Co-Founder, Chief Executive Officer & Director, CORSAIR GAMING INC
Corsair Gaming (NASDAQ: CRSR) - Q2 2024 Earnings Call
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About Andrew Paul
Andrew Paul, co-founder and CEO of Corsair Gaming, discussed his personal experience with adversity in a December 2024 video, stating that after reaching his "lowest moment" he felt "untouchable" and that "there was nothing they could do to me." In a November 2024 interview, Paul addressed Corsair's acquisition of Fanatec, describing the company's financial difficulties as stemming from a loss of cost control and a post-COVID market bubble. He stated that Corsair intends to let the Fanatec brand maintain its own identity and that the company is working to integrate systems and improve customer service. In earlier appearances, Paul commented on the gaming market's trajectory following the pandemic, noting that a "surge of gamers" buying gear had subsided but that a short refresh cycle would bring customers back. He also discussed the impact of supply chain constraints on graphics cards and shipping costs, and expressed a positive outlook for sim racing as a growth market. Regarding Corsair's stock being targeted by retail traders in 2021, Paul attributed the activity to a battle between long-term investors and short-selling hedge funds.
Transcript (36 segments)
O
Operator0:00
And welcome to Corsair Gaming's second quarter 2024 earnings conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press the star key followed by zero on your telephone keypad. With that, I would like to turn the call over to Ronald vanin, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please go ahead.
R
Ronald vanin0:41
Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ended June 30, 2024. On the call today, we have our Co-Chair CEO Andy Paul and CFO Michael Potter. Andy will review highlights from the quarter, Michael will then review the financials and our outlook, and we will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections through a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Note that until our 10-Q has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release we issued after the market closed today. With that, I'll now turn the call over to Andy.
A
Andrew Paul1:55
Thank you, Ronald, and welcome, everyone, to our earnings call. Q2 is always the lowest revenue quarter of the year for us, and this year is no exception. However, current macroeconomic trends and lengthened refresh cycles have caused this quarter to be weaker than expected. In our two business segments, the Gamer and Creator segment showed good growth with revenue up approximately 20% year-on-year. We've launched some exciting products over the last 9 months which have increased our footprint and market reach. This includes our K65 wireless keyboard, which quickly became the best-selling keyboard in the US according to third-party data in Q2. The gaming components and systems segment, which makes components used for self-built PCs and also full gaming systems, was a different story. There we see market dynamics where incredibly exciting new games and gaming hardware technology is on the horizon but not here yet, which is causing many consumers to hold off with upgrades on new builds. We saw a dip in this components market of approximately 15% year-on-year, and on top of that, some ASP pressure and channel inventory reduction that altogether led to a year-on-year drop of 32% in this business segment.
To expand on the market trends and conditions, it's helpful to put a five-year lens on recent activity. We went through a surge of activity during the COVID lockdown where third-party data showed that the demand for gaming headsets approximately tripled and the self-built PC market approximately doubled. Three years on, having emerged from the lockdowns, the gaming headset market, which is the best indicator for peripherals, is now roughly double the size it was pre-COVID, while the self-built PC market, which we can see from third-party data on cases and power supplies, is roughly flat to pre-COVID levels. Refresh cycles are clearly lengthening on high-priced items like $2,000-plus gaming PCs. We see GPU cards which used to be on an 18-to-24-month refresh cycle have now moved to 24 to 30 months, and some highly anticipated, more complex games like Grand Theft Auto 6 have been pushed to 2025, while others like Call of Duty Black Ops 6 are now expected to be released very soon this year. We think that our historical view of a 3-to-5-year refresh cycle may now be looking more like four to six years in these current economic conditions.
Also weighing on the market is the fact that consumers are acting with caution and are getting used to July Prime Day. As a result, sales in the immediate months before Prime Day appeared to drop. And as a quick preview, our Prime Day sales in July were quite successful, with most categories overperforming compared to last year. Looking at an overall view of the gaming market, we see that the installed base of gaming hardware post-COVID is at an all-time high. Gaming ads continue to rise generation by generation, and incredibly exciting new games and new AI-packed gaming technology are around the corner. In fact, the gaming hardware space looking at 2025 has never looked more exciting. AI continues to move into every piece of gaming hardware as we'll be able to use technology to make devices more adaptive and able to customize their settings to a gamer's playing ability, and we expect to see new generation GPU cards within the next 6 months.
