Turtle Beach Corporation (TBCH) Q1 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Turtle Beach Q1 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I will now hand the conference over to Jacques Cornet, ICR. Please go ahead, sir.

Thank you, operator. On today's call, we will be referring to the press release filed this afternoon that details the company's first quarter 2026 results, which is available on the news page of the company's Investor Relations website corp.turtlebeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available in 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. 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. The 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, the reconciliation tables provided in today's earnings release and presentation. Hosting the call today are Cris Keirn, Chief Executive Officer; Mark Weinswig, Chief Financial Officer. With that, I'll turn the call over to Cris.

Thanks, Jacques. Good afternoon, everyone, and welcome to our first quarter 2026 earnings call. As we build momentum through our brand transformation and significant releases of new products in 2026, our first quarter results reflect a continuation of a challenging market environment that carried over from 2025. The quarter was impacted by a temporary dip in channel inventories as our retail partners manage stock levels in consideration of the short-term dynamic of multiyear market lows for Q1 in the headset and controller markets. This channel reduction included clearing retail inventories to support the load-in of our new product launches in Q2. We expect channel inventory to rebound in the coming quarters, which should act as a tailwind to year-over-year growth as we ramp new product placements at retail and prepare for improving market conditions leading up to holiday 2026. At the same time, we executed in Q1 to lay the groundwork for a meaningful step-up in our new product introduction cycle. We are tracking with excellent progress on our plan to realize over 50% year-over-year growth in new product launches for 2026, including our recently announced Stealth Pro 2 flagship headset, our new Command Series PC lineup and multiple accessories across categories that are officially licensed for the Nintendo Switch 2 ecosystem. Stealth Pro 2 represents the next evolution of our premium audio platform, combining Japan Audio Society certified high-res audio, our patented 60-millimeter Eclipse dual drivers for powerful bass and crisp highs with exceptional precision, Dolby Atmos Spatial Audio for immersive 3D gaming and entertainment and active noise cancellation to reduce background distractions. It also introduces our new CrossPlay 2.0, multi-platform wireless audio system, building on the CrossPlay wireless technology pioneered by Turtle Beach, and now supporting up to 4 audio sources. This industry-leading innovation gives gamers greater flexibility and seamless control across multiple audio sources without the need for cables running to a separate audio hub. All of this is paired with a refined premium build featuring anodized aluminum components, soft touch materials, a fabric suspension headband and memory foam ear cushions for long-lasting comfort. Together, these innovations reinforce our leadership in premium gaming audio and provide gamers with a pinnacle of gaming audio technology. To amplify this fantastic new addition to our headset lineup, we have also initiated our brand transformation to reinvent how Turtle Beach engages with gamers. A key example of this is our campaign for the Stealth Pro 2 launch, The Last Ninja. The ultimate Stealth showdown highlighting Turtle Beach's legacy of gaming sound and industry-leading audio performance. We believe this fun and more resonant approach to storytelling will strengthen brand affinity and drive deeper engagement with gamers. The combined benefits of Stealth Pro 2's new standard for gaming audio experiences and The Last Ninja campaign have resulted in very strong early momentum for Stealth Pro 2 with preorders on our site so far already more than double that of its predecessor, our original Stealth Pro. Looking ahead, we have strong conviction in our forward trajectory and are reaffirming our full year 2026 guidance, which considers several growth drivers for our business and the industry. Our outlook reflects our expanded innovation pipeline with accelerating momentum from confirmed new retail placements across multiple categories starting in Q2. We are also advantageously positioned ahead of the anticipated November 2026 launch of Grand Theft Auto VI as one of the biggest gaming releases in history, we expect it to serve as a meaningful catalyst for gamer engagement and accessory demand in the second half of the year and beyond. Importantly, with only PlayStation 5 and Xbox Series X and S currently confirmed as supported platforms at launch, we believe Turtle Beach is well positioned to see an outsized initial benefit given our strong presence in these console ecosystems. We are prepared to capture that demand as it materializes. Across the opportunities that our new product launches and brand engagement will provide upcoming market lift from GTA VI and the next generation of console hardware platforms in the coming years, our focus remains consistent, executing for success driving operational discipline and delivering meaningful value for our shareholders. In addition, we announced earlier this week that we recently restructured our credit facilities to enhance our capital return flexibility. With $56 million remaining on our current $75 million share repurchase authorization, this new financing structure supports our active and systematic buyback strategy. We have both the capacity and the commitment to return capital to shareholders while investing in the strategic growth initiatives that will drive long-term value creation. Given our confidence in the business and the strength of our outlook, we believe there continues to be a meaningful disconnect between our current stock price and the intrinsic value of Turtle Beach, and we will remain disciplined and opportunistic in deploying capital under this program. Overall, we remain focused on our strategic priorities as we move through 2026. We're executing against a clear strategy as we continue to optimize our cost structure, accelerate product innovations, and prepare the company to capitalize on significant upcoming industry catalysts. With our transformative work on the business over the last few years, we are exceptionally well positioned for the opportunities that lie ahead. Mark will now take us through the financials in more detail. Mark?

