Greetings, and welcome to the Corsair Gaming Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ronald van Veen, Corsair’s Vice President of Finance, Investor Relations. Thank you, Mr. van Veen. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Corsair’s financial results conference call for the third quarter ending September 30, 2020. On the call today, we have Corsair’s CEO, Andy Paul; and CFO, Michael Potter. 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 due to 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. Today's remarks will also include reference 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. This conference call will be available for replay via webcast through Corsair’s Investor Relations website at ir.corsair.com. Andy will begin with an overview of Corsair, followed by the third quarter highlights. Michael will then take you through a review of the financials before we proceed to Q&A. With that, I'll now turn the call over to Andy.

Thank you, Ronald. And welcome to our first earnings call as a public company. It was great to meet many of you during the course of our IPO road show in September. And we look forward to getting to know all of you better as we go forward. Now, as some of you may be new to our story, I'd like to spend a few minutes to take you through a brief overview of who we are, what we do and the growing market opportunity we see in front of us. Please note that this overview will make today's call a little longer than what will be typical going forward. And then I'll provide an overview of our recent progress and performance, and then turn the call over to Michael for a financial review of the quarter. We are a leading global provider and innovator of high-performance gear for gamers and content creators. Our gaming gear helps gamers perform at their peak across PC or console platforms. And our streaming gear enables creators to produce studio quality content, to share with friends, also broadcast to millions of friends. We've served the market for over two decades. And most of our product lines maintain a top three U.S. market share position with several in number one positions, according to data from NPD Group and internal estimates. We have built a passionate base of loyal customers who build and upgrade their gaming PCs using Corsair components, and then use our peripheral products for gaming or streaming. Competitive gaming rewards speed, precision and reliability. As in other sports, specialized high-performance gear such as gaming mice, keyboards, headsets and performance controllers allow digital athletes to perform at their best. Modern games also require significant processing power to render high resolution graphics and reward the…

Thanks, Andy and good morning, everyone. During the third quarter, we delivered net revenue of $457.1 million, an increase of $172.7 million or 60.7% compared to $284.4 million in Q3 2019. Our strong top line performance was driven by strong growth across both the gamer and creator peripherals segment and the gaming components and system segment. We believe the strong revenue growth year-over-year is driven in part by the COVID-19 shelter-in-place orders, as consumers spend more time working and gaming at home. The gamer and creator peripherals segment provided $161.6 million of net revenue during the third quarter, an increase of $90.9 million or 128.8% from $70.6 million in Q3 2019. This was primarily driven by strong growth across all product categories, in particular sales of our Elgato branded streaming products. In addition to the contribution from SCUF, which we did not own in Q3 2019, the gamer and creator peripherals net revenue was 35.3% of total net revenue, an increase of 1050 basis points from 24.8% in Q3 2019. The gaming components and systems segment provided $295.5 million of net revenue during the third quarter, an increase of $81.8 million or 38.3% from $213.8 million in Q3, 2019, primarily driven by strong growth across all products, including our PSU, cooling PC cases and DRAM, due to the continued strong market demand. Our memory products contributed $141.3 million of this revenue. Gross profit in the third quarter was $127.9 million, an increase of $67.7 million or 112.4% from $60.2 million in Q3, 2019, primarily driven by the increase in revenue in these periods, as well as the positive margin impact from sales of higher margin SCUF products and streaming gear. Gross profit margins increased by 680 basis points to 28% from 21.2% in Q3 2019. The gamer and creator peripherals…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rod Hall with Goldman Sachs. Please proceed with your question.

Yes. Hi guys. Thanks for the question and congrats on a great first quarter. I wanted to – I guess, I wanted to start off, the problem doesn’t seem to be demand, its supply. So wanted to see if you could talk a little bit more about the supply situation, what products are out of stock and what are your expectations for getting things back into stock and so on? And did that have any effect on your balance sheet or other financials? I guess probably not, but just to double check that. And then I’m just curious too, as we head into the holiday season here, what products are selling the best? Can you, I know, Andy, you went through a lot of the new products. What are the one do you have the highest hopes for? How are you doing in the different categories, do you think from a share point of view? Just kind of curious, what’s going on competitively now that some of the new products are out there in the market? Thanks.

