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Edited Transcript of HEAR earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Turtle Beach Corp Earnings Call

Jul 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Turtle Beach Corp earnings conference call or presentation Wednesday, May 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John T. Hanson

Turtle Beach Corporation - CFO, Treasurer & Secretary

* Juergen Stark

Turtle Beach Corporation - CEO, President & Director

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Conference Call Participants

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* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Sean Henderson

D.A. Davidson & Co. - Research Associate

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach First Quarter 2019's Conference call. (Operator Instructions) As a reminder, this conference call is being recorded. Before we get started, we will be referring to the press releases filed today that details the company's first quarter 2019 results that can be downloaded from their Investor Relations page at corp.turtlebeach.com. On that website, you will also find an earnings presentation that supplements the information to be discussed on today's call. Finally, a recording of the call will be available on the Investor Relations section of the company's website later this evening. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal security 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. The company encourages you to review the safe harbor statements and risk factors contained in today's press releases and in their filings with the Securities and Exchange Commission. Including without limitation, their most recent quarterly report on Form 10-Q, 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 forward-looking statements.

The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. The company also notes that on this call, they 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 their reported GAAP results in and the reconciliation tables provided in today's earnings release and presentation.

And now, I'll turn the call over to Juergen Stark, the company's Chief Executive Officer. Mr. Stark, you may begin.

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [2]

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Good afternoon, everyone, and thank you for joining us. As we reported this afternoon, in the first quarter of 2019, we were able to grow our sales by 10% even though last year's first quarter revenue grew 185% over the first quarter of 2017. This resulted in what was easily the highest first quarter of sales in our company's history. We also ended the quarter with the best balance sheet the company has had since I joined as CEO in September 2012. We continue to be the dominant leader in console gaming headsets with great products for every level of gamer often with unique innovations that provide gamers with competitive advantage and/or just make gaming more fun. As many of you know, our exceptional product portfolio, brand and business in console gaming headsets benefited from a huge influx of new gamers and new gaming headset users driven by Battle Royale games like Fortnite last year, and the 2018 holiday season capped off the year with an exceptionally strong slate of triple-A game releases.

Our strong operational execution allowed us to gain share and maintain supply despite an over 80% growth in sell-through. As a result, we significantly outperformed the market, paid off all of our long-term debt and set strategic plans in motion to drive long-term growth. Home run all the way around. The first quarter came in as we expected with some minor timing differences between Q1 and Q2 which can happen, yet we remain on track to meet both our expected first half revenues and our full year guidance. In fact, because there can be some revenue movement between quarters which does not impact the year, particularly between Q3 and Q4 and sometimes between Q1 and Q2 like this year, we are now going to be providing guidance on a half year basis. So far, the market is playing out pretty closely to how we had forecasted.

The larger installed base of gaming headset users, the continued upgrade replacement cycle we've talked through many times and a solid holiday release of games produced a strong first quarter. NPD data shows the North American market for console gaming headsets was down in the first quarter of 2019 compared to last year and that our share was down slightly as expected, but that both the market and our share were higher than the comparable period in 2017. And March 2019 NPD sell-through data reflected a steeper decline given that the Battle Royale impact accelerated significantly in March of last year, again as we expected and factored into our guidance. We expect this trend to continue into the second quarter where Battle Royale hit with full force last year, but again, we expect that market sell-through numbers will reflect a significantly larger installed base of headset users replacing and upgrading relative to 2017.

It's very important to note that timing of sell-in, our sales, and sell-through with retail to consumers varied more than normal in Q1 and Q2 of last year due to the significant increase in sell-through during Q1. While there are slight differences this year as can often happen, last year's sell-in, our sales, lagged sell-through significantly. So both the channel and we ended Q1 with low inventory and "caught up" in Q2. The impact of these timing differences last year is the key driver of why our revenues grew in Q1 this year while sell-through per NPD declined. In our March earnings call, we walked through the 2018 market dynamics and our expectations for 2019 in detail. We illustrated how and why the 93% growth in our revenues in 2018 would be followed by a 15% expected decline in 2019 without that signaling a decline or some downturn or problem, and we articulated our long-term revenue growth goal of 10% to 20% to make that clear.

