Turtle Beach Corp Q3 FY2025 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Turtle Beach Corporation Third Quarter 2025 Conference Call. As a reminder, the conference call is being recorded. I will now turn the conference over to Jacques Cornet from the Investor Relations team. Jacques, you may begin.

Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon that details the company's third quarter 2025 results, which is available on the news page of the company's Investor Relations website, corp.turtlebeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the Events and Presentations section of the company's Investor Relations website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, we will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. Hosting the call today are Cris Keirn, Chief Executive Officer; and Mark Weinswig, Chief Financial Officer. With that, I'll turn the call over to Cris. Cris?

Thanks, Jacques. Good afternoon, everyone, and thanks for joining us for Turtle Beach's third quarter 2025 earnings call. Turtle Beach delivered another quarter of solid execution against our strategic priorities with results that met our expectations in the face of the ongoing challenges in the gaming accessories market. Today, I'd like to touch on four highlights from the quarter. First, we generated $80.5 million in revenue, and we continue to make progress on profitability with gross margins up nearly 120 basis points year-over-year, coming in at over 37%. That improvement reflects the team's continued focus on operational discipline and cost management. I'm especially proud that we were able to fully offset the margin impact of tariffs this quarter, thanks to strong execution across the board, including partner cost negotiations, selective price adjustments and selling inventory that we proactively brought in before the latest tariff increases. Second, as we mentioned last quarter, we completed a refinancing of our term loan and credit facility. This was an important milestone for us. We strengthened our balance sheet, lowered our cost of capital and extended our maturity profile, giving us more flexibility going forward. The refinancing also cut our term loan interest rate by more than 450 basis points, which will provide meaningful savings and help us continue building long-term shareholder value. Third, we continue to return capital to shareholders through our repurchase program. During the quarter, we bought back $10 million of stock from our existing shareholder, Diversis Capital, roughly 695,000 shares at an average price of $14.41. That brings our year-to-date repurchases to about $17 million. Share repurchases remain an important part of our strategy. They demonstrate both our confidence in the business and our ongoing commitment to creating value for our shareholders. And finally, we maintained our focus on innovation, announcing and launching more than 40 new products since Q2. This momentum strengthens our position heading into the holiday season and sets us up for continued growth in 2026. Our accelerated launch cadence across headsets, controllers, simulation gear and PC peripherals highlights our transformation into a comprehensive gaming accessories leader with the added advantage of official partnerships with all three major console platforms. Let's take a closer look at the product side, where we've made some exciting additions across our entire Turtle Beach lineup. Starting with headsets. We've expanded our portfolio with several new wired models since Q2. Our Airlite Fit, one of our officially licensed headsets for Nintendo Switch and Switch 2 delivers great audio, a super lightweight fit and comes in a range of fun color options for Nintendo fans everywhere. We also launched an officially licensed Switch version of our Recon 70, which continues to hold its spot as the industry's best-selling wired gaming headset year after year. For PlayStation and other platforms, we rolled out the new Atlas 200 series, which includes our first ever officially licensed PlayStation headset and features our premium 50-millimeter Nanoclear drivers for incredible sound clarity. The response has been fantastic, and it even received a perfect 10 out of 10 score and Editor's Choice Award from CGMag online, which we're thrilled about. Through our ongoing partnership with Nintendo, we also announced a broad lineup of officially licensed accessories for both Switch and Switch 2. This includes new Rematch, Afterglow and Afterglow Wave wired and wireless controllers along with travel cases and other accessories that are rolling out now through the end of the year. Controllers continue to be one of our strongest growth opportunities, and we're proud to now be one of the leading third-party controller brands in the market. We've grown, thanks in part, to our premium Victrix brand, which is well known among competitive gamers. The new Victrix Pro BFG Reloaded Controllers for PlayStation, Xbox and PC raised the bar again with upgrades like hall-effect triggers and mechanical buttons that give players a real performance edge. For Nintendo fans, we also launched two new wireless lenticular controllers, themed for Donkey Kong and Super Mario, featuring dynamic artwork that shifts with different viewing angles. On the Xbox side, we've added new Afterglow Wave and Rematch Core wired controllers in several exciting colors, plus the Afterglow Ignite RGB controller for Xbox and PC, which looks incredible. We even expanded further into music gaming with our new Riffmaster Wireless Guitar Controller for Nintendo Switch and Switch 2, building on the success that we've seen with our Xbox and PlayStation models. On the simulation front, our VelocityOne series continues to push boundaries. We introduced the VelocityOne Race KD3 Wheel and Pedals, the VelocityOne F-RX formula style wheel and the Racer Wireless Wheel for Xbox and Windows. Each of these amazing new products were engineered to bring even more realism and fun, whether you're a dedicated sim racer or just want a great driving experience. And in PC gaming, we're broadening our footprint with high-performance peripherals like the Vulcan II TKL hot swappable mechanical keyboard and a Burst II Pro wireless esports mouse, both earning top-tier reviews for speed, accuracy and design. Altogether, these new products show how Turtle Beach has evolved into a true gaming accessories powerhouse, while delivering innovation, quality and value across every major category and platform. We're pleased with how our team continues to execute by growing our portfolio, driving efficiency and laying down a strong financial foundation for the future. Even though the overall gaming accessories market remains down year-to-date, we've seen year-over-year improvements as expected through Q3. We're encouraged by the improvement trends we've seen and remain confident in the industry's growth trajectory. Looking ahead to 2026, there's a lot to be excited about the upcoming release of GTA 6, other major AAA game launches, the continued momentum of the Switch 2 and an overdue replacement cycle for accessories bought during COVID are all setting the stage for a new multiyear growth cycle in gaming. Combine that with our expanded product lineup and a stronger balance sheet, and we're in a great position to capitalize on what's next for Turtle Beach and the broader gaming market. With that, I'll hand it over to Mark to walk through the quarterly financials.

