Good afternoon. And welcome to Corsair Gaming’s Second Quarter 2023 Earnings Conference Call. As a reminder, today’s call is being recorded and your participation implies consent to such recording. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. With that, I would now like to turn the call over to 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 second quarter ended June 30, 2023. On the call today, we have Corsair’s CEO, Andy Paul, and CFO, Michael Potter. Andy will review highlights from the quarter. Michael will then review the financials and our outlook. 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, may include forward-looking statements related to the expected future results of our company. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties related to forward-looking statements are described in our earnings release and on our SEC filings. Note that until our 10-Q has been filed, these numbers are preliminary. Today’s remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information and GAAP financial information, is provided in the press release we issued after the market close today. With that, I will now turn the call over to Andy.

Thank you, Ronald, and welcome everyone to our earnings call. The key takeaways for Q2 are: first, our revenue exceeded expectations for Q2, growing nearly 15% on a year-over-year basis. Consumer spending on gaming hardware is holding at significantly higher levels than pre-pandemic. We believe that even with a challenging macro environment, we are seeing increased activity due to new gamers that entered the market in 2020, now starting to refresh and upgrade their gear. Second, gross margins showed strong growth with healthy inventory profiles and reduced freight costs. Third, we are now active again in M&A, which is a key component of our growth strategy. Our strong cash balance and low leverage now allow us to pursue M&A opportunities, with our latest announcement in July that we agreed to purchase Drop Incorporated. Taken together, we expect the gaming market to continue to be healthy for the balance of the year, with new game titles and lower-cost GPU cards in the market, and we expect to continue to gain market share with our new product rollouts. Let me take a few minutes to expand on these points. First, I am very pleased to report that our results for the second quarter exceeded our original expectations. The gaming hardware market is healthy and appears resilient to macroeconomic effects, driven by new games and graphics cards being launched. For components used in building gaming PCs, depending on the region, we see a 24% to 28% increase from Q2 2019 to Q2 2023. For gaming peripherals, we see an overall increase of 57% to 63% this year compared to pre-pandemic levels. It’s reasonable to consider current consumer activity as a post-pandemic baseline since there’s no evidence of increased activity due to COVID-related behavior. Based on everything we are seeing and hearing, we believe this increased activity is coming from the surge of new gaming hardware buyers who entered the market during 2020 and 2021, which we now refer to as the COVID bulge. Since this comparison is now over 4 years, that would lead to a net CAGR from pre-pandemic to post-pandemic of approximately 5% to 6% in PC platform building and 12% to 13% for gaming peripherals. This is roughly in line with our expected growth rates for these categories, and we think it’s reasonable to expect that this will continue over the next few years. Second, margins continued to improve in all categories. In our components category, we gained significant market share in 2022, and that, on top of the healthy market, meant that we were running short of inventory in many of our top SKUs, which required us to airfreight products. We largely caught up with inventory needs by Q1 2023, and in Q2, we benefited from lower freight costs and healthy inventory positions, thus driving up gross margins. In gaming peripheral categories, we had some delays in getting our new flagship products out. We also noted in previous earnings reports that we cleared our excess channel inventory faster than our competitors, and so we decided to hold back from matching their high levels of discounting. Both of these factors caused us to lose some market share in the near term, but competitors' discounting has now largely calmed down. For example, we noted during Prime Day that while we had prices at reduced levels compared to our biggest Prime Days, we actually outperformed compared to the total category sales of Amazon in almost every category we track. In Q2, while our gaming peripheral revenue was less than expected, we experienced improved margins and better sales momentum going into and coming out of Prime Day and Prime Week. As our latest flagship products get launched during the second half of the year and into early next year, we expect to continue to gain market share and increase margins further. We are now active again on the M&A front as we benefit from our strong cash balance and low leverage. There are a lot of M&A opportunities out there, and we have been disciplined in evaluating companies. We have acquired six companies to date and have a strong track record. Our latest announcement was in July regarding our agreement to acquire Drop, a community-based e-commerce company specializing in customized DIY keyboards and key caps. Personalized keyboards that can be modified by consumers are among the fastest-growing trends in the gaming peripheral space. Drop is actively engaged with millions of enthusiasts to support its products and build and showcase gaming stations. Drop has proven to be a leader in this space, and we expect to significantly grow the Drop brand worldwide. We see significant opportunities and synergies here, offering cost efficiencies of our products on the Drop side, as well as introducing some of their popular products into our worldwide channel. We aim for this to mirror the success we had with Elgato. We acquired Elgato about five years ago, and we have increased the revenue by more than three times, expanding the brand into new revenue areas, including microphones, cameras, and lights. We also launched our marketplace weeks ago and expect this to grow over time. The new Stream Deck marketplace will allow third-party plug-ins and applications to be sold to our content creators directly from the Elgato website. Developers will have easy access to Elgato’s growing Stream Deck installed base. We believe these added plug-ins and applications will increase our installed base of Stream Deck users and open a significant new revenue stream for us. Overall, we are off to a strong first half and expect further improvement in the second half of 2023. We anticipate the gaming market to remain healthy for the remainder of the year, and we expect to build a leading market share in the categories we serve. Let me now turn the call over to our CFO, Michael Potter, for details on the financials.

