All right. Well, thanks very much, everyone, for being here. I'm Colin Sebastian. I follow Internet Digital Media Interactive Entertainment here at Baird, and we're honored to have from Corsair Gordon Mattingly, Chief Financial Officer. Thank you very much for coming. We'll start with a brief introduction to the company for those who may not be as familiar with Corsair. You know, this is a company that I talk to a lot of investors about, and almost always the reaction after we go through the story is, wow, I didn't know the company was doing all of that. And I think it's an interesting story for you all to hear. But, Gordon, thanks for being here, and I'll turn it over to you for an
introduction. Thanks, Colin. And morning, everyone. It's great to be here. As you rightly just said, Corsair is really in the middle of a really meaningful transformation as a company. As Colin mentioned, historically, investors have really more thought of the company primarily as a pc components and gaming hardware business which naturally carries some cyclicality to it tied to gpu launches memory pricing consumer upgrade cycles etc and that's still an important part of who we are as a company but it's no longer the full story. The company today is broader, a high-performance ecosystem for gamers, creators, streamers, sim racers, PC enthusiasts, and increasingly prosumer and SMB AI workstation customers. And Q1 was a great proof point of all of this. Our revenue was down modestly year-over-year, but our gross profit increased 13%. Gross margin expanded 500 basis points to what was a record for us for a first quarter of 32.7%. An adjusted EBITDA increased 58% to $35.8 million. And this is the clearest evidence that the business is really becoming more profitable, more resilient. Even when parts of the hardware cycle are under pressure from some of that cyclicality. And our strategy is really centered on three things. First and foremost, shifting mix more towards the higher margin gamer and creator peripheral segment, which contains Elgato, Stream Deck, Fanatec, shifting more to direct consumer. Secondly, scaling our ecosystem and platform revenue through Elgato marketplace and software enabled workflows. And then thirdly, maintaining discipline around operating expenses, inventory management and capital allocation. Back to Q1, we also ended the quarter with near zero net debt. We generated really strong cash in the quarter, and we repurchased about $5 million of our own stock under our new repurchase program. So the balance sheet now gives us additional flexibility to invest in growth while still being disciplined. That's the background of the story.
That's great. Thanks, Gordon. And for those of you in the room, feel free to send an email to the email address on your table. and I can ask questions on your behalf. But Gordon, maybe sticking with the high-level transformation or transition that you talked about, you mentioned revenues were down a little bit, margins are up. Maybe help us understand the timeline for that transition to that ecosystem and how that may play out over time.
Yeah, back to Q1, as you mentioned, revenue down 4%. A lot of that was tied to global semiconductor supply issues. And despite that 4% down on revenue, our gross profit grew 13%. And we held our operating expenses flat year over year, which meant that all of that incremental gross profit dropped down to the bottom line. and we saw adjusted EBITDA grow 58% year-over-year to 35.8 million and the structural aspects of that performance of what I would really want to highlight we talked about briefly already our intentional strategy to shift more mix towards our higher margin gamer and creator peripheral segment which carries naturally structurally higher margins in q1 the mix shifted from 30 percent a year ago to 35 percent in q1 so that's the structural shift that underpinned our part of our q1 performance the second thing that we're really pushing on is direct to consumer and direct consumer a year ago was 17% of our mix. In Q1, we grew that to 20%. And obviously, again, direct-to-consumer contained a structurally higher gross margin profile. And then the third thing really was keeping those operating expenses flat year-over-year, which allowed all of that incremental profit to drop down to the bottom line. So I think the takeaways from Q1 is really underpinning that strategy and I think we're looking to continue that shift that makeshift and transition in the coming months and years. And maybe from a gross margin perspective
then obviously there's the mix shift that happens is there are there any underlying changes in the gross margin profile by those individual segments as you transition to more services and recurring revenues and direct the consumer. Yeah it's certainly interesting
if you look at the the gamer and creator peripheral segment itself probably the two fastest growing parts of that segment elgato and fanatech sim racing actually contain higher gross margins than themselves as categories and obviously elgato is not just a point solution it's part of an ecosystem tied to the El Gato marketplace which contains naturally higher margins, greater customer engagement and basically a longer lifetime relationship with our customers. So those two elements of the peripheral segments have been growing quicker and that lifts gross margin even within the peripheral segment and then obviously just the growth catalyst and and the growth we see in q1 10 growth in that higher margin peripheral segment is an indication
of the underlying demand maybe stepping back i mean you're relatively new to corsair but your background you know running a services recurring revenue business what lessons you know are you bringing to corsair as as as the company transitions to that ecosystem to marketplace place to recurring, et cetera?
