Good afternoon and welcome to the Corsair Gaming Fourth Quarter and Full Year 2022 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 will now turn the call over to Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. You may begin.

Thank you. Good afternoon, everyone and thank you for joining us for Corsair's financial results conference call for the fourth quarter and full year ended December 31, 2022. On the call today, we have Corsair’s I, Andy Paul; and Michael Potter. Andy will review highlights from the full year fourth quarter 2022. Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections 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 on our SEC filings. Note that until our 10-K has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release we issued after the market close today. With that, I’ll now turn the call over to Andy.

Thank you, Ronald and welcome, everyone, to our Q4 and full year 2022 earnings call. We are pleased with our fourth quarter results following a challenging 2022 year, impacted by the Russian-Ukrainian conflict, high freight costs and a large channel inventory adjustment. Q4 2022 holiday sales were strong for most of the gaming and streaming categories that we participate in. And our overall retail sales out from the channel was substantially above pre-pandemic 2019 levels, putting us on a positive trajectory for the first half of '23. There are a number of notable financial highlights from Q4 and 2022. First, the gaming PC component market resumed growth. We benefited from an uptick in demand in the gaming PC market, fueled by new GPU and CPU launches from Nvidia, AMD and Intel at the end of 2022 with more expected rollout in Q1 2023. As we've noted before, gaming PCs built with these new platforms need faster memory such as DDR5, larger power supplies with 1,000-watt capability or higher and better cooling technology. These are all product categories that we are expert in and have attained a dominant market share. This is a big positive for our enthusiast customers who are now able to build faster, more powerful game PCs with more features at a lower cost than they could during the pandemic. There have also been several recent games launched or updated that take full use of the new technologies built into the new GPUs, making them more immersive and more exciting to play. This is another powerful growth catalyst for us and is helping to drive higher demand for gaming PCs as well as peripherals. Based on our improved results, we believe we continue to gain market share in components used to build gaming PCs. We continue to command…

Thanks, Andy and good afternoon, everyone. Q4 2022 tracked to the very high end of our expectations and ended well with momentum carrying into Q1 2023. In terms of specifics, Q4 2022 net revenue increased to $398.7 million compared to $311.8 million in Q3 2022. This compares to $510.6 million in Q4 2021. Net revenue for the year was $1.375 billion compared to $1.904 billion in 2021, a decrease of 27.8%. Our channel partners continue to reduce their inventories in Q4 2022 to current and expected consumer demand and the reduced transit and lead times. We also further reduced our own inventory by about 23% quarter-over-quarter which is back to more historic normalized levels. We are hopeful that the broader industry's inventory in the channel is also in a better position which would lead to less discounting in 2023. European markets continue to be softer than Americas and contributed about 30% of our revenue, well below the historic average in the high 30 percentile but up from the approximately 29% in Q3 2022. Turning now to our segments. The gamer and creator peripheral segment contributed $117.8 million of net revenue during the fourth quarter, up from $96.8 million in the prior quarter and a decrease of 33.4% from $176.9 million in Q4 2021. The gamer and creator peripheral segment net revenue contributed 29.6% of total net revenue, a decrease of 500 basis points from 34.6% in Q4 2021. For the year, gamer and creator peripheral segment net revenue was $437.8 million, a decrease of 32.4% year-over-year. The gaming components and systems segment contributed $280.9 million of net revenue during the quarter, up from $214.9 million in the prior quarter and a decrease of 15.8% from $333.7 million in Q4 2021. Memory Products contributed $158.1 million in Q4 2022 compared to…

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

So, I think there’s a comment in the press release that revenue guidance is not expected to be affected by negative inventory trends. So if your revenue is flattish to slightly up for the year, is there a way to help us understand the tailwind you expect to get from restocking? And what does your forecast assume in terms of retail performance? Is it up? Is it down? Or is it sideways? And I have a follow-up.

Yes. So the premise that we've done our forecast and guidance on is that we expect the market overall and obviously, this depends on different regions but we expect the market overall to be flat, perhaps a slightly down, perhaps a slightly up. We definitely have a tailwind in there of something like $100 million and that's assuming that this year is neutral which is a good assumption because we definitely shipped out to consumers $100 million more than we shipped into the channel. So hopefully, that gives you a sense of where we're at. Roughly the midpoint of the guidance is roughly $100 million up [ph] compared to our 2022 revenue.

Got it. Okay. No, that’s helpful. And then maybe for Michael, are the shipping – the lower shipping costs, excuse me, mentioned those running through the COGS line and SG&A? Or is it one or the other? And then you mentioned a decline of over 70% in Q4 versus the beginning of last year. Is there a way in which you can put that in dollar terms? And what type of benefit is your guidance embed for '23?

