Good morning, and welcome to the Corsair Gaming Second Quarter 2021 Earnings Conference Call. This call is being recorded, and your participation implies consent to that recording. I would now like to turn the call over to Ronald Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir, please begin.

Thank you. Good morning, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ending June 30, 2021. On the call today, we have Corsair CEO, Andy Paul; CFO, Michael Potter. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release. I would also like to remind everyone that until our 10-Q is on file, the Q2 2021 numbers are preliminary. This conference call will be available for replay via webcast through Corsair's Investor Relations website at ir.corsair.com. Andy will begin with our second quarter business highlights, and Michael will then take you through a review of the financials before we proceed to Q&A. With that, I'll now turn the call over to Andy.

Thank you, Ronald, and welcome to our Q2 '21 earnings call. Well, overall, I'm very pleased with our Q2 performance, where we delivered net revenue growth of 24% to $473 million as well as 24% gross profit growth to $130 million, which is our best second quarter ever. Our results highlight the strength of the underlying fundamentals of our business, as gamers continue to purchase and upgrade their gear, even as entertainment outside of the home and travel began to open back up. We experienced growth in every category, despite key component shortages in the market, such as graphics cards for enthusiastic build gaming PCs as well as semiconductor shortages, logistics issues and port delays. We are now at a $2 billion run rate compared to our 2019 revenue of $1.1 billion, which speaks to the strong momentum in our business. We therefore are continuing to expand our resources and invest heavily in R&D, marketing and infrastructure. We are extremely excited by the recent launch of our first camera, which has received an overwhelmingly positive response from the creator community. We've launched over 75 new products so far this year, which is just an astounding pace of innovation. Our new Elgato Camera called Facecam is designed specifically for streamers and content creators and outputs uncompressed 1080p video at 60 frames a second which is, of course, significantly higher quality than a standard webcam. It has many features similar to a DSLR camera, with software that controls contrast, white balance, zoom, etc. And all those settings can be stored in the camera, again, unlike a standard webcam. Facecam also features a multilayer coated lens in a high-end Sony camera. We also introduced our 7000 Series full tower case, which allows for multiple radiators so that an ultimate gaming PC can be built for maximum performance, and the Virtuoso RGB XT, our new flagship gaming headset, offering incredible sounds and impeccable clarity now includes Bluetooth as well as our proprietary Slipstream low-latency wireless connection. NPD data continues to show year-over-year growth in the gaming peripherals market, with recent data showing keyboards and mice growing faster than headsets. We believe this is further evidence to support our conviction that as gamers spend more time playing games and improving their skills, they will want to upgrade to better gear that is designed specifically for gaming. We continue to observe that the market for gaming gear is at an early stage of evolution. The average annual growth pre-COVID for PC gaming peripherals have been running at about 24% per year in the U.S. and a similar rate in Western Europe, where we're able to collect detailed market data. Now in 2020, with lockdown, this increased to approximately 80%. These growth numbers are substantially higher than either the increase in new gamers to the market or the rate of growth in video game software. So what we believe is happening is that after people learn to play PC games for a while and get good at them, they start to want better specialized gaming gear. And because the market is still at an early stage and the penetration is so low, that's why we are seeing such high growth rates in gaming hardware due to the low base. If we look at gaming headsets, which is the most widely purchased peripheral, then only 20% of gamers playing premium games in the U.S. have bought those in the last 3 years, which is roughly the refresh cycle, with the other 80% yet to come to the market. So our belief is that the situation in 2020 and early '21, where gamers clearly spent more time in their homes, learning to play games better, that should establish a higher base of consumers ready to step up and upgrade their gaming setup, which includes peripherals as well as gaming PCs. Headsets tend to be the first peripheral that gamers buy to make the game more immersive. But as skill improves, the next purchase tends to be high-performance gaming mice and keyboards. The market for gaming PCs and laptops in the last 12 months has been phenomenal, one of the fastest-growing consumer electronics categories according to NPD. High-end graphics cards were very difficult to buy in the last 6 months, and we believe there is a large number of gaming enthusiasts in the wings waiting to build a new PC on top of the elevated numbers of people that actually did build a new gaming rig. In Creative Peripherals, we continue to be the market leader in video capture cards and lighting. Our Wave microphone, which we launched last year, has gained significant market share quickly. Our Stream Deck has now become the standard for home broadcasting, and we now have several apps from third parties that can use Stream Deck. Turning now to our outlook for the year. The guidance for the full year of 2021 remains unchanged from Q1, with total revenue in the range of $1.9 billion to $2.1 billion, representing growth of 11.6% to 23.4%; adjusted operating income in the range of $235 million to $255 million and adjusted EBITDA in the range of $245 million to $265 million. Thank you for your time and continued support. I'll now turn the call over to Michael to discuss our financial results for the quarter.

