Turtle Beach Corporation (NASDAQ:HEAR), a leading gaming accessory brand, has reported a revenue increase of 9% year-over-year to $55.8 million in the first quarter of 2024. This growth is attributed to the acquisition of PDP, a gaming peripherals manufacturer. The company also saw an improvement in profitability, with adjusted EBITDA turning positive at $1.4 million, a significant shift from the $2.8 million loss in the same period last year.
Turtle Beach anticipates continued expansion in the gaming accessory market and plans to launch new products soon. The full-year revenue is projected to be between $370 million and $380 million, with pro forma combined adjusted EBITDA forecasted to be between $51 million and $54 million.
Key Takeaways
- Turtle Beach's Q1 2024 revenue rose to $55.8 million, a 9% increase year-over-year.
- Adjusted EBITDA for Q1 was a positive $1.4 million, compared to a loss of $2.8 million in the previous year.
- The company attributes growth to the PDP acquisition and double-digit revenue growth in the US gaming headset and controller markets.
- New product launches are expected in the coming weeks, with a focus on the gaming accessory market.
- Turtle Beach is replacing its wireless gaming headsets in May and expects channel inventory normalization in Q2.
- A share repurchase program has replaced the Dutch tender offer.
- The company's Q1 10-Q filing is anticipated to be completed on the day of the earnings call.
Company Outlook
- Turtle Beach forecasts full-year revenue to be in the range of $370 million to $380 million.
- Pro forma combined adjusted EBITDA is expected to be between $51 million and $54 million, including nine months of PDP operations.
- The company is optimistic about the gaming accessories market and is focusing on integrating PDP into its portfolio.
Bearish Highlights
- Turtle Beach expects Q2 gross margins to be slightly lower due to higher promotions.
Bullish Highlights
- The company has experienced double-digit YoY revenue growth in key markets.
- Turtle Beach is launching new products in the simulation and guitar controller categories.
- The acquisition of PDP is expected to contribute positively to adjusted EBITDA.
- Cost improvements have led to higher gross margins in Q1.
Misses
- There were no specific misses reported in the earnings call.
Q&A Highlights
- Executives discussed the significant task of transitioning to a new generation of wireless gaming headsets.
- They also highlighted the proactive steps taken to manage channel inventory, including halting replenishments of older headset models.
- The company ended Q1 with low headset inventory but plans to reload in Q2.
In summary, Turtle Beach is showing positive momentum with its strategic initiatives, particularly the PDP acquisition. The company is managing its product transitions effectively and is gearing up for new launches that are expected to bolster growth in the competitive gaming accessories market. Investors are likely to keep an eye on the company's ability to maintain profitability and market share in the upcoming quarters.
InvestingPro Insights
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InvestingPro Data indicates that Turtle Beach has a market capitalization of approximately $316.6 million and has experienced a notable price uptick of 50.1% over the last six months. This positive trend is further supported by a 3-month price total return of 27.91%, signaling strong recent market performance. However, the company's P/E ratio stands at -14.23, reflecting challenges in profitability over the last twelve months.
An InvestingPro Tip highlights that analysts are optimistic about Turtle Beach's future, expecting net income growth and sales growth in the current year. This aligns with the company's own projections for increased revenue and adjusted EBITDA. Another relevant tip is that Turtle Beach's liquid assets exceed its short-term obligations, indicating a solid liquidity position that could support its operational needs and strategic initiatives.
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Full transcript - Turtle Beach Corp (HEAR) Q1 2024:
Operator: Welcome to the Turtle Beach First Quarter 2024 Conference Call. My name is Didi, and I will 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 Cris Keirn, Chief Executive Officer; and John Hanson, Chief Financial Officer. Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the 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 first quarter 2024 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 Web site later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the Safe Harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, we will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now, I'll turn the call over to Cris Keirn, CEO of Turtle Beach. Cris?
