HEAR - Earnings call transcript Q2 2019 | Turtle Beach Corporation

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Operator

Good day, ladies and gentlemen and welcome to the Turtle Beach Second Quarter 2019 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded.

Before we get started, we'll be referring to the press release filed today that details the company's second quarter 2019 results, can be downloaded from their Investor Relations page at corp.turtlebeach.com. On that website you will also find an earnings presentation that supplements the information to be discussed on today's call.

the the be evening. company's of Relations on recording of section website a call available will Investor Finally, later this

be cause expressions containing statements regarding of call some Statements with about the aware Form other made beliefs and will, in could, results that laws. as Turtle and or Please on current those this materially and may, limitation, Form report company's risk review These uncertainties during contained the expectations the periodic federal the Exchange expectations. the Commission. may security statements risk from their to reports may such the differ XX-Q, releases factors management's events within operations you statements. cause comments in Corporation's forward-looking the Annual and on company The factors meaning words materially safe today's of include that identify believe, expect, actual Beach could constitute most statements. results harbor anticipate specific to results involve forward-looking and filings differ and future company's recent also similar and from risks Securities Including encourages Report XX-K and without quarterly statements to press their in forward-looking which that described

accepted discussing to to The States that information. accounting information notes financial also as any the forward-looking they company on of supplement information providing generally or non-GAAP update GAAP. call. is accordance this undertake does company be prepared The statements with will this not a or United revise publicly The principles after conference that the call, in company in date

and reported earnings these in of reconciliation tables the results a GAAP release provided and in find metrics to reconciliation can their today's presentation. You

the Stark. now, call Executive Mr. the Officer, to Juergen Chief over I'll Juergen, company's turn And

Juergen Stark

slightly and guidance in in higher, we Good earnings Revenues pleased of range thank the middle our the second last us. We're the outside year. QX best joining right you financials achieve with and everyone, of for resulting quarter. in afternoon, results were

compared For example, than quarter while second our last of second twice XX% They quarter more of of quarter year. were level the the to second down XXXX. sales were

As as laid half our market in accessories outlook console as out position emerging the initial XXXX, the we we tracking we of the what and market, in it our well first PC pretty presence during are look at expected closely to things XXXX. for when gaming our

console year. is to XXXX up second gaming to only shaping biggest for ever, be last second the year headsets

portfolio headsets lead the headsets in gaming We successful acquisition. gaming increasing gamers. of continue with And with well of market closing significantly and ROCCAT to share our market levels for has powerful continued all this accessories PC innovative and growth the our high-quality a PC gone of market with the

new and influx a games Fortnite, headset new Both gamers As of console to headset users. PUBG XXXX who large These you more. existing recall, time last year. record saw sales buyers Battle adopted like first and drove Royale headsets may gaming play

in what due tiers. despite stock share believe percent keep our XX-plus our entry through is gained to market our products already also dramatic price share headset and ability to our the share We increase level the sales strong in we market

year-over-year revenues a XX% As in grew we XXXX. result

to the year share XX% level levels gains factor reduced XXXX. last market their normalize, continue XX of gaming Coming higher of would and weren't but advantages our the rates sales upgrade historical reduce around at would XXXX, gamers base somewhat, as the but users and in-stock And of percentage in the headset prior influx new headsets that of into expected year's to months. the replace year's remain entry share this drove we new year, of roughly tiers last large and a somewhat, our than

NPD U.S. share my which comments Note, and call our referring market. using sell-through to today's represents U.S. share, data are largest we're throughout

and So had is market tracking roughly has where projected. is we happened the far what this

about XX% but continues market than from up our is sell-through market this from to is down June for XXXX, share year-to-date and the higher XXXX. down year significantly XXXX as And somewhat, but over outpace competitors. expected, our XX%

a line our the over despite pricing As result expectations is maybe marketing more and in this result, aggressive of revenues were them and a competitors from forecasting with as market.

ROCCAT billion and with well-positioned $X.X we've own quite our Beach to the gaming, talent and us of PC pleased the completed end market. remain joining May thrilled Atlas the added their PC products has to the combination in I'm have team of confident and Turtle headsets PC expertise we We plus keyboards gaming ROCCAT with mice, grow the of line at acquisition this strong that highly us. And and that remain PC of gaming portfolio

We'll as John say after through outlook commentary have more the about to walks environment as second current our well on quarter financial John? updated results. our

John Hanson

everyone. Juergen, Hey, you thank good afternoon, and

result, users market. was quarter second the XXXX now part the million our of second reflecting are headset million $XX who the into basis, of quarter $XX.X currency or a of installed base constant gaming on revenue in right net increased Moving core