Thank you, Cris, and good afternoon, everyone. As Cris mentioned, our third quarter results demonstrate our continued focus on operational performance and financial discipline in the current market environment. Revenue for the third quarter was $80.5 million, in line with expectations. Our gross margin of 37.4% is a year-over-year improvement of nearly 120 basis points, reflecting the benefits of our ongoing cost optimization initiatives and tariff mitigation strategies. Operating expenses for the quarter were $24.7 million, representing 30.7% of revenue compared to $27.7 million or 29.4% in the prior year period. The expense reduction over the prior year was primarily driven by lower sales and integration-related activities, partially offset by investments in internal systems, processes and infrastructure that will enable us to continue scaling the business and drive operational leverage. Net income for the quarter was $1.7 million, which includes a one-time noncash write-off of $1.9 million for previously capitalized fees relating to our refinancing. Adjusted EBITDA for the third quarter was $11 million and reflects strong performance at our current revenue level. Turning to the balance sheet. At September 30th, our cash position was $12 million and total debt was $90 million, resulting in net debt of $78 million. As Cris mentioned, our recently completed term loan and credit facility refinancing has strengthened our capital structure, increased our operating flexibility and reduced our cost of capital. With the base interest rate on the term loan lowered by approximately 450 basis points, we expect an annual interest savings of over $2 million. Turtle Beach's business model is designed to generate strong free cash flow, supported by our current operational structure and disciplined working capital management. We expect to see significant improvement in our operating cash flow over the next two quarters as we benefit from the seasonal dynamics of the holiday period. With respect to our capital allocation strategy, year-to-date, we have returned approximately $17 million to shareholders through share repurchases. During the third quarter, we repurchased $10 million of shares from our existing shareholder, Diversis Capital under our previously authorized $75 million share buyback program. One of our key priorities is to deliver value to our shareholders through share buybacks while maintaining a strong balance sheet. This will continue to be an integral part of our capital allocation activities moving forward. Based on our performance through the first three quarters and our outlook for the remainder of the year, we are reiterating our full year 2025 revenue and adjusted EBITDA guidance ranges. We continue to expect full year revenue to be in the range of $340 million to $360 million and full year adjusted EBITDA to be in the range of $47 million to $53 million. In summary, our third quarter results reflect our continued focus on operational excellence and financial discipline in a complex market environment. We are pleased with our ability to maintain strong gross margins, refinance our prior debt facilities and return significant capital to shareholders, all while continuing to innovate across our product platform. Our strengthened financial position and enhanced operational flexibility position us well to capitalize on the opportunities ahead. With that, I will turn the call back to Cris for closing remarks.