Cris Keirn: Thank you all for joining us today on our first quarter 2024 earnings call. I'm very pleased with our continued progress in a transformative year for the company. As expected, we have made significant progress on multiple strategic initiatives to drive profitable and sustainable growth. While we are in the early stages of integration for our recent acquisition of PDP, this infusion of additional talent and expertise has further energized our team and we are executing to achieve both revenue and cost synergies. We look forward to maximizing the benefits of our increased scale and enhanced product portfolio in 2024 and beyond. First quarter revenue was $55,8 million, up roughly 9% year-over-year, which included incremental revenue contribution in the back half of March from our acquisition of PDP. We also realized improved profitability in the quarter, delivering $1.4 million of adjusted EBITDA compared to an adjusted EBITDA loss of $2.8 million a year ago. As we've previously communicated, we continue to see year-over-year improvements in profitability through our portfolio optimization, SKU rationalization and platform product development initiatives, all of which are coming into full effect throughout this year. Following market gains that started in December of 2023, both the US gaming headset and gaming controller markets continued to climb with double digit year-over-year revenue growth in Q1. First Circana, combined console and PC headset markets were up 18% and gaming controllers were up nearly 20% by revenue. Third party controllers exceeded revenue growth compared to first party controllers, driven by our new Stealth Ultra controller and increased sales of PDP models. We remain optimistic for continued growth in the gaming accessory markets and have an exceptional lineup of new Turtle Beach products launching in just a few weeks and then again before the holidays. Q1 demonstrated that accessory sales at this point in the console cycles are growing as gamers remain highly engaged with a strong lineup of titles over the last year. We believe another contributor to market growth in Q1 was a result of a replacement cycle lift from pandemic era accessory purchases, especially with a new generation of accessories in the market that offer upgrades to technology and features. As mentioned in previous calls, we anticipated that pandemic era replacement purchases would contribute to gaming accessory market growth in 2024. Double digit market growth for key gaming accessory categories in Q1 was a good indicator that these replacement purchases are underway and we believe replacement purchases will continue to support market performance in future quarters. In our headset and PC categories, we proactively reduced channel inventory and promotional activity in Q1 ahead of our significant new headset and PC product launches in Q2. Channel load in for our new headsets and PC products is occurring now and channel inventory is projected to return to normalized levels once the new load in of new products is completed in Q2. We are eager to bring these fantastic new products to our gaming customers and are confident they will deliver strong results for the business. Our new controller and simulation models, including the Premium Stealth Ultra controller and VelocityOne simulation products drove Q1 share gains for Turtle Beach. Our revenue share of the US flight simulation market grew from 20% in Q1 2023 to 25% in Q1 2024 as reported by Circana. With additional products in development, we anticipate continued share growth over time in simulation categories. Additionally, we are pleased with the extraordinary preorders and ongoing post launch demand for the PDP RIFFMASTER Guitar Controller. The RIFFMASTER launch was timed to Fortnite Festival's recent update, which added guitar controller capability with the game. Demand has greatly exceeded our initial supply and our teams are working diligently to expedite deliveries of additional goods. We remain highly focused on delivering value to our shareholders and gaming customers everywhere through launching our innovative new products, maximizing the extensive benefits from the PDP acquisition and driving our initiatives for profit enhancement and growth. John will now take us through the financials in more detail. John?
John Hanson: Thanks, Cris. And good afternoon, everyone. As Cris noted, our first quarter 2024 revenue was $55.8 million, that's an increase of approximately 9% compared to the year ago period, driven by increased sales of our controller and simulation products and incremental revenue from the PDP acquisition. Console headset revenue was down year-over-year as we intentionally reduced channel inventory levels in Q1 ahead of the launch of our new wireless headsets and rebranded PC accessories. We are currently reloading the channel to support the launch of these products in Q2. Gross margin in the first quarter was 31.8% compared to 27.5%, that is a 430 basis point improvement from the year ago period. The increase resulted from lower freight costs, product costs, promotional spend and return reserves and is driven by the various profit improvement initiatives we have been executing over the past months. Operating expenses in the first quarter were $23.5 million compared to $20.6 million a year ago and include $5 million in costs related to the acquisition of PDP in March of this year. First quarter cash based recurring operating expenses declined approximately 6% year-over-year, primarily driven by ongoing proactive expense management. Our first quarter adjusted EBITDA improved to $1.4 million compared to an adjusted EBITDA loss of $2.8 million in the year ago period. The $4.3 million year-over-year improvement is primarily driven by the revenue increase, margin improvement and cash based recurring operating expense reductions. Our first quarter net income was a positive $0.2 million or $0.01 per diluted share compared to a net loss of $6.7 million or $0.40 per diluted share a year ago. Turning to the balance sheet. At March 31, 2024, we had $17.8 million of cash and no outstanding borrowings on our revolving credit line. The company secured a $50 million term loan for the PDP acquisition and our net debt was $32.1 million at quarter end. Inventories at March 31, 2024, were $69.5 million compared to $65.2 million at March 31, 2023. And the increase resulted from the addition of $23.8 million in inventory for PDP, partially offset by a $19.5 million reduction in Turtle Beach inventory. Cash flow from operations was $27.3 million compared to $29 million at March 31, 2023. Free cash flow was $26.6 million. Our ability to generate strong free cash flow from revenue growth and operational efficiency opens the door for a variety of value creating opportunities. And now, I'll turn the call back over to Cris for some additional comments. Cris?