Royale demand covered. revenue XXXX while in just historical the remained Juergen from year consumer the rates net driven $XX.X demand above the as delta of has expected this or million, games, by the QX decline prior record result was Battle levels, was in levels

offset XX.X% margin cost, cost. the based mix, XX.X% volume compared Gross leverage decline product a the decline freight quarter the result decrease as due by in quarter primarily This second to to fixed cross increased a and of the revenue, was in of decrease expected in in a in warehouse was partially second XXXX. refurbishing

and This acquired of to in sponsorship ROCCAT quarter marketing $XX spend increase was and in an increased planned in same XXXX. due compensation. million quarter and integration expenses, transaction million and from million of stock expected the the digital $X.X operating cost, second as ROCCAT XXXX $XX.X non-cash expenses Operating to primarily of base

in quarter, a million of compared loss a result million the million which on an gross $X.X $X.X this is Exclusive interest was of partially by expected a financial in included loss expense. the XXXX of of by as the $X.X increased unrealized net loss unrealized decline decline revenues ago loss, Net the to planned of expenses, in driven instrument obligation. larger loss operating year the second quarter a in the offset and profit lower in

share Net share the loss weighted per diluted share XXXX on of XX.X was the average negative in shares million $X.XX second loss shares $X.XX a average negative outstanding net compared a year quarter. million weighted quarter to per XX.X ago a in on of outstanding,

per million transaction in million related income Adjusted incurred share integration period. net and ROCCAT, or acquisition to the $X.X net diluted $X.XX compared the XXXX per costs $X.XX to diluted which or of of excludes was loss, $X.X share

ago Adjusted the certain $X.X EBITDA initiatives quarter. note, EBITDA that half due deferral was XXXX in year. in adjusted half are marketing the of guidance Please the million to earnings $X.X year our first now back of primarily per planned to share and million compared ranges exceeded the

sheet. Now XXXX from for the XX, of the compares $XX.X by paid cash and turning year-over-year primarily cash of performance, $XX.X cash to million $X.X offset company's equivalent June operational the At This XXXX. balance debt $X.X company at ROCCAT acquisition the XXXX. million resulted of equivalent outstanding improvement partially and cash million business This debt revolving of with to improved in cash June had XX, credit million and the under outstanding line. the our of

to million XXXX June includes at at million and for were Inventories last $XX.X approximately XX, million year June compared $XX $X.X XX ROCCAT.

will utilize assume fully net an due remaining accordingly. tax the continue operating we to than an approximately experience to our to due rate of utilization of We in rate losses. effective expected higher XXXX If profits, the increase tax we XX% the pretax expected effective NOLs

in utilize of NOLs XXXX we XXXX. guidance, in Assuming to the pretax expect income implied to the our most continue

April $XX announced program. million we on XX, a Finally, repurchase share

conditions course, will less approximately average development. in be our to quarter, themselves. the was we flow. months subject The this that cost of prioritize and During regulatory of activity if share. continue the authorization per an right active conditions timing cash be X will, XXX,XXX growth of $X.XX buyback present repurchased shares and than to we investing our second to in we market And expect business opportunistic But parameters, our at

back call the over Juergen to Juergen? some comments. turn additional I'll Now, for

Juergen Stark

John. Thanks,

bit and it was year. they news with what the develop this will June, we major changed see expect to that much are our in expo titles to consoles or the that launches was a formally the now hear line we The look Let's and EX, PlayStation what and have we didn't that launching dramatically announced half. were market gaming of how Still, both in console EX. expectations new At year. Sony second anticipated for the our of Microsoft that on Xbox next closer had confirmed confirmed view good next-gen prior were released

more first video launches this delaying will this business how said, the the positive the their QX until That to generation believe customers about with potential formally be are we're impact and were history this It accessory game see heavily We positive purchase consoles potential Sony that dates. to of some the next is in potential few ahead Microsoft affects far excited the prices discounting console sales, and interesting announced of maintain years. on and next negative of console a new launched. the new of very launch consoles time

even more speed to gaming. will upgrade enable significantly platforms entertaining Both power, again and capabilities and immersive

more high audio, PlayStation advantage the will headset, which This take have in console for make a should that gaming the to experience. the Sony specifically X it optimize just have the a audio not XD suggests that order have games developed quality focus said to also to capabilities that gaming on chat, big a focus of on really but console. audio for of important will even

xCloud, that all among about lead initiatives gaming the always stand expand rolls talked base to Stadia, market benefit anything the grows higher but it with like Google's and user increases xCloud as hours gameplay. existing not their And Microsoft gamers games, only Microsoft, gamers. which and to usage progress base bit and as a leader for Project expected, as the from headsets, out, of should should more in also of the we

