Turtle Beach Corporation (TBCH) Q4 2024 Earnings Report, Transcript and Summary

Greetings, and welcome to the Turtle Beach Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jacques Cornet with ICR. Please go ahead.

Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon that details the company's fourth quarter and year-end 2024 results. The release is available on the Press Releases page of the company's Investor Relations website, corp.turtlebeach.com. There, you'll also in the latest earnings presentation that supplements the information discussed on today's call. And finally, a recording of the call will be available on the Events and Presentations section of the company's Investor Relations website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's 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 the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially so the company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission including, without limitation, its annual report on Form 10-K and other periodic reports which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. Company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, we'll be discussing non-GAAP financial information. The company is 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 the company's reported GAAP results in the reconciliation tables provided in today's earnings press release and presentation. Hosting the call today are Crist Keirn, Chief Executive Officer; and Mark Weinswig, Chief Financial Officer. With that, I'll turn the call over to Cris.

Thanks, Jacques. Good afternoon, everyone, and welcome to our fourth quarter and year-end 2024 earnings call. I'm thrilled to report that we ended a record-breaking 2024 with a record-breaking quarter. We achieved our highest ever quarterly results in both revenue and adjusted EBITDA, underscoring the strength and resilience of our strategy, execution and business model. This strong performance was driven by several key factors. Our acquisition of PDP has been a game changer, significantly expanding our product portfolio and market reach and infusing the company with more amazing talent and expertise. PDP delivered an immediate positive impact on our performance at the time of the acquisition and the completion of our integration activities in Q4 continued to drive results. For the fourth quarter, revenue was $146.1 million, up 46.8% compared to the same quarter last year driven primarily by incremental sales and retail distribution for PDP as well as low-single digit percentage growth for Turtle-Beach-branded products. We were able to reduce our promotional spend as a percentage of revenue for the fourth quarter and full year on the strength of our next-generation product launches in 2024, and we're pleased to see ASP increases as a result. This promotional approach also contributed to improved profitability that was achieved for the quarter and full year. Adjusted EBITDA for the fourth quarter was $35.7 million, a significant increase from $14 million in the same period last year. The substantial improvement with our adjusted EBITDA growing at a faster pace than our revenue reflects our ongoing focus to enhance efficiency and streamline our processes. As one example, we expect to realize more than $13 million in annual cost synergies from the PDP acquisition, surpassing our initial expectations of $10 million to $12 million. These results underscore our commitment to driving profitability and operational excellence as we continue to optimize our expanded portfolio and organization. To that point, our relentless focus on operational excellence has yielded substantial improvements across the company. From supply chain optimization to cost management, our efforts have enhanced efficiency and profitability while positioning us for sustained growth. These efforts include preparations and mitigations for the impact of any new tariffs. 2024 was truly a transformational year for Turtle Beach. We have built a solid foundation for future expansion, and I'm confident that we are well positioned to capitalize on the opportunities ahead. With that, let's dive into a few takeaways from 2024 and the fourth quarter. We're pleased to see that, as we expected, the full year 2024 growth of 6% for U.S. gaming accessories outpaced the overall gaming market, which was slightly down per Circana data. Turtle Beach-branded gaming headsets revenue share in the U.S. increased 270 basis points in the fourth quarter compared to the previous quarter, supported by the launch of our new Stealth 700 Gen 3 premium wireless headset built on our next-generation platform design. For the controllers and game pads category, Circana data shows that our revenue growth in the U.S. significantly outpaced the market with a 25% increase in retail sales for 2024, while the market grew about 2.5%. Notably our premium Victrix pro BFG and Turtle Beach Stealth Ultra controllers ranked as the second and third best-selling third-party game pads during the year. Additionally, our RiFFMASTER wireless Cantar controllers perfect for Fortnite Festival, continued dominating the music controller category with the number one share in the U.S. Over the course of the year, our strong cash generation enabled us to continue to return value to our shareholders. For the full year, we executed nearly $28 million in share buybacks at an average price of $15.39 per share. These repurchases were the largest in our history, and underscore our confidence in Turtle Beach's long-term growth prospects and are dedicated to enhancing shareholder value. As we move forward, we will maintain a sharp focus on capital allocation, ensuring that our financial strategies align with our goal of delivering sustained value and growth. Before turning the call over, I'd like to take a moment to acknowledge some important updates in our leadership team. First, I'm delighted to welcome Mark Weinswig as our new Chief Financial Officer. Mark brings a wealth of experience and a proven track record of financial leadership. We're confident that he will be instrumental in driving our financial strategy and supporting our growth initiatives. Welcome aboard, Mark. At the same time, I'd like to extend our gratitude to John Hanson as he embarks on retirement after 11 years of dedicated service to Turtle Beach. John's contributions have been invaluable and steering the company through many significant milestones and challenges. We want to thank John for his commitment and leadership and wish him all the best in his well-deserved retirement. Mark will now take us through the financials in more detail and 2025 guidance. Mark?

