Turtle Beach Corporation (TBCH) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the floor over to your host, Cody Slach. Sir, you may begin.

Thanks, George. Good afternoon everyone, and welcome to Turtle Beach Corporation's first quarter 2016 earnings call. Before we get started, we will be referring to the press release filed today with details of results which can be downloaded from the Investor Relations page of our website at corp.turtlebeach.com. In addition, a recording of the call will be available on the Investor Relations section of the company's website later this evening. Please be aware that some of the comments made during our call may include forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements and risks factors contained in today's press release and in our filings with the Securities and Exchange Commission, including without limitation our most recent Annual Report on Form 10-K and our other periodic reports, which identifies specific risk factors that may also cause actual results or events to differ materially from those described in forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements after the date of this conference call. We also note that on this call we will be discussing non-GAAP financial information. We are providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release. And now, I'll turn the call over to Juergen Stark, the company's CEO. Juergen?

Thanks, Cody, and good afternoon, everyone. Thank you for joining our call. First, I'll share some highlights of the business before passing the call to our CFO, John Hanson, who will provide details on our financial performance. I'll then expand upon our operations and speak more about our raised financial outlook for 2016. The momentum we established in our business at the end of 2015 has continued in the first quarter. Net revenue was up 22%, compared to first quarter last year, and our higher margin new-gen headset sales increased 64% compared to the year-ago quarter. This continues to be driven by robust sell-through of our new-gen headset portfolio in both domestic and European market. We believe we are well-positioned to grow headset revenues and significantly improve profitability of the headset business, which we've articulated as a key goal for the year. We are also very excited about the anticipated launch of our Elite Pro gaming headset tournament audio controller and Elite Pro accessories this summer. This line was designed to define the future of eSports gaming audio equipment, delivering best-in-class audio performance for game sound and team chat, plus innovative comfort-driven technologies to help ensure players stay cool and comfortable under fire. Recognizing this step-change in competitive gaming audio accessories, OpTic Gaming, one of the most prolific eSports teams in the world, selected Turtle Beach and the all-new Elite Pro line as their official gaming audio gear of choice and recently won the eSports World Convention gold medal for Call of Duty using our earlier. I will have more to say about the upcoming launch and this new partnership in my closing remarks. We experienced steady revenue growth in our HyperSound business in the first quarter, with a significant contributor being the March launch in Europe. The hearing healthcare offices that are fully trained and actively selling the product continue to convert prospects to customers at a rate of over 20%. We continue to focus on refining the sales approach and more quickly scaling fully active offices, while carefully controlling the resources and cash burn. To that end, May is the American Speech Language sharing associations Better Hearing & Speech month, and we've organized a targeted media campaign to drive awareness and test various marketing effort in two specific geographies, Southern California and Florida's Gulf Coast. While, I will provide more context on our HyperSound business, as well as additional commentary on headset, after John's discussion of Q1 financial results. We are very pleased with our Q1 performance which is enabling us to raise our 2016 guidance including a significant increase to a positive adjusted EBITDA. I will speak in more detail about our outlook, but first pass the call over to John. John?