Yes. Hi, Rod. Nice to hear from you. So a few questions there, I think from a supply standpoint, I would say that much of the year has been supply constraint. And that’s true, not just for us, but either with our competitors as well. So generally, if you’ve been into a best buy or try to shop on Amazon, you’ll see there’s a lot of stockouts, a lot of empty shelves. Clearly, we didn’t expect to grow 50% this year, right. So when we set our supply chain up and gave forecast out, we didn’t put them in at that level. So really what it comes down to is, a lot of our complex products, peripherals that have got controllers in them, microcontrollers, et cetera. Some of those lead times are starting to stretch out as long as 16 weeks. Typically even, without shortages, we tend to sort of want to give eight to 12 weeks of visibility to our supply chain. So the point is that sales in September, the forecast for those are made in May or June, and this was really, Q2 was the start of people really focusing on gaming and streaming and buying gear. So that’s a little bit of what happens. Clearly, now we’ve got much of the year under our belt, we’re pretty comfortable or a little bit easier to forecast what’s going on. And we’re seeing that this is not a sort of pull forward. In other words, it’s not people that would have bought products in Q3, they bought in Q2. There is a big surge in gaming and streaming activity mainly from new people coming into discover gaming and streaming for the first time. So now we’ve raised our forecast quite considerably in the supply chain. And we’re gradually…

All right, that’s great. Thanks, Andy. Yes. My daughter wants a power supply, but I guess she’s a strange one. So anyway, thanks for the many answers. Appreciate it.

Thank you. Our next question comes from line of Matt Cabral with Credit Suisse. Please proceed with your question.

Yes. Thank you. Andy, you mentioned this in your prepared remarks. I think you even hit it on the last question. But I’m wondering if you could expand a little bit more on just how much of this year’s growth you think is from new gamers that maybe have the potential to become more committed over time versus just the existing user base. And I know you said you haven’t seen a pull forward impact in Q3, Q4, I guess, as we roll forward to start thinking about next year, I’m just wondering how to balance the risk of maybe some normalization from this year surge in demand versus sort of sustainable underlying levels?

Yes. I mean, obviously, we don’t have completely clear crystal balls, right? So the thing, we can see just from the mixed shift this year in particular is that there’s a lot more entry level products going out. And when we talk to our retailers, they tell us the same thing. In other words, it’s new gamers coming to the shops. People that have never bought stuff before or people are just discovering streaming. So that’s encouraging. Even for experienced gamers that are upgrading, I think, this is not a one-time thing, right. So, what we see in general is like any sport or hobby or pastime, if you have a little bit more time to spend on it, or a little bit more time to learn to get into it in the first place, that’s not a short-term effect. So if, for example, your friends take you skiing and you like skiing, you probably ski for a while and continue to buy game. And this is what we sort of expected going to happen. At least, we hope is going to happen. Is it all these new people that have been introduced, or perhaps game is that had never built a game PC before now, they’ve discovered how to do it, we’ll now upgrade in the future. So, we think a lot of people is just the beginning of a long-term spend cycle.

And then a quick follow-up, why don’t you talk a little bit more about what growth and I’ve got though, it looked like in the quarter, and maybe, just more broadly, where you think penetration of streaming gear sits right now and how much of the opportunity is within your existing customers versus maybe, reaching a different audience than you typically sell to?

Yes. We don’t break out; I’ll go to product separately. But I mean obviously, we’re really happy with that acquisition. And I think we spotted trend in streaming. The one thing we’ve learned about streaming in general is that when we first went into this, we imagined that everybody that was streaming was trying to be a YouTube staff and would pay for their gear, out of advertising per season. So, it would be like a sort of a small B2B. but in fact, that’s not really what’s happening when we look at all the number of channels; the vast majority of channels, streaming channels have less than 100 viewers. And so what it’s turning into is more of a social sharing mechanisms, sort of a bit like Facebook, where people are just in small groups, sharing gaming content or whatever they’re doing with their friends and that means that we’ve got a massive opportunity, in terms of the number of people that could start streaming. And the other thing that’s happening is that for all of us, even if you’re not the game or you don’t want to be a YouTube star stream at all, everyone’s now getting completely familiar with video calls. I mean, I’d say 90% of the conversations I have now with people I’m using video, rather than just on the phone. So, as everybody gets more comfortable with how that works and how to set it up, I think we’ll continue to see more and more people are turning to video streaming gear.