In our Gamer and Creator peripheral segment, as I mentioned before, we are seeing very good growth with revenue up 19.6% year-over-year. This is the third successive quarter of high-teens percentage growth. We are benefiting from a slight improvement in the overall market combined with our success entering new parts of the market which will drive our long-term growth. We intend to continue to grow the Gamer and Creator peripheral segment organically as well as with strategic acquisitions. We expect this business will become larger than our traditional components business within a few years. This year alone, we launched teleprompters, PC controllers, and mobile controllers, as well as many other innovative new products in the existing categories. We also recently announced our entry into the sim racing market with products which we recently showcased at Computex. Separately, as we noted in today's earnings press release, we remain interested in the sim racing brand Fanatec owned by Endor AG, and though we were disappointed to see the company file for insolvency, we are still hopeful that we can acquire this company. Moving on to our components and memory businesses, we continue to dominate the market with leading market share in most categories. We intend to continue that trend while running these businesses as efficiently as we can from a cost standpoint while we wait for the market to recover and return to growth. Overall, our long-term fundamentals remain strong and we continue to lead. We're positioned to benefit from a strong refresh cycle when the new GPUs launch later this year, and we are excited about continued strong growth in our core Gamer and Creator peripheral segment. Let me now turn the call over to our CFO Michael Potter for details on the financials. Michael, please go ahead.
M
Michael Potter8:00
Thanks, Andy, and good afternoon, everyone. This quarter was particularly challenging due to the lower than expected demand in the high-end gaming components and systems market where we have a leading market share. This had a significant impact on our profitability due to the lower than expected revenue and our operating cost base not yet being adjusted. It also had an impact on cash as we paid for inventory that has not yet been sold. However, as Andy discussed, we continue to expect a better second half due to normal seasonality and our new product introductions. To partially mitigate the near-term impact of lower revenue, we implemented additional cost-saving measures in July and will continue to reduce operating expenses where needed to better align with the reduced sales levels in the short term. In terms of the specifics, Q2 2024 net revenue was $261.5 million compared to $325.0 million in Q2 2023. For the first 6 months of 2024, net revenue was $598.6 million from $679.95 million. Per our Q2 2024 revenues compared to 34.3% in Q1 2024, while the APAC region was 10.9% of our Q2 2024 revenues compared to 13.8% in Q1 2024. Turning now to our segments, the Gamer and Creator peripheral segment contributed $94.2 million of net revenue during the second quarter compared to $78.8 million in Q2 2023. For the first 6 months of 2024, Gamer and Creator peripheral segment revenue was $212.2 million compared to $167.72 million in the first 6 months of 2023. The gaming components and system segment contributed $167.1 million of net revenue during the second quarter from $246.74 million. Memory products contributed $81.8 million in Q2 2024 compared to $88.9 million in Q2 2023. For the first 6 months of 2024, gaming components and system segment revenue decreased to $397.4 million from $517.7 million in the first 6 months of 2023, with revenue from memory products decreasing to $26.7 million from $24.27 million. Overall gross profit in the second quarter was $63.11 million compared to $82.8 million in Q2 2023, reflecting the lower revenue level and a 1 to 2% margin impact from fixed costs allocated over lower than expected volumes. Gross margin decreased to 24.1% compared to 25.5% in Q2 2023. Overall gross profit decreased to $149.7 million for the first 6 months of 2024 compared to $168.2 million in the first 6 months of 2023. Gross profit in the Gamer and Creator peripheral segment was $35.7 million compared to $25.5 million in Q2 2023, gross margin at 37.9% compared to 32.4% in Q2 2023. We're pleased to see the continued rebound in this business and believe we're on track for further improvements while higher sales volume continues. The gaming components and system segment gross profit was $27.4 million compared to $57.3 million in Q2 2023, reflecting the lower sales volume. Gross margin was 16.4% compared to 23.2% in Q2 2023. Our memory products gross margin in this segment were 11.5% for the second quarter compared to 14.6% in Q2 2023.