Thanks, Juergen, and good afternoon, everyone. Jumping right into the numbers, net revenue in the first quarter of 2016 increased 22% to $24 million, compared to $19.7 million in the same year ago quarter. The increase was primarily attributable to a 21% increase in headset sales due to continued robust sell-through of our new-gen headset portfolio. Gross profit in the first quarter increased 8% to $3.4 million, compared to $3.1 million in the year-ago quarter. Gross margin was 14% compared to 15.8% in the first quarter of 2015. A 290 basis point improvement in the headset gross margin was offset by intangible asset amortization costs associated with the launch of HyperSound Clear 500P. Our higher margin new-gen headsets contributed 86% of revenues in the first quarter, up from 64% during the same period in 2015. As a reminder, we have recognized between $3 million and $4 million in each of the past five quarters in fixed cost relating to supply chain, logistics, depreciation, amortization and stock compensation expense. The amortization portion is expected to modestly rise in each sequential quarter of 2016, primarily due to amortization of the HyperSound Healthcare product. As such, consolidate gross margins are expected to be lower in the first half of 2016 due to fixed cost de-leveraging, as well as the seasonality of the headset business. But are expected to expand for the full year driven by higher revenue during the holiday season. A final point related to gross margin. We have managed down old-gen inventory substantially. At the end of the first quarter, we had only $2.7 million worth of inventory net of reserves, a 71% decline from a year ago. First quarter operating expenses were reduced by 16% to $13.1 million compared to the year ago quarter. The decrease was attributable to strong cost management in the headset business, which more than offset a modest increase in investments to ramp HyperSound Clear 500P sales efforts. Adjusted EBITDA on a consolidated basis improved to a negative $6.3 million, compared to adjusted EBITDA of negative $9.7 million in the year-ago quarter. The large improvement was primarily driven by strong new-gen headset sales and cost reduction initiatives. Adjusted EBITDA for the headset business improved to a negative $3.2 million in the first quarter compared to a negative $6.7 million in the year-ago quarter. Remember, with revenues expected to increase for the remainder of the year as we enter our peak selling season for headsets in Q4 and with better than expected gross margin and lower OpEx we would naturally expect to flow through more EBITDA in the headset business in the latter part of the year. Net loss in the first quarter was $12 million or a negative $0.26 per diluted share, compared to $10.6 million or a negative $0.25 per diluted share in the year-ago quarter. The year-ago quarter included a $3.4 million income tax benefit or approximately $0.08 per share versus a $0.1 million income tax expense in the first quarter of 2016. The tax expense versus the year ago benefit was due to our recording a full valuation allowance against our deferred tax assets in Q3 of 2015 due to US GAAP reporting requirement. So if you were to exclude the tax benefit from our first quarter results last year, we would have reported EPS of approximately a negative $0.33 per share versus the negative $0.26 in Q1 of 2016. Now turning to balance sheet. We ended the quarter with cash and cash equivalents of $3.2 million, compared to $7.1 million at December 31 of 2015. As a reminder, given the availability under our $60 million revolving credit line, we generally do not hold a large cash balance on a quarterly basis. Outstanding principal debt at March 31 was $35.5 million, compared to $68.1 million at December 31, 2015. The decrease in debt was due to a $31.9 million reduction in our revolving credit facility, which was driven by receipts from strong holiday sales and the February 2016 follow-on public offering. The debt consisted of $0.5 million of borrowings under our revolving credit facility. Historically, the outstanding balance fluctuates throughout the year. Recently it is been close to zero in Q1 and than ramps up ahead of the holiday. At the end of the first quarter the balance was close to zero and our ABL revolver with our expectations and goal. Subordinated debt totaled $17.8 million, and the term loans totaled $17.2 million. The addition of the term loan and subordinated debt in 2015 provide the company permanent capital reducing our dependency on the ABL revolver. In addition, internally we look at cash, plus accounts receivable, less accounts payable as a measure of our liquidity. At a positive $6.5 million this is approximately $9 million higher than the first quarter last year, taking into consideration with our $6.9 million in cash and availability on our line of credit and our expectation to be EBITDA positive on a consolidated basis in 2016, we believe we have sufficient capital to fund our business plan. This is further supported by our spending management in the quarter which we expect to continue throughout 2016. Now I'll turn the call back over to Juergen for some additional comments on the business and our updated outlook. Juergen?

