Corsair Gaming, Inc. (NASDAQ:CRSR) Q3 2022 Earnings Convention Name November 3, 2022 5:00 PM ET
Firm Members
Ronald Van Veen – Vice President of Finance & Investor Relations
Andy Paul – Chief Govt Officer
Michael Potter – Chief Monetary Officer
Convention Name Members
Drew Crum – Stifel
Mario Lu – Barclays
Operator
Good afternoon, girls and gents, and welcome to the Corsair Gaming Third Quarter 2022 Earnings Convention Name. As a reminder, right this moment’s name is being recorded, and your participation implies consent to such recording. At the moment, all members are in a listen-only mode. A quick question-and-answer session will observe the formal presentation. [Operator Instructions]
With that, I might now like to show the convention over to Ronald Van Veen, Corsair’s Vice President of Finance and Investor Relations. Thanks, sir. Please start.
Ronald Van Veen
Thanks. Good afternoon, everybody, and thanks for becoming a member of us for Corsair’s monetary outcomes convention name for the third quarter ending September 30, 2022. On the decision right this moment, we have now Corsair’s CEO, Andy Paul; and CFO, Michael Potter. Andy will assessment highlights from the third quarter and the enterprise surroundings. Michael will then assessment the financials and our outlook. We are going to then have time for any questions.
Earlier than we start, permit me to supply a disclaimer relating to forward-looking statements. This name, together with the Q&A portion of the decision, might embrace forward-looking statements associated to the anticipated future outcomes of our firm and are due to this fact forward-looking statements. Our precise outcomes might differ materially from our projections on account of a lot of dangers and uncertainties. The dangers and uncertainties that forward-looking statements are topic to are described in our earnings launch and our different SEC filings. As we speak’s remarks may even embrace references to non-GAAP monetary measures. Further info, together with reconciliation between non-GAAP monetary info to the GAAP monetary info is offered within the press launch we issued after the market closed right this moment.
With that, I am going to now flip over the decision to Andy.
Andy Paul
Thanks, Ronald, and welcome, everybody, to our Q3 2022 earnings name. I am more than happy to report that we achieved a ten% sequential income development in Q3 2022 from Q2 2022, whereas persevering with to cope with higher-than-normal stock ranges. Gross sales ranges from our channel to shoppers had been considerably above pre-pandemic ranges in nearly all product traces and lots of had been above the yr in the past stage.
As we have now reported in latest earnings calls, this yr has been marked by extreme stock within the channel, particularly in Europe. We proceed to report and make feedback on shopper gross sales from our channel in addition to our income from gross sales into the channel to supply readability on the progress we’re making. For instance, within the US, we have now made nice progress in lowering this stock and inventory ranges are actually nearer to a extra regular stage.
European channel stock place stays elevated, however can be slowly normalizing. Our goal is to cut back our worldwide channel stock overhang by roughly $100 million from the beginning of 2022 to the tip of this yr, with a bit left extra to go in our inventive and peripheral section and our European channel stock.
As we talked about in earlier quarters, the self-built PC market has been held again over the previous two years, with excessive demand for graphics playing cards from crypto miners on high of elevated demand for computer systems through the pandemic, which had brought on GPU costs to rise in some instances to double. Now that crypto mining can not use GPUs as successfully as earlier than, there’s been a decline in demand and costs are again to straightforward MSRP or beneath.
Moreover, in latest months, there have been launches of recent know-how platforms via NVIDIA, AMD, and Intel, which look to be accelerating demand within the self-built PC market as our fanatic clients can now construct a greater and sooner gaming PC for a decrease value than they may over the past two years. The added constructive for Corsair is that gaming PCs constructed with these new platforms want sooner reminiscences equivalent to DDR5, bigger energy provides with 1,000-watt functionality or increased, and higher cooling know-how, all product classes that we’re skilled in and have obtained a dominant market share.
There have additionally been a number of latest video games launched or up to date that take full use of recent applied sciences constructed into the brand new GPUs, making them extra immersive and extra thrilling to play. That is additionally serving to to drive increased demand for gaming PCs and peripherals.