A few things. I think to drive a successful recurring revenue model, you need hardware that users interact with on a regular basis. You need an ecosystem, which is strong, that they have a willingness and a desire to stay in, because you're demonstrating value. And then you need a content layer that adds incremental value over time. And a perfect example of all of that is Elgato. Elgato Stream Deck is a workflow utility tool that people use on a regular basis. The Elgato marketplace, we have increasing number of developers who are developing really, really cool apps for people to use with their Stream Decks. That itself is driving incremental value to the Elgato customer over time and basically making the hardware more valuable. So all of that, that's powerful ingredients for recurring revenue. If I stand back and look at the Corsair business, we have a lot of other things going for us that could be really powerful from a recurring revenue perspective long term. Volume. We have three to four million active users of our IQ software already on a monthly basis. We have two million accounts on the Elgato marketplace. That's already significant volume. And then if you think about how many hardware units we ship on an annual basis, it's literally millions and millions of units. If you can attach, through creating value for those customers, creating additional utility, if you can attach just a small portion to all of that volume, then you can drive meaningful recurring revenue. And I think about it from a math perspective. Even if you just add together the 2 million Elgato accounts, the 3 to 4 million IQ active users, If you can attach less than 5% of that, you would get 200,000 subscribers. And if you can generate value for those subscribers, even charging them $5 a month at 80% gross margin, that would deliver $10 million of incremental EBITDA. And if you think about it from a hardware perspective, how much more incremental hardware revenue would we have to drive to deliver that same result? It's pretty compelling. So I think we have a lot of the ingredients on our side. Coupled with that, we have highly engaged, passionate customers. So I think putting all of that together, there is definitely, definitely a lot of opportunity for us to drive recurring revenue. The final piece of it is the direct consumer. We're increasingly, as you know, 20% of our mix in Q1. We're increasingly having direct contact with our customers. And that's super, super important for a driving or recurring revenue relationship.
And with that data, with those recurring revenues, as you convert more to subscriptions, as you know more about the end user, does that become, for the ecosystem, in terms of cross-selling or creating more of a product flywheel, does that then drive that engagement, drive more hardware sales that drives adoption of other services within the ecosystem? or how do you think about that sort of broader holistic opportunity?
Yeah, I mean definitely Elgato is a great example of that. And the interesting thing with Elgato combined with AI, AI is actually democratizing software development. So it's not inconceivable that someone like me could develop an app if I wanted to using AI and vibe coding, et cetera, that you can do nowadays. days. That democratization of the development process is naturally lending itself to creation of more content for the El Gato marketplace. More content, more breadth of content. And that in of itself is serving to reinforce the utility of the hardware. So that's pretty powerful. And that is the virtuous cycle. There's a really good picture in our investor deck if you want to check it out which talks about the el el gato flywheel and that ecosystem but ultimately yes there's a lot of opportunity and i see as we drive more value to customers through the marketplace it makes the hardware more valuable and it is a virtuous cycle because then you get more developers who want to develop and developing is becoming a lot easier because
of ai so what should we in terms of metrics or kpis you know thinking about that opportunity for you the marketplace the adoption of these new services and tools what are the metrics or kpis that we should follow to track uh your success along the way i think uh very obvious things to
at our number of accounts as well as the number of actual digital products available on the marketplace. And the great news there is even in Q1 alone we saw double digits sequential growth in both of those metrics. I think from a longer term perspective thinking about how is the utility of Elgato and Stream Deck expanding. We would expect to see, in terms of measuring its success, we'd expect to see more content, more digital products available, but breadth, more breadth of that content and potentially crossing over to different use cases. And the great news is we're already seeing that. One of the more popular apps for Stream Deck on the marketplace is for Adobe Photoshop. And we're seeing things like music production companies generating specific apps to make music production workflows easier. So we are already seeing definite increase in the breadth of the portfolio that we're seeing on Marketplace. And as we talked about, AI in of itself is making the development of apps a lot easier. And that naturally is generating more and more content. Actually, the challenge we have increasingly is staying up with curation And staying up with publishing, which is, you know, great problems to have. So, yeah, those are the things that we'd look at. But at its core it's number of accounts number of users number of developers the breadth of the Offerings on the marketplace and really user engagement how much of those Those digital products actually being used