Thanks, John. As I mentioned in my opening remarks, strong sell through in our headset business continued in our first quarter. In fact, we experienced quite a strong finish to March. This strong sell through again outpaced sell in resulting in lower channel inventory and a small amount of out of stock situations which has since largely been resolved. As I mentioned on our last call, given all the work we've done, managing down all the old-gen business over the past two years, its nice to be putting work into chasing strong demand on next gen. We experienced strong performance domestically and across Europe and we continue to be the clear category leader from a retail standpoint delivering excellent sales and operational metrics. These results were reinforced by recent domestic NPD data that shows Turtle Beach continuing to outpace a healthy, double-digit growing headset market in both retail unit sold and revenue share. In fact, while the counsel headset market is up 19% in revenue during Q1, we gained 22% year-over-year. In the UK, GFK and Chart-Track data shows that sell through on a revenue basis was up over 25% significantly outpacing the market growth of 14%. Looking at domestic data on a unit basis, while the counsel headset market is up 20% we gained 31%. Please keep in mind, since we are the industry leader, these growth rates are on a much larger level of volume and revenues than any other player in the category. As intended our Recon series has driven very strong share gains in the under 50 retail price segment, explain part of the difference in unit and dollar growth dynamics. At 43% we also overwhelmingly hold the leading share and the largest price here to $50 to $99 segment. Finally, we ended the first quarter with 41.6% consolidated revenue share, domestic NPD data, up 110 basis points from the same time last year. Amongst several other leading product positions, we continue to have the top third party models in the gaming industry as confirmed by NPD for the first quarter of 2016. Four of the top five selling third party headsets are all Turtle Beach and our XO FOUR Stealth continues to be the highest selling third party headset followed by XO ONE. Launched in October 2015, PX24 is already the largest selling third party PlayStation for headset so far in 2016 as measured by revenue, followed by Stealth 500P, our feature rich wireless PlayStation for headset. And that’s not all, we have some more great stuff planned on the product front. As I mentioned on the last call, 2016 will be our first normalized year of product introduction since 2012. We expect to launch several exciting new products during the course of the year and with old gen expected to be under 10% of sales in 2016, we expect to start improving profitability consistent with increased outlook we provided in today's press release, which I will speak to momentarily. On the subject of new products, about a decade ago Turtle Beach pioneered the counsel gaming headset category. We've driven many of the major innovations in the category year after year. We are proud to say we expect to do so again in 2016 with our Elite Pro product line. This line up includes the Elite Pro tournament gaming headset, a Elite Pro tactical audio controller, and elite Pro accessories. Our Elite series of products including our existing Elite 800 fully wireless headset reflect the highest level in gaming audio quality and innovation. Elite Pro wired tournament headset, audio controller and accessories represents our all new line up of competitive gaming audio gear that is tailored to meet the demands of today's professional and aspiring players. The Elite Pro headsets journey actually began in 2013, three years ago, seeing the consistent growth and popularity of ESports, we launched a comprehensive scientific research program to deeply examine the needs of professional and hardcore gamers as it pertain to game audio, communication with team mates and overall comfort. We studied every aspect of gaming headsets, including our own very successful models to identify the suite spots on weight balance, fit ear cup size, adjustability and key areas of discomfort from long hours of use. We literally had gamers wearing headsets for hours with temperature probe in their rear cups to understand heat and moisture. We then embarked on a ground up redesign of the pro-gaming headset and spent almost two years making it perfect. The result is the all new Elite Pro tournament gaming headset, a ground up re-design of the competitive gaming headset that brings to market multiple first and only innovation in the core mechanic of headset design weight and fit. Not only does the Elite Pro head set provide Turtle Beach's best in class game audio and check performance, but also delivers new comfort driven technologies, including the comfort tech fit system with multiple adjustment points for a truly personalize headset fit and feel, Aerofi, Ear Cushions that stay cool in the heat of battle and Turtle Beach's all new patented ProSpecs Glasses Relief System that finally makes wearing a gaming headset comfortable for players with glasses. Additionally, the Elite Pro tournament audio controller, or TAC for short, is the most powerful audio controller ever design for ESports, combining cutting edge audio technology like DTS Headphone:X 7.1 Surround Sound and our amazing super human hearing capabilities with incredibly powerful chat and micro firm tuning tools. The Elite Pro headset TAC and accessories are planned to launch globally this June and will be available later this month for pre order. To our new partnership with OpTic Gaming that I mentioned earlier, OpTic's Championship Call of Duty, Halo, Counter Strike, Global Offensive teams have begun using the Elite Pro headset TAC and other accessories. As I mentioned, our OpTic Gaming's first even using the new Elite Pro set up was at last week ESports World Convention where they successfully defended as Call of Duty Champions using our new gear. The strong start to the year in our headset business and the coming launch of the Elite Pro line, as well as a few other yet unannounced headsets in the works for holiday were key factors in our decision to raise overall revenue and EBITDA guidance for the year. Before I turn to HyperSound, let me discuss two more macro level items for the headset business that sometimes come up in conversations with investors. First, our view on old gen counsels. A couple of weeks ago Microsoft announced their decision to stop manufacturing new Xbox 360 counsel, the old gen counsel as we call it. This was not a surprise to us and was anticipated in our internal plans. Microsoft will continue to support a platform in multiple ways including selling, all remaining counsel at retail and still supporting the hardware. This move further supports our expectation that old gen will take its last final plunge in 2016 and will be immaterial revenue producer in 2017 and beyond. Second, our view of international markets. As you may recall from our third quarter call, the strong dollar impacted our international business last year in ways that are not captured by constant currency calculation, the strong dollar raises market prices and compresses distributor margins in regions where our product cost are driven in dollars. This was a major impact in Europe and was really the only major part of our headset business that did not perform to our expectations last year. In Q1, our European business showed growth of about 8% and tracked actually somewhat above our internal plans and we are undertaking some changes to our distribution model, as I have discussed in the past to be able to better and more directly manage our business in certain foreign markets in an effort to offset some of the impact of the strong dollar over time. As a result, we remain committed to our international market and believe we have significant growth opportunities overseas. This includes recovery in Europe and over time we believe China remains a large untapped market that we will pursue as we achieve our goals and improving profitability in our core markets. In general, we may remain optimistic about our headset business. ESports is taking off Microsoft and Sony have made recent public