Generally, as we transfer via the second half of the yr, we’re beginning to see the market get well from the decrease demand seen within the early a part of 2022. The US continues to be a powerful market and we count on This autumn to see continued development in all classes.
Europe continues to be monitoring decrease than final yr, however has proven enhancements, and we presently additionally count on development in This autumn in comparison with Q3. Income in Asia for Q3 was roughly flat in comparison with final yr.
Let me now take a minute to replace you on a few of our Q3 product developments. In Q3, we started promoting the Corsair Voyager a1600 AMD Benefit Version laptop computer. That is our first Corsair branded laptop computer, and it combines AMD’s newest CPU and GPU platforms with our software program and applied sciences to create an unparalleled gaming and streaming expertise. This laptop computer has been the best single R&D funding in our firm’s historical past, getting into the highest finish of the gaming laptop computer market.
We additionally launched a brand new 45-inch OLED bendable gaming monitor developed in partnership with LG. This extremely wanting show be adjusted from flat to curve by hand for various gaming use instances and is the primary of its variety available in the market. We count on to start out delivery this monitor in first quarter of 2023.
Different launches in Q3 embrace our new K100 Air wi-fi mechanical gaming keyboard, and we introduced full availability of PC elements suitable with NVIDIA’s newest 40 collection graphics playing cards.
In abstract, whereas the market surroundings stays difficult, we’re very inspired by the latest exercise within the self-built gaming PC market and we count on elevated demand to proceed as new lower-priced fashions of GPUs get launched within the coming months.
Long term, we count on an additional profit from the growth within the gaming gears market numbers of lively shoppers through the pandemic, which ought to drive a better spending base over the subsequent few years.
We have made important progress in driving down stock ranges, each within the channel in addition to internally and count on to cut back these ranges additional in This autumn as we transfer again to our regular targets.
Let me now flip the decision over to our CFO, Michael Potter, for particulars on the financials. Michael, please go forward.
Michael Potter
Thanks Andy and good afternoon everybody. We achieved 10% sequential income development in Q3 in a difficult surroundings. This displays our continued execution, power of our market place, and sustained underlying demand.
Gross margins had been pressured by the latest sharp power of the US {dollars} in opposition to the European and Asian currencies, however moderately currencies look like extra secure. We’ve got taken some actions associated to the forex modifications that ought to result in gross margin enhancements going ahead.
When it comes to the specifics, Q3 2022 income elevated $311.8 million in comparison with $283.9 million in Q2 2022. This compares to $391.1 million in Q3 2021. Our channel companions proceed to cut back their inventories in Q3 2022 to present and anticipated shopper demand and the decreased transit and lead instances, thus eradicating a lot of the overhang from orders positioned on account of longer lead instances in prior intervals brought on by the results of the COVID pandemic.
We additionally decreased our personal stock by about 15% quarter-over-quarter as we drive our stock to extra historic normalized ranges. European markets proceed to be softer than Americas, and contributed about 29% of our revenues, nicely beneath the historic common within the excessive 30 percentile, however up from the roughly 25% in Q2 2022.
Turning now to our segments. The Gamer and Creator Peripheral section contributed $96.8 million of web income through the third quarter, up from $89 million within the prior quarter and a lower of 30.5% from $139.3 million in Q3 2021. The Gamer and Creator Peripheral section web income contributed 31.1% of complete web income, a lower of 450 foundation factors from 35.6% in Q3 2021.
The Gaming Parts & Techniques section contributed $214.9 million of web income through the quarter, up from $194.9 million within the prior quarter and a lower of 14.7% from $251.9 million in Q3 2021. Reminiscence merchandise contributed $115.2 million in third quarter 2022 in comparison with $115.5 million in 3Q 2021.
Total gross revenue within the third quarter decreased by 29.4% to $71.6 million from $101.4 million in Q3 2021. The lower in comparison with Q3 2021 was primarily pushed by decreased revenues. Gross revenue margin was 23% in comparison with 25.9% in Q3 2021.
We’re beginning to profit from the fee actions we introduced final quarter, together with the success of newer merchandise we not too long ago launched, which we consider can have a big constructive impact on margins shifting ahead. A few of which we realized within the third quarter.
