Turtle Beach Corporation (NASDAQ:HEAR) Q4 2023 Earnings Call Transcript
Turtle Beach Corporation (NASDAQ:HEAR) Q4 2023 Earnings Call Transcript March 13, 2024
Turtle Beach Corporation misses on earnings expectations. Reported EPS is $0.56 EPS, expectations were $0.6. HEAR isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by. Welcome to Turtle Beach Fourth Quarter 2023 Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Alex Thompson, Gateway Investor Relations. You may begin.
Alex Thompson: Thank you, Tawanda, and today's prepared remarks are from Terry Jimenez, Chairman of the Board; Cris Keirn, Chief Executive Officer; and John Hanson, Chief Financial Officer. On today's call, we will be referring to the press release filed this afternoon that details the company's fourth quarter and full year 2023 results, which can be downloaded from the Investor Relations page at corp.turtlebeach.com, where you'll also find the latest earnings presentations 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 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 and 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?
Terry Jimenez: Thanks, Alex, and thank you all for your interest in Turtle Beach. On behalf of the board of directors at Turtle Beach, I would like to share a number of exciting announcements today. These actions that we believe will fundamentally change Turtle Beach for the better. First, after a lengthy and comprehensive process of assessing strategic alternatives, we have announced an acquisition that will provide a much larger, more resilient and more diversified foundation on which to grow the business. Today, we announced our acquisition of Performance Designed Products, or PDP, as the industry knows it. We have acquired PDP for an enterprise value of $118 million in a combination consisting of roughly one third stock and two thirds cash.
PDP is a leader in video game accessories among market leading share in controllers and other product categories, with PDP being a leader in controllers and Turtle Beach being the leader in console headsets. We believe that we've created a powerhouse gaming accessories platform. In addition to the significant scale benefits that come with diversifying our revenue base and tangential categories with the same partners and consumers, we believe we will realize significant cost synergies in the deal. These synergies, alongside PDP's attractive standalone profile, have allowed Turtle Beach to acquire PDP at a highly attractive multiple, both on a pre- and post-synergy basis. We expect the first 12 months of the combined company to generate $390 million to $410 million in revenue and between $60 million to $65 million of adjusted EBITDA.
This acquisition will significantly increase our profitability and free cash flow generation throughout the cycle, better minimize our earnings and free cash flow volatility and create a global powerhouse in the gaming category. Additionally, we are pleased to have announced today our intention to launch a significant return of capital to shareholders by way of a reverse Dutch tender auction. We intend to repurchase up to $30 million of our common stock at a price range between $13.75 to $15 per share. This tender auction, which will end following our first quarter earnings results in May, is set to launch next month and will provide shareholders that are seeking liquidity, a chance to sell some or all of their stock back to the company at a minimum premium of 25% from today's closing share price.
Diversis, the former owners of PDP as well as each member of the Turtle Beach management team and Board of Directors, have committed to not tender a single share of stock, highlighting the confidence that we all have that this deal will create significantly more value to shareholders than the top end of the tender range provides. We have listened to shareholders, and providing this liquidity option was an important consideration for our Board. As part of the transaction with PDP, we have entered into a debt facility that will have less than one times leverage for the pro forma company at close. Assuming the tender of $30 million is fully utilized, our net leverage level will sit at just 1.2 times next 12 months EBITDA. And importantly, pro forma for the transaction, as we have detailed in our slide deck, Turtle Beach is currently trading at less than half the enterprise value over the next 12 months EBITDA multiple of its closest peers.
We expect this gap to narrow over time as shareholders recognize the massive transformation that has happened at the company over the past year, culminating with today's announcements, allowing significant value to be created for our shareholders as we now focus on execution. With the transaction comes a great set of complementary assets, products and team members as well as a new Board member. We welcome Dave Muscatel to our Board, and we are thrilled to have someone with such deep gaming market experience join our Board. And finally, after a comprehensive and exhaustive search, we are pleased to announce Cris Keirn as our next Chief Executive Officer. The Board, guided by its search consultant, ran a broad and sweeping review. The external demand for this role was significant, and the Board engaged deeply with a number of remarkable candidates.
At the end of the search, it became quite clear that the Board believed that Chris' deep understanding of the existing Turtle Beach business, his understanding of PDP and his ability to execute on the company's strategy gave us the best chance to succeed both near and long term. We are enthusiastic about this new, refreshed and transformed Turtle Beach and its future prospects for shareholders, employees and customers. The Board has been hard at work over the past year, and we are excited about the future for the company and its shareholders. With that, I will turn it over to our Chief Executive Officer, Cris Keirn.
Cris Keirn: Thanks, Terry. And thank you all for joining us today on our fourth quarter and full year 2023 earnings call. First, I'd like to thank the Board for placing their trust in me to lead the business as CEO moving forward. Since assuming the Interim CEO role last summer, we worked closely together to best position Turtle Beach for future success. I also want to thank the great team that we have here at Turtle Beach and recognize their tremendous efforts. Together with the Board and the entire team, I look forward to advancing our strategy to ultimately drive increased return for our shareholders. Next, I want to discuss the exciting news that we announced separately from our earnings release earlier today. As Terry noted, we announced the execution of a definitive agreement to acquire PDP, a leading gaming accessories provider.