Thanks, Andy, and good morning, everyone. During the second quarter, we delivered net revenue of $472.9 million, an increase of 24.3% compared to $380.4 million in Q2 2020. The gamer and creator peripheral segment provided $155.2 million of net revenue during the second quarter, an increase of 40.9% from $110.1 million in Q2 2020, driven by strong growth across all product categories, including sales of our SCUF branded console products. The gamer and creator peripheral segment net revenue contributed 32.8% of total net revenue, an increase of 390 basis points from 28.9% in Q2 2020. The gaming components and systems segment provided $317.7 million of net revenue during the second quarter, an increase of 17.6% from $270.3 million in Q2 2020, primarily driven by strong growth across all product categories, as consumers continue to buy and build gaming PCs. Of this revenue, memory products contributed $158.7 million. Gross profit in the second quarter increased by 24.1% to $130.4 million from $105.1 million in Q2 2020, which is a second quarter record. The increase over Q2 2020 was primarily driven by increased revenues. Gross profit margin remained flat at 27.6%. The positive impacts of mix shift towards the gamer and creator peripheral segment was offset by significant increases in logistic costs, particularly ocean freight. The gamer and creator peripheral segment gross profit was $54.6 million, an increase of $15.9 million from $38.7 million in Q2 2020, primarily driven by an increase in revenue in the same periods. Gross profit margin was 35.2%, flat with Q2 2020. We continue to see a mix shift as gamer and creator peripherals contributed 41.9% of total gross profit in Q2 2021 as compared to 36.9% in Q2 2020. This remains a great overall story and formula for continued overall margin expansion, as our fastest growing and highest margin segment also sits in our largest market. The gaming components and systems segment gross profit of $75.7 million, an increase of $9.4 million from $66.3 million in Q2 2020, was primarily driven by an increase in revenue in the same periods. Gross profit margin decreased to 23.8% from 24.5% in Q2 2020 primarily due to freight costs. Gaming components and systems contributed 58.1% of the total gross profit in Q2 2021 as compared to 63.1% in Q2 2020. Our Memory profit margin in this segment was 17.7% for the quarter. Second quarter SG&A expenses were $80.2 million, an increase of $23.3 million or 41.1% compared to $56.8 million in Q2 2020, primarily driven by an increase in outbound freight costs due to an increase in revenue, an increase due to expenses related to being a public company and an increase in personnel-related expenses. Second quarter product development expenses were $15.5 million, an increase of $3.6 million or 30.8% compared to $11.8 million in Q2 2020, primarily driven by an increase in personnel-related expenses as we continue to focus on bringing an increasing number of products to the market. Operating income in the second quarter of 2021 was $34.7 million, a decrease of $1.7 million from $36.4 million in Q2 2020. Adjusted operating income in the second quarter of 2021 was $49.3 million, an increase of $1.9 million from $47.4 million in Q2 2020. Second quarter net income was $27.7 million or $0.28 per diluted share as compared to net income of $22.6 million or $0.26 per diluted share in Q2 2020. Second quarter adjusted net income was $35.7 million or $0.36 per diluted share as compared to adjusted net income of $32.3 million or $0.37 per diluted share in Q2 2020. Adjusted EBITDA for Q2 2021 was $51.6 million, an increase of $2 million or 4% compared to $49.6 million for Q2 2020, resulting in an adjusted EBITDA margin of 10.9%, a decrease of 210 basis points for year-over-year. Turning now to our balance sheet. We continue to convert our strong financial performance into an opportunity to further strengthen our balance sheet. In Q2 2021, we generated $31.6 million in cash from operations and used it to reduce debt by an additional $25 million, with face value now at $274 million and net debt at $139.4 million, resulting in a net leverage ratio of 0.5. We did this while growing quickly and leaving sufficient resources to further accelerate growth in the future. We expect to continue to reduce debt in 2021, subject to business conditions and any need for additional growth capital. We're also looking to reduce the carrying cost of our existing debt significantly. As of June 20, 2021, we had $48.6 million capacity under our revolving credit facility, total GAAP long-term debt of $270 million and cash, excluding restricted cash, of $134.6 million. The additional modeling details underlying our outlook remain the same as we discussed in our first quarter earnings call, with the exception of a now further reduced interest expense and a slightly lower effective tax rate due to deductibility of options exercised. For ease, I'll repeat them. We expect gross margins to slightly improve year-over-year and operating expenses to increase as well to support our higher revenue level, the need to continue to innovate at a larger scale and a full year of public company costs. Assuming no further debt paydown, we now expect interest expense of approximately $4.1 million per quarter. As noted, we've already paid down $53 million of our debt and expect to pay down approximately an additional $47 million for a total of $100 million of debt reduction in 2021, subject to business conditions and any need for additional growth capital. The $4 million patent trial win in Q1 2021 is not in our outlook. This amount could vary depending on what the judge rules, is subject to appeal and the timing of recognition of a gain, if any, is uncertain at this time; an effective tax rate of approximately 20% to 22% for 2021, and full year weighted average diluted shares outstanding of approximately 100 million to 102 million shares. Overall, we're pleased with the continued progress we have made in our strategic initiatives and performance of the business. We grew in Q2 2021, and we are expecting growth in revenue and adjusted operating income and adjusted EBITDA for 2021. With the exception of a number of our premium products with high semiconductor content, the channel is much better stocked now. And with Prime Day at the end of Q2, coupled with the upcoming holiday season, we expect a more normal promotional environment. In Q2, shipping expenses were much higher than normal, and we expect that to continue for the rest of 2021. Finally, memory chip prices started moving down near the end of Q2, and that normally lowers margins on our memory products while prices are moving down. These are expected to somewhat counterbalance the strong demand we have from our loyal, existing and new customers. With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q&A?