We recognize that the dramatic sales and EBITDA outperformance in 2018 has created an uneven growth trajectory, but the company is far better off having had that surge than it would have been if our growth had more smoothly risen to the level we expect for this year and next. The dramatic surge in cash flow last year has allowed us to have a debt-free balance sheet and to pursue the ROCCAT acquisition, a strategic move that more than doubles our TAM. So I like our path pretty well even if it forces investors to think across multiple years.

More on ROCCAT. The PC and console markets and our outlook after John covers the first quarter results. John?

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John T. Hanson, Turtle Beach Corporation - CFO, Treasurer & Secretary [3]

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Thanks, Juergen, and good afternoon, everyone. Moving to the first quarter results. Net revenue in the first quarter of 2019 increased 10% to a Q1 company record $44.8 million compared to $40.9 million in the first quarter of 2018. The year-over-year increase was the result of continued strong market demand for console gaming headsets primarily driven by the exceptionally strong slate of triple-A game releases in the holiday period last year.

Net revenue in the first quarter of 2019 also exceeded our guidance of $42 million announced in March. Gross margin in the first quarter was 33% compared to 36.8% in the first quarter of 2018. This expected decrease was primarily due to anticipated higher promotional allowances including preparation for the RECON 70 launch, refurbishing costs incurred to support higher revenue as well as channel mix. Operating expenses in the first quarter of 2019 increased to $13 million from $11.2 million in the same quarter of 2018. This was primarily due to an increase in marketing spend primarily related to the new RECON 70 series headset launch and $0.8 million of transaction and integration costs related to the pending ROCCAT acquisition.

Net income in the first quarter of 2019 increased 56% to $3.1 million compared to $2.0 million in the year ago quarter. The increase was driven by a gain of $1.6 million from the mark-to-market adjustment of the financial instrument obligation related to the non-cash settlement of the Series B preferred stock in April 2018. Diluted earnings per share in the first quarter of 2019 was $0.09 per diluted share on 16.3 million weighted average shares outstanding compared to $0.16 per diluted share on 12.4 million weighted average shares outstanding in the year ago quarter. Net income for diluted earnings per share in the 2019 period excludes the $1.6 million unrealized gain on the financial instrument obligation.

Adjusted net income in the first quarter of 2019 which excludes the mark-to-market adjustment of the financial instrument obligation as well as costs incurred related to the pending ROCCAT acquisition was $2.2 million or $0.13 per diluted share compared to $2.0 million or $0.16 per diluted share in the 2018 period. While on the subject of the financial instrument obligation related to the Series B share retirement on March 30, 2019, we amended the warrant agreement in connection with the exchange of the Series B preferred stock. As a result, the warrants are no longer accounted for as a financial instrument obligation or reported as a liability that is mark-to-market each period with changes in fair value reported in earnings. The warrants were mark-to-market through March 30, 2019, at which time, the warrants are accounted for as an equity instrument with the fair value on that date reclassified to additional paid-in capital. As such, we will no longer be exposed to the swings in net income arising from the former accounting treatment of the warrants.

Adjusted EBITDA in the first quarter of 2019 was $4.3 million compared to $5.3 million in the year ago quarter. As we have previously guided, we expect free cash flow to be in the range of $23 million to $27 million for the full year 2019, and our current plan is to use this cash flow to fund the ROCCAT acquisition and support the recently announced share repurchase program.

Now turning to the balance sheet. We ended the quarter with $10.2 million of cash and cash equivalents with no outstanding debt. This compares to $4.3 million of cash and cash equivalents and total debt outstanding of $53.8 million which consisted of $22.6 million in subordinated debt, $9.3 million in term loans, $2.6 million of revolving debt and $19.3 million outstanding for our Series B preferred stock obligation at March 31, 2018. This year-over-year increase in cash and repayment of all outstanding debt primarily resulted from our significantly improved operating performance.