statements about the possibility for multi player online games to be played across platforms, VR is coming as a potential great add on to the counsel experience. So as we get clear of the counsel transition and anticipate improving our headset profitability, this year we plan to put some focus on expanding into PC gaming particularly in China, as well as mobile game. The gaming industry is indeed a great market to be in and even better to be a leader at. Now moving to our HyperSound business. We experienced small but steady revenue growth trends in Q1 with a significantly contributor being the launch in Europe. We continue to focus on training offices, which as I mentioned is proceeding more slowly and with more resources required than we had originally expected. A challenge we underestimated is that many hearing healthcare offices are so focused on selling hearing aid that it is taking more effort and training to get them to integrated HyperSound Clear 500P into their daily office work flow. And we have limited resources and are carefully managing our spend, so we continue to refine the sales approach, test and experiment and find the most effective route to scaling the number of fully active offices in a highly focused way. To take advantage of Better Hearing & Speech month in May, we dedicated marketing dollars to two geographies to test the impact of a focused marketing approach. This includes a combination of digital, radio newspaper and PR effort in the Southern California Florida Gulf Coast regions. Viewers, listeners and leaders will be directed to our HyperSound website, which includes details on the nearest hearing healthcare office that offers the product. Measuring our website traffic generated by these marketing campaigns and the flow through to office appointment will provide highly valuable data for future campaigns of this nature. We're also working to expand our markets for HyperSound Clear and have made good progress. In addition to the European launch in March, we realized preliminary data from a clinical study we conducted that suggest HyperSound Clear has the potential to alleviate Tinnitus, commonly known as ringing in the years. Tinnitus is the perception of sound when no actual noise is present. There are currently no known cures for most types of the condition. Additionally the American Tinnitus Association state that million of Americans experience Tinnitus often to debilitating degree, making it one of the most common health conditions in the country. The US Centers for Disease Control estimate that 15% of the general public, over 50 million Americans experience some form of Tinnitus with approximately 20 million struggling with chronic Tinnitus and 2 million living with extreme and debilitating cases. Our study included a 11 adult patients with chronic Tinnitus who we had listened through a selection of customized accrue stick stimulate [ph] through HyperSound Clear 500Ps, work in progress Tinnitus application. While sitting in the HyperSound Clear has directed audio beams subject in the study experience impressive reductions in the Tinnitus loudness and annoyance. This early data is very exciting because it suggest HyperSound technology may also have the potential to help people manage chronic Tinnitus. Again these are early findings and there is certainly more research and product development to be done, but even preliminarily this is great news for the hearing healthcare market. We recently previewed a prototype version of our potential Tinnitus add on feature at this years AudiologyNOW! Convention and Expo, and it was received with great enthusiasm. We expect to file a 5-10-K application with the FDA in the near future and if we receive clearance to market from the FDA we expect to offer this potential add on feature for an additional cost to the consumer that could be determined. As I have discussed HyperSounds entrance in the healthcare market is only the first type of application that’s a key point in our long-term view and why we continue to be to invest in the HyperSound technology. So the bottom line is we continue to be very excited about the prospects for HyperSound. With that all in mind, I'd like to now address our financial outlook for the second quarter and the full year 2016. Starting with Q2. We expect net revenue to increase 11% to approximately $25 million, compared to $22.6 million in the second quarter of 2015. We also expect headset gross margins to increase strongly from last year, and consolidated margins - gross margins to be roughly flat including the impact of the HyperSound amortization. We have reduced our operating expenses in recent quarters, which is expected to more than offset a modest increase in HyperSound investment, so consolidated OpEx is expected to be slightly lower than last year. As a result, consolidated adjusted EBITDA is expected to improve to negative $6 million, compared to negative $8.2 million in the year ago quarter. Net loss for the second quarter is expected to be approximately $0.23 per diluted share, unchanged from the second quarter 2015. Recall the second quarter of 2015 included a $3.1 million income tax benefit or approximately $0.07 per share, associated with our deferred tax asset. No such benefit is expected to occur in the second quarter of 2016 due to the full valuation allowance recorded in the third quarter of 2015. For modeling purposes, we do not expect to be able to utilize our large accumulated tax assets for the foreseeable, so no tax benefit should be assumed in the analyst models. Please keep in mind that our headset business is very seasonable with roughly 50% of the sales occurring in Q4, so margins and profitability are meaningfully lowered in the slower quarters like Q1 and Q2. On to the year, we are raising our full year outlook and now expect net revenue to increase 1% to 8% and range between $165 million to $175 million. That’s up from $160 million to $172 million in our previous outlook stated in March and compares to $162.7 million in 2015. Included within these expectations is anticipated 18% to 23% growth versus to 12% to 16% previously in new gen headset revenues to $147 million to $153 million range versus $140 million to $145 million previously. A 60% to 70% decline in old gen headset revenues to $8 million to $10 million, same as our last guidance and approximately $5 million to $7 million in HyperSound revenues versus $7 million to $10 million stated previously and approximately $5 million in other headset and accessory revenues. The slight reduction in the expected HyperSound revenue is due to the aforementioned slower than expected ramp in the hearing healthcare offices and the lower spend on sales and marketing. We now expect to generate positive zero to $2 million in consolidated adjusted EBITDA in 2016 compared to an implied loss of approximately $5 million in our previous outlook. This compares to a consolidated adjusted EBITDA of negative $11.4 million in 2015. So obviously a sizeable improvement consistent with our stated priority to improve profitability and reach positive consolidated EBITDA. Our 2016 EBITDA assumption raises our headset adjusted EBITDA to approximately $12 million, compared to $9 million in our prior outlook or roughly 5x [ph] increase over 2015. In our HyperSound business we expect to hold our investments to below $12 million in 2016 as revenues and expense scale. As we stated, we are working to spend within our means, including carefully evaluating our spend on HyperSound even if it limits resources we could apply to attempt to grow more rapidly. Net loss in 2016 is expected to improve significantly to range of negative $0.46 million to negative $0.50 per share based on 48.6 million shares outstanding compared to a net loss of $1.96 in 2015. For the remainder of 2016 with the product portfolio transition largely behind us, as well as the expected final drop in lower margin old gen headsets sales, growing new gen headset sales and HyperSound Clear 500P now launched, we believe we are well positioned to drive top line growth and increase profitability. Thanks as always to a fantastic team of colleagues at Turtle Beach for their continued contribution and dedication. Operator we're not ready to take questions.