Yes. So for the first question, for gross margin, that's benefit in shipment in. Shipment out, we recognize the quarter we do the shipment. There's no delay in it. So it's whenever you do the ship out, that's an OpEx. But bringing inventory in gets capitalized into inventory and comes out over the terms. Just roughly in terms of some numbers, the change. As we lap 2021, it was costing close to $20,000 a container depending exactly on the routes but some of our routes as that high. By the end of 2022, it was somewhere between $3,000 to $4,000 a container again depending on specifically what route. But there was a pretty significant decrease on container costs.

Next question, Aaron [ph] with Macquarie.

I wanted to touch on the promotional environment for a second. You guys gave some good color on the heavier discounting by your peers and some of the excess inventory that could take some time to resolve for the industry. Outside of that, are you starting to see any improvements in the promotional environment? Or is it too early to tell? And assuming peers continue to discount, is your strategy to maintain price just given your premium positioning?

Well, firstly, let me welcome you to the analyst group, Aaron [ph]. I know you are the new analyst on Macquarie. So it's the first time we've spoken. So in terms of promotional activity, we actually think we're a little bit ahead of our -- generally of our competitors on inventory -- I mean in terms of inventory reduction in the channel. So we saw through Q4, many of our larger competitors discounting far more heavily than we were and it indicated to us that may be a little longer on inventory in the channel. Now, we think we -- well, we know we've roughly taken care of our inventory overhang by the end of the year and whatever was left, we're eating up. In fact, in many areas now we are under inventory targets in the channel. But we think that many of our competitors still have access. I believe that there will still be some discounting going on in the channel mostly in gaming peripherals for the next 1 or 2 quarters. And we will do what we can to maintain our market share but most of the discounting tends to happen in the entry level. And we're okay to lose a little bit of market share in the entry level, if it would then cause us to be in a loss position. So hopefully, that makes sense. So we think that the promotional environment will be still going on for the next 6 months -- 3 to 6 months. And I hope by the second half, it will go away as everyone's inventory clears up back to a normal level.

Got it. Perfect. That's helpful. And just as a quick follow-up. I know you've recently announced several upgrades to some of your existing product lines and you've also launched, obviously, some new products as well. So as you look at 2023, how are you planning on splitting your development resources between upgrades and new product launches? Is it pretty split pretty evenly?

No, it's not. I mean we've obviously got different sizes of businesses across the board. Some of the businesses we're in, like Elgato streaming for example, has got a very heavy software content and so the products are just a lot more complicated and for that reason, higher margins. We've also -- so there's a lot of resources going into that. We've got a pretty big software ecosystem which requires resources. We have a much bigger TAM that we're addressing in gaming peripherals and so there's a lot more products coming out there. In terms of the gaming components and products that we use to build gaming systems, that's the biggest part of our revenue now. And so obviously, we keep having to upgrade those. Most recently, what we've had to do is upgrade all of our power supplies to higher wattage levels because the new graphics cards from Nvidia and AMD come to that are using a lot more power or more powerful. I'm sure you've seen that in the news. So there's a general upgrade across the board. But I'd say, look, in general, the R&D budget is more geared towards products that require a lot more software and complexity. But that doesn't necessarily tie up with the revenue of each product line. I think in terms of longer-term market share expansion, we'd expect there's a lot more opportunity for us to grow in the gaming peripheral and the Elgato streaming area because those are newer. We're quite well established in memory sales and other components are going to self-build PCs and we have very high market share.

Got you. Perfect. And congrats on the quarter. Really nice performance.

[Operator Instructions] Next question comes from Doug Creutz with Cowen & Company.

If I take the midpoint of your guidance ranges, you’re sort of suggesting you’re going to earn close to 7% EBITDA margins which is basically where you were pre pandemic. If I think about what the pathway is to get to, let’s say, 10% EBITDA margins, is that just a function of creating operating leverage from top line growth? Or are there still things going on in the market or with you that are structurally impacting your margins that you think will get resolved over time?

Yes, that's a good question. And both are true. The largest component is size and leverage. And so clearly, the $2-plus billion level is a lot. There's a lot more overhead -- less overhead in terms of percentage. So that drives it up. But there's still a lot of margin enhancement going on in almost every product line. We still have some remnants of freight -- high freight costs sitting in inventory. As Michael said, they go into the balance sheet. We still have some discounting going on, as I said. So we think if we got back to the normal situation that we were in -- in 2019, in terms of market, we'd actually be substantially above 41 or 2 points higher in terms of EBITDA level.

Next question, Mario Lu with Barclays.

Great. So the first one is just a high-level question. So now that the retail channel is normalizing, Curious if there's any other areas of focus that you'll be returning to or new initiatives this year? I know in the past, you mentioned kind of growing your DTC channels or growing your services segment, for example.

