Corsair Gaming, Inc. Q1 FY2022 Earnings Call

Good afternoon, and welcome to Corsair Gaming's First Quarter 2022 Earnings Conference Call. This call is being recorded, and by participating, you consent to the recording. All participants are currently in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Now, I would like to turn the call over to Mr. Ronald van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir, please begin.

Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the first quarter ending March 31st, 2022. On the call today, we have our CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights from the first quarter and the business environment. Michael will then review the financials and our outlook, and we will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and 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 we issued after the market closed today. With that, I'll now turn the call over to Andy.

Thank you, Ronald, and welcome everyone to our Q1 2022 earnings call. Despite facing challenges in Q1 due to inflation, the ongoing Russia-Ukraine conflict, and high freight costs, we are witnessing positive growth trends in the gaming hardware sector. In Q1, GPU cards, the most expensive components of a gaming PC, remained at a high premium, approximately 150% of MSRP. Even with this premium, we observed a slight increase in gaming PC builds compared to pre-pandemic and pre-GPU shortage levels. Our Components segment grew by 6% in Q1 2022 compared to Q1 2020, the last Q1 before the pandemic and shelter-at-home orders. The surge in activity during the shelter-at-home period does not seem to have resulted in a significant pull forward in builds; instead, it appears to mark the entry of new gamers building for the first time. We anticipate that GPU cards will return to MSRP in the coming weeks, possibly even at discounted rates. With GPUs expected to be available and reasonably priced, we foresee a surge of activity in the second half of 2022 and into 2023. A similar positive trend is seen in peripherals; while the market is generally down by 15% to 25% compared to last year’s peak, it remains significantly above pre-pandemic levels. Our Peripheral segment experienced 77% growth from Q1 2020 to Q1 2022. As outlined in our Investor Day presentations, we believe the Peripheral market will continue to see 20% to 25% annual growth. We also expect that our continuously evolving IQ control software and innovative product pipelines will help us gain market share. However, our Q1 2022 revenue fell short of expectations. We are experiencing the impact of inflation, particularly in Europe, which, along with the Russia-Ukraine conflict, has weakened consumer demand, resulting in higher than optimal channel inventory, and we are addressing that issue. It is important to note that we do not believe inflation will affect committed gamers looking to consistently upgrade their setups. However, we do expect inflation to influence casual or impulse purchases at the entry level, which is not a significant portion of our business as we primarily target committed gamers. Therefore, we are adjusting our revenue outlook for the year to between $1.6 billion and $1.8 billion. Michael will provide further details on our complete outlook later. Many of our product lines showed encouraging growth in Q1, with significant progress in our streamdeck products, systems group, and staff controllers. The streamdeck serves as a central control center for creators and streamers. Some of the underlying technology for Streamdeck comes from iDisplay, a company in Taiwan where we acquired a 51% stake in January this year, enabling a closer partnership and accelerating our product roadmap that utilizes their displays. Our Systems Group, which includes gaming platforms like Corsair One, Corsair Engines, and our Origin division for custom gaming PCs, has performed well over the past year, yielding a growing opportunity, as many individuals lack the time or skills to build PCs themselves. Skilled custom PC builders within our systems group excel at creating impressive gaming PCs. We launched our new PS5 SCUF controller late last year, and demand since then has been exceptional, leading to repeated sellouts. We believe our continuously expanding IQ control software and innovative product pipeline will help us capture more market share. In Q1, we gained additional market share in our components and memory categories, maintaining our leading position in every major category. Our Elgato line of creative products continues to thrive, and we are making solid progress in our new categories, cameras, and microphones. We believe that our comprehensive software suite for Elgato products is a key reason creators are enjoying our new offerings. Additionally, I want to highlight a few products we have recently launched. First, the MP600-Pro-LPX solid-state drive, designed for high-performance storage expansion for the PlayStation 5, enhancing our presence in the console market. Second, our Corsair iCUE 5000T RGB case, featuring high airflow with three RGB cooling fans and lighting strips controlled by a pre-installed iCUE controller, providing an excellent platform for building a stunning RGB system with the latest high-power GPUs and CPUs. Lastly, we introduced our latest capture card, the HD 60X, which supports VRR (Variable Rate Refresh), a new feature available on both the PS5 and Xbox Series X, and it also supports 1440P at 60 frames per second as well as 1080P at the same frame rate. I'll now hand the call over to Michael to discuss our financial results for the quarter.

