Corsair Gaming, Inc. (CRSR) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Corsair Gaming Second Quarter 2021 Earnings Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. [Operator Instructions]. With that, I would now like to turn the call over to Ronald Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir, please begin.

Thank you. Good morning, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ending June 30, 2021. On the call today, we have Corsair CEO, Andy Paul; 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 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. I would also like to remind everyone that until our 10-Q is on file, the Q2 2021 numbers are preliminary. This conference call will be available for replay via webcast through Corsair's Investor Relations website at ir.corsair.com. Andy will begin with our second quarter business highlights, and 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 Q2 '21 earnings call. Well, overall, I'm very pleased with our Q2 performance, where we delivered net revenue growth of 24% to $473 million as well as 24% gross profit growth to $130 million, which is our best second quarter ever. Our results highlight the strength of the underlying fundamentals of our business, as gamers continue to purchase and upgrade their gear, even as entertainment outside of the home and travel began to open back up. We experienced growth in every category, despite key component shortages in the market, such as graphics cards for enthusiastic build gaming PCs as well as semiconductor shortages, logistics issues and port delays. We are now at a $2 billion run rate compared to our 2019 revenue of $1.1 billion, which speaks to the strong momentum in our business. We therefore are continuing to expand our resources and invest heavily in R&D, marketing and infrastructure. We are extremely excited by the recent launch of our first camera, which has received an overwhelmingly positive response from the creator community. We've launched over 75 new products so far this year, which is just an astounding pace of innovation. Our new Elgato Camera called Facecam is designed specifically for streamers and content creators and outputs uncompressed 1080p video at 60 frames a second which is, of course, significantly higher quality than a standard webcam. It has many features similar to a DLSR camera, with software that controls contrast, white balance, zoom, et cetera. And all those settings can be stored in the camera, again, unlike a standard webcam. Facecam also features a multilayer coated lens in a high-end Sony camera. We also introduced our 7000 Series full tower case, which allows for multiple radiators so that an ultimate gaming PC can be built for maximum performance, and the Virtuoso RGB XT, our new flagship gaming headset, offering incredible sounds and impeccable clarity now includes Bluetooth as well as our proprietary Slipstream low-latency wireless connection. NPD data continues to show year-over-year growth in the gaming peripherals market, with recent data showing keyboard and mice growing faster than headsets. We believe this is further evidence to support our conviction that as gamers spend more time playing games and improving their skills, they will want to upgrade to better gear that is designed specifically for gaming. We continue to observe that the market for gaming gear is at an early stage of evolution. The average annual growth pre-COVID for PC gaming peripherals have been running at about 24% per year in the U.S. and a similar rate in Western Europe, where we're able to collect detailed market data. Now in 2020, with lockdown, this increased to approximately 80%. These growth numbers are substantially higher than either the increase in new gamers to the market or the rate of growth in video game software. So what we believe is happening is that after people learn to play PC games for a while and get good at them, they start to want better specialized gaming gear. And because the market is still at an early stage and the penetration is so low, that's why we are seeing such high growth rates in gaming hardware due to the low base. If we look at gaming headsets, which is the most widely purchased peripheral, then only 20% of gamers playing premium games in the U.S. have bought those in the last 3 years, which is roughly the refresh cycle, with the other 80% yet to come to the market. So our belief is that the situation in 2020 and early '21, where gamers clearly spent more time in their homes, learning to play games better, that should establish a higher base of consumers ready to step up and upgrade their gaming setup, which includes peripherals as well as gaming PCs. Headsets tend to be the first peripheral that gamers buy to make the game more immersive. But as skill improves, the next purchase tends to be high-performance gaming mice and keyboards. The market for gaming PCs and laptops in the last 12 months has been phenomenal, one of the fastest-growing consumer electronics categories according to NPD. High-end graphics cards were very difficult to buy in the last 6 months, and we believe there is a large number of gaming enthusiast in the wings waiting to build a new PC on top of the elevated numbers of people that actually did build a new gaming rig. In Creative Peripherals, we continue to be the market leader in video capture cards and lighting. Our Wave microphone, which we launched last year, has gained significant market share quickly. Our Stream Deck has now become the standard for home broadcasting, and we now have several apps from third parties that can use Stream Deck. Turning now to our outlook for the year. The guidance for the full year of 2021 remains unchanged from Q1, with total revenue in the range of $1.9 billion to $2.1 billion, representing growth of 11.6% to 23.4%; adjusted operating income in the range of $235 million to $255 million and adjusted EBITDA in the range of $245 million to $265 million. Thank you for your time and continued support. I'll now turn the call over to Michael to discuss our financial results for the quarter.