Yes. Good question, Mario. Well, at the moment, the most important market we're chasing after is -- or trying to keep up with is a self-built PC component market. That has really researched with the new graphics cards coming out with from Nvidia. And in fact, it's only really the high-end cars that have come out so far. So we still have [indiscernible] which will probably end up being the most popular card that will drive most volume for us. So the first priority for us is to keep up with that demand is very strong, stronger than I think most people would expect given sort of a recessionary period, you would think it would be difficult for people to spend $2,000 or $3,000 on building the MPCs but that's what everyone is doing at a very good rate, substantially above pre-pandemic levels. So that is one area. We talked earlier about the fact that we still have a large market to go after in gaming peripherals, so that will continue to be a focus. Streaming and building out some of the streaming and content creator products such as Stream Deck. We're trying to enhance that, so it's more useful for people doing all sorts of work in business, whether it's using Teams or Zoom or Adobe. So we're going to do a lot of work there. And then yes, we are actually doing very well in our direct-to-consumer business, we had a record 15 total sales last quarter that was direct-to-consumer. So I think it's important for us to continue to build that out.

Great. And just a follow-up on the comment on seasonality. You mentioned that the second half will be stronger than the first half. Is there any [indiscernible], so that we can use, like for example, should we look back in 2019, where the second half was, call it, mid-50 percentage of total?

It should be much more like pre-pandemic type of patterns down from Q4 into Q1. Q2 is the lowest and then it starts going back up. Second half is higher than the first half. Partially, it will be from new product releases during the year as well. We believe that expand the addressable TAM for us and that will give us more opportunity for more revenue throughout the year and then I’ll help our second half.

Just to give some color there, Mario, the uncertainties that we face are several, right? We know right now, we've got a very, very strong self-built PC market. with more to come. And so we expect that's going to go on for some time. If it does, it will be stronger in the second half, probably than the first half. We have China which is sort of going through exit of COVID, if you like. And if you remember, whenever he came out of COVID in the U.S. and Europe, the initial reaction was to do lots of vacations and restaurants and that's things that people were spending money in other places. So that's yet to come. And so there's a lot of things like that. Europe; how soon will the Ukraine Russia situation resolve itself, how well inflation work over there. So while we've got a very clear sight and feel great about the U.S. I think there's more uncertainties in Europe and Asia that could affect how the seasonality works.

[Operator Instructions] Next question comes from Colin Sebastian with Baird.

It's Reece [ph] on for Colin. I kind of had a 2-part question on Europe. The first part being, could you just kind of frame up where you are in that 26% gross stat versus 2019 relative to the market? And then what's kind of embedded in the guidance this year for Europe? Is it continued weakness? Or is it something else? And then I think, Andy, in your prepared remarks, if I heard you correctly, you mentioned something around mobile -- if you could just touch on that, that would be great.

So just for normal percentages in the past for Europe, we’re usually in the high 30%, close to the Americas. That went down into the mid-20s at the start of the conflict between Russia and Ukraine. Got back up to about 30% by the end of last year. Assuming that there’s no further deterioration from energy costs or the conflict there, we do expect to have some gradual improvement in Europe through the year but not returning back up to the old levels by the end of next year. But certainly, some strength there.

Yes. The added color there is that there was more of an inventory adjustment needed in Europe than in the U.S. So what that means is that remember the first question about how do we think about revenue sales out from the channel versus sales in there's a bigger differential in Europe than there was in the U.S. which therefore affected our revenue mix. In terms of mobile, I'm not sure what the question was. You mean what's our feeling about mobile gaming?

Yes. I thought you had mentioned something about mobile gaming product development or I may have heard it incorrectly.

Yes. No, that's right. We've said previously that there's a couple as that we're looking at carefully in the gaming or the interactive entertainment space. One of them is AR and VR, still a little bit early for us to jump into that. And the other one is mobile gaming which we're watching closely, it's sort of fairly small market in terms of the accessories. And by accessories, I mean, something that clips onto the phone and allows you to use buttons for a better gaming experience. So we're looking at that very carefully. Clearly, we have console controllers in our SCUF division, so we know about how that market works. But the vast majority of people playing games on phones are just using the phone screen for inputs. But as that's developed and some opportunities arise, we'll certainly jump into that.

Thank you. I will now turn the call back to the company's CEO for closing comments.

Well, thank you everybody for joining the call today and for their continued support. Obviously, we're feeling pretty bullish at the moment with our nice results in Q4. We expect that to continue for next year against, obviously, macroeconomic issues. So if you have any further questions, please contact our Investor Relations department. We look forward to updating you next quarter. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.