Cris Keirn: Thanks, John. As I've mentioned, we are pleased with our progress for the first quarter of 2024. We've continued our focus on driving profitable growth and are excited about our upcoming product launches and the demonstrated success of our multiple profit improvement initiatives. From this, we are maintaining our full year 2024 outlook. Net revenues are expected to be in the range of $370 million to $380 million with growth driven primarily by the acquisition of PDP, gaming accessory market growth and our expected outperformance of gaming markets with compelling new accessory launches in 2024. Including synergies from the PDP acquisition, we expect pro forma combined adjusted EBITDA to be between $51 million and $54 million, which incorporates approximately nine months of operations from PDP. I want to thank our entire team at Turtle Beach for their excellent efforts and contributions, which have delivered a strong quarter to start this very exciting year. We have a lot in store for the remainder of 2024 and remain confident about our renewed growth strategy and execution for this year and beyond to drive value for our shareholders and gaming customers. And with that, let's turn to Q&A.
Operator: [Operator Instructions] And our first question comes from Mark Argento of Lake Street Capital Markets.
Mark Argento: Just a couple of quick ones from me. Cris, maybe you could -- could you just delve in a little bit more in terms of kind of the product refresh or kind of the restocking in terms of inventory, and some of the new products you guys are launching that would be helpful?
Cris Keirn: In Q1 -- so we've got coming up in Q2, we are refreshing our wireless lineup at that key $99 price point. So this is still $600 and still $500. We've announced that those products are going to be replaced here coming up in May, actually within a couple of weeks. And those are the most widely distributed products globally for wireless gaming headsets. So that's a significant amount of channel that we have to transition from the last generation into this new generation. So we saw that coming. If you remember in Q4, we had driven a good amount of promotions, right, to get that inventory in a very healthy position. And then as we went through Q1, we turned off replenishments on those midway through Q1. And so we expected to see that channel come down that -- we did that proactively. And we're also -- to the team's credit, we're also able to do that without running -- with promotions running lower than last year actually. So that is now complete. We're in the middle of reloading the channel now and we've seen those channel inventory numbers here in Q2 return as expected to those levels. So we did have some transitional impact there in Q1 that will recover in Q2 as expected. Across the other categories, we're also launching new products in Sim in Q1 with a new race product, new flight Sim products. And on the PDP side, that guitar controller has just been a fantastic surprise for us. We knew it was a great product but the demand out there has been pretty exceptional. So a lot of good load-ins here coming in Q2 that we feel good about.
Mark Argento: And then, John, maybe in terms of the overall guidance, including obviously, pro forma for PDP. What does that kind of imply backing out the business, what does that imply for kind of the core of your products? Is that flattish, is it up a little, down a little? How should we just be thinking about the core growth rate on the legacy business?
John Hanson: So the core business certainly within our guidance is expected to grow and it's going to be in the -- it's going to be more to the single digit, mid single digit range, which we signaled back in November that we felt that the core business still has that potential for growth. Obviously, with the cost improvements from the laser sharp focus cost initiative work we've done, that's going to deliver much higher EBITDA than the business has realized in the past. And then you overlay PDP and their contribution and that's how you drive to the $51 million to $53 million guidance for adjusted EBITDA for the calendar year 2024.
Operator: And our next question comes from Jack Vander Aarde of Maxim (NASDAQ:MXIM) Group.