PDP is a leader in video game accessories, including controllers, headsets, power cases and other categories. The transaction creates a powerhouse with the combination of industry-leading teams and expertise, significant product momentum and proven track records of delivering profitable growth. Bringing PDP's leading gaming controller category to Turtle Beach will provide additional scale and create future development opportunities in addition to an estimated $10 million to $12 million in cost synergies and meaningful revenue synergies. The acquisition of PDP adds significant financial benefits to Turtle Beach that fundamentally transforms the financial profile of the company. Considering this transformational development, let me now state our full year 2024 outlook before recapping 2023.
For the full year 2024, including the PDP contributions and synergies for nine months, we expect to generate revenue in the range of $370 million to $380 million and generate adjusted EBITDA in the range of $51 million to $54 million. Further, in the first four quarters of operation, as in Q2 2024 through Q1 2025, the pro forma business expects net sales to be in the range of $390 million to $410 million and adjusted EBITDA to be in the range of $60 million to $65 million. This is a tremendous outcome, and I want to welcome the fantastic PDP team to Turtle Beach. We look forward to achieving great success together. I'll now move into the fourth quarter and full year 2023 commentary. Turtle Beach's resilience and adaptability in 2023 has elevated our leadership position across gaming and accessories.
Our 2023 full year net revenue increased by 7.5% year-over-year as a result of significant share gains across multiple categories and geographies, including our core business of console gaming headsets. With post-pandemic transitional effects to gaming markets and our business now behind us, we are looking forward to a strong era of exciting new products and growth. We also returned to profitability in 2023, generating $6.5 million of adjusted EBITDA compared to an adjusted EBITDA loss of $29.9 million a year ago. Our share benefited from the temporary higher promotional spend as our U.S. console headset value grew 300 basis points – our share grew 300 basis points year-over-year in the fourth quarter and was up for the full year 2023. The fourth quarter promotional spend was successful in preparing our inventory and the channel inventory levels for the significant upcoming new product launches throughout 2024, including groundbreaking new wireless models.
Higher spend has not continued in January and lower levels of promotional spend are projected through 2024 across categories. Despite reduced year-over-year promotional spend in January 2024, we're seeing continued share growth in key areas, including console gaming headsets, positioning us well for our upcoming new product launches, set to differentiate the gaming accessories landscape in 2024. As an example, the launch of our highly acclaimed Stealth Ultra controller for Xbox and PC is just the beginning of what we believe will be a transformative year for Turtle Beach. John will now take us through the financials in more detail. John?
John Hanson: Hey, thanks, Cris, and good afternoon, everyone. As Cris noted, our full year 2023 revenue was $258.1 million that’s an increase of 7.5% compared to the year ago period, driven by revenue and share gains for both our console headset and simulation products. Fourth quarter revenues at $99.5 million were down slightly compared to the $100.9 million a year ago, driven by higher than expected promotional spend due to the softer than expected console gaming headset market. In 2023, our gross margin was 29.3% compared to 20.5% in 2022. The increase was a result of lower freight and promotional spending during the year. As you’ll recall, in the year ago period, we recorded a $9.8 million charge for potential excess components and finished goods relating to the pandemic driven supply chain impacts and a weak gaming market.
Excluding these non-recurring items, adjusted gross margin was 24.6% in 2022, which reflects a 470 basis point improvement year-over-year. Operating expenses for the full year 2023 were $91.9 million compared to $100.7 million in the year ago period. Recurring operating expenses declined 10.6%, a reflection of the proactive expense management initiatives we undertook in mid-2022, as well as the alignment of marketing to support demand and our product launches. Our full year adjusted EBITDA improved significantly to $6.5 million compared to an adjusted EBITDA loss of $29.9 million in the year ago period. The year-over-year variance is primarily driven by the items I’ve covered above. We continue to advance our enhancements in profitability and we expect to deliver strong adjusted EBITDA growth in 2024.
Our full year net loss improved to $17.7 million or $1.03 per diluted share, compared to a net loss of $59.5 million or $3.62 per diluted share a year ago. Turning to the balance sheet, at December 31, 2023, we had $18.7 million of cash and no outstanding borrowings on our revolving credit line. Inventories at December 31, 2023 were $44 million compared to $71.3 million at December 31, 2022. Cash flow from operations was $27 million, which was a $68.9 million improvement year-over-year on a year-to-date basis. Additionally, and as we communicated in our separate press release today, along with the acquisition of PDP, Turtle Beach announced that we have commenced a modified Dutch Auction Tender Offer to purchase with cash up to $30 million in value of our common stock at a price per share not less than $13.75 per share and not greater than $15 per share, less any applicable withholding taxes and without interest using available cash on hand.
On March 12 of 2024, the closing price of the common stock was $11.03 per share. The Tender Offer is anticipated to commence April 10, 2024, and will expire at 12:00 midnight, New York City time at the end of the day on May 10, 2024, unless extended or terminated. And now I'll turn the call back over to Cris for additional comments. Cris?
Cris Keirn: Thanks, John. As mentioned, the acquisition of PDP significantly benefits our financial profile. Gaming portfolio and industry leading team, together, we are a stronger business with an industry leading product portfolio poised for growth. As such, we're energized by the trends throughout our business, and I would like to thank the entire Turtle Beach team, including our new PDP colleagues for their tremendous efforts and performing at such a high level in this dynamic environment. We should remain highly focused on driving enhanced value for our gamers, partners and shareholders. With that, let's turn to Q&A.
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