Thank you, Cris, and good afternoon, everyone. Our first quarter 2026 revenue was $42.2 million compared to $63.9 million in the prior year period. This decline reflects the continuation of challenging market conditions from 2025 as well as the channel inventory compression we saw in advance of our array of new products launching in 2026. Our gross margin for the first quarter was 26.8% compared to 36.6% in the prior year period. This margin decline was primarily driven by lower revenue due to channel inventory compression. In addition, we utilized targeted promotional activity to reduce inventory in the channel, which pressured margins but positions us well as our new products launch and gain traction in the market. During the first quarter, we also realized a roughly 2 percentage point margin hit from the onetime costs associated with the transition of our U.S. warehouse. We view these items as a short-term headwind and expect to see significantly higher margins in future quarters. Our total operating expenses of $25.4 million represents [ 60% ] of revenue in the quarter, higher than the prior year, primarily due to the $3.4 million benefit we realized in 2025 associated with the insurance recovery. Our first quarter 2026 adjusted EBITDA was a loss of $6.5 million compared to income of $4.1 million in the prior year period. This decline reflects the lower revenue base and the margin pressure from channel reduction as well as the continuation of our investment in product development and innovation that will drive growth throughout the remainder of 2026. At the bottom line, we reported a net loss of $15.2 million compared to a net loss of $0.7 million in the prior year period. The compression is reflective of our lower revenue levels, combined with higher operating expenses. Turning to our balance sheet. As of March 31, net debt was $41.3 million, comprised of $53.6 million of outstanding debt and $12.3 million of cash. During the quarter, we generated $29.4 million in cash flow from operations, paying off our revolving line of credit, which had a 0 balance as of March 31. With respect to recent financing activities, on Monday, we announced a refinancing of our credit facilities that enhances our financial flexibility, particularly our commitment to returning capital to shareholders through share repurchases. Under the new structure, our ABL facility provides up to $80 million of revolving borrowing capacity, bearing interest at SOFR plus 150 to 200 basis points based on loan balance levels. The term loan provides $85 million of committed term debt with borrowings bearing interest at SOFR plus 675 to 750 basis points and a maturity of 3 years. Importantly, the new facilities include a financial covenant structure specifically designed to accommodate the company's active share repurchase program. And to that end, we started purchasing shares this week. With the new structure in place, we have both the capacity and the framework to consistently and systematically pursue our capital allocation priorities. We have $56 million remaining on our current share repurchase authorization. The new credit facility structure supports an active buyback strategy, and we intend to be opportunistic in returning capital to shareholders while maintaining the financial flexibility to invest in organic growth initiatives. Now turning to guidance. Despite the soft first quarter results, we are reaffirming our full year 2026 revenue guidance of $335 million to $355 million and our adjusted EBITDA guidance of $44 million to $48 million. This guidance reflects our confidence in the strategic initiatives outlined by Cris and represents growth in both revenue and profitability compared to 2025. In terms of seasonality, it's important to note that we typically see the majority of our revenues in the second half of the year, coinciding with the holiday season. We had expected the first quarter to represent approximately 13% of our full year revenues. And while we came in slightly below that range, we remain confident in our ability to achieve our full year targets. We expect to see sequential improvement beginning this quarter as our new products launch and gain traction in the market, with Q2 representing approximately 17% to 18% of our full year revenue. In the second half of the year, we anticipate significant acceleration driven by continued Nintendo Switch 2 momentum, our new products releases, the anticipated November launch of Grand Theft Auto VI and a strong holiday season. With that, I will turn the call back to Cris. Cris?