is piece news and compatible. expected of both that backwards are good Xbox very to other be PlayStation One

disruptive for about many In reducing our and have products we business to their any reluctance out buy during the addition the Net-net, change to we console excited we're experienced accessories and consoles not consumers quite in to gaming last impact on that to need potentially holiday, the new future. also the transition. expect during

that continues well. to should do Switch Nintendo I very also mention

to a While relative driver a headsets Xbox of platform have third we those gamers. headset for great small indeed of and and use sales it's portfolio it is for PlayStation, headset a gaming becoming

during products be we impressed booth Turning about to very I to of the added we've the go visits team discussions know EX. with our excited I and were to said, ROCCAT, the well. Retail continue continue quality portfolio as their very company. analysts to the several at

We already Turtle are already to of -- ROCCAT's Beach Asian there. also take advantage headsets accelerate presence starting markets in to

and accessories momentum line in years. that continue -- half Even business XXXX, very a for the having from market to good PC look significant ROCCAT's expect in to from of of gaming integrated we been ROCCAT able coming just to accessory a forward the able $XXX add but of small without fully benefit million our the headsets to base, share to any to to an gaming it's build PC be We first be significantly. Yes, able will start. PC grow headset in we've XXXX.

to which Now for outlook remains XXXX, our turning unchanged.

$XX of XXXX, full $XX million sales which EPS are shares million. to based XX% on gross XX.X million We to of $X.XX calls to to $XXX GAAP and for $X.XX $XXX EPS guidance million our year adjusted XX%, of net maintaining of adjustment $X.XX, of $X.XX million, to the EBITDA margins for

some We XX% to expect million to QX, second at to revenues those roughly in to $XXX normal without quarters XX% that QX million impacting shift phased XX% and between can the total. with half possibility roughly revenues in in $XXX be XX%

we relative dynamics million the deal we That versus the overall closed to than in our million business difference to $XX ROCCAT impact revenues planned, console full does small $XX million not to market, Since guidance. year to the $XX our our prior. to it anticipate and overall later to ROCCAT had million $XX so approximately is contribute

XXXX, below And is that slightly based to gross of Note impacted on that September mitigate stay to purchase by dissipates and sold. for the after X. the is inventory, if mid-XXs which tariff accounting gross margins this as target, most for be year are margin our in of inventory they expected forecast ability ROCCAT place impacts our

New about console in and launches prospects with next us accessories PC year ROCCAT our gaming very XXXX. have excited

looking opportunistically initiatives XXXX. expect some you'd on are incremental require are all with at a they we as accelerate impact XXXX, and OpEx on So we finishing XXXX can focused, even if while out where view of we also they activities our how in

million As a a bit operating estimate. $XX total, result, to our by million to increase million we $XX $XX $XX expenses than in to expect previous million higher

As income and outlook effective of per XX%. to John's comments, rate our tax EPS an net continued assume

As very see of to I exciting to how mentioned, a it's the interesting of plays going out the be year be what should ahead XXXX. rest

like and Royale users the That rates. gaming normal by the Our historical of of few forecast is Number console gaming these driven assumptions. could overall our of influx And market headset installed no vary the headset view. Battle effect. or headset from significantly new added the dynamics users replace for upgrade, key headset current is base of reflect XXXX a one, course, XXXX,

to new sales contributing launches in Number discounted, two, will console be accessory XXXX. QX expected console despite prices

driven are similar be have AAA year game prior some the XXXX, with noted. was recently weaker, that be Modern console Warfare as of analysts consistent prior percentage So a which but will last sales very holiday Call full as Duty: launches strong, our to the sales of year. will assumptions,

impact Number starting a remain they gaming meaningful of impact if four, September again, on factors. pending in not mitigating have effect, to X, tariffs, due which will variety QX headset sell-through, XX% a

assumption but based a for than console our market and gaming XXXX share Those are normal will dynamics our of overall of on of than within our are lower level key that driven and competitive modestly the revenue market then the that promotions sales forecast by XXXX, marketing. be higher headset

in a an global continues to exciting last earnings great influencers believe best few a me I segment that reiterating We're by is call. to consumer including market Gaming, points participating on Let streaming end made our the in we be market. and be today. eSports,

PlayStation additionally which continued We And Xbox position are launch headsets, new and in multiplayer after incremental growth strong consoles have from benefiting leadership brand drive in year. a and console gaming. they the increase next could gaming social and

target ROCCAT XX% our to billion We've and PC the adds of our a XX% accessories, portfolio per well ourselves top positioned drive trends now. the acquisition On of with $X.X address beyond. market an above, of XXXX with move of including growth future year into we in can to incremental

for I'm in colleagues well grateful have across I all to areas. Finally, team this. capabilities believe, a we've functional demonstrated fantastic our execute to of And our company

Operator, to questions. take now ready we're

Operator

[Operator Instructions].