Thank you, sir. [Operator Instructions] And our first question comes from Rob Stone of Cowen & Company. Please proceed.

Hi, guys I wanted to ask little bit more about the margin profile for HyperSound and just if you could provide a little more color on the amortization piece, which is going to increase quarter-by-quarter for that, John?

Excuse me. Hey thanks Rob. Yes so relative to – relative to HyperSound, when we launched the - excuse me Rob, when we launched the 500P product that started the amortization under U.S. GAAP for the IPR&D for that product. And so it’s approximately $1.1 million a quarter today and it will rise gradually quarter-to-quarter in 2016 to about $1.4 million a quarter by Q4 of 2016.

Okay. And can you provide the breakdown of the non-cash items that were in the quarter and how those figure e into your EBITDA guidance for the year? That is stock based compensation, depreciation and amortization?

Yes so let me – let me make sure I have got the question. Associated with the press release, we have Q1, we have the non-cash items reconciled Rob in for Q1. And so I think you’re asking on a full year basis, what does the non-cash items look like in a full year basis? Correct?

Yes.

Yes so, it makes sense. Yes so from a depreciation on a full year basis, depreciation and amortization about a $11 million for the year.

Okay.

And it’s approximately $4.8 million.

Okay. So another question for Juergen, you are targeting a little bit less HyperSound revenues this year, given the challenges in training up the offices. How will you think about some sort of milestone or conversion rate or some other metrics that will tell you when it’s time to go and open the sales and marketing figure a little bit and try and grow the revenue faster?