Thanks, Andy, and good morning, everyone. During the second quarter, we delivered net revenue of $472.9 million, an increase of 24.3%, compared to $380.4 million in Q2 2020. The gamer and creator peripheral segment provided $155.2 million of net revenue during the second quarter, an increase of 40.9% from $110.1 million in Q2 2020, driven by strong growth across all product categories, including sales of our SCUF branded console products. The gamer and creator peripheral segment net revenue contributed 32.8% of total net revenue, an increase of 390 basis points from 28.9% in Q2 2020. The gaming components and systems segment provided $317.7 million of net revenue during the second quarter, an increase of 17.6% from $270.3 million in Q2 2020, primarily driven by strong growth across all product categories, as consumers continue to buy and build gaming PCs. Of this revenue, memory products contributed $158.7 million. Gross profit in the second quarter increased by 24.1% to $130.4 million from $105.1 million in Q2 2020, which is a second quarter record. The increase over Q2 2020 was primarily driven by increased revenues. Gross profit margin remained flat at 27.6%. The positive impacts of mix shift towards the gamer and creator peripheral segment was offset by significant increases in logistic costs, particularly ocean freight. The gamer and creator peripheral segment gross profit was $54.6 million, an increase of $15.9 million from $38.7 million in Q2 2020, primarily driven by an increase in revenue in the same periods. Gross profit margin was 35.2%, flat with Q2 2020. We continue to see a mix shift as gamer and creator peripherals contributed 41.9% of total gross profit in Q2 2021 as compared to 36.9% in Q2 2020. This remains a great overall story and formula for continued overall margin expansion, as our fastest growing and highest margin segment also sits in our largest market. The gaming components and systems segment gross profit of $75.7 million, an increase of $9.4 million from $66.3 million in Q2 2020, was primarily driven by an increase in revenue in the same periods. Gross profit margin decreased to 23.8% from 24.5% in Q2 2020 primarily due to freight costs. Gaming components and systems contributed 58.1% of the total gross profit in Q2 2021 as compared to 63.1% in Q2 2020. Our Memory profit margin in this segment was 17.7% for the quarter. Second quarter SG&A expenses were $80.2 million, an increase of $23.3 million or 41.1% compared to $56.8 million in Q2 2020, primarily driven by an increase in outbound freight costs due to increase in revenue, an increase due to expenses related to being a public company and an increase in personnel-related expenses. Second quarter product development expenses were $15.5 million, an increase of $3.6 million or 30.8% compared to $11.8 million in Q2 2020, primarily driven by an increase in personnel-related expenses as we continue to focus on bringing an increasing number of products to the market. Operating income in the second quarter of 2021 was $34.7 million, a decrease of $1.7 million from $36.4 million in Q2 2020. Adjusted operating income in the second quarter of 2021 was $49.3 million, an increase of $1.9 million from $47.4 million in Q2 2020. Second quarter net income was $27.7 million or $0.28 per diluted share as compared to net income of $22.6 million or $0.26 per dilated share in Q2 2020. Second quarter adjusted net income was $35.7 million or $0.36 per diluted share as compared to adjusted net income of $32.3 million or $0.37 per diluted share in Q2 2020. Adjusted EBITDA for Q2 2021 was $51.6 million, an increase of $2 million or 4% compared to $49.6 million for Q2 2020, resulting in an adjusted EBITDA margin of 10.9%, a decrease of 210 basis points for year-over-year. Turning now to our balance sheet. We continue to convert our strong financial performance into an opportunity to further strengthen our balance sheet. In Q2 2021, we generated $31.6 million in cash from operations and used it to reduce debt by an additional $25 million, with face value now at $274 million and net debt at $139.4 million, resulting in a net leverage ratio of 0.5. We did this while growing quickly and leaving sufficient resources to further accelerate growth in the future. We expect to continue to reduce debt in 2021, subject to business conditions and any need for additional growth capital. We're also looking to reduce the carrying cost of our existing debt significantly. As of June 20, 2021, we had $48.6 million capacity under our revolving credit facility, total GAAP long-term debt of $270 million and cash, excluding restricted cash, of $134.6 million. The additional modeling details underlying our outlook remain the same as we discussed in our first quarter earnings call, with the exception of a now further reduced interest expense and a slightly lower effective tax rate due to deductibility of options exercised. For ease, I'll repeat them. We expect gross margins to slightly improve year-over-year and operating expense to increase as well to support our higher revenue level, the need to continue to innovate at a larger scale and a full year of public company costs. Assuming no further debt paydown, we now expect interest expense of approximately $4.1 million per quarter. As noted, we've already paid down $53 million of our debt and expect to pay down approximately an additional $47 million for a total of $100 million of debt reduction in 2021, subject to business conditions and any need for additional growth capital. The $4 million patent trial win in Q1 2021 is not in our outlook. This amount could vary depending on what the judge rules, is subject to appeal and the timing of recognition of a gain, if any, is uncertain at this time; an effective tax rate of approximately 20% to 22% for 2021, and full year weighted average diluted shares outstanding of approximately 100 million to 102 million shares. Overall, we're pleased with the continued progress we have made in our strategic initiatives and performance of the business. We grew in Q2 2021, and we are expecting growth in revenue and adjusted operating income and adjusted EBITDA for 2021. With the exception of a number of our premium products with high semiconductor content, the channel is much better stock now. And with Prime Day at the end of Q2, coupled with the upcoming holiday season, we expect a more normal promotional environment. In Q2, shipping expenses were much higher than normal, and we expect that to continue for the rest of 2021. Finally, memory chip prices started moving down near the end of Q2, and that normally lowers margins on our memory products, while prices are moving down. These are expected to somewhat counterbalance the strong demand we have from our loyal, existing and new customers. With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q&A?