Thanks, Andy, and good afternoon, everyone. In Q1, we delivered net revenue of $380.7 million, well above the Q1 2020 pre-pandemic level of $308.5 million. This compares to $529.4 million in Q1, 2021, which was a record first quarter for Corsair, led by seamless checks and pent-up demand. Over 70% of the revenue decline in Q1 2022 versus Q1 2021 was in the European region, as we've seen European consumer sentiment drop sharply following the start of the conflict in Ukraine. We believe that the channel has reasonable levels of inventory of our products. Our channel partners are adjusting inventory levels based on their current and expected consumer demand and the decreased shipping times today compared to a year ago. This will cause short-term headwinds, but we expect inventory to be at normal levels during Q2. Turning now to our segments. The Gamer and Creator Peripherals segment contributed $134.1 million of net revenue during the first quarter, a decrease of 23.7% from $175.9 million in Q1, 2021, but still a healthy 76.8% above pre-pandemic Q1, 2020, of $75.9 million. The Gamer and Creator Peripherals segment net revenue contributed 35.2% of total net revenue, an increase of 200 basis points from 33.2% in Q1, 2021. The Gaming Components and Systems segment contributed $246.5 million of net revenue during the quarter, a decrease of 30.3% from $353.5 million in Q1, 2021, primarily driven by a shortage of reasonably priced GPUs and supply and logistics constraints. It was 6% above Q1 2020's level of $232.7 million. Just over half of this revenue came from memory products, which contributed $132.2 million. Overall, gross profit in the first quarter decreased by 43.4% to $90.8 million from the record $160.3 million in Q1, 2021. The decrease over Q1, 2021, was primarily driven by reduced revenues, increased logistics costs and a return to more normal promotional activity. Gross profit margin was 23.8%, a decrease of 650 basis points from the record 30.3% in Q1, 2021, mainly due to significant increases in logistics costs, especially ocean freight, promotional activity and lower absorption on reduced volumes. Sequentially, the margin was roughly flat, with 23.9% in the fourth quarter of 2021. We've also countered inflation effects by raising prices where appropriate and expect to continue such actions. Some of the more severe logistics cost headwinds moderated during Q1. The Gamer and Creator Peripherals segment gross profit was $43.1 million, a decrease of 37.5% from $68.9 million in Q1, 2021, primarily driven by a decrease in revenue in the same periods, increased supply chain and logistics costs and a return to more normal pre-pandemic level of promotions. Gross profit margin was 32.1%, a decrease of 700 basis points from the record 39.1% in Q1 2021, largely due to the previously mentioned supply chain and logistics costs and rebate levels. Sequentially, the margin was up 220 basis points over the fourth quarter of 2021, largely due to a favorable mix shift towards our higher-margin Elgato and Scuf branded products. This shows the durable strength of our diverse portfolio of products. The Gaming Components & Systems segment gross profit was $47.7 million, a decrease of 47.8% from $91.5 million in Q1 2021, primarily driven by the decrease in revenue in the same periods and increased logistics costs. Gross profit margin was 19.3%, a decrease of 660 basis points from the record 25.9% in Q1 2021, primarily due to freight costs as well as some under-absorption associated with the lower revenues. Our memory product margin in this segment was 15.9% for the quarter. First quarter SG&A expenses were $76.1 million, a slight decrease of 2.2% compared to $77.9 million in Q1 2021, primarily due to a decrease in personnel-related costs. The impact of outbound freight costs due to the reduced revenues was offset by increases in outbound ocean and air freight rates. Adjusted operating income in the first quarter of 2022 was $13.3 million, a decrease of $67.1 million from $80.4 million in Q1 2021. First quarter net loss was $3.3 million, of which $2.9 million is attributable to Corsair Gaming, Inc. or a loss of $0.05 per diluted share compared to a net income of $46.7 million or $0.47 per diluted share in Q1 2021. First quarter adjusted net income was $9.2 million or $0.09 per diluted share compared to adjusted net income of $58.2 million or $0.58 per diluted share in Q1 2021. Adjusted EBITDA for the first quarter of 2022 was $15.4 million, a decrease of $65 million compared to $80.4 million for Q1 2021, resulting in adjusted EBITDA margin of 4.1% compared to 15.2% in Q1 2021. Turning now to our balance sheet. We ended the quarter with $29.4 million of unrestricted cash, no draw on our $100 million revolver, and $247.5 million of debt at face value. We spent $4.4 million for CapEx and $1.25 million for principal debt repayment. Additionally, we used $19.5 million in net cash to acquire a controlling 51% share of iDisplay as we continue to look for strategic opportunities to use the cash we generate. This is another investment in growth as we prioritize investments in new markets and R&D to bolster our product development efforts. Barring such opportunities, we look to bring our cash balance back to Q3 or Q4 2021 levels. In terms of the full year 2022, we are updating our outlook as follows: we now expect total revenue in the range of $1.6 billion to $1.8 billion, adjusted operating income in the range of $100 million to $120 million, and adjusted EBITDA in the range of $110 million to $130 million. We previously expected an approximately 45% to 55% revenue split for the first half and second half and now believe the second half will represent a slightly higher portion. There are some changes in the additional modeling details underlying our outlook. We are seeing an adjustment of channel inventory to reflect the current demand, and we expect that during the balance of the first half, we expect sales into our channel to be significantly less than sales out to consumers. We expect channel inventory to be normalized in late Q2. We still expect gross margins to remain pressured by logistics costs, especially in the first half of the year, but we have started to see some improvements. We will continue to invest in new product development in order to maintain a vigorous release schedule. We will moderate other operating expenses in tune with the current business environment. With the Fed rate cycle in progress, forecasting interest expense is more difficult. Assuming no further debt paydown, we now expect interest expense of approximately $2 million per quarter. 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 24% to 26% for 2022 and full year weighted average diluted shares outstanding of approximately 100 million to 102 million shares. There was an impact of approximately $0.02 on EPS in Q1 due to the accounting for put rights associated with iDisplay. There may be further accretion of this over the next several years, depending on performance, but it is unlikely to be even $0.01 in any quarter. To summarize, our underlying growth trends remain strong, and we are executing despite the macro headwinds impacting everyone. We expect the operating environment will improve as we move through 2022, which will flow through to our revenue growth, margin improvement, and increased operating cash flow. In particular, GPU prices have continued to moderate, and we continue to believe that this will increase the demand for PC components as more gaming PCs are built. We continue to expect this will occur in the second half of 2022. With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q&A?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is from Mario Lu with Barclays. Please proceed.