Thanks, Andy, and good afternoon, everyone. We are pleased with the substantial financial improvement in Q2, led by revenue growth, steadily improving adjusted EBITDA, and a more balanced inventory. We exceeded our near-term expectations for gross margins and we continue to be operational cash flow positive, while modestly investing in inventory to support the expected stronger second half of 2023. In terms of specifics, Q2 2023 net revenue was $325.4 million, compared to $283.9 million in Q2 2022. For the first six months of 2023, net revenue increased 2.2% to $679.4 million from $664.6 million in the year-ago period. European markets continue to be softer than the Americas but are improving, contributing about 32.3% of our revenues, an increase from 32% in Q1 2023. Turning now to our segments, the gamer and creator peripheral segment contributed $78.8 million of net revenue during the second quarter, compared to $89 million in Q2 2022. For the first six months of 2023, gamer and creator peripheral segment revenue was $167.7 million, compared to $223.1 million for the first half of 2022. The gaming components and systems segment contributed $246.7 million of net revenue during the quarter, an increase of 26.6% from $194.9 million in Q2 2022. Memory products contributed $108.9 million in Q2 2023, compared to $99.1 million in Q2 2022. For the first six months of 2023, gaming components and systems segment revenue increased to $511.7 million from $441.5 million in the first half of 2022, with revenue from memory products increasing to $240.2 million from $231.3 million. Overall gross profit in the second quarter was $82.8 million, compared to $36.5 million in Q2 2022, which included lower revenue and an excess inventory reserve. Gross margin increased to 25.5%, compared to 19.7% in Q2 2022 without the effect of the excess inventory reserve. Ongoing improvements in freight costs, as well as new product introductions, were the main reasons for the improvement. Overall gross profit increased to $168.2 million for the first six months of 2023, compared to $127.2 million in the first half of 2022. The gamer and creator peripheral segment gross profit was $25.5 million, compared to $10.6 million in Q2 2022. Gross margin was 32.4%, up from 11.9% in Q2 2022. We benefited from a further reduction in excess promotions by some leading competitors on gaming peripherals in Q2, which we believe will lead to margin improvements in the second half of 2023. The gaming components and systems segment gross profit rose to $57.3 million, an increase of 121.3% from $25.9 million in Q2 2022. Gross margin was 23.2%, up from 13.3% in Q2 2022. Our memory products' gross margins in this segment were 14.6% for the second quarter, compared to 9% in Q2 2022. Second quarter SG&A expenses were $70 million, a 4.7% decrease from $73.4 million in Q2 2022, driven in part by reduced freight rates. This reflects the impact of prior 2022 headcount reductions, along with our continued management of all expenses as we support revenue-generating areas. Second quarter R&D expenses were $15.6 million, down about 13.5% from Q2 2022 as we prioritize investments in new products. GAAP operating loss in the second quarter of 2023 was $2.7 million, compared to a GAAP operating loss of $55 million in Q2 2022. The prior year included the impact of the excess inventory charge. Second quarter adjusted operating income was a bright spot for us, increasing to $15.9 million compared to an adjusted operating loss of $14.2 million in Q2 2022. Adjusted operating income increased to $34 million for the first half of 2023 from a loss of $0.9 million in the first half of 2022. Second quarter net income attributable to common shareholders was $1.1 million or $0.01 per diluted share, as compared to a net loss of $59.4 million or a loss of $0.62 per diluted share in Q2 2022. On an adjusted basis, second quarter net income improved to $9.8 million or $0.09 per diluted share, compared to an adjusted net loss of $19 million or a loss of $0.20 per share in Q2 2022. For the first six months of 2023, adjusted net income improved to $21.8 million or $0.20 per diluted share from a loss of $9.8 million or a loss of $0.10 per share in the first half of 2022. Finally, we increased the second quarter adjusted EBITDA to $17.8 million, compared to an adjusted loss of $11 million for Q2 2022. For the first six months of 2023, adjusted EBITDA increased to $38.3 million from $4.4 million in the year-ago period. Turning now to our balance sheet. We ended Q2 with a cash balance of $184 million. Shortly after quarter-end, we invested in growth via our acquisition of Drop, which Andy provided details on earlier. The acquisition cost was not significant and was in the low double digits of millions of dollars. We ended Q2 with $220 million of debt at face value, and our $100 million working capital revolver remains undrawn and fully available. Overall, we expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities arise. We are pleased that the first half performed slightly above our expectations and we believe we are well positioned for the second half. Both the channel and our inventory are in a healthy state. Although we are closely monitoring this due to economic headwinds from high interest rates and inflation affecting consumer confidence, we believe we have substantial white space to sell into and room to recapture market share as excess discounting and gaming peripherals ease and as new products are introduced. In terms of the full year 2023, we reiterate our outlook of flat to up revenue. We continue to expect total revenue in the range of $1.35 billion to $1.55 billion, adjusted operating income in the range of $75 million to $95 million, and adjusted EBITDA in the range of $90 million to $110 million. With that, we are now happy to open the call for questions. Operator, will you please open the call for Q&A?