Inventories at March 31, 2019, were $44.5 million compared to $15.8 million at March 31, 2018. Keep in mind that our March ending inventory last year was well below normal given the uptick in demand driven by Battle Royale games and, as such, is not a good comparable.

We continue to assume an effective tax rate of approximately 10% due to the expected utilization of non-operating losses. If we fully utilize remaining NOLs to the higher than expected pretax profits, we will experience an increase in our 2019 effective tax rate accordingly. Assuming the pretax income implied in our 2019 guidance, we continue to expect to utilize all or most of the NOLs in 2019.

Finally, as you know, we announced shortly after the end of the quarter that our Board had authorized the company to repurchase up to $15 million worth of our common stock over the next 2 years. We intend to use our cash flow from operations to fund stock repurchases as well as the ROCCAT acquisition and other potential strategic uses. The timing of our stock buyback activity will, of course, be subject to regulatory parameters, market conditions and our cash flow.

Now I'll turn the call back over to Juergen for some additional comments. Juergen?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [4]

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Thanks, John. I'm going to cover the overall gaming market, console headset market, PC accessory market and our growth prospects including the ROCCAT acquisition. The summary is simple: One, we're in a great market; two, with a strong brand and business in a key segment of that market; three, and we have put ourselves in a great position to take advantage of those strengths to drive future growth.

Here we go. Number one, we're in a great market. For the second year in a row, NPD reported that of all the consumer categories that NPD tracks, gaming was the fastest growing posting year-over-year growth of 16% over the prior year, nearly double the growth rate of the next fastest-growing category. There are over 200 million gamers in the U.S. and over 2 billion globally. Gaming is now the world's favorite form of entertainment as the gaming industry generated more revenues last year than sports, TV, movies or music did.

Esports has an audience of over 165 million, already overtaking the NHL and Major League Baseball with an expected 14% CAGR producing an audience that is expected to rival the NFL by 2022. We would argue gaming is one of the best consumer markets to be in. Gaming continues to become more social with multiplayer gaming steadily increasing each year, steadily, but with Battle Royale games like Fortnite driving a big step function increase in that direction last year. Multiplayer in social gaming means talking with each other which drives gaming headset sales regardless by the way of what platform the gaming takes place on. Number two, we have a strong brand and business in a key segment of the gaming market. Gaming accessories, including only headsets, keyboards and mice, is a $4.7 billion market. This is consumer hardware, a point that investors raise with me regularly. But unlike many consumer hardware categories, it's in a rapidly growing market, and gaming hardware, in our view, allows for much more technology and innovation, more differentiation and less commoditization. Console gaming headsets is the largest slice of that market at $1.8 billion, and we have had and continue to have the dominant position in that market with over 40% market share for more than 8 years running.

I'll spare you the stats we cover every earnings call about us having the best-selling headsets in this category and in that category, in fact in most categories, because frankly, they've been consistent for years and the trends continue. Suffice it to say, we lead console gaming headsets by far with one of the strongest brands in gaming accessories driven by a great lineup of high-quality headsets, often with innovations and features which provide gamers with a competitive advantage or just make their gaming more immersive and comfortable.

Over 75 patents in gaming headsets protect many of those innovations. And as we demonstrated last year and now again in Q1, we execute well and generate good margins, profitability and cash flow in that console gaming headset business. While we expect Xbox and PlayStation to have a weaker performance this year, the hints on next-gen consoles over the past few months give us optimism for 2020 and beyond. For example, Sony has now indicated it is planning to launch their next-generation console in 2020. PlayStation 4 was launched in 2013, so a launch next year of next gen 7 years after the last major launch would be consistent with prior generational timing. The specs disclosed by Sony in a media interview are very impressive and include 8K video resolution, for example, and a big focus on 3D audio. The focus on audio makes sense as audio is a key component of providing a fully immersive realistic gaming experience.