Argento of Lake Our Capital. Street first Mark question comes from

Mark Argento

think revenue, there rates then growth Any to and XX% guys. Just more also about gaming your talked decent some fit? a if want on to growth the rates, beyond on to And thoughts on historically market some you've XX% it's thoughts get relative to of wanted Google, your be XX% your I to helpful. the launching on of platforms XXXX XX% get updates -- of the just based think you other of these product kind of EBITDA. How that cloud would

Juergen Stark

as gaming Stadia, for we because Google net lower a mentioned, the headsets, to positive new for think are devices with going devices, barriers xCloud, you Xbox essentially gaming forward gamers. cloud entry So those and now

Downloaded to example go the minutes, gave Stadia materials, in can that on So within video on. of all game watching on someone having versus buy the out a game. kind marketing running Google a be they it, today of video, and or where it a and matter the up of game the YouTube order going that. be of an Click install

going talk to audio hear if those from, to they need want to need devices, well. matter to play cloud going You come people, multiplayer games -- you're on the to to no who you're going you're

therefore gamers, of devices and our the gamers on more critical the play And for more a have is it or support lower new will the headset to like jack headsets. devices barrier that entry those so headsets. And a those positive accessory the

And confirmed, to XX% to with And with growth. and last call. new now then are addition XX% targets more target mentioned rate. I to -- also -- our revenue And about about And reiterating the consoles XX% the now prior about asked feel and XX%, Yes, EBITDA forward. as those XX% comfortable quite excited to achieve time are you we rate progress XXXX PC. target important we're frankly, excited going our ROCCAT a on very with them very on mentioned of XX% growth a the growth I then

Operator

question next & Our comes Co. from Uerkwitz Oppenheimer of Andrew

Andrew Uerkwitz

only fear and another Just survey related a -- that want came gamers believe. that gamers there's out point pretty in going a those a they know, of to little longer you a what won't is some they and Fortnite I What now that again, stick to of won't suggest this bit guys do buy Battle to upgrade, are new we're the of good at maybe I than gamers maybe year or job suggesting lot Royale. here that that. Those upgrade? -- around it's a would data think purchases

Juergen Stark

Great detail forecasting we and results one used overall did always we've round, to We the at inform those discussed we calls. the to in forecasting we've Andrew, I Great. like mentioned why another -- in think -- of thank market. reasonably is more good been prior this survey those course, our our you. question, Yes, We that's drivers do. and of

as of we ago, while down that new results so expected. latest gamers new game are influx pretty things survey round a And slowed the That indicate tracking frankly. much have of -- is

stop importantly, I'll on Battle there earnings Those of here. other the week Royale wasn't at from they're gamers roughly staying average level playing they actually that and at the In Fortnite, not same And, playing gamers. last even hours console an games. gamer. They're big are the They're playing call, fact, They're -- as in very reiterate if of per games. articulated for even as last rough just leaving. -- the in QX impact example, year, as I

upgrading right at of or headsets roughly XX-month intend the a to kind they're in rate replacing So and historical they are their reflects the average. mainstream or that

And curve distribution curve. we keep and around it's in normal months, wide XX about mind that a not a talk when

lot of market much people pretty in with a ahead So well and that's XX will line expected of tracking projections. as our we replace All months.

Andrew Uerkwitz

up. your historical follow console this as well consoles one next a this cycle lot growth like just the in we pieces look, How -- second of you numbers will then there. next And with seems impact side as should and rates -- potential moving think? PC the those console numbers about think [indiscernible] -- hold those attached around do start do should It

Juergen Stark

first of are rate launches. on DFC's get installed active And think Usually in what the any launches yes. this you it's new average, effect growth base that bit installed reflected and way of to in in -- see Is the XXXX then have now console year that in console forecasts. the active keep significantly be is year plus guys year late a the by you in that. up dips three That a We this in without XXXX. They quarters new bit, are a cycle the the mind you in prior increased the the that would sales. forecast so transition base who be year. would And is the launches, and and what

every accessories, a year. anticipate we gaming active and function took On on year bit. will bit tailwind a Obviously, how huge a that, of up tends out. top That's to because you last social go have installed a of multiplayer base roll things increase step That's of consoles.

would some a quarterly that update top to the And would headset to base now, accessories presentation expect so, and And lastly, the trend, a the launch. few in of to on projections. that that add pages through we the typical top released console tailwind walks data we of of some continue. that's that maybe did of installed expect We new on impact

Operator

Our next question comes from Maxim Nehal Chokshi Group. of

Christine Jian

I Nehal. few. a for Christine is This just have

channel Q is in relative And some that comments would inventory you XQ was come expectations how on could for if on on that basis. inventory a any First, great. this be to or current provide inventory And did managed, where your clarification quarter?

