Q1 2024 Corsair Gaming Inc Earnings Call

Participants

Ronald Veen; IR Contact Officer; Corsair Gaming Inc

Andrew Paul; Chief Executive Officer, Director; Corsair Gaming Inc

Michael Potter; Chief Financial Officer; Corsair Gaming Inc

George Wang; Analyst; Barclays

Drew Crum; Analyst; Stifel

Aaron Lee; Analyst; Macquarie

Colin Sebastian; Analyst; Robert W. Baird & Co Inc

Presentation

Operator

Good afternoon, everyone, and welcome to Corsair Gaming's First Quarter 2024 earnings conference call. As a reminder, today's call is being recorded, and your participation implies consent to such recording at this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. With that, I would now like to turn the call over to Ronald van de for Saras Vice President of Finance and Investor Relations.
Thank you, sir. Please begin.

Ronald Veen

Thank you. Good afternoon, everyone, and thank you for joining us for potash Financial Results Conference Call for the First Quarter ended March 31st, 2024. On the call today we have Corsair CEO, Andy Paul, and CFO, Michael Potter. Andy will review highlights from the quarter, and Michael will then review the financials and our outlook we will then have time for any questions.
Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties the risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings.
Today's remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release we issued after the market close today.
With that, I'll now turn the call over to Andy.

Andrew Paul

Thank you, Ronald, and welcome, everyone, to our Q1 earnings call. 2024 is starting out as expected, with new products driving a rebound in peripherals growth. Our gaming and creator peripherals segment as continued its impressive performance, achieving 20% year-over-year revenue growth in the first quarter of 2024 after 16% year over year revenue growth in the fourth quarter of 2023. We're very pleased that growth is coming from all product lines.
This was across El Gallo with its popular stream deck products. Scott gaming with the successful recent launch of PC controllers and courseware peripherals with several new keyboards headsets in mice. We were particularly pleased to see the gross margin lift to 40% with these new product launch launches. We fully expect to build on this momentum over the coming quarters with an exciting lineup of planned product launches, some of which we will discuss on the call today, demand was more subdued in the component market as is normal in this stage of a GPU cycle.
In the short term, the self-built TCE market is stable with the next surge expected in late 2024 and 2025 when next-gen GPUs and CPUs alone. We're also already seeing some benefit in the pricing of our most popular DRAM modules as gamers are using higher DRAM capacity, faster game play gives you a sense of how big the memory opportunity is. It is estimated that 95% of steam gamers have less than 16 gig of memory in their systems. That represents a huge opportunity for us. We continue to have high market share in the component space, which we are focused on further growing, led by a strong planned product launch schedule, including several recent launches with our 2,500 and 6,500 series cases IQ Link, our X-Series fans and course, a one platform upgrade.
As we look forward, 2024 will be a exciting year of innovation with an impressive slate of new coarser products as we broaden our category reach with a lot of work as part of our product selection and development. As a result, we expect both our upcoming mobile gaming controller and our upcoming sim racing product line will be two standout launches for us. Corsair and Lacey is set to launch at Computex in June 2024. We have developed a total experience engineered to offer a fully immersive sim racing experience.
This is a high growth category, especially as Formula One continues to gain interest in the US. Wholesale will have a unique advantage in this market because of our ability to produce all the relevant components to assume racing setup, combining our new racing outlets with our gaming PCs, curved monitors and PC peripherals. We are also excited for the upcoming launch of our scarf mobile gaming controller. This is one of the market's fastest growing areas and represents a very large global opportunity for us, which we expect will become another important long-term growth driver.
And we're very encouraged with our recent launch of the new El Gallo Neo product family, which is targeting a different and more casual user base than our traditional prosumer algo customers. The response has been very positive, and we expect sales to ramp to 2024 and over the coming years. This is one of the largest launches in our gathers history. By combining hype and performance with plug-and-play simplicity, we make live video calls and live streams easier and more professional looking. This is another large segment of the market that we expect to be at to be additive to our growth as we expand our market share. All launch included the wave.
The microphone, please come key like Kathy Rickard and stream debt. We also expect this will help drive even faster growth in our expanding stream deck ecosystem. In addition to launching the new models, Ostarine deck application marketplace continues to rapidly add new users. As of Q1, over 40% of the estimated stream deck installed base have opened accounts on the marketplace website. Given the popularity of stream deck, we expect the marketplace will become a very meaningful new revenue stream over the coming years.
On our last call, we highlighted proactive actions we have taken to increase our operational efficiency, including moving production of many of our scarf controllers through our factory in Taiwan, closure of an expensive UK factory and expansion of our lines of facility. Adding to this, our efforts in regional and retail expansion are also progressing well with anticipated revenue boost in the latter half of 2024. We have successfully expanded the retail presence, of course, as full suite of gamer and creator products introduced the drop product lines through retail channels, expanded our scope of gaming product lines in retail and strengthened our partnerships with several major online retailers. These initiatives solidify our position in the market and set the stage for continued growth and success in the years ahead.
Finally, we remain active on the M&A front, which is a key driver in the peripheral segment. Our recent acquisition of drop is fully integrated and contributing. This builds on our impressive track record of success with our Gatineau scarf and five other M&A transactions we are carefully evaluating opportunities as part of the regular course of business, and we will look to pursue those that fit our long-term growth plans from a product and brand standpoint, and valuation.
Looking forward to the balance of 2024, we did not expect growth in the gaming Components & Systems segment until the next family of GPU cards launched, which we expect to be late 24 or early 2025.
For the gamer and creator peripherals segment, we expect significant growth, especially some new products we recently launched and more that we're about to launch. In addition, as we mentioned in our last update, we'll be entering two new product categories in 2020 for sim racing and mobile controllers. We expect the overall gaming market to now resume back to historical growth levels as the effects of the pandemic recede into history.
Let me now turn the call over to our CFO, Michael Potter for details on the financials. Michael, please go ahead.