Jack Vander Aarde: Great to see the strong results guys and reiterated outlook. Can I just ask a question maybe on the first quarter? Revenue was definitely stronger than typically seasonally speaking. PDP contributed to that. Maybe -- are you able to just touch on -- PDP was I think about $100 million run rate business in terms of revenue. How much of that was related to PDP and maybe just directionally?
Cris Keirn: Q1, it was about 5.9%. I think was there 5.8% contribution?
John Hanson: Yes.
Cris Keirn: So we think we get some benefit there in the back half of March. You're correct in the historic size of that business and we see strong growth in the PDP business coming this year, that's included in our guidance. And so when you look at the core business, we were really happy to see the markets performing as well as they have for accessories. We talked about before that running that phase of the console cycle now where you're getting into -- folks have bought -- they bought plenty of great games last year, they were finally able to get a console last year. And now, we're entering that phase of the cycle where typically you'll see accessory repurchases, and particularly with the pandemic replacement purchases coming from a few years ago. So we believe that's what's driving that strong lift in both headsets and constant and controllers. And we were happy to see that in Q1, pretty high double digit growth there for the markets and also for our sell through. So as an example, on the core business, we still saw double digit value sell through growth, but with us taking the channel inventory down, that's why you see kind of flattish results for the core business in Q1, that's a timing issue. Seasonally, we're going to see the benefit of that load in here in Q2.
Jack Vander Aarde: And then maybe just in terms of -- there's another question on the product SKU rationalization. Maybe just specifically, does that -- does the SKU rationalization, does that -- the entire process and kind of strategy, does this relate or include PDP as well? I mean, you guys just brought in the acquisition. But how much of that's the core Turtle Beach kind of console headset business versus -- and maybe ROCCAT? But is PDP also involved in that? And then I'm just looking at -- the guitar has obviously been a massive success, but just in terms of like revenue concentration across the PDP product portfolio. Is it similar to the revenue cost pressure across your core business product portfolio?
Cris Keirn: And it's exactly what we're working through on the integration of PDP right now. We've got the benefit of PDP's business being very complementary to our core business historically. PDP has done a great job over the last few years of really leaning into those great licensing agreements that they've got doing some great development on the controller front, using those partnerships that are already established. And that controller business fits very well with our historically strong headset business. And so the two combined, it's really a one plus one equals three kind of situation where we're getting the benefits of both. And so what we're working through now with portfolio optimization and some of the SKU rationalization, it does include both, because there are products that are out there that are complementary between the two brands portfolios and there's opportunities for us there to realize synergies, not only on the cost side, but also on the revenue side as we talk through this with retailers. We've had a really great set of discussions with our retailers, a lot of excitement in the channel about this acquisition and what it means for the gaming category, right? Because it really -- when you look at the consolidation happening in the category, this really puts us in a different range, in a different scale when we're talking to retailers, now being able to offer so many categories as retailers also kind of look at what they're doing with their category space for gaming moving forward. So we've been really excited about what we've seen so far. We're very early in integration obviously, but it's gone quite well.
Jack Vander Aarde: Maybe just one more. I'm wondering if you can just touch on a status update on the share repurchase program, and just kind of the recent developments there?
John Hanson: So as we said in announcement here with Q4, we increased the size of the authorized share repurchase program. And so it's our intention to continue to pursue opportunities to increase the value for shareholders and with a focus on capital allocation. And we said that we would be with that increase in the authorized share buyback that we would be opportunistic here going forward through the balance of this year and that is that's currently our -- that's currently the path we're on.
Operator: And our next question comes from Sean McGowan of ROTH.
Sean McGowan: At the risk of being that guy, I'm going to say, I know it's the first quarter and I know it's the smallest quarter and I know that not a lot of dollars move some percentages. But if we are talking about headsets being down in your shipments in the first quarter against industry numbers that look like probably better than I would have thought for the category. And even if you strip out flight sim, that would be an even bigger decrease in your shipments of headsets. How are you not raising the guidance for the year, just are you expecting a massive slowdown like in the second half?