[Operator Instructions]. The first question comes from Drew Crum with Stifel.

Okay. Wondering if you're willing to address your competitive performance in the quarter, whether you added or lost share during the period. And then separately, any guidance you can give concerning revenue and adjusted EBITDA phasing by quarter in the second half?

Well, let's start with the -- I think the second point is what we know, but the first part of the question, we actually did pretty well in Q2. It varies by product type, but, in general, we did quite well in components. In peripherals, we stayed roughly even. And I think as you probably have gathered, the situation that us and most of our competitors are in right now is trying to get enough products in from Asia on what's now very expensive containers. And so -- we also have, as you know, semiconductor shortages. So what we've been faced with over the year is we tend to have high market share on our high ASP categories and lower market share on very low ASP categories. In other words, we're not typically an entry-level player, and so the initial surge last year was a lot of entry-level products. And so that changed the dynamics a little bit. But now, we're starting to get some more supply of our higher ASP, high semiconductor content products, it's helping with market share.

In terms of the guidance for -- by quarter, we don't give quarter guidance. We give annual guidance. Last call, when asked a similar question, we pointed the seasonality. Like, for example, second quarter tends to be the -- one of the lower quarters of the year, and you have to take into account timing of things like Prime Day and such as well. But normally, the second half is stronger than the first half for normal seasonality. And normally, the -- normally, you tend to sort of ramp as you come out of the summer and as you go into the holiday season.

The next question comes from Mario Lu with Barclays.

So yes, I know you guys only guided for full year numbers, but since the 2Q revenue came in a little bit below street, just curious how it performed relative to your own expectations. Any strengths or weaknesses within certain product lines that is worth highlighting?