Michael Potter

Thanks, Andy, and good afternoon, everyone. I am pleased to report a solid start to 2024, especially for our key gamer and creator peripherals segment and gross margins. In general, we expect to build on this start with improved revenue growth and EBITDA expansion in the second half. The success of our new products is driving market share gains and margin expansion with notable growth in our gamer and creator peripherals segment. Overall, our markets remain healthy, and we continue to execute on our organic business with an eye on accelerated growth through M&A, given our track record and strong financial position.
In terms of the specifics, Q1 2024 net revenue was $337.3 million compared to $354 million in Q1 2023. European markets contributed 34.3% of our Q1 2024 revenues compared to 38.6% in Q4 2023, while the A-Pac region was 13.8% of our Q1 revenues compared to 9.9% in Q4 2023.
Turning now to our segments. The gamer and creator peripherals segment contributed $107 million of net revenue during the first quarter compared to $88.9 million in Q1 2023. The gaming Components & Systems segment contributed $230.3 million of net revenue during the quarter compared to $265 million in the year ago period.
Memory Products contributed $124.9 million in first quarter 2024 compared to $131.3 million in Q1 2023. Overall gross profit in the first quarter was $86.6 million compared to $85.4 million in Q1 2023, primarily reflecting mix. Gross margin increased 160 basis points to 25.7% compared to 24.1% in Q1 2023. We achieved this expansion despite challenges such as increased freight costs stemming from tomorrow in the Red Sea and resulting delays necessitating incremental air shipments.
Gamer and creator peripherals segment gross profit was $43.6 million compared to $26.6 million in Q1 2023. Gross margin was a record 40.8%, up 1,080 basis points compared to 30% in Q1 2023. Gaming Components & Systems segment gross profit was $43 million compared to $58.8 million in Q1 2023.
Gross margin was 18.7% compared to 22.2% in Q1 2023, reflecting mix and continued cost headwinds. Our Memory Products gross margins in this segment were 14.5% for the first quarter compared to 15.8% in Q1 2023. First quarter SG&A expenses were $80.2 million compared to $67.5 million in Q1 2023, while R&D expenses were $16.6 million compared to $16.8 million in Q1 2023. We continue to invest in support of new category leadership products in both our Components and Peripherals segments with recent major introductions from alcohol and scarf gaming and major new category launches coming in sim racing in mobile gaming.
Consumer response has been very positive and we are encouraged with the momentum we are building as we continue to take market share as a result of our investments in SG&A, GAAP operating loss in the first quarter of 2024 was $10.2 million compared to operating income of $1 million in Q1 2023. First quarter adjusted operating income was $15.4 million compared to $18.2 million in Q1 2023.
First quarter net loss attributable to common shareholders was $12.5 million, or $0.12 per diluted share as compared to a net loss of $1.1 million or $0.01 per diluted share in Q1 2023. On an adjusted basis, first quarter net income was $9.5 million, or $0.09 per diluted share compared to $11.9 million or $0.11 per share in Q1 2023.
First Quarter 2024 adjusted EBITDA was $18 million compared to $20.6 million in Q1 2023. Drop was neutral as expected in Q1. And with the integration behind us, we continue to expect it to grow as we move through 2024.
Turning now to our balance sheet. We ended Q1 in a strong financial position with a cash balance, including restricted cash of $130.2 million. We ended Q1 with $184 million of debt at face value, and our $100 million working capital revolver remains undrawn and fully available. We further reduced debt in Q1 and plan to continue doing so over the next coming quarters.
Given our strong balance sheet, we have the flexibility to continue decreasing debt while also allocating resources to invest in our operations, which includes actively seeking out further M&A opportunities. These strategic initiatives are designed to accelerate our growth and increase profitability over the long term.
In terms of our outlook, we are affirming our outlook for the full year 2024. We continue to expect total revenue in the range of $1.45 billion to $1.6 billion, adjusted operating income in the range of $92 million to $112 million and adjusted EBITDA in the range of $105 million to $125 million.
Assuming we maintain the same debt and cash balances in 2024, we expect to have approximately $2 million of net interest expense per quarter we're using an effective tax rate of approximately 18% to 22% for 2024 and full year weighted average diluted shares outstanding of approximately 107 million to 110 million shares. As a reminder, we're expecting normal seasonality this year with Q2 typically being the lowest revenue quarter of the year. We also expect year-over-year strength in our gamer and creator peripherals segment throughout the year.
In summary, we're pleased with our strong growth in the gamer and creator peripherals segment and with our continued strong market share we expect to achieve increased growth in the second half of 2024, led by our new products and expansion into two major new categories. Our balance sheet is strong and we remain committed to investing in the products that will drive our growth and further market share gains across both peripherals and components. And with that, we're now happy to open the call for questions. Operator as we open up the call for Q&A.

