Good afternoon, and welcome to the Corsair Gaming's Fourth Quarter 2021 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 a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] With that, I would now like to turn the call over to Mr. Ronald van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir, please begin.

Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the fourth quarter ending December 31, 2021. On the call today, we have our 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 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 Q4 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 fourth quarter business highlights, and a discussion on what we are seeing in the market and Michael will then take you through a review of the financials and outlook before we proceed to Q&A. With that, I'll now turn the call over to Andy.

Thank you, Ronald, and welcome to our Q4 2021 earnings call. We're pleased to report that for the fourth quarter, revenues were $510.6 million at the high end of our guidance, resulting in a record $1.9 billion for 2021, 11.8% growth over 2020. Gross profit for the quarter came in at $121.8 million and a record $513.9 million for the year. We accomplished this as the world started to move towards a post-pandemic environment and in the second half of '21 outside entertainment has mostly opened back up and shelter at home guidelines have generally been relaxed. Throughout 2021 and continuing today, we continue to be in a challenging supply chain environment. And based on feedback from our customers, we believe that the market for self-build gaming PCs continues to be constrained by the shortage of high performance graphics cards. Michael will walk through more of our financial results in greater detail later in our call and address some of the questions we received at our Investor Day related to 2021 and short-term business conditions, which we weren't able to address at the time. It was our first ever Investor Day as a public company. And we received quite a bit of positive feedback. If you've not yet had a chance to listen to the recording, I encourage you to do so. I'll now take a moment to recap some of the highlights of our Investor day. We outlined three pillars of our growth strategy, which I'll quickly repeat now. Firstly, the gaming and creative market continues to grow quickly. And gaming hardware is growing much faster than gaming software revenue as consumers start to become more competitive and want to buy better PCs and peripherals. The creative market is exploding as video interaction becomes the norm. Secondly, we continue…

Thanks, Andy. And good afternoon, everyone. We have a lot of numbers to run through as we released both quarterly and annual results, so please bear with me. In Q4, we delivered net revenue of $510.6 million, though a decrease of 8.2% compared to our record $556.3 million in Q4 2020, it remains well above Q4 2019 pre-pandemic level of $326.6 million. Net revenue for the year was $1.904 billion, an increase of 11.8% year-over-year. As Andy mentioned earlier, our fourth quarter results and really the whole second half remain challenged by a very difficult logistics and supply chain environment. Logistics remains slower than usual with many shipping lanes taking over doubled in normal shipping times and at a much higher costs. We estimate that the effect of increased supply chain costs continues to have a 2% to 3% headwind on our gross margin and resulting EBITDA percent during the fourth quarter. And we expect this to continue in the upcoming quarter. Ocean freight of 44 containers remains elevated compared to historical prices. But we did see some slight easing at the end of 2021 fourth quarter and expect somewhat better rates for 2022. Turning now to our segments. The Gamer and Creator Peripherals segment provided $176.9 million of net revenue during the fourth quarter impacted by supply and logistics constraints, a decrease of 7.8% from $191.8 million in Q4 2020, and well above Q4 2019 of $94.1 million. The Gamer and Creator Peripherals segment net revenue contributed 34.6% of total net revenue, an increase of 10 basis points from 34.5% in Q4 2020. For the year Gamer and Creator Peripherals segment net revenue was a record $647.2 million, an increase of 20% year-over-year. The Gaming Components and Systems segment provided $333.7 million of net revenue during the fourth quarter,…

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

Andy, you mentioned launching some products tied to DDR5 during 4Q. Can you comment on how those have performed to date and what your expectations are for 2022? How material are these to your forecast? And then separately for Michael, the business experienced a little bit of gross margin slippage in '21 as you highlighted. And you mentioned some expected pressure in the first half. Just wanted to confirm that you're assuming gross margins for the year improved and whether or not you think '22 gross margin can get back to exceed where you were in 2020?