Thank you.

Thank you. Our next question comes from the line of Mario Lu with Barclays. Please proceed with your question.

Great, amazing quarter and thanks for taking the questions. As one on streaming and one on the full-year guide, so the one on streaming, besides the acquisition of the camp, are there any other updates in terms of adding a video camera to the Elgato portfolio? Are there any streaming products that currently you think it’s still missing that you could potentially add overtime? And then on the full-year guide, some time that fourth quarter, year-on-year growth of 46% or a 4% growth sequentially; which I believe is below the seasonal pattern historically, of roughly 20% growth sequentially. So, I guess, Michael, if you can provide more detail on what is embedded in the full-year and 4Q guide, whether it does include some full forward demand, or if it’s assuming that the number of new entrance coming to the market is still remaining elevated. Thank you.

Yes. it was two parts of that question. I think, I don’t really want to comment too much on new products. clearly, in the streaming world, video is a very important part of it. Now, one of the products that Elgato is most famous for is a product called Camlink, which sells for about $129. And that allows you to connect a very high-quality DSLR [ph] camera to your PC. And we sell a lot of those, surprisingly, a lot of those. So that’s what people at the high end tend to do. The best stream is not using webcams. They’re using dealers on cameras. So, we’re already in that business, EpocCam was a slightly different application, where we wanted to start exploring some of the mobile applications. And we’re going to continue to invest in all streaming gear. We’re trying to maximize our footprint there. So, yes, anything you could imagine that would make sense to do in stream, we’re probably already working on. Now, in terms of the Q4 cadence, you’re absolutely right. Normally Q4 is bigger than Q3. And obviously, this is a slightly different year. We’ve got stockouts everywhere. We’ve got to consider the effects of how much our supply chain can react and it’s already pretty stretched. and so that’s how we’ve arrived at the guidance. As I said, we’re not in a situation now where we are demand constrained at all. This is purely a supply driven back half of the year.

Thank you. Our next question comes from the line of Tom Forte with D.A. Davidson. Please proceed with your question.

Great. Thanks for taking my question. congrats on the quarter. When we think about your long-term margin opportunity, and we think about your non-gaming revenue, coaching being an example you gave, how accretive can that be versus maybe, a traditional hardware model and how should we think about your non-gaming revenue in general and how that may drive your hardware revenue as well? Thanks.

Well, when we look at coaching and training, what we realize is that most of the sports or hobbies or pastimes, however you want to phrase this, contain a significant amount of training revenue. In fact, many sports that spend that people have compared to gear and lessons can be 30% of the total revenue. So, we don’t know how big that can be. What’s clear to us is that the existing market for training and coaching is kind of ranges from free lessons on YouTube to just people on the internet trying to sort of help, right. But if you can imagine being a golf infrastructure and not being associated with a golf shot or a golf course, or a ski instructor, not associated with the ski slope. it would be very, very difficult to get a lot of business. So, we think that the right place for offering coaching and training or lessons is the same place that you go to buy your gear. So, we’ll have to see how that works out. We’re pretty bullish about it. We’re investing quite heavily as you can see, we’ve made our first – announced our first acquisitions and partnerships just recently. I’m sure there’ll be more. So yes, that’s how we think about it. Now, clearly in terms of how that works with hardware sales, you can just imagine that if you’re taking golf lessons and the golf pro suggests you what clubs you should buy. you’re probably going to take his advice. And so we expect the same thing. In fact, any higher level of engagement that we can have with our customers is going to be beneficial.

Thanks for taking my question.

Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question.

Okay. Thanks. Good morning, guys. So Andy, you recently launched a headset for the Xbox. Can you talk about the company’s plans to expand your presence in the console headset category and any commentary you can offer in terms of general demand you’re seeing with product tie to the constant transition and then separately, the 4Q guidance, at least at the midpoint, the implied adjusted EBITDA margin is 10.4% if my math is correct, which would imply a step down from a 13.9% reported in 3Q. I just wonder if you could offer any commentary as to why that that’s lower on a sequential basis? Thanks.