Second quarter SG&A expenses were $77.4 million compared to $70 million in Q2 2023. Second quarter R&D expenses were $17.4 million compared to $15.6 million in Q2 2023. This reflects our investments in support of our expanded product line and new areas including mobile controllers and sim racing. We expect R&D to decrease in Q3 given the number of new products we have already launched in 2024. As additional color, we are executing on cost savings and took additional action in July including the reduction of approximately 100 employees and will reduce some external expenses, which will lower operating expenses in the second half of 2024. We remain committed to controlling operating expenses while continuing to support growth in our Gamer and Creator peripheral segment which has higher operating expense demands for R&D and marketing. GAAP operating loss in the second quarter of 2024 was $24.7 million compared to GAAP operating loss of $2.7 million in Q2 2023. Second quarter adjusted operating loss was $3.8 million compared to adjusted operating income of $15.9 million in Q2 2023. Adjusted operating income was $1.6 million for the first half of 2024 compared to $34 million in the first half of 2023. Second quarter net loss attributable to common shareholders was $29.6 million or 28 cents per diluted share as compared to net income of $1.1 million or 1 cent per diluted share in Q2 2023. On an adjusted basis, second quarter net loss was $6.8 million or 7 cents per diluted share compared to an adjusted net income of $9.8 million or 9 cents per share in Q2 2023. For the first 6 months of 2024, adjusted net income was $2.7 million or 3 cents per diluted share compared to $21.8 million or 20 cents per share in the first 6 months of 2023. Finally, second quarter adjusted EBITDA was a loss of $1.2 million compared to a gain of $17.8 million for Q2 2023. For the first 6 months of 2024, adjusted EBITDA was $16.8 million compared to $38.3 million in the year ago period.
Turning now to our balance sheet, we ended Q2 with a cash balance including restricted cash of $94.6 million. We continue to maintain a healthy balance sheet with sufficient liquidity to fund the development of our expanding product portfolio. We expect to further reduce inventory during the third quarter as we move into the traditionally stronger second half, which will also generate additional cash. In particular, we expect to sell inventory that we ordered based on higher expected demand. This is concentrated in components inventory which has a longer technology refresh rate, and we anticipate selling that inventory in the second half and turning it into cash in Q4 2024 and Q1 2025. We ended Q2 with $18.9 million of debt at face value and our $100 million working capital revolver remains undrawn and fully available. Overall, we expect liquidity to remain excellent for the rest of 2024, allowing us to be flexible as opportunities present themselves. In terms of the full year 2024, we are updating our previous outlook to reflect the market softness Andy discussed earlier. We now expect total revenue in the range of $1.25 billion to $1.35 million, adjusted operating income in the range of $48 million to $63 million, and adjusted EBITDA in the range of $60 million to $75 million. With that, we're now happy to open the call for questions. Operator, will you please open up the call for Q&A?
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Operator16:57
We will now begin the question answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from George Wang with Barclays. Please go ahead.
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George Wang17:18
Oh, hey, guys. Thanks for taking my question. Firstly, just on the self-build DIY PC kind of memory component, you guys talk about kind of recovery pushed out in terms of the refresh kind now four to six years, but still expecting GPU refresh in the next six months. Can you talk about kind of potential for further delay or you guys are kind of quite confident you should be on the horizon? Just maybe you can give a little bit more color just on how you forecast potential downside or, given the macro or do you think given historical presence and the data you're seeing, you should be relatively in short order?
A
Andrew Paul18:04
Yeah, so there are two things on that. One is obviously we're privy to confidential information from our partners that I can't share. What I'd say on the standard release of cards, the market is all kind of agreeing. The buzz around the market is that the new cards will come out either very late this year or early next year, so that's out there. Now, what will that do in terms of buying activity? Clearly, every two years up until now, or every 18 months to two years, NVIDIA or AMD has launched new graphics cards. So if they launch in Q1, that would be more like 30 months, so that's a delay. Now the second thing is what do we expect that refresh cycle to look like? We're pretty convinced that a refresh cycle after COVID where the PC component business basically doubled has to be followed by an echo of that huge surge. For an echo not to occur would mean that all the people that came into the market to buy new people that came into the market to build gaming PCs, which we think was almost the same number that previously existed, all of those would have to go away and not ever upgrade, which we don't believe that scenario. So we're pretty sure there's going to be a strong refresh next year. And obviously once we get into new graphics cards at the higher end where people are using these cards to build $3,000 machines, that is much more where we operate and we have high market share.
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George Wang20:02
Okay, great. Just a second, quickly follow-up if I may. Just on the peripheral Creator business, it's nice to see almost 20% growth year over year with nice margin. Just curious how sustainable it is and from a kind of high level, any latest updates in terms of the consumer as it relates to the peripherals? I mean, do you still see more white space to drive up the ASP over the next few quarters?
