Turtle Beach Corporation (NASDAQ:HEAR) Q2 2023 Earnings Call Transcript

Turtle Beach Corporation (NASDAQ:HEAR) Q2 2023 Earnings Call Transcript August 7, 2023

Operator: Welcome to the Turtle Beach Second Quarter 2023 Conference Call. My name is Gigi and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Delivering today's prepared remarks are non-Executive Chairman of the Board, Terry Jimenez; Interim Chief Executive Officer and Senior Vice President of global sales, Cris Keirn and Chief Financial Officer, John Hanson. Following their prepared remarks, the management team will open the call for any questions. As a reminder, this conference is being recorded. I will now turn the call over to Alex Thompson from Investor Relations. Alex, you may begin.

Alex Thompson: Thank you, operator. On today's call we will be referring to the press release filed this afternoon that details the company’s second quarter 2023 results, which can be downloaded from the Investor Relations page at corp.turtlebeach.com, where you'll also find our latest earnings presentation that supplements information discussed on today's call. Finally, a recording of the call will be available on the Investors section of the company's 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 the 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 the 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. And now, I’ll turn the call over to Terry Jimenez, the company’s Chairman of the Board.

Terry Jimenez: Thank you, Alex, I'm excited to be here today and I'm very pleased with our board and the management team's recent progress, energy and focus. As previously disclosed, the board is conducting an extensive and well organized search process for the permanent CEO position. We are focused on finding and appointing the best possible CEO for Turtle Beach shareholders and the board is moving forward with disciplined urgency. While the search is ongoing, we are pleased to have Cris Keirn, our longtime Global Head of Sales serving as our Interim CEO. Since Cris's appointment effective July, 1 of 2023, the Board has worked extensively with Cris regarding the path forward and we have full confidence in his ability to lead the company during this transition.

We will provide an update at the conclusion of the CEO search process. Next, I'd like to briefly comment on the value Enhancement committee of the Board, which continues to review any and all ways to drive value for our shareholders and stakeholders in conjunction with the full board and the management team. Significant progress has been made to date and the work of this committee, the management team and the full board has given me a significant amount of optimism for the potential of Turtle Beach. We have engaged a new financial advisor at Jefferies. And while we are encouraged by the early engagement in that process, we do not have a formal update at this time. While I'm proud of the progress today, our work is not done and we will continue to drive a clear path to near and long term value creation.

We look forward to sharing more developments at the appropriate time and we appreciate your investment and support of Turtle Beach. I believe that the prospects and potential for Turtle Beach continues to get stronger every day. With that, I will hand it over to Cris Keirn, our Interim Chief Executive Officer. Cris?

Cris Keirn: Thanks, Terry, and good afternoon, everyone. Thank you for joining us to discuss our second quarter 2023 results and I'm pleased to be speaking with you as Turtle Beach’s, Interim CEO. Before we review the results from the second quarter, speak about the balance of 2023 and provide insight into our accelerated initiatives, let me say a few words about my current role. Prior to being named as the Interim CEO, I've worked at Turtle Beach for over ten years and have a deep understanding of our business, our strengths and our opportunities ahead. In the last seven years, I've led our industry leading global sales team and I'm passionate about driving best in class performance across our entire organization. We have an excellent team in place that's accelerating and focusing our efforts to grow revenues, lead in product innovation and strive for flawless execution.

In my capacity as Interim CEO, I'm taking steps to drive our business forward. Importantly, we are driving several value creating initiatives already underway, that I will discuss later in the call. Not only are these opportunities significant, but many are expected to take shape as soon as the second half of 2023, positioning 2024 for tremendous potential improvement in the company's profitability. First, a view on our second quarter results. The second quarter provided a number of reasons to be optimistic about our future and we remain on track to meet our full year 2023 guidance 10% to 12% revenue growth and between $6 million to $8 million of adjusted EBITDA. Recall that as we stated in May, this 2023 adjusted EBITDA guidance includes headwinds of approximately $10 million in a higher promotional spend in freight costs that we consider transitory and expect to normalize in 2024.

Our second quarter of 2023 reported net revenues of $48 million, up 16% year-over-year. This revenue growth exceeded overall market performance by double digits due to share gains across key categories and geographies. The US console headset market is up 3.5% year-to-date, including growth in the month of June, which is a favorable sign for the back half of 2023 and for 2024. Our newly released Stealth Pro has already captured over 15% of the premium 200 plus price tier of the U.S. console gaming headset category during its first two months of sales in May and June highlighting the power of the Turtle Beach brand. Stealth Pro garnered a variety of top review scores and accolades including a five out of five from Games Radar, who called it a masterpiece.