Yes, sure. I’ll take those in two parts. So headsets is an interesting one. It turns out that over the last few years, a lot of retail and etail have been merging headsets; in other words, console and PC, because at the low end, where you’ve got a three pole jack plug connecting the interface with the same thing. so historically, the notion was that it’s good to have licensed products, because for a lot of people, especially in the holiday season that are buying gifts and may not quite understand the interfaces, it’s easier to have a package with Xbox on it, and you can only do that some – if you have a license. So, it’s really an experiment. You don’t have to do that in fact, the biggest guy county specializing in console headsets doesn’t necessarily use licenses and most of the products. So you – it’s a bit of an experiment, but yes, we certainly shipped quite a few headsets into the console space that is being bought for the council use. Now, what we expect you in the transition, I think that we’re seeing that more with our Scout subsidiary, which is banking controllers that are a 100% going into high-end councils. I’d say this year due to the price points and the limited availability of the new Xbox and PS5, we don’t expect the transition to be quite as severe. most people knew that Xbox was compatible for some backwards, and there’s a certain amount of compatibility on PS5 plus PS4 as well. So, we don’t expect it to be so severe, but we’ll find out, you won’t really know until people stop to – shopping in black Friday in December. I think the other part; do you want to take the EBITDA?

So, the EBITDA, the difference, first of all, Q3 obviously was a lot stronger than we expected. So, when that happens, you tend to overachieve, because your OpEx is sort of what you expected and everything else with fire. So that helps. But specifically, for Q4, if you look at the gross margin line, a combination of higher air freight, because bigger demands in Q4 and a lot more than expected demand in Q3, means we’ve got our air freight more things for our customers. And obviously, there’s a little bit more promotional activity traditionally in Q4 than in Q3. on the OpEx side, if you think this is our first quarter as a public company. So, there’s going to be some increased public company expenses there compared to prior quarters. We’re also spending more on product development for new products coming out next year. We’re sort of accelerating some spending there and a little bit extra marketing spending around some branding and other initiatives, we’re doing. So that’s the main components of the difference between the actual Q3 and the implied forecast.

Got it. Okay. Thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Doug Creutz with Cowen and company. Please proceed with your question.

Hey, thank you and good morning. big week for gaming, obviously, the new consoles are shipping. And one of the things that reviewers have consistently said about the PS5 is that the haptic feedback controllers are quite impressive. I was just wondering with your SCUF offline, is that something that you’ll be able to do at some point with the SCUF controllers? Is that something you’re planning to do? And how important is that you think to being able to maintain your dominant market share position on PlayStation with SCUF? Thanks.

Yes, yes. Good question. It turns out the most of the people that are pretty competitive on console turn a half to golf. And so the people that are really trying to concentrate on in gameplay, it’s kind of annoying. So that’s the first thing, but we’ll have it. The most of the products that SCUF makes today are modified versions of the PS4 and Xbox, and will be modified versions of PS5. So, we can keep or lose any part of it. Normally, we basically allow people to take the whole haptic module out of the hand grips, and a lot of people do that. So, it’s – we don’t think it’s a big deal, but we’ll have it anyway.

Okay. Thank you.

Thank you. Our next question comes from the line of Tim Nollen with Macquarie. Please proceed with your question.

Thanks. A couple of questions, one another follow-up on the consoles coming out, I wonder if it’s possible, hopefully quantitatively, but at least qualitatively, maybe to pull together some of the comments you’ve made thus far and just give us an idea what the console launches of Xbox and PlayStation 5 will mean for your growth i.e. incremental peripheral sales, whatever that might be. And then secondly, I might have missed this, but is it possible to provide a number on a call-in organic growth number for Q3? Because I know there were some acquired revenues, I guess, SCUF was in there. Just what was an organic growth figure for Q3 please?