Question and Answer Session

Operator

(Operator Instructions) George Wang, Barclays.

George Wang

Hey, guys. Thanks for taking my question. I have two quick ones.
Firstly, I can't give you a little bit more color. Just talk about the component memory business, definitely weaker than expected kind of partially drove the kind of the overall below expectation. You guys talk about no growth and your new GPO slashed if you launch in the second half as well as 2025. So what Now what's the refresh growth rate was for this year based on my model things it's tracking kind of who your slight decline on a year-over-year basis. Just curious how confident you are in terms of kind of a tangible rebound in a few quarters?

Andrew Paul

Well, we see every KeyView cycle. The same thing happens with now, I mean, the real majority out of when in video is going to launch their new cards. Obviously, they have officially announced but it is but the rumors out there saying end of this year, early '25 and so people start gearing up for that. And in fact, sometimes people start building machines in advance of the new cards, so building a machine to take it. So that's why we're expecting Q4 to be pretty good. But this year and the early adopters are definitely going to wait for that new car. And that's offset by the mainstream customers that are now using the that's expensive COGS to build gaming PCs. So overall, that gives you as you say a flat to slightly down market, depending on which part of the world.

George Wang

Okay, great. Certainly, can you kind of address regional and retail expansion, kind of what I'll call kind of the prepared remarks. And also, I noticed that Asia still a smaller mix versus total kind of up in the low 10s. So there's likely some opportunity on the Asia expansion. So maybe you can talk about your investment in retail as well as the regional expansion.

Andrew Paul

Yes, sure. Well, there's a few things going on in the US. We're expanding into additional retailers. We're expanding our footprint into Walmart. We target with some of our new product lines worldwide. You are right. Asia has been the weakest part of the globe, and that's mostly because China is not doing well, as you probably know. So pretty big unemployment in the in the US in China.
So we switched our attention is now to really double down on Korea and Japan, where we see lots of opportunities and we have a much lower market share there than we do in other parts of the world. So we'd expect Asia to bounce back, but not in China, but in places like Korea and and Japan. Europe is doing quite well. And I just spent the week in Europe with our sales guys, and that's extremely positive to the U.S. It is also a pretty strong in a lot of gaming categories. But in the self-build PC market, as we just said, we went into new cards.

George Wang

Okay, great.
I'll go back to the queue.

Operator

Drew Crum, Stifel.

Drew Crum

Okay, thanks, guys. Good afternoon.
On the gamer and creator segment. Was there anything unique during the period that drove the record gross margin performance and you see that as sustainable going forward? Or should we assume it falls sequentially?
And then I have a follow-up.

Andrew Paul

Well, no, we're expecting that this is this is where it should be because of new things going on from a mix perspective on and I think as you know, we invested in some of the supply chain from our El Gallo product lines. So we have one manufacturer that developed with us the stream that we bought a significant amount of that company and that allows us to increase our margins quite substantially. And that actually is the biggest part of our El Gallo portfolio now. So that's driving very healthy margins. We've had a really good bounce back with scale, which again is direct-to-consumer and very high margins. So a lot of this is mix in the different parts of the gaming creative segment. We've got some parts that are very high of a 50% margin kind of categories that drive the mix up. But the are our traditional and peripherals categories, which is keyboards, mice and headsets. It's also sequentially been increasing. So I would hope that we'll use this our margin as a base and keep building from here

Drew Crum

Okay, helpful. And then, Andy, in your prepared remarks, you talked about the mobile gaming controller and the new sim racing product line you're launching in June. Any way you can size the TAM for for both of those banks?