OlegDoroshin/Shutterstock.com

Outside of our core console gaming headset products, we are continuing to realize growth across other categories. As reported by Circana, our U.S. flight controller sales are up 27% year-to-date and our share of the flight simulation category now exceeds 20%. More amazing products including new simulation models and controllers will be announced later this year and we have meaningful reason to be optimistic about the growth runway in these categories. U.S. PC gaming accessories markets have been weak and are still down roughly 12% year-to-date, but we gained share during Q2 and US gaming keyboards and mice and achieved share gains in Europe across these categories. We expanded our Vulcan keyboard lineup with the launches of Vulcan II Mini Air and Vulcan II mechanical keyboards and we are taking actions to ensure that as the market normalizes, we will be better positioned to drive continued growth in our PC gaming accessories.

On this note, before I turn it over to John for his detailed review of the quarter I'd like to spend a minute to highlight the initiatives we are driving that will create value for our customers and shareholders. Working closely with our board and the previously announced Value Enhancement Committee, we have mobilized and accelerated initiatives for a variety of efficiencies that include SKU rationalization, portfolio optimization, platform product development for a range of cost improvements and more. We are pleased to announce today that these strategic initiatives are expected to contribute meaningfully to the profitability of Turtle Beach on a run rate basis. Based on the work completed to date we now have line of sight to exiting 2023 with our run rate adjusted EBITDA and the range of $25 million to $30 million, in line with the 10% adjusted EBITDA target that we have previously identified as a baseline level of profitability.

While formal earnings guidance for 2024 will be provided early next year, as-- is consistent with our past practice and after we receive complete visibility on an important Q4, we felt it appropriate to highlight the clear opportunity that we believe lays before us and the work completed thus far that has gone into identifying and developing such opportunities. I'll now pass it over to John to cover the financials. John?

John Hanson: Hi, thanks Cris and good afternoon everyone. For the second quarter, we reported revenue of $48 million, a 16% year-over-year increase compared to $41.3 million a year ago. The revenue increase was primarily driven by strong performance in console headset and simulation products year-over-year. Additionally, channel inventories have stabilized compared to the prior year and this dynamic is aligning sell in and sell through versus last year. Gross margin in the second quarter improved 560 basis points to 24.7% compared to 19.1% in the year ago period driven by lower freight costs, warehouse costs, promotional credits and business mix. Operating expenses in the second quarter were $27.7 million compared to $29.3 million in the year ago quarter.

Second quarter recurring operating expenses declined 8.2% year-over-year, which was primarily driven by continued proactive expense management. Over the past six quarters, our recurring operating expenses on an LTM basis have decreased $17.5 million or 19%. Our second quarter adjusted EBITDA loss was $5.6 million compared to a loss of $12.1 million in the year ago period. The year-over-year improvement is primarily driven by higher revenue as well as proactive cost management initiatives. We are on track to continue generating adjusted EBITDA improvements throughout the year and expect to deliver positive adjusted EBITDA for 2023. Adjusted net loss for the second quarter was $7 million or $0.41 per diluted share compared to adjusted net loss of $12.7 million or $0.77 per diluted share in the year ago period.

We expect our effective tax rate for adjusted net income to be approximately 25% for the full year. Turning to the balance sheet, at June, 30, 2023, we had $15.8 million of cash and no outstanding borrowings on our revolving credit line. Inventories at June 30 were $67.8 million compared to $120.7 million at June 30th of 2022. Cash flow from operations was $24.2 million, which was a $65.5 million improvement year-over-year on a year-to-date basis. We continue to be focused on optimizing inventory levels taking into consideration the current logistics market dynamics. Additionally, in March of 2023, we announced that our Board of Directors approved the extension of our share repurchase program for an additional two years through April 9, of 2025, authorizing the acquisition of up to $25 million of shares of common stock.

During the second quarter of 2023, we repurchased 85,900 shares at an average price of $11.34 totaling roughly $974,000. At June 30, 2023, we had approximately $16.6 million remaining under the share repurchase authorization. And now I'll turn the call back over to Cris for some additional comments. Cris?

Cris Keirn: Thanks John. With unconstrained console supply and an exciting upcoming lineup with game launches, we believe the underlying positive trends in the gaming market will support increased accessories demand for the remainder of the year and into 2024. We remain committed to maintaining our leadership and gaming headsets and driving growth in adjacent categories. While we execute on these core pillars, we will continue to proactively manage our operating expenses to support our growth strategy. As I said at the beginning of the call, I'm very excited to be working with our Board and our management team to deliver on our strategy, execute on our key initiatives and ultimately increase value for our shareholders. We have an amazing team in place to accomplish our goals. Thank you to the entire Turtle Beach team for all of your contributions and excellent work. With that, let's turn to our Q&A.

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