Great. Thanks for taking the questions. So the first one is on the full year revenue guide. I know you guys just took it down by $300 million. But I was just wondering if you can give us more color and kind of frame the upside scenario, especially with the GPU pricing coming down in the upcoming months until GPU this summer. So any color you can provide in terms of how those catalysts are embedded in the new full year guide? Thanks.

Yes. We have provided a range for our projections, with the higher end assuming a strong recovery in GPU prices. We are already observing improvements, especially in the US and somewhat in Asia, as sales of components are increasing as GPU prices return to their suggested retail prices. We believe these prices will likely drop below retail in the next month, particularly by the end of Q2. Additionally, we have taken into account some market weakness, especially in Europe, which we expect to persist throughout the year, although we anticipate it will not be as severe as currently experienced due to necessary inventory adjustments. We have analyzed all available data based on the current situation. Of course, if unexpected global events occur, that could change things, but based on current trends, we feel confident about our projections.

Great. Thanks, Andy. And then just one, if I could, on the market share commentary, despite revenues being down year-on-year, it seems your products are still outpacing the rest of the industry. So just curious, any product lines to call out, in particular, that have gained meaningful share over the last few months?

I believe our business can be divided into three tiers. The first two-thirds consists of memory and components, while the final third is peripherals. In the components sector, nearly every category has increased its market share, but the standout ones, exceeding our expectations, are memory and power supplies. Our memory market share rose from 60% in Q4 to 65% in Q1 and reached 67% by March. This was a significant increase, similar to what we saw with other components, but those two were exceptional. Among other successful products, Stream Deck performed particularly well, although that isn't a market share concern since we have virtually 100% of that market as it’s unique to us. Our systems business also showed strong performance; while our share is small compared to the wider gaming systems market, we were pleased with the growth. Additionally, we have introduced two new categories, microphones and cameras, where we previously had no market presence but now have gained a notable single-digit market share in both. We are quite satisfied with the performance across these categories.

Great. Thank you.

Our next question is from Rod Hall with Goldman Sachs. Please proceed.