Good afternoon, everyone, and thank you, Cris, for the warm welcome. I am truly honored to join Turtle Beach as the new Chief Financial Officer. I'm excited to work alongside such a talented and dedicated team and look forward to contributing to its continued success. I would also like to extend my gratitude to John for his guidance and direction during this transition period. As Cris mentioned, our fourth quarter 2024 revenue was at an all-time record of $146 million, reflecting incremental revenue from the PDP business, our next-generation products and solid execution. In addition to the strong revenue performance, our gross margin for the fourth quarter improved to 37%, a 500 basis point improvement compared to 32% from the year ago period. Included in the cost of sales for the most recent quarter is a $3.4 million charge related to a loss of inventory in transit. Operating expenses of $30.6 million were 21% of revenue compared to 24% in the prior year, reflecting the improved leverage of the business from the higher revenue base. We continue to invest in new products and product line extensions to expand our product portfolio and grow our addressable market. Most importantly, our fourth quarter adjusted EBITDA improved to an all-time quarterly record of $35.7 million compared to $14 million in the year ago period. For the full year, adjusted EBITDA was $56.4 million compared to $6.5 million in the prior year. The significant increase in adjusted EBITDA was driven by higher revenues, combined with the cost containment actions taken providing strong operating leverage. Now turning to the balance sheet. At year-end, net debt was $85 million, comprised of $98 million of outstanding debt and $13 million of cash. The debt balance is comprised of $49 million outstanding under our revolving credit line and $49 million on the term loan. One important item to note is that just this week, we nearly paid off the entire revolving line balance due to strong cash receipts. During the fourth quarter, we repurchased approximately 162,000 shares at an average price of $15 per share, returning $2.4 million to shareholders through our share repurchase program. For the full year, we repurchased a total of $27.8 million. Our current share repurchase program expires in April. In line with our continued commitment to return capital to shareholders, we are opportunistically assessing various potential share repurchase strategies. Turning to guidance. We are expecting full year 2025 revenue to be in the range of $395 million to $405 million. This represents 7% growth at the midpoint compared to 2024. We expect our full year 2025 adjusted EBITDA to be in the range of $68 million to $72 million. The midpoint for 2025 represents a greater than 200 basis point improvement in adjusted EBITDA margin and 24% growth compared to $56 million of EBITDA in 2024. Both of these will be record levels for the company. As we navigate recent volatility in the retail market, we want to provide additional context on expected seasonality. First, it's important to note that we typically see the majority of our revenues in the second half of the year driven by the holiday season. We believe the second half of this year will see an even larger portion of revenues than usual due to the anticipated launch of new games and console platforms. As such, we expect the first quarter will account for approximately 15% to 16% of full year revenues. Finally, as Cris noted, we are actively monitoring the changing tariff environment. We expect this to be a dynamic situation for the time being. Our full year 2025 guidance includes the expected net impact of the tariffs currently in place. We expect to provide further clarity in future calls. Now I'll turn the call back over to Cris for additional comments.