Yes. I think the most obvious thing is that we talked about semiconductor shortages, and that's not just related to components that we buy, some of those was going through our components. So as you probably know, there's been a huge shortage of high-end CPUs and graphics cards, so it's actually been quite difficult for the most extreme gamers that are building these $2,000, $3,000, $4,000 gaming PCs. It's been difficult for them to build. And so we actually think we've got a huge amount of people waiting in the wings to build, as these cards start to become available. So what we saw happen was that in video and, to a certain extent, AMD allocated a lot more products into the finished PC manufacturers, Amy, Dell, et cetera, and not so much product into Amazon and the retail segment. So that's now starting to change. So the point is the components side of our business, we had quite a few headwinds with not all the components being available, so that people build PCs. The peripheral market is still pretty strong. And at the moment, the NPD data is showing that peripherals are as same size, in some cases, bigger than last year. So we're now lapping COVID quarters, and streaming continues to be very strong. So hopefully, that gives you a slight indication of what's going on.

The next question comes from Matt Cabral with Credit Suisse.

Yes. You guys have called out supply constraints and logistics issues several times already. I'm just wondering if there's any way to quantify the impact of both of those factors, both as we think about revenue in the quarter as well as kind of looking further down at gross margin.

Yes. I mean, it's really difficult to give an exact number because, certainly, it's in the tens of millions. But we haven't sort of gone through and done the math to see exactly what we thought we would have shipped if we were to have full supply and our competitors had for supply. But I think the biggest issue right now numerically is probably the lack of graphics cards that's holding back the component market and stopping viewer burden PCs. The second issue is that we're really not yet at a situation where our highest end products or high ASP products are fully in stock. And then we have very expensive freight to deal with. Some of the freight costs obviously get offset because, as we introduce new products, we're able to adjust pricing and some of our competitors. But it's meaningful numbers.

Got it. And then just a follow-up, if I could. I guess, trying to understand how to think about normalized profitability for the business. I guess, if I look at EBITDA in the last 12 months, you guys have been a little bit above 13% versus if I go back before COVID prior to 2020. It was more like mid- to high single digits, and I don't think have changed. There's been M&A and, obviously, the big surge in demand over the past year. I guess, I'm just trying to think through what steady-state profitability is for the business? And if it is higher than that pre-COVID baseline, I guess, help us just understand the factors underneath that?

Yes. I think we've always said that we wanted to be in the low teens and perhaps get to mid-teens. Obviously, we had a little bit of a tail wind last year with the market ramping up faster than we could possibly expand the business. Right now, we're at a fairly hefty expansion mode in terms of R&D and marketing because the business has got so much bigger. So we're not -- we're nowhere near sort of a mature business that I'll tell you that we've got an exact target in mind, but somewhere in that range is how we try to manage the business.

So that would be above pre-COVID levels, but not right now, today, the same level as Q1, which we talked about in the Q1 that, that was a particularly strong quarter, and we hadn't finished investing in the business yet. But we think that what we did in Q1 is achievable. We just need to grow the business more and keep putting out good, high-margin products and our help. Also, I'll note that we are seeing a shift towards more higher-margin gamer and creator peripherals, which continued in Q2, and that's going to be lifting our margins overall over time. So that should be a good tailwind for us for margins going forward.

The next question comes from Tom Forte with D.A. Davidson.

Great. So I have four questions. They're quick. I'll go one at a time. So the first one is on the pressure -- cost pressure from logistics. How should I think about it? Is this leaning into air because of demand? Or is it -- how should I think about the cost? Can you give a little more, I guess, granularity?

So I think last year was a lot of air freight. That's right because we were so short on supply. The most recent quarter, it's more just the cost of containers. So the cost of containers is probably 3x to 4x now what it was 2 years ago, and we certainly expect that's going to be somewhat of a temporary situation. Otherwise, we'll be starting up container companies. But probably for -- until the whole consumer electronics surge dies down, I expect that to continue for some time. But it's extraordinarily high levels at the moment.

Yes. Very helpful, Andy. All right. So then the second question is, when you think about the cost pressure then from logistics, how should we think about your ability and your interest in taking price across your portfolio?