Juergen Stark

Sure.

so million. having that inventory channel ROCCAT, inventory believe, in very a A monthly So the line Inventory understanding channel of basis. piece of way around on inventory weekly big -- a very is we -- is by ROCCAT inventory. including in good manage And inventory actively, with but I $X $XX and our is at, came million. expectations,

of with time. what And in so we -- at planned this we in where right wanted and it's point we kind to had line be

XXXX Be still were our on our do are on very that rely the careful were not inventories quite because years, inventory trying line do so and at it if to inventory the expectations low to in draw comment productive comparisons our prior level to be like math that levels plans and look analysis. to you with -- versus won't

Christine Jian

sell-in color additional and sell-through on data? any And

Juergen Stark

down Only prepared always in what up more using roughly with we NPD XXXX. It's that remarks. expectations. year-to-date, over our tracking U.S. said Sell-through as XX% data, line XX% in sell-through than

incremental than So exactly included But, now we lot as past. time bigger who first market and much again had upgrading are predicted. of right the was of and we roughly part The is have the a obviously, in of year last expected. and market, as replacing cited it buyers, benefit the

Operator

a [Operator Davidson. of from Henderson Instructions] We Sean have question D.A.

Sean Henderson

the in previously levers that government been to a any pull of subject know about guys? affect guys goods you U.S. to how on that impacts? plans should not XX% And China touched made place efforts? your you but share guys tariff on what timing have potential you now How then investors I that think does secondly, can So had repurchase And earlier, offset to this tariffs.

Juergen Stark

Sean. Thanks, Sure.

prepared remarks through that go gaming without gory details, so very to mitigation, So any based tariffs, mitigate more announced important. essentially stated industry impact on of holiday market. covers good be that has in way holiday to inventory we very XX% tariff into needs. now that they that expect last XXXX, how in is largely already. channel been And does how the part to much X, That And on were September effect our able going September we've headsets. by to the how affect to the that's the -- levels And will inventory sell-through we a long long then to will sell -- do have satisfy purchasing inventory going do -- X, into

months a that's big first only a we So have factor. have of cover and Essentially, impact. XXXX the to not have mitigating it few

are partners with to savings manufacturing offsetting the our get if we through working can to see tie we Second, some us cost essentially holiday. help

Third, if prices. margin we with course, -- to to with Retailers that's have the what wholesale needed, this But increase will remain this prices then neutral decide of is will wholesale retail goal do goal not prices. they year's disrupt the want financials. to

affect this note and why keep components if And is saying, just things those are is didn't to tariffs, in and that I'll tariffs, and this impacting major effect, that increase retailers consumer manufacturers the directly that goods round United they this that largely of is round different. rounds unlike prior in purchases, cost tariffs the round remain were reason unlikely of of the consumer purchase swallow very by The tariffs costs. items of States. I And definition,

they be through. they passed will So go see up. time prices And over -- consumer consumers along

area So it than prior is to a much tariff more sensitive rounds. the

stay knows who if to in place? they're So going

our of stay running up is, non-China time. chain of in stay year. production if last tariffs. working we and over that we already China -- is to production started going to place, obviously, part with next That's on place, impact early expect comment in outside be continue strategy are will as do feel QX like will Last year And supply we to they if have tariffs our and

repurchase. And then about asked, you Sean, your

we have in window so stated we open purchases, as essentially So done the and is can QX. we make

ROCCAT some in invest in the we And where invest remains share to growth the acquire QX, business growth, those invest business, will fund look our we then continuing at used business, in priority repurchases. like of Our cash to opportunistically, development.

Operator

concludes to I turn Currently Mr. would to for like back the session. Stark this question-and-answer over our closing remark. call

Juergen Stark

you a all colleagues very you results We I'd every hard always Have to work with third forward and and everyone as thank great big to for when just good day investors our the on to gamers. day. thank Thank report Beach to like quarter accessories analysts you Turtle deliver November. to we end our joining. speaking a in look who much,

Operator

gentlemen, and conclude teleconference. does this Ladies today's

your you disconnect lines Thank for participation. now time. this your may You at

Turtle Beach (TBCH) 9 Aug 192019 Q2 Earnings call transcript