Thanks, Mark. We have never been more excited about the future of Turtle Beach, considering the record quarter we delivered in Q4 and the new baseline of performance for the company in 2025 and beyond. We've discussed how our strategic efforts could put us in a position to exceed previous highs elastin for the company during the Battle Royale surge in 2018 and the pandemic era in 2020 and 2021. Q4 demonstrated that our new run rates and scale have already surpassed those previous milestones, and we're energized to expand on that success with a record 2025. Our steadfast dedication to innovation, exceptional execution and growth continues to distinguish Turtle Beach as a frontrunner in the gaming accessories market. We remain committed to driving expansion in complementary product categories and executing on accretive M&A to drive additional scale in our business. As always, our amazing team at Turtle Beach is the driving force behind our results. And I want to thank them for their contributions and a transformative and record year. We remain confident in our strategy and focused on delivering value for our shareholders and gaming customers. And with that, let's turn to Q&A.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Sean McGowan with ROTH Capital Partners. Please proceed with your question.

Hi, guys. Thank you. Cris, could you possibly put any kind of a number around what you expect the impact to be from tariffs? Is it simply a reduction in sales? Is it increase in cost? Is it both?

Yeah. Hey, Sean, it's a great question. It's something we've spent quite a bit of time on preparing for tariffs, looking at our mitigations and looking at what the future may look like for tariffs. As far as putting a number on it, it would be in the range of several million of EBITDA if we were able to if they came off tomorrow and tariffs didn't return, it would be a benefit of several million for us. If there are additional tariffs, it's something that we -- it's a very dynamic environment and trying to estimate what might come down in that respect is something that we're tracking. And I feel very good about what the team has done from a mitigation standpoint and our preparedness for any new tariffs that may come down. But clearly, not knowing what those might be, could have an impact on our results.

Okay. Thank you. Maybe, Mark, for you, a question on the margin. If we add back that inventory charge. I assume that's all in COGS. So does that imply that gross margin in the quarter would have been 39%. And maybe more importantly, is that a level we should expect at this kind of level of revenue going forward?

Yeah, Sean, thanks for the question. So we actually put in the -- in today's release, we added in the financial outlook section a part that actually talks about our go-forward expectations for gross margins. We've noted in there that we're now focusing on mid- to high 30s in terms of gross margin percent for the full year. Obviously, our gross margin is very much reflective of revenues. So we'll be very much back-end loaded in terms of the margin percentage, but we feel very good about this expansion in our potential margin opportunity.

Okay. Let me finish with a question about buybacks. So if you look back, you've contemplated things like Dutch, you've done some buyback I think the upper range, if I remember correctly on the Dutch was around 15. So should we view this current price as an attractive one? And would you consider doing something kind of a big event like that?

Yeah, this is something that we're constantly assessing. We are committed to look at how we can return capital to shareholders, and we're going to be opportunistic about opportunities in that range. Clearly, we believe that there's a lot of value here that is not being recognized in the current price. So we do feel that the stock is extremely attractive at the pricing that it is. So that factors into our decisions, clearly.

Very helpful. Thank you.

Thanks, Sean.

Our next question is from Jack Vander Aarde with Maxim Group.

Hey, guys. Great. Welcome to Mark, and congrats to John again. Thanks for taking the questions. So Chris, maybe for you, can you just touch on your revenue outlook in terms of where you see, I guess, by product category? And then also, where you have the greatest visibility or maybe the greatest -- the least visibility in terms of geographical regions? Thanks.

Sure. Jack, thanks for the question. Yes, when you look at the outlook, we're -- I believe, taking a pretty conservative approach here based on what we're seeing so far in 2025. We'd anticipated that we'd seen a bit of a stronger market at this point when we were going into the holiday. We did see a bit of a decline in the markets in December year-over-year. And that's -- we always talk about how Q4 sort of leads into Q1 performance, and we are seeing that in Q1. As we noted, as you probably saw there in the release, the markets in the U.S. for accessories for gaming were down pretty significantly in January. And so what we believe is going to happen for '25 is that we think it will continue to be a bit softer here in the first half of the year, but we're very excited about what's happening in the back half of the year. The two main drivers there, Nintendo has confirmed that at some point in 2025, Nintendo Switch 2 will launch, and that will be an extremely positive factor for everyone in gaming. And then secondly, as you know, GTA VI is planned to be launched this fall. Those two factors are going to have a tremendous effect on the gaming accessories markets in the back half of the year. And so our overall revenue for the year reflects that dynamic. I think the second part of your question was around geographies and categories. So when you look at what Turtle Beach has been able to do over the last couple of years, we've been driving additional revenue in categories that are adjacent to gaming headsets. And we've made a ton of progress there, particularly with the PDP acquisition to where we believe 2025 more than a third of our revenues are going to be coming from non-headset categories. So -- and that continues to increase for us. And I do think over time, you're going to see that approaching 40%, 50% of our revenues being outside of headsets. From a geographical standpoint, we have about rough and tough, maybe 70% of the revenue domestically, about 25% in UK and Europe and then Asia is a single-digit contributor to our revenue.