We're going to talk about other parts of the product portfolio But there's clearly a lot of excitement right now around the ai product portfolio the way a workstation on the hardware side maybe could you help us understand what's the size of that opportunity what investments you're making to to to really create value there and uh congratulations on the recent product product launches
yeah thanks thanks for that we obviously are super excited about about that opportunity But it's definitely an area where we feel super strong that we absolutely have a right to win there. And why do we have a right to win? Because the key things that you need to be successful there are part of our DNA and heritage already. If you think about AI workstations, what you need to be successful there, and particularly in the roughly 22 billion market for desktop AI PCs that we're specifically addressing. You need to have expertise in customization, systems customization, which is very much part and parcel of our DNA, particularly through Origin PC and our components business. You need expertise in thermal management. You need expertise in power supply management. All of this is directly within our wheelhouse, and we feel super, super confident in our ability to execute on that. And the market opportunity, as mentioned, $22 billion. If you look at our investor deck, there's an even broader opportunity. The broader AI workstation market is about growing to $430 billion by 2030. That's roughly a CAGR of about 47%. The interesting thing from our perspective is people are talking about our ai story as a pivot but we don't see it as a pivot we just see it as a very very logical extension of capabilities and expertise that has always been part of our heritage and is already very much part of our dna and actually you know the irony is you can't actually even say corsair without saying ai because it's actually part of our name which is which is quite amusing in terms of the opportunity itself I think what it does is it raises a ceiling on on our potential looking out 20 20 27 and beyond I think for 20 26 we're already halfway through the year I think meaningful contribution will come in 20 27 and beyond yeah look forward
to that and maybe you mentioned some of this before but as a related question maybe you could go through some of the specific segments and products in terms of how you're prioritizing investments. You have a lot on the plate in a good way. But a lot of that does require investment and ahead of time. And obviously we're also in a market where there are supply constraints for a lot of components used in in some of your products. But in terms of prioritization of investments and how you think about that I think would be useful. Yeah.
The way we look at prioritization is pretty simple. We focus mainly on three things. Number one is margin. Number two is ecosystem value. And number three is right to Win, which we just talked about with the ai workstation. And if i stand back and look at our various categories, Elgato is very, very highly ranked on all three of those Metrics. Obviously it's a combination of Hardware and software with a recurring revenue angle. So that ranks very, very strongly. Sim racing is very enthusiast-driven, and our relationship and partnership with F1 gives us authenticity as well as a community aspect that is very powerful. And then if I look, we just talked about it just now, AI workstation, again, right to win, very, very strong in terms of our expertise in customisation, thermal management, and power supply management. Components are still an important part of our business, obviously been impacted by the memory pricing at the moment. What I would say, we're still investing there, but we're just being very disciplined about how we do it, and we're managing our inventory very tightly. Obviously, the dynamics with components right now, we see that as a short-term issue, but it's pent-up demand. That's the good news. Because of the high memory prices impacting demand for components in the short term, that demand's not going away. We don't think it's perishing. We think it's actually building up pent-up demand that once the semiconductor situation calms down mid-27, I think we could see some pretty significant demand again end for components. So it's balancing all those things. Yes, we can be disciplined with our operating expenses while at the same time being very strategic and intentional about where we invest based on those metrics that I mentioned, margin, ecosystem, right to win. That's helpful.
