect gross margins to remain within our targeted mid- to high 30% range. As our newest products scale through the second half of the year and revenue increases seasonally, -- we expect those operating improvements and positive product mix to become increasingly evident. The recently announced tariff action increases the effective tariff rate on imports from China and Vietnam to approximately 12.5% and from the prior 10% level. While we continue to monitor the trade environment closely, the actions we've taken over the past year to diversify our supply chain and optimize sourcing provide confidence that we can largely mitigate these changes a material impact on profitability. Operating expenses were $24.9 million or 44% of revenue compared to $18.6 million or 33% of revenue in the prior year quarter. The increase primarily reflects higher marketing investments supporting our expanded product launch schedule and brand initiatives, together with higher general and administrative expenses compared to the prior year quarter that included a onetime insurance recovery. The marketing investments are consistent with the strategy we've outlined throughout the year and are intended to support long-term growth rather than near-term revenue. Net loss for the quarter was $7.3 million compared to $2.9 million in the prior year period. This quarter's loss reflects increased marketing investments during the period to support our brand and 2026 product road map together with modestly higher interest expense. The prior year quarter included a onetime insurance recovery, which partially offset the net loss for that period. This recovery was adjusted out of prior year EBITDA. Adjusted EBITDA for the quarter was $1.3 million compared to negative $3.9 million in the prior year period. The year-over-year improvement reflects the stronger gross margins presented in these results. Turning to the balance sheet. At June 30, net debt was $64.4 million, consisting of $83.9 million of outstanding debt and $19.6 million of cash. Operating cash inflow for the quarter was $6.5 million compared to an operating cash outflow of $3.1 million during the prior year period. Our revolving credit facility remained undrawn at quarter end. As we announced in May, we completed the refinancing of our credit facilities to increase financial flexibility and better align our capital structure with our long-term capital allocation priorities. The new structure provides up to $80 million in an asset-based revolving facility as well as an $85 million term loan, supporting both operational flexibility and our ongoing share repurchase strategy. During the second quarter, we repurchased approximately $25 million of common stock, representing nearly 2 million shares at an average purchase price of $12.53. In -- following these repurchases, approximately 17.9 million shares remained outstanding, with approximately $31 million remaining available under our current buyback authorization. As Chris mentioned, we continue to view share repurchases as an important component of our capital allocation framework. At the same time, we'll remain disciplined in balancing those repurchases with investments that support future growth. Turning to guidance, we are reaffirming our full year 2026 outlook. Revenue is expected to remain in the range of $335 million to $355 million, while adjusted EBITDA is expected to be between $44 million and $48 million. As is typical for Turtle Beach, we expect the majority of our revenue to be generated in the second half of the year. This year's revenue cadence is expected to be more heavily weighted towards the back half than our historical seasonal pattern, reflecting the timing of our expanded new product introductions, improving channel inventory levels and the industry's major software releases, including Grand Theft Auto VI. While we currently expect the third quarter to contribute a percentage in the mid- to high 20s of full year revenue, the precise timing of retail holiday inventory load-ins can shift revenue between the third and fourth quarters. This is a normal feature of our business is reflected in our guidance and does not affect our expectations for the full year. With that, I'll turn the call back to Chris.

Thanks, Andrew. As we look toward the second half of 2026, our priorities remain clear. We are focused on executing our product road map, supporting our retail partners through the holiday season, continuing to invest behind the Turtle Beach brand and allocating capital with discipline. The work we've completed over the past several years has created a stronger company with a broader product portfolio improved operating leverage and greater financial flexibility. While the overall gaming accessories market has remained challenged over the past several quarters, we believe the industry is entering a more favorable period supported by an improving content release calendar, momentum around Nintendo Switch 2 and the anticipated launch of Grand Theft Auto V and other titles. As those industry catalysts develop, our focus remains on translating revenue growth into expanding profitability and long-term shareholder value through disciplined execution. As always, I'd like to thank our employees for their strong delivery towards our goals, our retail and strategic partners for their collaboration and our shareholders for their continued support. With that, operator, we can open the call for Q&A.

[Operator Instructions] Our first question is from Drew Crum from B. Riley Securities.

Appreciate the detail on the retail inventory dynamics you noted, 1 month into 3Q, can you talk about any observations what you've seen in terms of willingness on the part of retailers to replenish? Or is that something you're anticipating later in the quarter? And then I have a follow-up.

Yes. Thanks for your question. Good to hear from you. Yes, we are seeing positive signs here to start Q3. We're a month in here. And what we have seen is really since the preorders for GTA 6 started -- while we haven't received the market data yet, obviously, that won't come out until -- in a few weeks here in August from Sircana. We do have the reported sell-through from retail that we get on a weekly basis. And we've seen, since that preorder started weekly year-over-year growth in the business. And so that's been a very positive sign for us, and we're seeing that momentum continue here into August, the very early part of August. So we're pleased to see that development. In addition, the channel inventory dynamics that we saw in the first quarter and that really continued to -- until about midpoint in the second quarter appear to be behind us. We're -- we've seen a nice stabilization of those numbers and knowing what's coming up in the back half with not only GTA 6, but some other really strong titles, we feel that will be a nice tailwind for the business moving forward.

Got it. Okay. Appreciate that. And then just a quick follow-up. I know that the business typically uses cash in 3Q. Can you talk about your ability to continue to buy shares given the cash flow dynamics of the business? Near term?

Absolutely. As you mentioned, we are getting in that period of time where we start to build inventory for holiday. You may see in the numbers, we've had a good reduction of inventory year-over-year. Up to this point in the year, we're about $20 million of inventory lower than we were at this time last year. If you remember, we had purchased ahead a good amount of inventory at that time in anticipation of the tariffs, which turned out to be a very good move for the company. But where we are now, we feel good about our inventory levels, but we are going to be committing more of that cash to the inventory build coming up, particularly with the growth that we expect to see in Q3 and Q4 due to the titles that are going to be releasing here in the back half.

Our next question is from Sean McGowan with ROTH Capital Partners.

Chris, Andrew. Question about costs, you gave us an idea of what to expect in terms of third quarter revenue relative to the full year, but can you talk a little bit about the phasing of cost particularly selling and marketing. I mean how is that going to be more skewed to the fourth quarter than typical?

Yes. Sean, thanks for your question. It's a great question, especially considering the dynamics we've got coming up. We have put more of the budget towards sales and marketing in the first half. There's 2 reasons for that. Number one, as we mentioned previously, we have a lot of new product launches this year. We've announced several of those. We've got more announcements coming here later this year. And secondly, we launched the new brand initiatives, which we've seen some really great early reception and results from on those initiatives. And so we have increased our spend so far this year. We do anticipate continuing some of that spend as we get into the back half, particularly with the opportunities that some of the new games are going to present. And some of the lift that we've seen in the past -- we talked a little about on the last call about this, about the historical lift that we've seen from a game like GTV. So we won't be continuing kind of the same level of spend that you've seen increase from us in the first half, you'll see similar kind of numbers in the second half, and that's all included in our guide.