Cris Keirn: Sean, absolutely not, to the last question, not expecting a massive slowdown. If anything, we’re going to see the benefit and we already are seeing the benefit actually of that loan in on the channel. So when you look at the headsets’ performance, we knew going into Q1 and we’ve included that in our guidance that we were going to be draining the channel to get ready for these massive launches that are coming up this month. So as that occurred in Q1, we still saw double digit sell through growth and value in our US headset business for console headset. So we still realized that growth year-over-year but you see it in sell through on the sell in side because we took all that channel inventory out you didn’t get the sell in. We’re getting that sell in in Q2, because that sell through was sustained through Q1 right up in transition. So we’re actually very excited about how that panned out for us because we were able to really reduce a lot of the promotional dollars that we would typically have to spend there to clear inventory, a lot of that was already accomplished in Q4 for us. I think we kind of talked about that in the last earnings call. So no, we’re actually feeling very bullish about the prospects of the gaming accessories market this year, and the guidance does not assume that the market continues to be as strong as it was in Q1. We had the market pegged it at moderate growth for this year kind of single digit increases. So the fact that we saw what we did in Q1 is a nice surprise. I think you'll see as we talked about the replacement purchases from the pandemic piece are going to continue to drive accessory upgrades. And the other thing that drives accessory upgrades are new tech and everything you see coming from Turtle Beach and also from the PDP launches, they've got great new innovations in it, the product teams here have done a fantastic job of really presenting some new products here this year that we know are going to drive the market and drive our performance.
Sean McGowan: So you must have ended the quarter with inventories of headsets just at a very lean level and you see reloading some of that into the second quarter. Would you expect at the end of second quarter you'd be kind of caught up to sell-through? I mean that would imply an unbelievably strong second quarter, right?
Cris Keirn: We will be back up to the normal levels of channel inventory, that's actually -- we're almost there now as we're kind of midway through the quarter, because a lot of that load in is happening with those launches coming up in the next few weeks. So yes, we did actually end the quarter quite low on inventory and we are seeing the load in happen. So you hit it right on the head there.
Sean McGowan: Question for you, John. Is there anything -- I mean, the gross margin came in a little bit higher than I thought, but that's good, maybe that's because the sales did too. But is there anything in that quarter mix wise or anything else that would be kind of unsustainably high like that would have boosted it unsustainably?
John Hanson: No. The first quarter, for one, for better term, is pretty clean in that regard. And what we're starting to see coming through the P&L now are the cost improvements as we -- as our mix transitions into the new products, you're seeing lower costs, which we've been talking about now for several quarters and that have been working their way into the P&L for us. So we did signal and guide to higher margins throughout the year and you're starting to see that here in the first quarter. We do expect margins in the second quarter to be slightly potentially a point lower as we complete this transition of both the wireless and of course, the brand transition of ROCCAT to Turtle Beach. We do have some higher promotions planned in Q2 that will have a small impact on the margin percentage, but then that would quickly then improve back in Q3 and Q4 as now we're selling all of the new products that we've been working so diligently on in the last -- over the last six months.
Sean McGowan: But would that cost issue that you just mentioned there in the second quarter, would that not be over offset by the volume related upside that you get to margin or are you saying that we shouldn't expect that…
John Hanson: In terms of dollars, yes, but it's more of a percentage game. My comments were, I was talking more about the percentage. So we would expect slightly lower percentage, but certainly more dollars.
Sean McGowan: Two other questions for me. One is just, what do we make of the fact that there's still, in the appendix of the presentation, commentary about the Dutch tender that got canceled. Is that just to kind of tweak us a little bit or is that a preview of something coming?
John Hanson: No. As announced, that tender has been replaced with the share repurchase program…
Sean McGowan: Just -- it that summary financial information following tender completion, so I didn't know if that was a preview of something to come.
John Hanson: No.
Sean McGowan: Last question. Is the 10-Q going to be out today?
John Hanson: It should be. It's probably in the works right now. Don't know how far behind the SEC is backed up, but the Q will in fact be filed today.
Operator: [Operator Instructions] I'm showing no further questions at this time. I'd like to turn it back to Cris Keirn for closing remarks.
Cris Keirn: Thank you, operator. And thank you all for your participation and interest in Turtle Beach. Have a great day.
Operator: This concludes today's conference call. Thank you for participating and you may now disconnect.
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