Thanks, Mark. We remain confident in our full year 2026 guidance, and that confidence is grounded in several key factors. Our product innovation pipeline and comprehensive marketing plans are the strongest they have been in years, and we're strategically positioned for the anticipated November 2026 launch of Grand Theft Auto VI which has the highest purchase intent for a new gaming release ever recorded by Circana. Beyond these near-term catalysts, the gaming industry is entering into an exciting period with anticipated console refresh cycles from Xbox and PlayStation in the coming years. New console launches have historically driven increased hardware adoption and broader consumer engagement, which typically translates to elevated accessory demand. Combined with the expected replacement cycle for accessories purchased during the COVID era, we believe the industry is positioned for sustained growth over the next 24 months. As this growth materializes, our operational discipline remains a cornerstone of our strategy. We've built a strong foundation through our cost optimization initiatives, and we're committed to expanding margins further as revenue scales. The refinancing we announced this week enhances our financial flexibility and enables us to execute on our capital allocation priorities, including our commitment to returning capital to shareholders through share repurchases. As always, I would like to recognize and thank our amazing team at Turtle Beach for their dedication and contributions to our success. And with that, operator, we can open the call for Q&A.

[Operator Instructions] The first question we have comes from Rian Bisson of Craig Hallum.

It's Rian on for Tony Stoss. It was nice to see that you were able to reiterate the full year guide. I guess could you talk a little bit about kind of your simulator products, how demand has been for those? And how that demand kind of compares to maybe your legacy headset business or any more resilience in the simulator space?

Rian, thanks for the question. We've seen some nice progress on our sim business. We did see some share gains year-over-year in Q1 between our race and our flight simulator products. It remains a small piece of our total business. It's a low single-digit contributor to our overall revenue. But we are pleased to see that progress in that space. We do think it's a great space for further expansion. And that's something we'll be pursuing with some of our launches that will be announced later this year. As far as it compares to the headset business, again, as I said, it's obviously much smaller for us headsets are north of 60% of our business, and this is a single-digit contributor. So we view it as an opportunity for growth and something that we'll continue to invest in and bring new products to market.

Got it. And then just as my follow-up, given some of the I guess, consumer spend worries over the past couple of quarters. I'm curious, are you seeing any trade down behavior with premium products to the lower-level products or entry-level products? Or is demand in the higher-level products remain relatively steady?

We've seen strong demand on the high end of the price ranges. We've actually -- if you look at the year-over-year trends for Q1, we're seeing people trade up to the next price tier. So even entry-level products that typically might come in at a $30 price point, people are trading up to closer to a $40 or $50 price point. The mid of the market, we're seeing the same kind of behavior where we've seen growth in the $100 to $150 tier. And then at the premium space, we've also seen growth in the ultra premium tier products there above $200 on the headset side. That's why we're really excited about the Stealth Pro 2. We see continued growth in that premium space, and we're bringing amazing product to market that will take advantage of that.

The next question we have comes from Drew Crum of B. Riley.

So Mark, on the 2Q revenue commentary, taking the midpoint of the range as you provided would imply something below the double-digit revenue growth expectation you suggested back in March with 4Q earnings. Just curious if there's something specific that's driving the lower updated view.

Yes, we saw Q1 be just a little bit slower than expected. We have mentioned that we are going to be a little bit more promotional. We saw that in some of the margin hit that we took in Q1 that will flow over a little bit into Q2 in addition to some of the weakness that we saw, and we'll make the second quarter a little bit weaker than what we were expecting. However, we are seeing some very interesting momentum for the second half of the year, as we mentioned. We'll be much more back-end loaded than we've been in previous years. But with the launch of new products, with what we've seen in terms of channel inventory compression. And then finally, with GTA VI, we do think the second half of the year will be a very robust period.

Got it. Okay. And then maybe for Cris. The subsequent to your 4Q earnings release, there was a lot of press suggesting that Nintendo intends to cut production of the Switch 2 due to weaker-than-expected holiday sales. I guess we'll find out tomorrow, but how does this impact your planogram or sales expectation for your Switch 2 line in '26?

Drew. Great question. I think that Nintendo Switch 2 sales have been very strong. I did see that they had indicated they were going to potentially bring that down. But remember, they'd also raised those expectations last year. So I think they're just adjusting to what they're seeing out in the market. What we've seen is sequential increasing comps each month here in Q1 for our Switch 2 products. As we get those rolled out to the market, we're seeing some nice growth there. It's still very first-party focused right now with a lot of the sales for accessories as we had talked about in previous calls. This is something that's normal for new console launches. You'll see a lot of very strong first-party accessory purchases for a period of time. And then as third parties like us have our products ready those will start to come into the market. That's exactly what you'll see from us as we get into Q2. We've got new placements coming up for our Switch 2 products. We're really excited about everything Nintendo is doing in that space, some really great work with their IP and the overall ecosystem there for Switch 2. So we feel good about Switch 2 for the year. We think it's going to drive growth for us, and we think that growth will accelerate as we go through the year.