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Andrew Paul20:30
Well, yeah, so actually this is a very interesting question. I'll take it in a few different parts. Firstly, the overall peripheral business is twice the size of what it was pre-COVID. So if you look at headsets, which is kind of the bellwether of the gaming piece, the number of headsets that were sold in the COVID period tripled from pre-COVID, so 2019 to 2020. And at this point, it's still 2x, so there's a healthy market that's growing there in terms of the number of people that are getting into gaming and buying gear. Now, this year compared to last year, the market has been relatively flat, but what we've seen in general is that the market is bifurcating a little bit. So there's a fair number of very low-end peripherals at low ASPs which we really don't participate in. The ASPs from the major suppliers are typically going up. And so I think this is something I talked a lot about when we did the IPO, that I thought there was a lot of expansion possible as people have been gaming for a while and are happy to pay more for products with extra features. And that's the same we've seen in any enthusiast-type products, whether it be skiing or golf. People, as they get older, buy more expensive gear with better features.
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George Wang22:07
Okay, great. I'll go back to the queue.
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Operator22:11
The next question comes from Colin Sebastian with Baird. Please go ahead.
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Colin Sebastian22:18
Hi, thanks and good afternoon. Andy, the comment in the release about the gamer peripheral segment perhaps becoming larger than components over time, that's an intriguing comment. I guess maybe if you could walk us through that dynamic in terms of maybe what you see as normalized growth rates in both sides of the business and maybe how that's informing your product development as you think about the next few years. And I have a follow.
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Andrew Paul23:47
Well, look, first thing, this has always been our plan. And just from the pure math of it, we have very, very high market share. Well, let me start at the growth numbers. So we've seen historically, because we've been doing this for a long time, right, we've seen historically 5 to 10% market growth on the gaming PC market, in other words, those people building $2,000 to $3,000 gaming PCs, but we've seen 15% market growth on peripherals, and this is over a sort of 10-year period. Now that's obviously been shaken up a little bit by this explosion in COVID and now we're on the backside of it still. But that just gives you a sense of the market dynamic. And so we're still seeing generational shifts of people doing more and more gaming; in other words, Gen Z are gaming more than millennials, millennials are gaming more than Gen X, and this sort of thing. So there's more and more people gaming, and the entry point is always a headset or a gaming keyboard. In terms of white space for us, we have a very, very low market share in peripherals and we have very high market share in components. So what that means is that we would expect, as things move forward, we obviously try and get more and more market share, but realistically we will grow at or slightly above the growth rate of components because we already have an extraordinary market share. With peripherals, we have so much space to grow that it wouldn't be out of the question for us to double the size of our business in a few years. And on top of that, this is where we're doing all the acquisitions. So we're looking around at all the small companies that are in the peripheral space or the enthusiast space, and in general there's a lot of sub-hundred-million companies that we can absorb and run much more efficiently than they can on their own. So that's kind of the game plan. A combination of organic growth and acquisitions, I think, will grow that. We're already at this point this year, we already expect that we'll make more gross margin from our peripheral segment than our component segment. And so that's where we're putting most of the resources. Obviously, it takes a lot more R&D and marketing to be successful in the peripheral space where the products are much more complicated, there's a lot of microcontrollers. So that just gives you a sense of where we're allocating both acquisition dollars and OpEx dollars to grow that segment.
C
Colin Sebastian25:25
Okay, thanks, Andy. And then Michael, I guess in terms of understanding the pathway back to growth, maybe the shape of Q3 versus Q4. I guess, you know, looking into Q4, what are the indications you're seeing around demand, your ability to meet that demand, and then perhaps the role that promotions will play in driving retail sell-through this year from what you're able to gather at this point?
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Operator26:47
Again, if you have a question, please press star and then one. Our next question comes from Drew Crum with Stifel. Please go ahead.
D
Drew Crum26:57
Okay, thanks. Hey, guys, good afternoon. So on the peripheral segment, Michael, anything to the step down in gross margin in Q2 versus Q1, and is the 40% you achieved in Q1 too optimistic for 2024? And I on the sim racing products that you launched back in early June, any early read just the receptivity you've seen for that line? And then I have a follow-up.
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Michael Potter27:26
I'll let Andy talk about the sim racing products a little bit. But just in terms of margins and things, somewhere around 40% is achievable. Q2 normally we just have lower unit volumes, so there's a little bit less fixed cost absorption, a little bit of mix difference as well in the second quarter, but it was otherwise relatively similar to the first quarter which had the 40%. Promotional activities usually step up during the Christmas selling season in Q4, but we haven't seen anything abnormal. I mean, the indications from the Prime Day that just passed is that people will discount but they weren't extreme like they were in previous years, so it was more like normal discounting that was going on. I'll let Andy talk about the sim racing product.