Okay. So first question was about DDR5. In terms of expectation, I mean, we've sold out of everything that we built. So the way to think about this is, the -- so semiconductor fabs that make memory chips will gradually move from DDR4 to DDR5. I think next year, maybe 20%, 25% of their capacity will move from DDR4 to DDR5 because the sort of people that are buying our components and the set of machines they're building tend to be higher end, the big 1 of the latest performance, there's a much higher demand. I think everybody, if they could spend a few more dollars will go to the DDR5 platform. And so yes, whatever we can get, we get probably an unshared fair of the supply because we have such a high market share now in consumer memory, but yes, everything we're getting was sold out. Now we're not assuming it's going to be a massive effect. It will help us a little bit because the ASPs are a little higher on DDR5 from DDR4 and it depends on the percentage. But we haven't remodeled that at the moment as a huge tailwind. And the reason for that is that the overall market for people building high-performance PCs is still somewhat limited by GPUs because they're so expensive and the difference in pricing GPUs of DDR5 versus DDR4. So I think the big effect that we're going to have in that side of our business is second half of '22 as GPUs become more widely available. I hope that answers the question.

In terms of your question on gross margin, if you look at the ranges we gave for EBITDA, there is a slight improvement if you use a midpoint range year-over-year expected. So we do expect there to be some small improvements in gross margin year-over-year, and they're going to be weighted more towards the back half of the year.

Our next question comes from Mario Lu with Barclays.

Yes, the first 1 is a little bit more high level. In terms of the Analyst Day, you guys said a couple of weeks ago, you mentioned the long-term revenue goal of $3.5 billion by 2026. So yes, I think that implies close to a 15% CAGR growth starting in 2023. So just curious, does that -- if you could provide more color in terms of if that includes like a breakout year needed to achieve that number or any drivers that are kind of embedded in that goal?

Well, what I would say there is that when you do year-to-year comparisons, it's very difficult to do that if you include a year where there was shelter at home. And for the purposes of the analysis, I think you remember in the Investor Day, we showed that from Q2 '20 through the end of Q2 '21, those 5 quarters were really shelter at home. And clearly, now we see that, that caused a bulge in consumer spending and consumer electronics spending. I mean, that's half the reason the supply chain is so stressed. Now out of that cycle -- but remember the first half of '21 was still in shelter at home. So we're not going to see the growth in '22 that matches the CAGR that you're talking about. We should start to see that in '23 and onwards. So what we showed you was that when you look at the side of the pandemic, and you look at the increase in gamers will spend and that sort of thing, that's the sort of growth that you see that will result from market growth plus our market share increases and that sort of thing. So hopefully, that gives you the expectation. Now there's a lot of reasons to be optimistic about the second half of '22, right? We've got Intel that's probably going to release graphics card in the middle of the year. We've got a theory of mining, which sometime during '22, I think, is going to be less profitable or in fact, impossible to do mining the way it's being done now. And I think all of those factors are going to result in much more available graphics cards should be much more affordable as well. So we think that's going to spur probably some late -- mid- to late '22 to '23, I'd expect there to be a lot of demand as people have been waiting for a reasonable priced graphic card to start building again.

Great. That's helpful. Thanks, Andy. And then maybe a follow-up on gross margin improvement. Is there any updates in terms of the D2C strategy that you guys are implementing I believe it's up to 11% of revenue now versus 9% a year ago. I guess, how is that trending versus your expectations? And are there any other products kind of outside of Origin and cuff that you're seeing a higher percentage to the D2C.

Yes. Well, I think now that we're well into the cycle of having a web store team and think strategically about the 2 things. One is as we release new products, we think about the web store strategy as we do it. So for example, we might launch, let's say, a microphone in the channel and then in our web store, we might launch a microphone plus populous shop mount, for example. So we've got lots of ways of differentiating now. The second thing is that, yes, as you mentioned, with SCUF and ORIGIN, most of the M&A opportunities we're looking at that are smaller tend to be direct-to-consumer because these days, if you start a new company, it's so easy with Shopify to start your own web store that most people just go in and do that. So both of those 2 things are going to continue to happen that will drive things up. Obviously, our base business of components in memory and keyboards and mice, we're not changing too much. So most of that business we expect to stay in the channel. The direct to consumer is clearly a higher-margin business, but it also has costs associated with it. And at the moment, we're not trying to aggressively drive customers from the channel to the store. We're more just trying to differentiate between some of the product offerings.