[Operator Instructions] The next question we have comes from Sean McGowan of ROTH Capital Partners.

A couple of questions, if I can. Given that the first quarter seemed a little bit less than maybe you would have thought and you're seeing similar industry resonance in maybe so far in the second quarter. I would have thought that inventory would be higher. Have you started building enough for the increase in sales you're starting to see or hoping to see?

Sean, yes, we're keeping a close eye on inventory. If you look at the year-over-year, we're down about $10 million year-over-year. And if you recall last year, We were right in the middle of stocking ahead of all the tariffs. So we were heavy at this time last year intentionally. That was part of the reason we saw such a great lift in our gross margins last year as we did get ahead of the tariffs carried a bit more and then sold that inventory off through the year. We feel good about where we're positioned inventory-wise going into the second half. We anticipate that with the Q4, assuming everything stays on track with GTA VI, which all signs out in the market indicate that, that is happening, that we'll be building inventory to prepare for that lift which was significant. If you look at GTA V, it's kind of the one data point that we've got there to compare in 2014. We saw over a 50% lift for console gaming headsets in Q4. Now we haven't modeled that into our guidance, that kind of lift. But it's a good comp for us to understand what we might see. And so we're keeping an eye on that data and also on how the launch is tracking as we look at what the ramp might look like as we get out of Q3 and into Q4, heading towards that November launch.

Okay. And can you comment on how much exposure you feel like you have to rising fuel costs, specifically freight and relating costs like that? What's your outlook there?

We're seeing some small increases. It hasn't been material really for us to this point. That's another item we're keeping a close eye on to make sure that we're optimizing our shipping containers and making sure that we're taking advantage of any improvements that we can drive there in our supply chain. But so far, nothing significant, and I wouldn't anticipate it to change anything that we've guided to for the full year.

Okay. If I could slide in 1 more. It's like the Circana data for the month of March for the accessories category, I think it showed like the first increase in a long time. Do you take any comfort in that? Or is that driven by something that doesn't really affect you guys?

Yes. I think that's an indication of the ongoing demand for gaming. It was great to see that number. When you look at our category specifically, so if I take headsets and controllers through Q1, those categories are just slightly down, sort of low single digits. So they're not yet seeing growth across -- that's, call it, 90% of our business between headsets and controllers but that overall 5% increase, I think, is a good sign as you look into how the next few quarters are going to go, going into what we expect to be a really nice back half of the year that, that demand is out there and the gamers are out there buying.

The next question we have comes from Martin Yang from Oppenheimer.

First question is around the holiday season channel activities. Do you think the launch of GTA in November could change how particularly timing, maybe volume regarding the channel activities into the holiday season?

Martin, it's possible. Again, looking back at 2014 is a great reference point. We did see that demand started to ramp in September leading up to that launch. So if that were to occur again, we could see some benefit to Q3 as some earlier load-ins would happen maybe compared to recent years. Buying behavior in 2014 was also very different, though. With a lot of sales going digital, you don't have quite the same store traffic that you might have for a launch. I do think GTA VI is going to be an exceptional launch and we may see some of that behavior return a bit with some sales leading up to the launch. So I do think that it could impact it. We're not really factoring in a large increase at this point for Q3. It's difficult to say when that lift would be seen necessarily in our revenue for the back half. But certainly, ahead of the launch, we would expect to see some lift as people start to refresh their accessories and get ready for some very long gaming sessions if I had to guess.

Cris. My next question is, given the newer challenges in the consumer hardware market in general -- are you actively managing the balance between console and PC new product launches because of the new reality?

Yes, it certainly factors into how we're thinking about future products, future technologies and innovations that we're putting into products, making sure that we've got multiplatform support across our products, whether it be headsets, controllers, or any other accessories because we are seeing gamers certainly playing across multiple platforms and really going to where their favorite games are. And we want to make sure that we're there to support them wherever they are in playing those games. And so I think that shift that we're seeing, I do think that we'll see a nice bump in console activity, starting with GTA VI. They've confirmed and some additional recent comments here just in the last couple of weeks that it will launch on PlayStation 5 and also on Xbox Series X and S. And it sounds like the PC won't be coming for some period of time. And that's something that really positions Turtle Beach in a very favorable light because obviously, our heritage there is with console gaming and our strength when you look at our share is very focused on the console side. So I think that will give us a nice -- certainly early advantage potentially in some of those sales for those gamers that are going to be playing that particular title.