As graphics continue to improve, so should the audio. The recognition of the importance of great audio is spot on, and we love it. To take advantage of those features, consumers will need a high-quality headset. So if what we're hearing is right, we think the emphasis on audio will very much play to our strengths. While Microsoft hasn't made any announcements, if this cycle follows the last one, we expect a new Xbox next year as well, and we expect Microsoft to showcase a great set of new innovations and features as they have in the past. Importantly, we remain confident that there will be full forward and backward compatibility of headsets on both new platforms. The reason forward compatibility is so important is that it reduces the temptation for consumers to defer their purchases of new games and accessories ahead of a launch and also avoid the type of disruption the industry saw last time around. So while rumors of new consoles might soften the market somewhat this year, particularly in the second half, new consoles generally create several years of post-launch growth. In fact, DFC, the industry analysts that forecasts consoles, show console projections, including the projected next-gen console sales, with a small decline in active installed base of Xbox and PlayStation this year followed by some offsetting growth in 2020, followed by 2 years of high single-digit growth rates in 2021 and 2022. Meanwhile, Nintendo Switch continues to sell very well and has quietly become a meaningful platform for headsets, which it hasn't been in the past. Regardless of what Sony and Microsoft do in 2020, we expect the Switch to continue to do well and drive demand for gaming headsets compatible with its system. There is often a high overlap between Xbox, PlayStation and Switch owners, but Switch seems to appeal to a part of the market that is not as penetrated by Sony and Microsoft and with those players who tend to be younger and include more females. So over time, we believe switch will grow the market for headsets.

Finally, we think cloud gaming like Stadia recently announced by Google is going to create good new gaming platforms in the future that will further reduce the barrier to entry for gaming. Stadia showcased an example where a user can watch a YouTube video of somebody playing a game, click on it and be up and running on that game without buying new hardware or waiting hours for a download. And based on the multiplayer game shown in the Stadia demo, gamers will want a headset regardless of whether it's a console, mobile device or cloud-based.

Number three, we put ourselves in a great position to take advantage of the attractive market and our strong position within that market to drive future growth. As you know, we've historically played in and focused on console gaming headsets which is a $1.8 billion market. PC gaming headsets add another $1.6 billion that we are now aggressively pursuing with our 3 new Atlas headsets launched in October last year. While we'll be updating progress annually, I will tell you that our first quarter share in PC headsets has doubled already versus prior year in the U.S., U.K. and combined major European markets, off to a good early start. We also see increasing overlaps in console and PC gaming with more and more multi-platform headsets including many of ours and increasing compatibility between the Xbox and PC gaming accessories. So us taking a position in PC gaming also makes sense from that standpoint.

And if we looked at our combined position in console and PC gaming headsets per U.S. NPD data, we are by far the #1 player with over 30% market share, and similar to console, that's more than the next 3 players combined. PC gaming keyboards and mice add another $1.3 billion market. While we believe we are the best in the world at gaming headsets, gaming keyboards and mice would have been very difficult categories for us to enter organically, very different products, skills and supply chain. So we evaluated a number of acquisition possibilities and in March we announced the acquisition of ROCCAT with an expectation to close that deal in Q2. ROCCAT is a German company with German engineering and design which brings a reputation among PC gamers for precision and performance. As an example of the reputation ROCCAT has, they have a strong social following on YouTube, Switch -- Twitch and Facebook, reaching over 100 million gamers worldwide. ROCCAT has a great portfolio of gaming keyboards and mice that are both high quality and innovative. Their Kone Aimo mouse was not only the best-selling mouse in Germany in 2018 but also had the highest ASP of the top 15 best-selling products. ROCCAT's new Vulcan keyboard was one of the top-selling keyboards in Germany over the holidays and had revenue share of 35% in the premium segment in Q4 last year. Note that I referenced the German PC market. Their strong product portfolio has some distribution in Europe and a bit in North America, but we obviously anticipate being able to leverage Turtle Beach's strong distribution in those regions to grow sales. On the flip side, ROCCAT already has some established distribution and brand recognition in Asia, which we anticipate will help our future growth plans across both ROCCAT and Turtle Beach products in Asia.