Okay. Great. I appreciate that. And then maybe just a follow-up in terms of the adjusted EBITDA guidance. So the 2025 EBITDA guidance appears very strong, considering the revenue outlook. I appreciate the commentary around the gross margins, which are much stronger than previous years for sure. And it sounds like it considers the tariff impact. So what about the operating expense line? Are we -- maybe if you could just provide some sense of how that compares maybe seasonality wise to the prior year? And just are costs coming down? Is there more non-cash add-backs? Any color there would be helpful.

Sure. Yeah, we expect to continue to get leverage on our operating expenses. This has been 1 big benefit for us. Obviously, with the acquisition and the synergies that we've realized there we've seen a dramatic improvement in our leverage for OpEx. And I think this year, what you'll see is it will continue to improve as we go through the year because those synergies are -- essentially, we're going to realize all of those for the full year of 2025, that $13 million that we mentioned earlier. And we think there's continued opportunities there as we continue to drive sort of streamline our processes and look for opportunities to leverage that. So I think from a seasonality standpoint, it will be similar to a run rate year but on a much lower run rate level than what we've seen in the past.

Okay, great. I appreciate the color there. I’ll hop back in the queue. Thanks, guys.

Thanks, Jack.

[Operator Instructions] Our next question is from Martin Yang with Oppenheimer.

Hi, thank you for taking question. So first, can you remind us your sensitivity to the currency changes? What happened in the U.S. do continues to weaken or whether a currency movement was factored into your annual guidance? Thank you.

Yeah. Thank you for the question. Right now, we are seeing some benefits in terms of just the strengthening market for us on the FX side. We have taken into account potential changes. We do not do any hedging or any type of transactions like that. But we have in a sense of natural hedge in terms of the amount of revenues that we have in different currencies. So at this point, we would say that it's something that we are looking at closely, but we feel very confident with our outlook for 2025 based on the results so far in the first three months of the year.

Got it. The second question is on your view towards a second half weighted revenue outlook. Is there any reference points in history that led you to the outlook or -- is there any particular year that's -- I think it will give us a good comparison or is that based on conversation with retail customers? Any sort of context led you to the second year -- second half outlook would be helpful. Thank you.

Sure. Yeah. It's a great question, Martin. It is such an important factor in how we're thinking about the year. When you look at similar years, I would say it would be very similar to 2019, which is sort of our pre-pandemic sort of normal seasonality with the exception that Q1 would be lower based on what we're seeing out there in the market right now. And that we would expect that, that loading would then come back in kind of Q3, Q4 time frame. So from a -- as far as the factors that are leading us to that, it is feedback from our retail partners. And a lot of the gaming industry folks that are taking a look at what's going on in the markets right now. There's a lot of excitement around what the back half will look like based off of those two huge factors mentioned earlier between the expected launch here for Switch 2 at some point, and what's going to happen with GTA VI. That's the anticipation around that game and we know what normal large releases will do for us from an accessory sales standpoint, we expect that effect to be even greater when GTA VI comes out. So those are really the main factors there. But I would look to 2019 with the adjustments to Q1 as sort of a bit more of a representative year.

Got it, thank you, guys. That’s it for me.

Thanks, Martin.

Thank you. Our next question is from Sean McGowan with ROTH Capital Partners.

Hi. I just wanted to circle back on your comment again about following up on that seasonality comment. Could you just remind us, did you say 15% to 16% based on the midpoint of that range?

Yeah. Yeah, that's true.

Okay. Just want to clarify that. Thank you.

Thanks, Sean.

There are no further questions at this time. I'd like to hand the floor back over to Cris Keirn for any closing comments.

Thank you all for joining our call today and your interest in the company, and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.