Thank you for the question. I'd like to revisit the situation in Europe regarding inventory. Do you observe any differences between peripherals and components in terms of demand development, or is it similar for both? I have a follow-up question related to this.

Yeah. So I think that what we've seen, Rod, is that the more casual impulse-buy kind of things that are sub-$100 tend to have been affected more in terms of consumer demand than the let's call it the enthusiastic research products. So people don't seem to be holding back or changing their buying habits on $2000 computers; that's much more driven by GPU and CPU prices. But yes, the casual peripherals seem to be the thing that people have moved away from a little bit. So that's the first thing. Now, in terms of what that means for channel inventory, it's actually pretty similar. I mean there's two different reasons for what's going on. But the excess inventory we've got in the channel is, I'd say, somewhat uniform across both categories. It's just a few weeks too high in both categories.

Okay, I wanted to ask about Logitech's mention of price increases. I'm curious if you see any flexibility to raise prices, or if that's even necessary. I understand they are dealing with foreign exchange issues, which might not impact you as much, but I'd like to know your thoughts on price increases in light of inflation and everything happening.

Yes, we've been monitoring price increases for some time, especially due to container costs and tariffs. Certain products, like chairs and cases, take up less space in containers, which makes shipping costs a significant percentage of their overall price, sometimes reaching 20%. We initiated price hikes early on because it was necessary for our business sustainability. Other categories have been more challenging; we hesitated to raise prices last year because we expected freight costs to decrease, which has not happened. They peaked in Q4 and are expected to remain high through 2022. Therefore, we were cautious about raising prices only to have to reduce them later. However, we have begun implementing price increases on many components, and given our leading market share in those areas, we anticipate our competitors will follow suit. In the peripherals market, the situation is more difficult due to two major competitors who are not raising prices, as they have higher inventory levels and are offering discounts. This makes it challenging for us to increase our prices without risking market share. We are raising prices where possible, but there are also instances where we can't. Currency fluctuations also compel us to raise prices because most of our European distributors purchase in US dollars, necessitating their price adjustments to mitigate losses from exchange rates.

And they're not. I guess promotional activity relative to that is for you guys not as much as what you see with some of the competitors, is that true, or are you seeing it kind of come back and affect some of this stuff too?

We have recently reduced our promotional activities. From our perspective, it's important to have some experience to understand this. In a somewhat soft market, if not handled carefully, discounting can occur, attracting customers who would have purchased anyway. Therefore, we believe significant discounting is unnecessary. It will just take time to manage our inventory.

Great. Thank you.

And Rod, just to give you a quick insight on FX, it's under 1% for the stuff we do sell in different currencies. And that's on the revenue side. Obviously, we have expenses in those regions as well. So expenses also go down when the currency goes down, so the effects on the net profitability is even less than the 0.8% or so it is on the revenue side. So it's not a significant part of our business, and we hedge the balance sheet exposure where we can.

Great. Okay. That's very helpful, Michael. Thanks a lot. Appreciate the answers. Thank you.

Our next question is from Drew Crum with Stifel.

Okay. Thanks. Hey, guys. Good afternoon. So Andy, I think you suggested the peripherals category was starting the year down kind of 15% to 25%-ish. Does your guidance suggest the peripherals business outpaces the Components & Systems segment as it has the last two years? And related to that, you indicated that easing GPU prices will serve as a tailwind for the components business. Any company-specific or macro catalysts you see for the second half for the peripheral segment? Thanks.

Yes, that's correct. The GPU data is clear and readily available, with discussions on its implications already ongoing. Regarding the peripheral segment, it is typically a seasonal business, with Q3 and Q4 usually seeing significantly stronger performance compared to Q1 and Q2. In some areas of the market, especially console-based ones or those with lower average selling prices, around 50% of the business occurs in Q4. This is a normal trend. What I observe in Europe is a bit of a surprise factor; however, I believe people will bounce back quickly despite the ongoing inflation. Recently, we saw that in the UK, which was previously one of the hardest-hit markets, there was a surge in spending on leisure and travel in April. This suggests that consumers are beginning to move past some of these challenges, although there is still a noticeable shock factor transitioning from Q1 to Q2. Overall, I anticipate that the peripheral business will show much stronger results in the second half of the year compared to the first half.

Got it. Okay. Thanks, guys.

Our next question is from Franco Granda with D.A. Davidson. Please proceed.