At 48 core models, Turtle Beach and ROCCAT combined have a portfolio of PC headsets, keyboards and mice we believe rivals the top players in the PC market. And to throw one more stat into the mix, the combined PC accessories revenues of Turtle Beach and ROCCAT increased 40% -- over 40% in the first quarter year-over-year. Of course, growing share in PC accessories will take time, work and investment, but we believe we have all the tools to be successful. So historically, we focused on a $1.8 billion console gaming market, and now our entry into PC headsets and peripherals is expanding our addressable market to the full $4.7 billion.

Now moving on to our financial outlook for 2019 which remains unchanged. For the full year 2019, we expect total net revenue to be in the range of $240 million to $248 million. This is based on the market dynamics and share assumptions I laid out earlier with a partial year ROCCAT revenues estimates folded in. We continue to expect the first half of the year to account for about 35% of our full year sales. Gross margin in 2019 is still expected to be 33% to 34% compared to about 38% last year and about 34% in 2017. As we discussed on our last call, this is somewhat under our goal of mid-30%s gross margin due to the onetime impact of purchase accounting of the ROCCAT acquisition. We expect operating expenses to increase $11 million to $13 million in total. This reflects roughly flat OpEx related to console headsets and increased spending related to ROCCAT. Spending related to growth initiatives, which include marketing costs for Turtle Beach PC headsets as well as operating expenses for ROCCAT, are estimated to be $10 million to $12 million. In addition, the company expects onetime transaction and integration costs associated with the ROCCAT acquisition to be about $3 million in 2019.

As a result, we continue to expect adjusted EBITDA to be in the range of $27 million to $31 million for the year.

GAAP earnings per diluted share are still expected to be between $0.70 and $0.90. Adjusted earnings per diluted share in 2019, which removes the ROCCAT transaction cost, are expected to range between $0.90 and $1.10. Net income and EPS outlooks assume an effective tax rate of 10% as John discussed. Going forward, as I mentioned, our guidance will be a little different from what we've done in the past given the tendencies of revenue -- revenues to shift between quarters without impacting the year particularly in Q3 and Q4. Historically, we have issued full year guidance when we reported our fourth quarter as well as the first quarter and then each quarter we would update the full year guidance as needed and issue guidance for the coming quarter.

Consistent with how we manage our business internally, we think it would be more helpful to focus on first half and second half instead and will be providing guidance that way going forward. We see our first half sales coming in at $85 million to $88 million consisted -- consistent with the revenue phasing for the first half of approximately 35% as we discussed on our last call and also reflecting a few million dollars of shift in revenues between Q2 and Q1. We expect first half gross margins of about 32% to 33% reflecting somewhat higher promotional spending than last year, including preparations for the RECON 70 launch, a bit lower fixed-cost leverage, lower ROCCAT gross margins due to the purchase accounting partially offset by lower air freight. We expect adjusted EBITDA in the first half of 2019 to range between $4 million and $5.5 million.

The reduction in adjusted EBITDA compared to last year is a function of higher promotional allowances, increased marketing spend to support our retail momentum including some upcoming product launches and folding in the ROCCAT acquisition. We expect GAAP EPS in the first half to range between negative $0.19 to negative $0.13 on 16.6 million shares outstanding. Adjusted EPS in the first quarter is expected to range between negative $0.03 per share and positive $0.04 per share which excludes approximately $2.8 million in transaction costs related to the acquisition of ROCCAT.