[Operator Instructions]. Our next question comes from Tim Nollen with Macquarie.

I wonder if I could push a bit more on the seasonality question. In Q1, you called that out. Looking back, it's a little difficult for us to assess what your kind of seasonality impacts are given that you came public during COVID. You've had this big run-up. And now you've got the supply chain question, and I've heard you in the second half, hopefully, the supply chain issues ease. It's just a little bit difficult to understand kind of how we should be phasing the revenues and therefore the margins throughout the 4 quarters of the year. Could you just maybe -- whatever color you're willing to give us, could you please give us?

Yes. So that's a difficult 1 because we don't want to start guiding quarterly. But I think what we can say is that, as you've heard from all the discussions just now, Clearly, there's a lot more tailwinds going to happen in the second half of this year than the first half in terms of growth from previous periods because the first half of last year was shelter at home year or period. And really, for the last 18 months, we've had chronic shortages and MSRP increases on graphics cards. So that really stops through the building gaming systems. So I think this year, like last year and the year before, is not going to be anything to do with historical seasonal norms. But I would say we -- our internal expectations are that, firstly, that we're more focused this year on comparing with 2020. In other words, 2019 and '20 pre-pandemic, that's what we're looking for now is to try and gauge how the market is doing post shelter at home, at length the long-term effects are. And the answer to that is really good news. But as I said, we're not going to match the surge of -- when people will step out of home with nothing else to do. Now everything, bars, restaurants are open and around here anywhere therefore. So that's the first part of it. But yes, I would say the message from here is that internally, we're assuming that there's going to be a much bigger headwind in the second half than the first because of graphics cards and also the easing of freight costs we expect. I'm surprised that hasn't happened already, but we expect that to start going down. Yes. Mike is there anything to add on that?

I mean we tried to say expect about 45% first half, 55% second half in total. And I've been here a little bit over 2 years now, and most of it was during the pandemic time. So I haven't seen a normal quarter yet. I did go back at the time with my team because I get asked this question all the time, what's normal seasonality. And Q1 tends to be down from Q4 but less than 10%. And then Q2 tends to be a little bit up and then -- sorry a little bit down from there and then Q3 and Q4 go up. When Lunar New Year timing is like it was a little earlier, tends to have a little bit bigger impact on Q1 and that conversely tends to help Q2. Not sure how much that's going to play through with the logistics environment we're in, but that would be more typical, but a more impact on Q1 than normal but less impact on Q2 based on the timing of the holidays.

Okay. That's actually very helpful because I was trying to go back to prior quarters, and it was just hard to determine a pattern given the information we have, given what's happened in the last couple of years. Could I ask 1 other numbers question actually, please, which is about promotion rebate costs. You mentioned those going up. I guess just curious how much is that related to product launches? How much is this just general cost inflation or choosing to market more? And what can we expect on that front in 2022?

I think '22, we'd expect it to get back to normal levels. I mean, with the surge that happened in the period, I described, right, Q2 '20 early -- I mean April '20 through sort of July of '21, there was no need to do any promotions because everything was completely sold out. I mean I think April, when shelter at home started pretty much every one of our retailer’s retail was sold out immediately. Yes, so I'd expect it to be more normal compared to what we saw in 2019.

More like 2019. Okay.

In terms of percentage, yes.

Our next question comes from Doug Creutz with Cowen.

It's been a bit over a year since you guys acquired Gamer Sensei, just wondering how that's proceeding, whether it's sort of going according to your expectations? And how maybe your experience has sort of affected your interest in other gamer service type acquisitions?