Thank you. Your first question comes from Aaron Lee with Macquarie. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. I wanted to start with the guidance range, which you noted in the release incorporates a softer macro. It seems like there’s greater confidence out there that the U.S. will avoid a hard landing. So could you just talk about the degree to which a stronger than expected macro environment would impact where you land in your guidance range versus some of the things that you can control?

Well, let’s be clear. If the economy improves, obviously, our revenue will go up and vice versa. Since we had at the beginning of the year, our expectation was that the market would be roughly flat, which is what we think about today. So that hasn’t really changed. The sense is that the market was slightly down, the consumer market in general, and you’ve seen that across different industries; a lot of parts are down, some are flat. But certainly, it’s a little further down than we thought, and we believe the second half will be a little further up. So I think the full year is probably going to end up being flat as we expected.

That’s the overall market. The range has a decent possibility of growing year-over-year for us.

Okay.

...overall market. The range has a decent possibility of growing year-over-year for us.

As a quick follow-up, you guys have done a great job expanding the Corsair ecosystem like with iCUE LINK recently, and obviously, you had the acquisition of Drop. As you think about your peripheral ecosystem, can you talk about any white spaces that are left?

Yeah. There’s quite a few actually. A couple of things we are pretty interested in. One is mobile gaming. Currently, mobile gaming is largely done on the phones, and that’s the attraction of it, because no approval is needed. But there is a growing opportunity for wraparound controllers that can hold a phone or an iPad. It’s a relatively small market now, but we are watching that carefully to see how that evolves, especially with Game Pass, which allows you to play the same game across different platforms. So that’s one. We are very interested in sim racing. This is a full simulator that typically has one driver. That market has grown significantly in the U.S. after the series Drive to Survive garnered interest in F1, which is already big in Europe. This is a nice market for us to move into because you need not only a system but also a range of peripherals like a cage, a seat, pedals, and wheels. We are also watching the VR goggles space, although currently, we don’t see a significant opportunity to make money on VR headsets as it remains early in that market.

Fantastic. Thanks for the color.

Your next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Hi, guys. This is Lina on for Eric. Thanks for taking my questions. I just had a few on the Drop acquisition. First, could you just speak to the deciding factors that led you to acquire Drop? And then how should we be thinking about the timing in terms of integration and the synergies that you see? Thanks.

Yeah. So the main reason we bought Drop was that most of our acquisitions are direct-to-consumer, and Drop is no exception. It’s all direct-to-consumer, because over time, we want to expand our direct connection with customers so that we can sell them multiple items. Most products we sell to consumers through the channel are bought one at a time, while on a gaming PC, there are five or ten different items to sell. The second reason is that it’s a community-based enthusiast e-commerce player. A lot of the things they sell are appealing to customers similar to ours but slightly outside the traditional gaming PC builders. This expands our market while remaining within the same genre. Thirdly, they have done an excellent job with mechanical DIY keyboards, which is a growing trend among enthusiasts and even non-gamers who want something different on their desk. These keyboards can have a variety of key switches and key caps, allowing for customization. When we looked at that, the overall package was interesting and lead us to the synergy aspect. We have a large footprint across the globe, primarily in channels. We want to take many of Drop’s key SKUs and distribute them through our channel, expecting to sell additional items like key caps directly to those customers. Additionally, we want to run some of our harder-to-sell items through the Drop site. In terms of acquisition scheduling, we have a six-month integration plan where we will combine activities to save on operating expenses. The revenue synergy is on an ongoing basis, starting immediately with SKU evaluations for channel placement. This might take time; for example, getting a product into Best Buy will be in their next window, probably Q1.

Okay. Great. Thank you.

Your next question comes from Drew Crum with Stifel. Please go ahead.