Got it. Last question for me. Can you maybe generally remind us your relationship with Xbox and whether that relationship has evolved since they're putting the new leadership team there?

Sure. We've got a great relationship with Xbox as we do with our other first-party partners. We really deeply appreciate the collaborative work that we do with each of those groups. We haven't seen any shift there. The folks that we work with have all been -- remained engaged and looking ahead to the future, we're excited about Project Helix. That's been sort of teased out there. And what that's going to mean when you look across all of our console partners with Switch 2 coming out last year and then Project Helix coming up and then likely PlayStation 6 in the future as well. We're just really excited to get this next console cycle underway. It's great to have started it with Switch 2, and we're already seeing the benefits there from the Switch 2 launch. And it's a very cyclical business. So when you look every 7 years or so, 6 or 7 years in that new hardware comes out, we see a great benefit for our business. And so this is part of the reason we're so excited about the next few years is that we've got a really fun time of gaming coming up and will create some nice tailwinds for accessories.

The final question we have comes from Jack Codera of Maxim.

This is Jack Codera calling in for Jack Vander Aarde. You kind of alluded to it before, but given recent comments from Take-Two, it does seem that GTA is kind of really on track at this time for the fall. I'm wondering if you have any comments, when do you expect that impact to start? Is it when their marketing starts kind of on the game side or when the game launches? And then given that kind of phased release of the console game as well as the PC game, do you see that as a persisting tailwind? And what sort of window of a tailwind would that be?

Sure. Great question, Jack. It's something that there's obviously a lot of discussion about in the industry. There's a lot of excitement around GTA VI for great reasons. Looking at when it might start, again, as we look back to GTA V, we did see that lift start to really creep in Q3 it ramped up pretty sharply. And again, I'm looking at console headset markets. It ramped up pretty sharply in September and carried right through Q4. So it could be that early. And a lot of that is just the buildup, again, as people are trying to get their setup updated and get ready for some gaming sessions there. We could see that come early, but we're not counting on it necessarily when we look at the back half, but we'll see how that rolls out. The second piece around the -- how long the tailwinds might be for console there. Last time, again, it was about a 6-month window between the console launch. And I believe the April of 2015 is when the PC version of GTA V came out. So it could be something similar. We don't really have any visibility into that. But what is encouraging is that we saw continued growth throughout 2015, following the 2014 launch on PlayStation 4 and Xbox One for GTA V. We saw double-digit growth in 2015 for those core markets with console gaming headsets. So I would anticipate that this is going to be a hugely popular game. It's going to have engagement that continues literally for years, much as GTA V has done. And that will provide a multiyear benefit for the industry and likely for our business as well.

Okay. That's helpful. And then I had 1 more if that's possible. Kind of a clarification question. You mentioned the retail channel inventory, kind of some of this new product, you're clearing out some of the old product and then there's the new buy-in. I'm wondering if you view it on maybe like a net basis are you seeing overall channel inventory start to build again? Or is that something we should kind of expect closer to the holiday season?

Sure. What we've seen so far is that retailers have adjusted to the markets that we saw in Q1. If you look at our primary categories of headsets and controllers Q1 was the lowest market. It was the lowest Q1 since Q1 of 2020 for those 2 categories. And that's part of the impact that we're seeing, even though they were just down sort of low single digits from last year. If you recall, last year, Q1 was down pretty significantly. So the fact that we're at those multiyear lows at the moment for the markets, has retailers responding appropriately and reducing their stock. I think what you'll see is as we get through Q2 and into Q3 in anticipation of a holiday that could see pretty significant lift, that's when you'll see that buildup start to go. Just to give you a feel for our guidance, our guidance presumes that the channel inventory stays relatively flat year-over-year between '25 and '26 to end the year. We think that, that's a fairly good and conservative look on it. We're not counting on any kind of channel inventory growth. We certainly could see that depending on how the holiday goes, but our guidance basically has a flat channel inventory year-over-year. So with the decrease that we saw in Q1, obviously, that's going to provide a benefit for us for the remaining quarters.

At this stage, there are no further questions in the queue. And I will now hand back to Cris for closing comments. Please go ahead, sir.

Thanks, everyone, for your interest in Turtle Beach, and have a great day.

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.