Hi, good afternoon, everyone. So there's a lot of rumors going on about GPUs coming out this year being very power hungry, at least relative to the most recent one. So I was curious to get some details around how the power of your PSUs have been trending over the past year and perhaps what your expectations are for the remainder of the year? Thanks.

Yes, that's a good question and it's very helpful for us. It's not only about power supplies but also includes cases and cooling fans, all of which contribute to moving air and cooling the entire system. Over the past five years, we've observed a consistent increase in the average wattage from 650 watts to 750 watts, reaching 850 watts last year. For 2022 and 2023, we expect most users will require between 850 and 1,000 watts to power their systems. This trend indicates that the average selling price (ASP) for power supplies and cases is on the rise. According to NPD data, the ASP for cases is climbing from around 90 to 115, reflecting a significant increase as systems become more complex and demand more power.

Yeah. That's very helpful. Thank you. And then, can you talk about the performance of the Corsair Gaming Monitors now that it's been out for over two quarters? And can you also talk about any correlation that you're seeing between the demands for the monitor, as CPU prices go down? Thanks.

Yeah. So I think the second part, I'm not sure how much correlation is going to be directly where people are building the system and then rushing out and buying a new monitor; obviously, the first-time buyers perhaps they will. The monitor we have is very high-end. We wanted to start at the high-end to probe the market. And overall, we've been pretty happy with the results. We weren't planning to sell a huge volume. These are $600, $700 monitors. So we wanted to get in the market and start to get our brand established with monitors. And we've done that. But a lot more to come on that front this is just the first product we launched.

Okay. Thanks, Andy for details.

Our next question is from Doug Creutz with Cowen. Please proceed.

Hey. Thanks. If I think back to January at your Analyst Day, you gave some long-term guidance that was predicated on assumed industry growth rates. And I assume that your feelings about those long-term growth rates haven't changed. I guess the question is, after sort of the gyrations of the last two years, what do you think the right baseline is to apply those growth rates off of? Is it this year? Do you think that this year is depressed and you're going to get kind of a year of above trend growth going into 2023? How should we think about that?

That's a great question. We're concluding that due to inflation and the war in Europe, 2022 will not be a growth year for the market, which is reflected in our outlook. It's a bit early to determine what this means for future years, but I believe 2023 will be a significant growth year. This is because we will have moved past crypto mining, new GPUs and CPUs will be released, and there will be exciting new games available. I expect substantial growth during that period. Our model suggests an average growth of 8% to 9% on components, which has been consistent when looking at pre-COVID versus post-COVID data. Starting from this year's baseline, there's a good chance that component growth could exceed that rate. Additionally, we accounted for a 1% market share gain, and we have already surpassed that in the first quarter. We are pleasantly surprised by how much additional market share we can capture in the components sector. Regarding peripherals, the market is expected to grow as more gamers enter the scene, contributing to overall expansion. We are currently around 75% up from Q1 2020, and we align closely with market trends, which we predict at 20% to 25% overall growth. There is significant growth potential in the market, though it may be slightly based on this year, which could see a decrease of around 15% to 20% compared to last year.

Okay. Thank you.

There are no further questions at this time. I would like to turn the call back to Mr. Andy Paul for any closing remarks.

Thank you. In closing, I want to remind everyone that we have three pillars of growth that we previously outlined, and they remain intact. The first is the anticipated long-term growth in the gaming and content creation markets, which is expected to accelerate. Reflecting on the second half of 2020 and the first half of 2021 during shelter-at-home orders, we clearly saw a surge in activity. We believe that much of this surge stemmed from new hardware buyers, who we expect will continue purchasing over the next three to five years. The second pillar is our growing market share in most categories. This is evident as, according to external sources, we hold the number one market share in nearly every component category we sell that enables high-performance gaming PCs, and we rank among the top three in almost every peripheral category. Notably, we further increased our market share in our two largest component categories in Q1. The third pillar is our expansion into new categories through internal development and acquisitions. Over the past 18 months, we have entered three new markets: microphones and cameras for content creators, as well as monitors for gamers and content creators. While we do face some short-term challenges from inflation, decreased consumer confidence in Europe, and higher than desired channel inventory levels, we believe these will be outweighed by a revival in gaming platform builds as GPU prices normalize. Thank you for your time and support, and thank you for joining us today.

This concludes today's conference. Thank you for your participation. You may now disconnect.