Yes. So that's a good question, and this all depends on the time frame, right? And the same is true with our competitors. So if we see cost increases in -- there are fundamental, that are going to stay there, we obviously adjust that into the pricing. If we see cost increases that are temporary, it's difficult to go and adjust retail MSRP price points on a short-term basis. So we're looking at that. But so far, we haven't made any huge changes. And obviously, it's a bit of a mixture because a lot of our bigger retailers are buying from us directly in Asia and then paying for the containers themselves. But so far, we haven't -- and in fact, most of our competitors haven't made any wholesale changes in MSRP. I think the general sense is that we're going to weather it for the next couple of quarters and so on until we see what the natural level is. But the container prices right now are very elevated, and this almost certainly would have to come down by the end of the year, if not before.

Good. All right. So last two. So from our vantage point, when we think about secular shifts, we really see this self-broadcasting as accelerating. There's a lot of anxiety among investors on tough compares for gaming, but this secular shift towards consumer self-broadcasting, using your products to help them broadcast when they play Fortnite, things like that. So I guess, do you agree with that assertion that, that trend is accelerating? And then what are the implications for Corsair?

Well, look, we've just doubled down, right? We announced our first camera last week, and that's clearly the biggest part of the self-broadcasting, as you say. We call it self-broadcasting, live streaming or whatever. But the biggest part of that TAM is the camera. And so we literally jumped into that, probably close to $1 billion market TAM that we've never been in before. So not only is that market continuing to grow, but we've increased our footprint. Now as you probably realize, there's some parts of the self-broadcasting market that gets a little bit confused with people at home doing Zoom calls. And so we think that the vast majority of the products that we sell are actually going into games and content creators, rather than home offices. But clearly, some products get bought by that, and that market will certainly be dying down. So I think what we're going to see with the streaming and content creators is a -- there's a strong tailwind from the secular shift to people sharing and showing content and streaming and a little bit of a headwind from those people that were buying microphones and cameras for their home office.

All right. So Andy, so now you made me have a fifth question. So before I get to my last, how should we think about the relative gross profit margin in the camera versus the rest of your portfolio?

The camera is a brand-new product. So usually, when you're ramping a new product into the channel, it's a little lower margin than it will achieve when it's a little bit more normalized. But it's right in line with the other creative peripherals, so it's much higher than the corporate average.

Excellent. All right, last question. So you talked a little about it, but how is your performance on Prime Day this year? And historically, has that been an important sales day for Corsair?

Sorry, Tom. Can you repeat that? I missed the...

Yes. Sorry.

So Prime Day, yes, yes.

How is your performance on Prime Day. Historically, is that important sales day for you?

Yes. So it can be. This year actually was not a great Prime Day for Amazon, as you probably know. And mostly because for us, a lot of the products that we'd normally line up for Prime Day sales were pretty light on stock. So we actually didn't participate heavily in Prime Day. And actually, a lot of our competitors really are in the same situation. So it ended up being less important this year than it normally is. Let's put it that way.

The next question comes from Tim Nollen with Macquarie.

This is Shan on for Tim. My question is around the product cycle. So you've launched 75 products this year so far. Any more comments on the release cycle in the back half as well as anything on usage outside of gaming? I know we talked about live streaming a bit, but anything on like general streaming, et cetera?

Yes. I think we're going to excel on that pace. We've built up a pretty good momentum. And as we keep adding more categories, they all have to be refreshed and new categories come in. So I wouldn't expect that pace to change. If anything, it may accelerate. And in terms of new categories or things we're doubling down on, clearly, look, we've just introduced our first camera, so you'll see more of those over the next year or 2. We've -- you'll see more microphones. So yes, we still think that the biggest growth out of all the segments we're in is in streaming, and we want to own that market. Most of the component areas were in refresh mode. And in the peripheral market, we still have a few price points that we're not present in. So still some more TAM that we can increase our footprint sizing.