The first question comes from Drew Crum with Stifel.

Okay. Wondering if you're willing to address your competitive performance in the quarter, whether you added or lost share during the period. And then separately, any guidance you can give concerning revenue and adjusted EBITDA phasing by quarter in the second half?

Well, let's start with the second point, but regarding the first part of the question, we actually performed quite well in Q2. It varies by product type, but overall, we did well in components. In peripherals, we remained mostly stable. As you may have noticed, both we and most of our competitors are currently facing challenges in obtaining enough products from Asia due to the high cost of shipping containers. Additionally, as you know, we are also contending with semiconductor shortages. Throughout the year, we've found that we tend to have a strong market share in our higher average selling price categories, while our market share is lower in very low average selling price categories. Essentially, we are not typically focused on entry-level products, and the initial surge last year was largely in that segment. This shifted the dynamics somewhat. However, we are beginning to see an increase in supply of our higher average selling price products with significant semiconductor content, which is helping improve our market share.

In terms of the guidance by quarter, we don't provide quarterly guidance; we offer annual guidance instead. In the previous call, when faced with a similar question, we discussed seasonality. For instance, the second quarter is generally one of the weaker quarters of the year, and factors like the timing of events such as Prime Day should be considered. Typically, the second half of the year performs better than the first half due to normal seasonal patterns. Generally, we see a ramp-up as we transition out of summer and head into the holiday season.

The next question comes from Mario Lu with Barclays.

So yes, I know you guys only guided for full year numbers, but since the 2Q revenue came in a little bit below street, just curious how it performed relative to your own expectations. Any strengths or weaknesses within certain product lines that is worth highlighting?

Yes. I think the most obvious thing is that we talked about semiconductor shortages, and that's not just related to components that we buy, some of those was going through our components. So as you probably know, there's been a huge shortage of high-end CPUs and graphics cards, so it's actually been quite difficult for the most extreme gamers that are building these $2,000, $3,000, $4,000 gaming PCs. It's been difficult for them to build. And so we actually think we've got a huge amount of people waiting in the wings to build, as these cards start to become available. So what we saw happen was that in video and, to a certain extent, AMD allocated a lot more products into the finished PC manufacturers, Amy, Dell, etc., and not so much product into Amazon and the retail segment. So that's now starting to change. So the point is the components side of our business, we had quite a few headwinds with not all the components being available, so that people build PCs. The peripheral market is still pretty strong. And at the moment, the NPD data is showing that peripherals are as same size, in some cases, bigger than last year. So we're now lapping COVID quarters, and streaming continues to be very strong. So hopefully, that gives you a slight indication of what's going on.

The next question comes from Matt Cabral with Credit Suisse.

Yes. You guys have called out supply constraints and logistics issues several times already. I'm just wondering if there's any way to quantify the impact of both of those factors, both as we think about revenue in the quarter as well as kind of looking further down at gross margin.

Yes. I mean, it's really difficult to give an exact number because, certainly, it's in the tens of millions. But we haven't sort of gone through and done the math to see exactly what we thought we would have shipped if we were to have full supply and our competitors had for supply. But I think the biggest issue right now numerically is probably the lack of graphics cards that's holding back the component market and stopping viewer burden PCs. The second issue is that we're really not yet at a situation where our highest-end products or high ASP products are fully in stock. And then we have very expensive freight to deal with. Some of the freight costs obviously get offset because, as we introduce new products, we're able to adjust pricing and some of our competitors. But it's meaningful numbers.

Got it. And then just a follow-up, if I could. I guess, trying to understand how to think about normalized profitability for the business. I guess, if I look at EBITDA in the last 12 months, you guys have been a little bit above 13% versus if I go back before COVID prior to 2020. It was more like mid- to high single digits, and I don't think have changed. There's been M&A and, obviously, the big surge in demand over the past year. I guess, I'm just trying to think through what steady-state profitability is for the business? And if it is higher than that pre-COVID baseline, I guess, help us just understand the factors underneath that?

Yes, we have always aimed for percentages in the low teens with the possibility of reaching the mid-teens. Last year, we benefited from a strong market growth that outpaced our capacity to grow the business. Currently, we are heavily focused on expanding our research and development and marketing efforts due to the significant growth of the business. While we cannot pinpoint a specific target since we are still in a growth phase, we strive to operate within that range as we manage the business.

So that would be above pre-COVID levels, but not right now, today, the same level as Q1, which we talked about in the Q1 that, that was a particularly strong quarter, and we hadn't finished investing in the business yet. But we think that what we did in Q1 is achievable. We just need to grow the business more and keep putting out good, high-margin products and our help. Also, I'll note that we are seeing a shift towards more higher-margin gamer and creator peripherals, which continued in Q2, and that's going to be lifting our margins overall over time. So that should be a good tailwind for us for margins going forward.

The next question comes from Tom Forte with D.A. Davidson.

Great. I have four quick questions, and I'll ask them one at a time. The first one is regarding cost pressure from logistics. How should I understand this? Is it leaning towards air due to demand, or how should I think about the cost? Can you provide a bit more detail?