Yes very good question Rob, so that - we’re doing something that I mentioned in my prepared remarks, we call it internationally the May bliss, where we have a focus set of marketing initiatives in two geographic areas, Southern California and Gulf Coast of Florida. We have about 31 offices between those two regions of Doctors offices that have been kind of fully trained and prepared and so we’re testing when we apply what you would view as a well-supported marketing campaign instead of kind of doing it nationwide, we’re testing it couple of different approaches, different media, measuring everything we possibly can, incoming phone calls, web hits, we even have some differences between the two regions, so that we can actually hone in on, what is the most – what are the most effective marketing vehicles, how much does it drive people to come to the website, people who click on where to buy, people have scheduling office appointments, all the way through to people who ultimately buy. And that allow us probably buy mid of June once we kind of see the results of the May activities, how do up internally and say okay here is what works, here is what didn’t work so well, where else could we apply the areas that work, we can or within our kind of limited resources and have a much better sense of how those investments would translate into revenue growth.

Okay. So it sounds like really combination of developing better intelligence in HyperSound and then maybe reaching some threshold level of improved profitability in the business overall will give you the confidence and the cash flow to go more aggressively 100%?

Exactly, we still have the kind of two key tenants, we got consumers who buy the product and we’ve got offices that once you can kind of fully trained and working the right way, they’re highly productive with the product. We - as I mentioned on the last call, we’re not a multibillion dollar hearing aid company, we can’t afford to spend – send hundreds of people into the field, do all the training, all that. So we're really looking to find that the most streamlined effective way to get an office from a prospect to fully trained, without having to do in a multiple visits and all that and then how do we most effectively market those the product to support those of offices.

Great, that’s all I have thanks.

Thanks, Rob.

Thanks, Rob.

And our next question comes from Mark Argento of Lake Street Capital Markets. Your line is open.

Hi, Juergen. Hi, john. Just wanted to drill down a little more on inventory levels, I know you guys coming out of the holidays pretty mean in terms of the inventory of retail. Could you talk about kind of where you see inventories right now and how those build through up into the holidays?

Sure, so we came out of last year I think with $12 million, $12 or $13 million lower inventory levels year-over-year, a part of the multiyear a very, very good executional effort to improve our internal processes and run the business with lower inventories. So that’s gone, that’s really gone very well. And then as all the way going back to the Q4 results, we’ve had sell-through at retail that has somewhat outpaced sell in. And so in Q1, particularly in the middle of Q1, we had actually a fair number of our products that are on what we call allocation where we are not able to fully fulfil retail need and were literally allocating the products each of the retailers and had a variety of stock outs. We have very good internal processes to kind of detect and measure sell-through on a weekly basis. And so we kind of we caught this far enough ahead of time and started working on it even before we reached kind of level of stock out and started more products flowing into the business, of course there are lead times with the products. And so we’ve now largely caught up where we shortly still have some shortages and price on allocations and some stock outs, but we’ve largely caught up and the results in, especially at the end of March continue to be very good. And so we still are in a bit of a chase mode which we view as a very positive thing. So, we're looking at the rest of the year, obviously we’ve raised our outlook accordingly and now working to actually lean forward a bit on inventory, especially only in the new-gen area to accommodate revenue upside that we think we might get just given the strong performance of the products. So, that’s kind of the core. And then obviously we – as John mentioned $2.7 million of old-gen inventory, that’s not to be underestimated, the level of execution that had to go into that, remember that was a couple hundred million dollar business in 2012. And so we – its something every month we pay very close attention to how are those products selling with the attempt to kind of time it perfectly, so that we don’t end up with excess inventory, it will never be perfect by the way, but we also don’t kind of cut off the products before the market has dried up. And so that’s - we continue to do that at $2.7 million on old-gen we feel pretty good about where we are.

I know in your press release you guys talked about taken some share in the quarter, you think you've taken share, other guys are in the same position where they are prior under inventory do degree you're able to take advantage, but again product on the shelves were more quickly or what do you see from the competitive environment why you guys are able to take some share?