There are a couple of areas of potential upside or downside from our guidance as we discussed on our last call. Factors that could lead to results coming in below our estimates include slower-than-expected replace and upgrade cycle, a weaker slate of game launches and the market slowdown due to new console rumors or announcements. Factors that could lead to results exceeding our estimates include users upgrading and replacing headsets at a faster-than-expected rate, a continued influx of new users at a higher rate than expected, a stronger slate of triple-A titles this holiday season and/or more games -- more major games adopting the free-to-play model. In particular, it will be interesting to see if any more major titles follow the free-to-play model given the success of Fortnite and now, Apex.

Finally, to reinforce our long-term goals, we aspire to grow our revenues at 10% to 20% per year rate in 2020 and beyond. With operating leverage and appropriate growth investments, our goal is to grow EBITDA 15% to 30%. And given anticipated new Xbox and PlayStation consoles, our opportunities and progress expanding into PC accessories and the strong execution we've demonstrated over the years, we believe we are in an excellent position to deliver on these goals.

Operator, we're now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Nehal Chokshi from Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [2]

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Congrats on a great quarter, strong gross margin. And let's start off with that in that this gross margin is significantly above the levels of 1Q '17 and 1Q '16. So is it fair to say that the promotional environment is still actually relatively benign relative to historical levels?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [3]

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Yes. So good question. So back in '16 and '17, we did have the HyperSound business and the costs associated with that HyperSound business did pull our margins down -- our margin percentage down. The margin that you're seeing right now and the promotional environment we are experiencing today is more -- is certainly consistent with 2017.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [4]

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Okay. All right. And then while you're providing 1 half, 2 half guidance, just to be clear, it will be 1 half and 2 half guidance and not a rolling 2-quarter floor guidance. Is that correct?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [5]

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Correct. We -- especially now going into Q3 and Q4. Now every time we got to like warn everybody that, "Hey, millions of dollars can easily flash between Q3 and Q4," and so the way we run the business internally is really in 2 halves because the middle of the year is typically kind of a slower period with not a lot of movement. And even with the Board, we reforecast our financials for the year fully going into the second half before our Q2 earnings call. So we're just going to adjust and report that way. We think that will be better for everybody.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [6]

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Okay. All right. So given the 1H guidance that does imply a 2Q guide of $40 million to $43 million and you did talk about a slowing here in the back half of 1Q '19, do you think that, that slowing has anything to do with replace cycles? Or do you think it has more to do with tailing off demand in triple-A games?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [7]

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Yes, it's not in -- I'm glad you asked because we don't see that being replacement or upgrade at all. The big difference -- the slowing is relative to last year, and you got to remember that last year in Q2, the Fortnite effect was heating fully. So like the comps are going to be down further just like in March -- February, it started hitting. March, it started hitting more strongly. So it's really the year-over-year percent difference that will increase, and we expect that to continue through Q2, and that's what we factored into our guidance. Does that make sense? It's very important to look at that in the context of 2018 as having an extraordinary bump in Q2 rather than some kind of fundamental slowdown in the market.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [8]

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Yes. Absolutely, I do understood that. I'll ask my last question and I'll get back into the queue. You did mention towards the end of your talk here that ROCCAT plus HEAR was up 40% year-over-year in 1Q '19. Just want to be clear that is including ROCCAT revenue from a year ago.

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [9]

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Yes. What I said, just as an example, was if you combined the Turtle Beach PC gaming headset revenues and the ROCCAT business in total for Q1 of 2019, that revenue amount would have been over 40% higher than the same combined revenue amount from last year.