Yes. So we're actually still pretty bullish on the whole space around not just services, but sort of how we engage with the gaming community and how we interact with them. And as we sort of get more engaged with our direct-to-consumer initiatives, this is certainly an important stepping stone. I'd say as we've gone through the year, there's been a few changes in terms of how gamers are expecting to do lessons and what's going on in the [promotive] environment and that sort of thing. So I think at the top level, we'd probably say still a work in process, still very bullish in the space. But a little different than we initially thought we went into it.

Our next question comes from Rod Hall with Goldman Sachs.

My first question comes back to the promotional activity, Andy, and the increase there. I'm just curious how close to normal we were in Q4? And when you think promotional activity would be back to whatever the new normal level is, does that take until the middle of the year and what does that mean for, I guess, your gross margins in the first part of the year? And then I've got a follow-up to that.

Yes. No, I think Q4 was pretty much at normal levels. I'm thinking…

The reason why I talked about it and went through that section is because I was comparing to 2020 with the prior year where there was almost no promotion activity because that was in the heart of the shelter at home period. I think I've characterized the end of last year of '21 more like a normal promotional type of environment, sort of like in the prior year of '19, '18 and so on. So we didn't see anything wild and out of ordinary, but certainly compared to the prior quarter, the year before, it was a lot more.

Okay. That's helpful. And then that kind of leads to my second question, which is you guys are saying gross margins up in '22, which they were 27% mathematically in '21. So I guess that puts them at 28% in '22, but yet you just pointed 24% with normal promotional activity. So it kind of seems hard to get back to 28%. And I was wondering if there's any way that you guys could -- or even above 27%, can you bridge back to that somehow help us understand how that happens.

And the 2 main elements, Rod. The first is the easing of the logistics costs and the entanglement around there. So that will certainly give us a pretty big help. The second part of it is going to be just the continued shift to a higher percentage of our higher gross margin products. They have a higher growth rate. So over time, that shows us the total margins. So between the two of them, we're relatively confident we can increase margins. Obviously, it's difficult to overcome the very high margins at the end of '20 and at the very beginning of 2021, when promotional activity was quite low due to shelter at home. But longer term, we don't see a problem with getting the margins back up.

Right. So you just feel like removal of logistics and some of these excess costs will kind of help to put those back to where you're thinking? It sounds like not far above 27%, if I'm kind of reading between the lines here, though, Michael, is that right?

I mean if you look at year-over-year, the first half of '21 was quite strong, and we're saying that second half of '22 would be stronger. So we certainly think we'll start recovering and bringing up. But we're not projecting -- if you look at the EBITDA ranges and bigger we're growing our OpEx, as we said, some are probably around where our revenue levels are based on the numbers here in the operating income and EBITDA. You should see there'll be just a slight year-over-year margin increase.

Yes. I’d add is, we did have a few things going on in the last few months related to COVID, some of our factories in Vietnam were really shut down for a while and we had to then revert back to sources out of China, which then started affecting the tariffs. So we did have some unusual costs that were flowing through because of that, and that's generally behind us now. So we're planning next year on essentially being -- won't be done with COVID, but it's ceasing to have the same effect as it did before. And surely, freight costs will drop down. The other thing I just would say is that the biggest increase in terms of dollars a PC gamer who wants to build PC is in graphics cards and keep talking about that. But the place where we sell our highest end products is for people that are building $2,500, $3,000 PCs. And so that's really where the biggest sort of holdback is in builds because you'd be talking about a $1,000 increase in the graphics card. So I think that we're being held back on some of our high-end products that normally would yield the highest margin. So that's -- that should change during the year.

Yes. Operator, are there any more questions? Operator? I'm not quite sure what happened for our operator there. Hopefully everybody else can hear us. I'll wait another minute or 2 and see if he comes back on. If not, we may have to take questions after the call during our scheduled call time.

All right. Well, I think the operator has gone, well.

Oh, he is not. No, no go ahead.

Yes. So look, thanks, everybody, for attending. We'll follow up with the analysts in our usual meetings, and we'll see you again next time.

Goodbye.