Yes. Okay. Well, we’ll come back to the organic growth in a second. In terms of console cycle, this is the first one for us. And actually, we’ve watched all the different companies around this space for quite some time, notably Turtle Beach and Mad Catz when they were around. So, we’ve seen this – and it’s always quite different, but I’d say in general, what tends to happen with councils is that when the new councils launch, people spend money on the council, and in the following year, people start buying more accessories for it. Now, what I think is going to be unusually, that's – the console comes with one controller, so the first thing people tend to buy is another controller. So that's what we would expect certainly we would think that next year would be a strong year for SCUF than this year. But having said that, this year was pretty good because there was a lot of people playing games at home. So I don't know if that really answered the question, it's tough to get to super granular on that because it's just too early in the cycle. I will say the numbers that are being talked about PS5 and Xbox-X were pretty – seemed pretty supplied constraints. So I think there is going to be a lot of people still buying PS4 and old Xboxes for a while and the same thing with accessories.

Yes. In terms of the organic versus inorganic. Organic growth was about 51.7%, it’s about 9% lower. So if you take out the items that we had in 2020, that we didn't have in 2019, growth would have been about 9% lower. So consistently for us our growth has been driven heavily by our own products, or if we bought something a couple years ago, our ability to ramp up and move that competitor our channel. So hopefully that answers your question.

And one follow-up, just to clarify on consoles. The only peripheral outside of SCUF that we sell that is largely used by console players is headsets, obviously you don't use a keyboard mouse for the console. And the ASP tends to be much lower on consoles, they're much, typically, much simpler most headsets, just a jack plug going into speakers, so vertical electronics in them. We really can't tell, when people are buying those at retail, whether they're buying them for console PC, because it's generally the same product. So, as I said earlier, we did see a fairly big surge this year of entry-level $30, $40 headsets, whether that's by people playing on console or PC, or in fact both, it's difficult to tell. We have seen in some of the surveys that there is a vast crossover, in other words, something like 70% or 80% of people that are PC gamers also play on console. So it's difficult to – the market is not one of the other.

Yes. That all makes sense. Thanks a lot.

Thank you. Our next question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.

Great. Thanks. Congrats on the IPO again and a strong quarter to kick things off. I wonder how much crossover in sales you're seeing between gaming and streaming product consumers if that's something you're able to measure. And if there's a reinforcing or beneficial impact there as streamers purchase gaming gear and vice versa, or are they somewhat distinct? And then secondly, looking further ahead in terms of the direct-to-consumer offering, can you talk about how e-commerce fits into that and the roadmap in terms of marketing or technology upgrades required to capture more direct traffic in sales? Thank you.

Yes, well, let's take those questions in reverse order. So firstly, we just went live yesterday with our CRM system. Traditionally, we've been a channel company as Elgato. So other than sort of chat-on forum and textbook, calls and that sort of thing, we haven't known too much about our customers. But with SCUF an origin 100% direct-to-consumer and we're trying to ramp up our direct-to-consumer as much as we can just to get higher engagement. So we're going to learn a lot more as all that data flows into our CRM system. We'll be able to see what people are doing individually on the website. We can also see to a certain extent what products they own to our IQ systems. So direct-to-consumer is important, because obviously, we've got the opportunity to not just sell one thing, but sell an array of products. Now, in terms of crossover, it varies, there is a lot of people that are streamers that have never built a gaming PC. And so the historical customer base is a little bit different. A lot of streamers are not particularly technical people, but there is some crossover and we're finding more and more gamers want to stream and share to their friends. So I would say when we bought Elgato, the estimates – probably 95% of the people buying streaming gear were streaming live gameplay, as you probably know, the majority of over 90% of the traffic on Twitch's is gaming. But we are starting to see just from social interaction and talking to people that there are a lot of people buying streaming gear for non-gaming activities, whether it's podcasting, cooking, makeup, fitness, those sorts of subjects, so that obviously, those are people that historically wouldn't have been buying our gear.

Thank you very much.

Thank you. We have no further questions at this time. I'd like to turn the floor over to Andy Paul for closing comments.

Yes. So thank you very much. Look, torso we are at the forefront of a massively growing market, since we’re gaming, eSports and streaming. And with our own parallel brand and quality of products, we think we're uniquely positioned to take advantage of this exploding market. Today the global and passionate community of gamers and streamers is engaged in the relentless pursuit of better performance. And we're proud to be a leading provider and an innovator of high performance gear for this new era of entertainment. We are committed to giving gamers and streamers the tools they need to play their best game, produce their best content and have fun doing it. Thank you for your interest in Corsair, and thank you for joining us on the call today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.