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Operator [10]

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Our next question or comment comes from the line of Mark Argento from Lake Street Capital.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [11]

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Just a couple of quick questions. So Juergen, can you talk a little bit about the go-to-market strategy with ROCCAT now? Have you really started talking to U.S. retailers? How do you see moving that product or expanding that opportunity domestically?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [12]

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Sure. So we've actually had a number of discussions with retailers here that have started, and also in Europe, the reception is very positive, I would say, especially some of the European retailers who know ROCCAT well. Several have expressed enthusiasm that, that good brand and that good portfolio will now be essentially under the operational execution capabilities and scale of Turtle Beach. So I would say quite positive, in our view, on that front. We -- overall the game plan -- and we'll say more about this after the close and as our plans are nailed down. We're doing a lot of work on how to drive the integration, how not to disrupt their business in the near term. We won't be just switching over products, relabeling stuff. None of that will happen this year. The goal for this year is to expand the distribution of ROCCAT products where possible, especially going into holiday, and leverage the combined scale of the companies. And then we'll have a big focus next year, particularly holiday of next year, having more of a consolidated lineup, a very clear set of brand, how we market the brand, all of that versus trying to somehow jam that in this year. We think that's the kind of the optimal route. So very positive retail feedback, and we're working kind of a 2-year plan to have ROCCAT fully integrated from a brand and packaging and all that standpoint.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [13]

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Any thoughts about using the ROCCAT brand there to branded handsets in the PC space?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [14]

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We're looking at that, Mark. There's a bunch of pros and cons to how you approach that both short term and longer term, and ROCCAT's clearly got a very strong brand but obviously somewhat more focused in Europe, in particular, I would say. So we're working through that with them, lots of activities going on, and we'll say more about that as we go through the year.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [15]

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Last one from me. Any thoughts on how the retailers are positioning themselves for 2019 in the console space. It seems like demand -- Q1, I think, is a perfect example. I mean you guys were comped at 185% year-over-year growth in Q1 of '18. You're still positively comped that. Obviously, comps go negative here, but the space continues to be -- seems to be sell-through and the overall size of the addressable market seems to have increased. Any thoughts on how retailers are positioning? Are they allocating more space to the category? What are your thoughts there? And how do you take advantage of that continued momentum?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [16]

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Yes. I think, in general, retailers remain very positive on gaming as a category. I don't think there -- the year-over-year -- they all understand very well the concept that we've attempted to clearly communicate here many times about kind of the extraordinary bump last year. So none of them seem overly concerned about the year-on-year comps being down because they view it as a great category with a lot of momentum and good long-term -- good long-term trends. We don't -- at this point, I don't have any input that would suggest they're going to expand the gaming section. We would probably find out more of that after E3. It's a little early in the year to get a clear picture of that. We did get -- I mean, we did get input from 1 large retailer who appreciated the fact that we did quite a good job of forecasting last year. We were told that we were one of the only if not the only major provider to them that did a pretty good job of forecasting Q1 as well, right? And so this is good, and I think that that relationship and the confidence in our ability to have a pretty good read on the market despite the difficulty of forecasting such a dynamic market and the strong relationship with them has allowed us to continue to stay in pretty good sync with them.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [17]

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And I guess just a follow-up to that. In terms of esports, it seems like a lot of the retailers -- I know Best Buy has been active. A lot of consumer brands have been pushing into esports in the way they tethered themselves or getting more close to the player. Any thoughts on -- is that having a lift or an impact to the overall segment? And how are you guys -- I know you do some sponsorships, but any thoughts on increased activity in the esports arena? That's it for me.

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [18]

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Yes. Thanks, Mark. I think that's just one of the factors that makes the whole industry exciting. It's one of the things that I think drove gaming to, again, be the highest consumer category in terms of growth at 16% than any other category NPD tracks, and the second category is -- it's almost double the next category. So I think that just is all adding fuel to the fire. It's clearly a great segment and esports is contributing to that. So we love it.

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Operator [19]

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(Operator Instructions) Our next question or comment comes from the line of Sean Henderson from D.A. Davidson.

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Sean Henderson, D.A. Davidson & Co. - Research Associate [20]

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Congratulation on a strong quarter. Was just hoping you guys could speak to kind of more publishers coming out with the freemium titles, how investors should think about basically more publishers coming out with these freemium-style games and what catalysts that'll serve in the long term for sales.