Thanks, Mark. In closing, I'm really proud of the progress we've made this quarter, especially given the challenges in the broader gaming accessories market. Our strategy is clear. Our execution is strong, and our teams remain laser-focused on driving sustainable growth and long-term value for our shareholders. We've built great momentum across the business, and I'm confident that Turtle Beach is exceptionally well positioned to take advantage of the exciting opportunities ahead in the holiday season throughout 2026 and well beyond as the next major growth cycle in gaming unfolds. I want to thank our incredible employees for their hard work and dedication, our partners for their collaboration and our shareholders for their continued support. Together, we're pushing Turtle Beach forward into its next phase of performance and growth. With that, operator, we can open the call for Q&A.

Our first question is from Rian Bisson with Craig-Hallum.

It's Rian on for Tony Stoss. From a high level, I'm just curious about mainly headset controllers, what you're seeing in terms of an accessory refresh just given the launch of Battlefield 6, the upcoming launch of Call of Duty and then what you're seeing with consumer spending trends for the December quarter?

Sure. Hi, Rian, the refresh is, I would say, delayed. We've seen that since COVID actually. When you look at the markets year-to-date, the markets continue to improve year-over-year, but they still remain down. And this was all accounted for in our guidance when we guided in Q1, if you recall, the accessories market at that point, and this is mainly talking headsets and third-party controllers, the markets were down over 20% year-over-year in Q1. So what we have guided is we believe the markets would continue to improve through Q2 and Q3 and end down for the full year about 10% to 12%. We have seen that play out. So when you look at Q2, the markets improved, they were down sort of in the high teens. And then when you look at Q3, they've improved again on a year-to-date basis, and they're down kind of low to mid-teens. So we are trending well to that 10% to 12% down. But that really implies that that refresh cycle hasn't fully kicked in yet. So we do believe that's one of the catalysts as you look ahead into the holiday and also into 2026, along with many other positive factors for the gaming market, we do think that's something that's going to drive growth in 2026.

Okay. Great. And then as my follow-up, more on the simulator side of the business. I mean, it was nice to see some new wheel launches in that space. I'm curious again what you guys are seeing in terms of maybe demand for the new wheels or just in general on that business? And then the same for the flight simulator market, what you guys are seeing there?

Sure. Yes, starting with the race wheels, we've seen some nice growth there with the recent launches. We've got some good placements of those coming up at retail. So we're pleased to see the progress of the new race products. I thought our team did a really fantastic job with those products and the engineering folks that worked on those. So the race category in general is up year-over-year. Flight sim is very similar to the other categories. Flight sim is down kind of low teens year-over-year, so very much in line with the rest of the accessories market.

Next question is from Drew Crum with B. Riley Securities.

So I wanted to start by asking about GTA 6. You mentioned it in your preamble, and in light of today's announcement, the game has been postponed again. I know the first delay was a factor in your decision to adjust 2025 guidance earlier this year. I know you're not providing an outlook for next year at this point. But with the release date pushed out by six months from May to now November, curious as to how that could impact your 2026 financials? And then I have a follow-up.

Great question, Drew. We saw that as well. And I think that's just an indication of how focused that team of Take-Two is on delivering an amazing game. I think that's really what we're going to get when that game is launched. We'll factor that into our 2026 guide. It's one of the things that we like about 2026. There's many other things happening in the gaming industry that, in addition to GTA 6, which is going to be a fantastic launch, that really have us excited about what's going on in gaming. If you look at the trends over the last several months. Circana cited the last five months have had consecutive year-over-year growth for the overall gaming industry through September. And I think what you're starting to see is the momentum that's building not only for new hardware because Switch 2, obviously, has done very well. You might have seen Nintendo raise their outlook on units, I think, from 15 million to 19 million for the Switch 2. So that will continue to drive engagement with gamers, but we've seen really good traction on other AAA launches. Borderlands 4 has been terrific. Battlefield 6 has driven some great engagement, and we're seeing that in the sell-through. And looking ahead, Black Ops is always a great title for accessories. So there's a lot of other things happening in the industry. Certainly, we'll factor in the timing of GTA 6, but that's one of many things we're looking at.

Okay. Got it. And then you guys delivered some nice gross margin improvement in the quarter. As you look at Q4, how sustainable is that with tariffs and the holidays where you tend to have more promotional activity, can you hold those gains?