Yeah, I’d say couple of things. First of all the share numbers will move around quarter to quarter, we don’t get overly excited about a few points move here and here. What we do get excited about is the largest share that we took was in the low $50 retail price point and that’s about 35% of the total market, just as a reminder the 50 to 99 of the segment is about another 45% of the markets. So those two tiers make up like 75% to 80% of total market and the last kind of set of products that we’ve launched, this was on a 2.5 year portfolio plan was to - for the kind of more bargain sub-50 price points and we took a ton of shares there. And so that’s what drove the modest increase in share and with the Elite Product launch one of our targets literally since 2013 is the start to reinvent the gaming headset category for the top town for the most demanding competitive gamers and we expect that now once we launch during the course of the year to help us at the higher price tiers. Obviously, we in the mid-price, we dominate that market share anyways.

Grateful. Congrats on a great start to the year and hopefully that talent continue. Thanks.

Thank you, Mark.

Thank you, Mark.

[Operator Instruction]. And our next question comes from Eric Wold of B. Riley. Your line is open.

Thanks, good afternoon. Just one follow up question on old-gen inventories, you’ve done a great job getting your inventory down, while still were keenly satisfied with demand that’s out there. What do you see out there in the channels from the other competitors or other manufacturers of what they are doing with old-gen inventory, kind of, level the demand, the market in terms of how long you think that will linger. I know it’s maybe less 10% of your sales this year is expected to be in terms of where the demand is in terms of possibly impacting other sales?

Yes. Good question, Eric. So one key point is, I mentioned, we do very regular analysis. And it’s not just of our inventory level, it’s the inventory of key retailers. And when you have a market that’s going away, a key factor is the fact that the channel will work their inventory level down to zero before we work our inventory level down to zero, right. So if you don’t comprehensively look at both, you’ll end up with the guy holding the bag with inventory at the end of this. So our expectation is that brick and mortar retail will be largely done and out of old-gen going into holiday. There might be a couple exceptions and we know of a few, but you can work under the principle that, that old-gen section of products will be repurposed. We kind of started planning for that back in Q4 already in 2015. And our discussions with retailers are showing that - they are the most likely game plan. So in that old-gen product that we will continue to sell, online channels will continue to have it and it will kind of have somewhat of a long tail, but with obviously most of the volume then gone by the end of Q3.

Okay. And then one question on HyperSound. The conversion you’ve seen so far you launched on 20%, what's the experience you’ve seen in terms of what the customer’s intent was? Did they come in there - would they walk out with nothing, 5% wasn’t there, they trade away from a hearing aid, some by both. What have you seen as of - how this impacted consumer behavior?

Yes. So, most of the trained offices are targeting HyperSound at two kinds of call it patients. One is happy hearing aid owners. These are people who come in regularly from what’s called a clean in-check. There are types of hearing aids, especially they are really small in the ear hearing aid that actually don’t work very well with TV. They don’t have any kind of transmission capability and those patients are a very good prospect for HyperSound because they can either keep their low tiny hearing aids and watch TV or even take them out. And then the other, the real kind of – the real sweet spot, frankly, for these offices longer term economically is the fact that - and we’ve talked about this before, that the hit rate on hearing aid is not that high. So a typical practice will have a below 50% conversion rate of somebody who comes in, gets their hearing tested, is confirmed a need of a hearing aid, and less than 50% of those people will actually buy hearing aid. And on non-average for the industry takes 7 plus years for someone to eventually on average come around to get a hearing aid, all kind of reasons for it by the way. And those lost customers essentially are the perfect prospect for HyperSound. If we think, and I personally strongly believe that if a person doesn’t buy a hearing aid, who isn’t hearing all that well, and then you sell him a HyperSound unit, you will number one, have generated revenue from that customer, and number two, you have a customer who is, in our opinion, more likely to get a hearing aid. And the analogy that I use for that is imagine you have blurry vision like I do when I don’t have my glasses on, and now you give me a pair of glasses but I can only use them when I watching TV. So I am going to be a really noticing the fact that I take them back off and they go outside and I can't see the leaves on the trees and all that kind of stuff, I am more likely to come back in and say, hey, I want a solution for outside too. So that’s – there are offices that are figuring this out now, they can improve their rate, generate revenues and keep a customer that is actually potentially more likely to come back and get a hearing aid without waiting the efforts seven plus years.

Got it that’s terrific. Thank you.

As this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Juergen Stark for closing remarks.

Great. I just want to thank everyone again for joining the call. And we look forward to speaking with our investors and analyst when we report our second quarter results in early August. Have a good day everybody.

Ladies and Gentlemen, thank you for your participation in today's conference. This conclude the program. You may now disconnect. Everyone have a great day.