Okay. Thanks. Hey, guys. Good afternoon. On your peripherals business, can you comment on your retail inventory position heading into the second half and the conversations you are having with retail partners regarding their willingness to restock inventory levels for the holidays? And I have a follow-up.

Q2 was pretty neutral regarding our sales into the channel, and we cleared up our channel inventory last year by about $100 million, which we thought was excess. This year has been generally neutral, but it depends on the category. I wouldn’t say we are concerned about having too much inventory in the channel at this point.

Okay. And then, Andy, just a follow-up on the Drop acquisition. I think there was a comment about hoping to replicate your experience with Elgato. Is that more qualitative or would you aspire to grow sales three times like with Elgato? Thanks.

Both, I mean, we are not including that in any guidance since we just started. But there’s a big opportunity. I don’t know how big that is yet because the DIY keyboard market is new with many small players. It’s similar to when we acquired Elgato, as the streaming market was then very small. We anticipate this market will grow significantly, but it’s too early to say if we can double or triple sales. However, we certainly believe we can make a substantial impact.

Your next question comes from Colin Sebastian with Baird. Please go ahead.

Yeah. Good afternoon. This is Reese on for Colin. I have two questions. One would be, could you discuss the keys to success that worked for Elgato? What internal shifts helped that wouldn’t be as visible to investors that you could perhaps replicate with Drop? Secondly, regarding guidance, what’s required to hit the upper end of your range, or what does the environment need to look like for that to happen? Thanks.

Let’s address these one at a time. With Elgato, what we did was straightforward and typical for small startups. Most of the small companies we acquire, those generating under $50 million, often struggle to manage cash flow due to high overhead expenses. They spend a lot of time battling with that instead of focusing on bringing products to market, which has also been the case with Drop. Since acquiring Elgato, we allowed them to focus solely on products by relieving them of financial burdens. We want to replicate this success with Drop. We will begin taking some of their key products into extensive channels, aiming to achieve store presence similarly to what we did with Elgato, placing their products in Best Buy stores within a few months. The timing will determine how soon these products can market before the holidays. For guidance, we need to see how much the market recovers and grows. As I mentioned earlier, it’s significantly above pre-pandemic levels, and it feels like the economy is stabilizing. We're already observing good results from Prime Day for both overall and specific products. If the market continues to strengthen and we fulfill our responsibilities to gain market share and launch new products, we can expect to be at the higher end. If the market stays flat, it will be more challenging.

Yeah. Got it. As a follow-up, could you provide some insight into where the promotional environment stands with competitors in the channel and what you’re observing?

In peripherals, we see a seasonal spike during events like Prime Day and Black Friday. There was much less discounting among our main competitors than in the past, which helped our performance relative to last year. The lower discounts improved our sales, as competitors previously offered heavy clearance deals.

Your next question comes from Doug Creutz with TD Cowen. Please go ahead.

Hey. There was a big industry release late in Q2, and I wondered if you could comment on any gains that might have helped boost either PC builds or peripheral sales. Looking ahead to Q3, I think Starfield is coming out, which could likely be a significant PC title. What are your views on its potential to drive PC builds?

The buzz was largely around Diablo IV over the last quarter, which we think helped. I mentioned that we added about eight new games to our deck on the IR website. A new version of Call of Duty is set for release at year’s end, which will be significant, along with other titles like Counter-Strike 2 scheduled for the summer of 2023. There’s a lot happening. I think Diablo was the most impactful in the first half, and for the second half, Call of Duty and Counter-Strike are likely to drive engagement.

The requirements for the upcoming games are significantly higher than before. To achieve all the features and enhancements, players will need more powerful PCs with additional memory and high-end video cards, neatly aligning with our product suite.

That’s a good point.

Your next question comes from Mario Lu with Barclays. Please go ahead.

Great. Hi. This is Jack Butler on for Mario. Thanks for taking my questions. I was just wondering whether you could elaborate on some of the partnerships you now have in place with content creators. A couple of quarters ago, you announced the NICKMERCS partnership and now we have CouRageJD. What responses have you seen from the gaming community? Are there indicators showing that these partnerships are proving successful? Also, how will this initiative evolve going forward?

We have a variety of partnerships. NICKMERCS has been a long-standing collaboration with us on the SCUF side, while CouRageJD is new. It’s early to draw any conclusions regarding how effective these partnerships are, as we don’t witness an immediate surge in metrics.

There are no further questions at this time. I will now turn the call back over to Andy Paul.

Thank you everybody for joining us on the call today and for your continued support. Any follow-up questions, please contact our Investor Relations Department, and we look forward to updating you next quarter. Thank you, and have a good evening.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you disconnect your lines.