Andrew Paul

Well, very roughly. I mean, the reason I say very roughly is there's not a lot of really good crystal data. I would say the same market as best we can tell, is probably around $1 billion now, and we're going to enter the top half of that initially. So we're not going to be making $100 or $200 will kits. So we'll be making products people that are spending a few thousand dollars on the on a rig same way as you do with our PC categories and plenty of market for us to ramp up to $100 million or $200 million there.
The mobile gaming is a little less than what I was thinking that can easily get to $1 billion is probably not there yet, but it is one of the fastest-growing categories. And what we want to make sure there is that we can stay in the $100-plus as pay area and not be pulled into the $50 category. So that's another one where we're going to stay in the premium end of the market.

Drew Crum

Got it.
Okay.
Thanks, guys.

Operator

Aaron Lee, Macquarie.

Aaron Lee

Good afternoon, guys. Thanks for taking my question. Just to start even in general, any color you can provide on the general state of the consumer? And do you still feel like there's room to push up ASPs or pass on costs?

Andrew Paul

Well, that's an interesting question.I mean, as Willie said, and I have been pretty distinctly in the in the IPO presentations, my feeling was that gaming hardware in general, it would follow the trend of sports equipment rather than consumer electronic hardware and other words that we keep going up as new features have found an appropriate people to play games better, and that's exactly what's happened.
So if you look at the headset or keyboard market, our people are quite comfortable now paying $200 or $300 for headsets and $200 or $300 for keyboards. When you go back 10 years, these were firmly $50 to $100 market. So the ASP continues to go up now in the component space. A lot of this depends on what happens with the power needs of GPUs. But we do think that when we listen to Janssen's thought and he is absolutely hell-bent on cramming as much and horsepower as you possibly can. That tends to use a lot of power. So we think the next generation is going to be power hungry as the first 4,000 cards were. And so that tends to mean people are starting to use 800 to 1,000 watt power supplies from around 500 to 600 watts. So so I think come in the component space, we'll see a healthy and maintain maybe a little bit up on ASPs, but some in pretzels, there's plenty of room to grow.

Aaron Lee

Got it. Thank you. And then just on some of these new product launches, obviously launch several new categories over the past few quarters. Are there any categories that have surprised you or stood out in terms of the demand and growth potential? Thank you.

Andrew Paul

Yes, I think the of the best success we've had compared to our expectations was a PC controller that we bought out through scarf. And we would we were we knew that a lot of people that transition from console PC, I'd like to use the console style control play PC games, certainly some of them and of course, the whole Call of Duty League move from console to PC on roads. So we bought out a controller that was only I must admit I was a little skeptical that that would confuse some of the consumers that realize they're buying something that then wouldn't work on, I guess for Xbox. But in fact, the demand has been overwhelming and we were sold out of the first six months. So that term that one has been fairly impressive.
The other thing that surprised us was the teleprompter, but I gather brought out and that literally has been sold out ever since we launched in, I think October, November. We're just now starting to get inventory in place. So we've taken that and the casual one, the pro suite in market by storm, then I think everybody that has seen this thing regularly does video calls wants to buy well.

Aaron Lee

Understood. Thanks for all the color. Appreciate it.

Operator

(Operator Instructions) Colin Sebastian, Baird.

Colin Sebastian

Hey, it's calmly and on conservation and thanks for taking our question. This one from us nicely in the peripheral segment out of 40% gross margin this quarter. Are you seeing any relief in freight cost so far in Q2? And then do you think you'll be utilizing airfreight this quarter to the same degree that you did in Q1?
Thanks.

Andrew Paul

Well, I certainly hope not in some cases if it occurs because we are so successful product launches that we get sold out and we after FID them, but we keep increasing our inventory of new launches to take care of that. So I certainly hope that's going to go down the vast majority of our gaming peripherals. It's a fairly small. So it doesn't have the same effect on freight as things like power supplies in cases, those things that really get affected when the rates go flying up because you just can't keep as many into a container. And but having said that, I mean, the overall effect of the Red Sea container issues. I don't know how much people realize this. The cost went flying up in Q1 had quite an effect, as Michael mentioned earlier, on both cost and lead time. But yes, I think come Q2, we'd expect airfreight definitely go down and we'll get some benefit from that.

Colin Sebastian

Okay, great.
Thank you.

Operator

(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to CEO. Andy Paul, for closing comments.

Andrew Paul

Well, thank you very much, everybody, for attending the call and thanks for your continued support and any further follow-up questions, please contact our Investor Relations department and we look forward to updating you next quarter. And thank you and have a good evening.

Operator

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.