I think, just generally, right, there's been some new consoles that have come out, so you would expect that Scott would have new console controllers at some point. And there's obviously a newer memory standard that's going in more towards the end of the year. And we've been in the lead for memory, particularly gaming memory forever. So you would expect to see something for that as well. But really, it's continually innovating in our existing portfolio and increasing our TAM. We have a new microphone product that lets you use your own XLR microphone but take advantage of our great software that Elgato has put together. That's the Wave XLR that just came out. And even Stream Deck, which is selling very well for us and is very well liked in the market, we came up with a newer version that's a little bit better form factor and a little bit easier for people to use in different uses because it seems that more and more people are discovering Stream Deck and want to use it not just for streaming, but for other applications as well.

The next question comes from Doug Creutz with Cowen.

A lot of concern in the market right now about what's going on over in China with respect to the government's sort of actions and words about video games. Can you remind us how big of a percent of your business in China is? And whether you're seeing anything in terms of your business there recently?

Not related to what you're talking about. We haven't seen the effect. China is 5%, 6%, something like that, of our business.

Yes. We're not very heavy in gaming peripherals. We're more components in China than the gaming peripherals directly, and it's more impacted by the DIY market and how that's going. So -- and we don't obviously sell game software, so we wouldn't be as affected by that type of pronouncement from the government. China has never been a big gaming market in terms of culture compared to U.S. and Europe and other parts in Asia.

[Operator Instructions]. The next question comes from Rod Hall with Goldman Sachs.

I wanted to just check on inventory levels, like where you're out of stock, what types of products. It looks to me just doing a Corsair research like maybe power supplies are short, but I'm just curious what things you're having hard time putting on shelves or populating inventory with.

Yes, that's a good question. For sure, high-end power supplies are very low in stock, and that's more a reflection of obviously some increased demand, but just the difficulty in building them because of semiconductor shortages. Typically, it's the high-end products. We were out of stock on our flagship keyboard for the longest time. We've now finally got that back in a reasonable stock position. We are not where we'd like to be on our high-end headsets, but we're getting there. So there's a steady increase in inventory. But certainly, I would say not yet at targets for the products that we really make a difference in market share.

Michael, are you going to say something?

No. Andy answered the question, so I didn't want to add something.

Yes. Okay. I wanted to just check. I expected to see the same thing with headsets, but I did a quick Amazon search, and it seems like they're in stock there. I'm curious where -- in what channels are you having the hardest time or keeping inventories. Is it physical channels like Best Buy, that sort of thing? Or where would we expect to see the inventory light? And then as we move into the holiday season, do you think that -- do you think you'll have enough product on shelves by then? Or do you think this will just persist right on through the end of the year for you?

No. I think we're going to gradually get back into good shape. So to the first question, we obviously have inventory targets on every single SKU. And in places like Best Buy or Target or Walmart, we've got targets for every store and how -- specifically, there's 3 or 4 products in some stores, depending -- popular stores have a few more. So oftentimes, you may be able to find it in stock, but if there's only 1 there instead of 4, for example, then we're way out of target, and that will cause them to be able to stop certain days -- a number of days in a month. So that's the way we think about it. If you're searching on Best Buy and something is out of stock, that's a real problem. So -- and the second part of the question was -- I mean, talking about -- sorry. Go ahead. Sorry.

When you might have the inventory in stock in the channel? Will you be there for the holiday season? Or do you think this will continue to be a problem by then?

Well, obviously, it depends on the demand and the supply, but I certainly hope so. I mean, we've spent the last year ramping up the supply lines. And so certainly, I would expect so. I mean, based on what we're seeing on what demand looks like, yes, it should be okay.

This concludes the question-and-answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.

Yes. Thanks. So look, as we stated before, we're at the forefront of a massively growing market centered around gaming, eSports and streaming. I actually went back and recently looked at our pre-IPO forecast, what we were thinking then, and I realize that our current and projected business levels is where we expected to be in 2023 or 2024. So clearly, the market has accelerated to a new spending level. We remain focused and committed to giving gamers and streamers the tools they need to play the best game, produce the best content and have fun doing it. Thanks for your interest in Corsair, and thanks for joining us on the call today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.