A
Andrew Paul28:10
Yeah, and I'd say also, Drew, look, we've spent the last couple of years retooling most of the base technologies in our gaming peripherals. So our keyboards today look quite different from the keyboards of two or three years ago when the trends were slightly different. And one of the things we really concentrated on was how to get the cost structures right so that we could get back to target levels. So that's the first thing. Sim racing, as you probably know, we brought out a prototype essentially at Computex of a chassis. Everyone that saw it loved it. That's not due to go into production later. And I think, as you know, we're also in the process of trying to acquire this company Fanatec from Germany, so we're all in on sim racing. And I think next year is going to be a big year, but that market is strong, growing, all the fundamentals are there. This is something where, in an environment where people's budgets are a little bit stretched, it's actually a lot cheaper for people that like racing to do sim racing at home and practice on tracks rather than take their car to a track. And with the Drive to Survive success and F1 success in the US, there's a lot of people now getting into this hobby, so very exciting market.
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Drew Crum29:38
Got it. Okay, um, and then on the components business, you discussed the new GPUs launching late in calendar 24 or early calendar 25. What is factored into your guidance for 24 at this point? And does the timing have any bearing on Q4 or does it not matter? Is the sale of your products coincident with the launch of the GPUs or is there a lag effect? Thanks.
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Operator31:35
Again, if you have a question, please press star and then one. Our next question comes from Doug Cruetz with Cowen. Please go ahead.
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Doug Cruetz31:42
Hey, thank you. Just looking at your components and systems margins, I think they were the lowest they've been in about five years. Can you talk about that, elaborate on that, and talk about what kind of margin recovery you are baking in for the rest of the year? Thank you.
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Andrew Paul32:15
Well, I think there's two things. I mean, Michael mentioned this earlier, there's a certain amount of fixed overhead that we have that applies to margins. With a much lower revenue base, that does move them down. But yes, we are having to retool some of these products, especially in power supplies and in some cases, cases, to meet the current trends and demands. So there's a little bit of inventory clear-out of old products in Q2. So I would say I would not expect the margins that we were seeing in Q2 to be repeated in Q3 and Q4. I would think we do much better. And there's also a little bit of a shift to lower ASP products for us, so we make lower margin percent on the lower ASP products in general and higher margin percent on the higher ASP product. So as we move closer to the end of the year and the newer graphics cards start driving more of the buying pattern, the ASPs should move up again and that should help margins as well.
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Operator33:15
And the last question comes from Aaron Lee with Macquarie. Please go ahead.
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Aaron Lee33:22
Hey, guys, good afternoon. Thanks for taking my question. Maybe a quick one on the competitive environment. Can you just comment on what that looks like currently? Have you seen any competitors behave irrationally just given the softer than expected market conditions in the first half?
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Andrew Paul33:39
Well, the major competitors, in general, I mean obviously there's always somebody that discounts heavily, but we just went through Prime Day and we didn't see anything insane. I will say that on a general basis, there's a lot of new brands showing up from the factories in China where China is definitely a weaker market than it was, higher unemployment, economic situation a little bit worse there. So there are sort of empty factories that need to be filled up, and we do see quite a lot of new brands showing up, especially on Amazon Marketplace, at fairly reduced prices. So that's the main thing I'd say. But this is where I was sort of talking earlier a little bit about ASPs of headsets. We are seeing that the market is somewhat bifurcated, so there's a big chunk of very, very low-cost peripherals out there now, and then in general, the major manufacturers, you know, ourselves, Logitech, Razer, etc., are managing to raise ASPs and do pretty well.
A
Aaron Lee34:47
Gotcha, that's helpful. Thank you. And then quick follow-up. You recently announced a partnership with TD Synnex, which I imagine is geared towards peripherals, maybe something like your Elgato products. So correct me if I'm wrong there, but can you just talk about that partnership and what it means for your business?
A
Andrew Paul35:44
Gotcha, okay. Thank you very much. And adding TD Synnex, we added CDW last year, and so this is just putting together the whole channel so that business can grow.
A
Aaron Lee35:41
Understood. Thanks for the color.
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Operator35:47
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
A
Andrew Paul35:54
Well, thank you, everyone, for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department. And we look forward to updating you next quarter. Thank you and have a good evening.
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Operator36:09
Thank you, everyone, for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department. We look forward to updating you next quarter. Thank you and have a good evening.