Yes. Well, we're really excited about the kind of what Q4 is going to look like. We have seen continuous improvement in our gross margins. One thing that we've talked about on previous calls was the potential impact for the tariffs. We worked very hard to mitigate almost all the impacts associated with that. And so far, with Q4 looking like it's going to be a very, very good quarter, we're excited about what the gross margins could be.

The next question is from Sean McGowan with ROTH Capital Partners.

I want to follow up on Drew's question there on gross margin. On that gross margin outlook regarding tariffs, have you exhausted, do you think, all that you can do to mitigate the impact or conversely, might there be some headwinds that you're not anticipating related specifically to tariffs that maybe cause some more pressure going forward?

Sean, thanks for the question. And yes, you hit it right on the head. It's been a very high focus area for us is to continue to work on tariff mitigation throughout the year. And there's really three fronts that we've been addressing. First, working with our manufacturing partners to drive costs out as well as we've talked about in the previous calls, transferring U.S. production into Vietnam. Secondly, negotiations with our retailers and the retail programs associated with our products; and third, selective cost or price increases. And the combination of those three effects, we are basically completely offsetting the tariff impact through 2025 with the combined impact of the benefits from those three activities. And so when we look ahead, I wouldn't say that we've exhausted everything we can do there. Certainly, if we see the environment change on tariffs I think that there's other mitigations that we could put in place, and I'm highly confident in our team's ability to do that. I really have to give credit across our entire organization. It's been a real high area of focus for this year, and they've done a fantastic job. So I'm really pleased to see what has come out of that and the strong margin that we've been able to generate this quarter and continued strong margin in Q4 because of those actions.

Another question is about the products, and you've done a great job summarizing some of the ones you're excited about. However, could you delve a bit deeper into the features of the headsets and controllers? What specific features will the new products have that would encourage someone to upgrade? If their current headsets are functioning well, what features would really motivate them to say, 'I need to get that'?

Sure. There are numerous advancements in technology thanks to the efforts of our engineering team to incorporate these new technologies into our latest products. For instance, the new headsets we have are built on advanced chipsets that consume less power, which translates to significantly longer battery life for gamers compared to what they've experienced before. Additionally, the wireless connectivity for audio is seamless, offering a flawless experience. We have also invested in enhancing the comfort of the headsets, making them ideal for gamers who engage in long gaming sessions with friends. Regarding controllers, we have made technological improvements, including hall-effect triggers and joysticks with TMR technology that effectively eliminates drift, a persistent issue for gamers. Overall, our new products provide many benefits for gamers looking to upgrade or replace their old gear.

The next question is from Jack Codera with Maxim Group.

This is Jack Codera calling in for Jack Vander Aarde. I just had one more question, kind of a follow-up regarding consumer strength. Could you give any more color on how you're seeing consumer strength shape up into the holiday season, particularly if you're seeing anything notable across different price points of your products?

Sure. That's a great question. It's something that especially with the tariff impacts across the industry this year that we've been watching very closely. Fortunately, for us, we've worked very hard to maintain a lot of the price points for a very long time. And in the last round of tariffs a few years ago, we didn't have to raise prices. With the selective price increases we've made now, we've seen consumers come along with us. We really haven't seen any impact in a meaningful way on the sell-through rates even though the prices have gone up slightly. We're seeing a strong response from premium consumers. So at the higher end of the price points, we're still seeing strong demand there. And some of the lower price points and some of the mids are where we start to see a little bit of challenges just from an overall market perspective, so it's something that we'll continue to monitor as we go into holiday here. I do believe, as we've seen in the past two quarters, that we'll see continued improvement in the overall markets here in Q4. And we've got the added benefit here in Q4 as well as we anticipate that the retailers may not load in early for holiday this year. That was part of what we talked about in the last call when we talked about what we expected to see for Q3, that turned out to be true. There was a much lower load in in September than we typically would see. And I think that's just a function of retailers taking a more conservative view going into holiday on where the markets are. And so the benefit that we get on that, obviously, is we'll get replenishments in Q4 here that may have in the past come in, in Q3 as retailers take that replenishment strategy. So we'll keep an eye on those price points and look for opportunities going into 2026.

This concludes the question-and-answer session. I'd like to turn the conference back over to Cris Keirn for any closing remarks.

Thank you, operator. Thank you, everyone, for your interest in Turtle Beach, and have a great day.

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