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [21]

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Yes, great question. And I mentioned it in my prepared remarks as one of the potential drivers of upside. So I'll say a little bit more about that. Obviously, Fortnite was a complete home run with the freemium model which means players don't have to pay for the game. They pay during the game when they play by buying stuff online, and Fortnite pretty much demonstrated that you can have chiller economics doing that. Apex followed suit. Apex has done very well. Apex is published by EA, which is kind of cool because they're a major -- obviously, a major name in the industry. So if more games follow the same model, like more of the triple-A titles, what that does in our view is it frees up $60 of spend yet holiday for the games. Like Call of Duty launches every year. Call of Duty is the master title in the space. If they were suddenly free or had a free-to-play version or something like that, then people don't have to spend $60. And while it doesn't drive like millions of new gaming headset users or anything like the Fortnite trend did last year, it does free up budget which we think would contribute positively to the upgrade and replacement cycle. That's kind of -- and we haven't factored that into the guidance. So I cited that as a potential incremental upside to the numbers, and we don't -- at this point, nobody has announced any new games that are freemium or anything like that, so we're going to have to kind of see as we go along. But we certainly think it's interesting that 2 major releases have demonstrated great economics following that model.

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Operator [22]

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We have a follow-up question from Mr. Nehal Chokshi from Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [23]

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Yes. Given -- I know you have your ASP data and you're not going to share that with us. But given what you do know, where do you see upgrades versus replacements going relative to where it was a year ago -- or not a year ago, 2 years ago when you didn't have the Fortnite phenomenon to deal with?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [24]

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So we're -- we've communicated in the past about a 24-month average replacement and upgrade cycle and a lot of that's upgrading by the way not replacing. That is pretty much front loaded, so it's not like a smooth distribution curve. That's important. It's a little front loaded with a long tail. And then we've communicated that Fortnite players that we've surveyed have had actually a slightly faster upgrade and replacement cycle and now everything we're seeing kind of given that our total forecast for sell-through for the market is pretty much tracking right on our model. We are not seeing any kind of major deviations in any direction from those metrics. Of course, we don't know with every headset sale whether it's an upgrade or replacement, but the fact that the model overall is holding gives us confidence that there's no major shifting in any of those factors.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [25]

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Okay. And then the $15 million share buyback, there's kind of 2 approaches to utilizing a buyback. Can you opine on which way would you do it? Would it be a steady repurchase cadence or it will be opportunistic? And if it's the latter, what are the inputs for determining when is a good opportunity?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [26]

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I think it would be more the latter opportunistic based on cash flows, other spending that's in front of us including the ROCCAT acquisition, all of that. When we have the $15 million authorization from the Board, that also includes a shorter-term authorization for specific amounts with some limits and guidelines this is the normal way to do it so you don't have to get the Board's reapproval on every action. And so that's kind of how we're looking at it and how we expect the process to work.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [27]

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Okay. And then my final question is that based on the parameters that you've given around ROCCAT, correct me if I'm wrong, but I assume a 25% gross margin for ROCCAT which includes purchase accounting impacts understanding that's going to be a higher gross margin once you get through that but 25% for full year calendar '19. Take the midpoint of the guidance, $22 million for ROCCAT and then take out $11 million of incremental OpEx which is not included, additional $3 million for integration, then I would be looking at I think about $0.40 headwind relative to your dollar EPS guidance. Is that not correct or just opine there, please?

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [28]

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Yes. That's probably too much math for me to do in my head on an earnings call. But that number $0.40 -- that number rings a bell so what you talked through makes sense to me.

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Operator [29]

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Currently this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Stark for any closing remarks.

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Juergen Stark, Turtle Beach Corporation - CEO, President & Director [30]

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Great. Thank you. I'd like to end on a thank you to all of our Turtle Beach colleagues who work hard every day to deliver great headsets to gamers, and to our incoming ROCCAT colleagues who we're excited to have join the team, thank you. We look forward to speaking with our investors and analysts when we report our second quarter results in August. Have a good day.

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Operator [31]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.