Last year, there was a significant reliance on air freight due to supply shortages. In the most recent quarter, the focus has shifted to container costs, which are currently three to four times higher than they were two years ago. We anticipate that this situation will be temporary, but as long as the demand for consumer electronics remains high, we expect these elevated costs to persist for a while. The current cost levels are exceptionally elevated.

Yes. Very helpful, Andy. All right. So then the second question is, when you think about the cost pressure then from logistics, how should we think about your ability and your interest in taking price across your portfolio?

Yes, that's a good question, and it all depends on the time frame. The same is true for our competitors. If we notice that cost increases are fundamental and likely to persist, we will adjust our pricing accordingly. However, if the cost increases are temporary, it becomes challenging to modify retail MSRP prices in the short term. We're monitoring the situation closely, but so far, we haven't implemented significant changes. Many of our larger retailers source directly from us in Asia and handle their own shipping costs. As of now, neither we nor most of our competitors have made major adjustments to MSRP. The prevailing sentiment is that we will be able to manage through the next few quarters until we determine the natural pricing level. Container prices remain high, but we anticipate that they will need to decrease by the end of the year, if not sooner.

Good. All right. So last two. So from our vantage point, when we think about secular shifts, we really see this self-broadcasting as accelerating. There's a lot of anxiety among investors on tough compares for gaming, but this secular shift towards consumer self-broadcasting, using your products to help them broadcast when they play Fortnite, things like that. So I guess, do you agree with that assertion that, that trend is accelerating? And then what are the implications for Corsair?

Well, look, we've just doubled down, right? We announced our first camera last week, and that's clearly the biggest part of the self-broadcasting, as you say. We call it self-broadcasting, live streaming or whatever. But the biggest part of that TAM is the camera. And so we literally jumped into that, probably close to a $1 billion market TAM that we've never been in before. So not only is that market continuing to grow, but we've increased our footprint. Now as you probably realize, there are some parts of the self-broadcasting market that gets a little bit confused with people at home doing Zoom calls. And so we think that the vast majority of the products that we sell are actually going into games and content creators, rather than home offices. But clearly, some products get bought by that, and that market will certainly be dying down. So I think what we're going to see with the streaming and content creators is a strong tailwind from the secular shift to people sharing and showing content and streaming and a little bit of a headwind from those people that were buying microphones and cameras for their home office.

All right. So Andy, so now you made me have a fifth question. So before I get to my last, how should we think about the relative gross profit margin in the camera versus the rest of your portfolio?

The camera is a brand-new product. So usually, when you're ramping a new product into the channel, it's a little lower margin than it will achieve when it's a little bit more normalized. But it's right in line with the other creative peripherals, so it's much higher than the corporate average.

Excellent. All right, last question. So you talked a little about it, but how is your performance on Prime Day this year? And historically, has that been an important sales day for Corsair?

Yes. So it can be. This year actually was not a great Prime Day for Amazon, as you probably know. And mostly because for us, a lot of the products that we'd normally line up for Prime Day sales were pretty light on stock. So we actually didn't participate heavily in Prime Day. And actually, a lot of our competitors really are in the same situation. So it ended up being less important this year than it normally is. Let's put it that way.

The next question comes from Shan for Tim.

My question is around the product cycle. So you've launched 75 products this year so far. Any more comments on the release cycle in the back half as well as anything on usage outside of gaming? I know we talked about live streaming a bit, but anything on like general streaming, etc.?

Yes. I believe we will maintain this momentum. We have established a strong pace, and as we continue to introduce new categories and refresh existing ones, I expect this pace to remain consistent, if not accelerate. We have recently launched our first camera, and you can expect more of these in the next year or two, as well as additional microphone options. We still see the largest growth potential in streaming, and we aim to capture that market. Most of our product areas are in refresh mode, and there are still some price points in the peripheral market where we are not present, indicating more opportunities to expand our reach.