Thank you, Gordon. I think since memory is still a reasonably large part of the business, maybe you could also dig in a little bit there more in terms of some of the puts and takes around constraints in that market, around inventory, around pricing, the demand, obviously, dynamics are important there as well, and margins, product margins. I think that could be useful. Absolutely. There's
definitely a lot going on there. I think I'll start with the more positive. In Q1, we were able to grow our memory revenue 6% year over year. It actually grew to just shy of $150 million. The gross profit from that was $47 million, which was up $23 million year over year. And that result was a combination of really good execution and intention on our behalf. And when I talk about intention, we built on purpose an inventory position for memory at the end of last year. And we executed on that in Q1. And we saw the benefit. And we've said continuously when we see memory prices rising, the inventory cost is lagging, the real-time market prices, we're going to see a margin benefit. it. We knew that and we executed on that super strongly in Q1. All of that being said, we have talked about some sort of normalization of memory over time. And we've actually guided already for Q2. Q1 gross margin was in the low 30s. We've guided for Q2 roughly, we think, in the mid 20s in terms of gross margin and then moving into q3 and q4 we think probably in the high teens is what we're expecting from from a memory margin perspective i think you asked about inventory and after the q1 results we'd actually bought our total inventory as a company down by 30 million probably 70 to 80 percent of that reduction was actually from memory so that stockpile that we built at the end of Q4 we normalised by the end of Q1 and we feel that we're really right-sized from an inventory perspective heading into what is a seasonally weaker Q2 for us and the rest of the industry so we feel good about inventory position we don't see any issues with our ability to get inventory and I think the way this plays out over the long term is right now it's It's a margin tailwind for us, but I would say it's a demand headwind. When I talk about demand headwind, I'm really talking about self-build PC and the demand for components, which we've already guided our component segment to be down low double digits year over year, and that's a reflection of the semiconductor issue and the impact of memory pricing on demand. so that's the short-term demand issue but as I already mentioned if we fast forward probably 12 to 18 months there's an incredible amount of pent-up demand for self-built PCs that isn't going away it's it's just building so I think what we all see is as the benefit the tailwind of memory margin comes down the headwind on demand will will become less and that pent up demand I think will come to fruition so we'll probably see some some decent revenue growth from that in the as we go through 2027 I would say.
Yeah so maybe a nice bridge between the segments there. Exactly. In the last few minutes I did want to ask more about the D2C opportunity you mentioned earlier it was 20 percent I think in Q1. But I think it might also be helpful to talk about the unit economics of that relative to other channels. And then across the segments, how large could this could direct to consumer be over
time? Yeah, on the direct consumer, as we already mentioned, 20 percent of the mix in Q1 up from 17 percent a year ago. We're pretty pleased with that. We've kind of put out a goal for ourselves to get to 25% of our mix from direct to consumer we're not forcing that I just want to be clear we still have immense amount of respect for our channel partners they are very much important part of our business we have no intention whatsoever for to undercut in any way shape or form our strategy is to be where our customers want to buy and actually if you look at our product portfolio you kind of some of the actual products lend themselves more to a direct-to-consumer relationship if you think about scuff controllers drop that's naturally highly customized product that lends itself more to direct consumer if you think about Elgato with the marketplace angle again that lends itself more to direct consumer sim racing very enthusiast based again lends itself to direct consumer so we are pushing it but we're pushing it because that's where our customers want to buy that's how they want to buy we get great data from that obviously the margin profile is better for us but we get really strong data from that relationship with our customers that helps us better inform future products and I would say metrics like lifetime time value, cost to acquire customers, and net promoter score is naturally better through a direct-to-consumer relationship. And again, we talked earlier about recurring revenue. The more that we can have a direct relationship with our customers gives us a better chance to enrich their lives through better utility and customer utility, which could lend itself to more recurring revenue opportunities for us as a business. So that's the way we see But i just wanted to be clear that we we are positioning ourselves as an omnichannel business to be where our customers want to buy. And the final thing that we haven't really talked about is the the actual retail showcase store that we opened up in valley fair. Shopping mall in in california late last year and that's going really really well and that that store itself. What we see in that store is higher average purchase price from those customers and a higher propensity to return and buy more. And it's a brilliant showcase for all our technology. So we're really pleased with how that store is going as well. That's just a natural extension of physical in-store direct-to-consumer relationship.
And you mentioned your partners. How big is Amazon Prime Days for Corsair? Is that an important event?
It's an important event, for sure. It's a little bit earlier this year. But with channel loading, we would normally see the benefit in Q2 anyway. But, yeah, for sure, it's an important part of our business and part of our seasonality.
Well, I think we'll leave it there. Thanks, everyone, for coming. And if you have any follow-up questions with Corsair, feel free to contact me or the company directly and have a great rest of the conference. Gordon, thank you very much. Thanks, Colin. Great to see you.