I think, just generally, right, there's been some new consoles that have come out, so you would expect that Scott would have new console controllers at some point. And there's obviously a newer memory standard that's going in more towards the end of the year. And we've been in the lead for memory, particularly gaming memory forever. So you would expect to see something for that as well. But really, it's continually innovating in our existing portfolio and increasing our TAM. We have a new microphone product that lets you use your own XLR microphone but take advantage of our great software that Elgato has put together. That's the Wave XLR that just came out. And even Stream Deck, which is selling very well for us and is very well liked in the market, we came up with a newer version that's a little bit better form factor and a little bit easier for people to use in different uses because it seems that more and more people are discovering Stream Deck and want to use it not just for streaming, but for other applications as well.

The next question comes from Doug Creutz with Cowen.

A lot of concern in the market right now about what's going on over in China with respect to the government's sort of actions and words about video games. Can you remind us how big of a percent of your business in China is? And whether you're seeing anything in terms of your business there recently?

Not related to what you're talking about. We haven't seen the effect. China is 5%, 6%, something like that of our business.

Yes. We focus more on components in China rather than gaming peripherals, which are more influenced by the DIY market. We do not sell game software, so we are not significantly impacted by government announcements related to that. Furthermore, gaming has not been a major cultural market in China compared to the U.S., Europe, and other regions in Asia.

The next question comes from Rod Hall with Goldman Sachs.

I wanted to just check on inventory levels, like where you're out of stock, what types of products. It looks to me just doing a Corsair research like maybe power supplies are short, but I'm just curious what things you're having hard time putting on shelves or populating inventory with.

Yes, that's a good question. For sure, high-end power supplies are very low in stock, and that's more a reflection of obviously some increased demand, but just the difficulty in building them because of semiconductor shortages. Typically, it's the high-end products. We were out of stock on our flagship keyboard for the longest time. We've now finally got that back in a reasonable stock position. We are not where we'd like to be on our high-end headsets, but we're getting there. So there's a steady increase in inventory. But certainly, I would say not yet at targets for the products that we really make a difference in market share.

Michael, are you going to say something?

No. Andy answered the question, so I didn't want to add something.

I wanted to check on the headsets. I expected to find similar issues, but I searched on Amazon and they seem to be in stock there. I'm curious about which channels are experiencing the most difficulties with inventory. Are physical retail locations like Best Buy struggling, or where should we expect to see limited inventory? As we approach the holiday season, do you believe you'll have enough products on shelves by then, or do you think the inventory challenges will continue into the end of the year?

No, I believe we will gradually improve. To address the first question, we have inventory targets for every SKU. In retailers like Best Buy, Target, and Walmart, we set specific targets for each store, often having three or four products available in some locations, while popular stores might have slightly more. As a result, you may find a product in stock, but if there is only one unit instead of the expected four, we are not meeting our targets. This discrepancy can lead to stock shortages on certain days throughout the month. That's how we view the situation. If you find an item out of stock at Best Buy, that's a significant issue. The second part of your question was, well, please continue.

When you might have the inventory in stock in the channel? Will you be there for the holiday season? Or do you think this will continue to be a problem by then?

Well, obviously, it depends on the demand and the supply, but I certainly hope so. I mean, we've spent the last year ramping up the supply lines. And so certainly, I would expect so. I mean, based on what we're seeing on what demand looks like, yes, it should be okay.

This concludes the question-and-answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.

Yes. Thanks. So look, as we stated before, we're at the forefront of a massively growing market centered around gaming, eSports and streaming. I actually went back and recently looked at our pre-IPO forecast, what we were thinking then, and I realize that our current and projected business levels is where we expected to be in 2023 or 2024. So clearly, the market has accelerated to a new spending level. We remain focused and committed to giving gamers and streamers the tools they need to play the best game, produce the best content and have fun doing it. Thanks for your interest in Corsair, and thanks for joining us on the call today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.