We’re additionally inspired by the enhancing provide chain surroundings, together with a big discount in freight charges and provide chain lead instances, that are quickly approaching the identical ranges as they had been pre-pandemic. There may be usually a 4 to five-month lag earlier than these value reductions are absolutely mirrored in our P&L as our stock turns.
The Gamer and Creator Peripheral section gross revenue was $31.8 million, a lower of 34.6% from $48.6 million in Q3 2021, primarily pushed by a lower in income and the provision chain and logistics prices I simply talked about.
Gross revenue was 32.8% in comparison with 34.9% in Q3 2021. The gaming elements and methods section gross revenue was $39.8 million, a lower of 24.7% from $52.8 million in Q3 2021 and primarily pushed by the lower in income in the identical interval and better logistics prices. Gross revenue margin was 18.5% in comparison with 21% in Q3 2021. Our Reminiscence Merchandise margin on this section was 14.4% for the quarter.
The third quarter SG&A bills had been $66.9 million, a 12% lower in comparison with $76.1 million in Q3 2021. We proceed to carefully monitor all bills whereas persevering with to help our revenue-generating areas. Adjusted working revenue within the third quarter of 2022 was $5.9 million, a lower of $20.5 million from working revenue of $26.4 million in Q3 2021. Third quarter web loss was $5.9 million, of which $6.2 million is attributable to Corsair Gaming, Inc. This represents a lack of $0.09 per diluted share as in comparison with web revenue of $1.8 million or $0.02 per diluted share in Q3 2021.
The Third quarter adjusted web revenue was $7.6 million or web revenue of $0.08 per diluted share as in comparison with adjusted web revenue of $16.3 million or $0.16 per diluted share in Q3 2021. Adjusted EBITDA for the third quarter of 2022 was $10.1 million in comparison with $27.6 million for Q3 2021.
Turning now to our steadiness sheet. We ended the quarter with $61.7 million of money and $245 million of debt at face worth with the $100 million revolver absolutely obtainable. We spent $7.9 million on CapEx, which incorporates $5.7 million associated to our new headquarters in Milpitas. We count on that this elevated CapEx stage is generally behind us borrowing strategic funding alternatives, we glance to convey our money steadiness additional up over time and resume lowering debt on a extra accelerated foundation.
When it comes to the complete yr 2022, whereas we’re beginning to see indicators of enchancment, we’re barely adjusting our outlook to mirror the continued difficult market surroundings and the headwinds I mentioned in my feedback earlier. For the complete yr 2022, we now count on complete income within the vary of $1.325 billion to $1.375 billion in comparison with $1.35 billion to $1.45 billion prior. Adjusted working revenue within the vary of $20 million to $30 million in comparison with $35 million to $50 million prior and adjusted EBITDA within the vary of $35 million to $45 million in comparison with $50 million to $65 million prior.
With the Fed price hike cycle in progress, forecasting curiosity expense is tougher. Assuming no additional debt paydown, we count on curiosity expense of roughly $3 million to $4 million per quarter. An efficient tax price of roughly 15% to twenty% for 2022 and full yr weighted common diluted shares excellent of roughly $98 million to $100 million.
To summarize, we’re beginning to see indicators of enchancment, however the market stays difficult. We’re beginning to see the good thing about value discount actions we beforehand took, and we’re carefully monitoring all expenditures, whereas persevering with to help our product and income technology. We consider that, we’re being prudent with OpEx, trimming the place wanted whereas persevering with to spend money on product growth and advertising to help current and future product income. We’ll additionally rigorously managing working capital as we enter the anticipated increased income second half of the yr.
Stock ranges are normalizing, and freight prices are coming down, which can have important constructive impact on margins shifting ahead. We began to see a few of this profit in Q3 and count on one other few proportion factors margin enchancment this yr and into 2023. Lastly, the uptick in demand for self-built gaming PCs from new GPU launches and the downturn in cryptocurrency that Andy talked about, lowering non-gaming demand on GPUs. It is one other constructive for us shifting into This autumn.
With that, we’re glad now to open the decision for questions. Operator, will you please open the road for Q&A?
Query-and-Reply Session
Operator
Thanks. Women and gents, we are actually on the Q&A session. [Operator Instructions] Our query comes from Drew Crum of Stifel.
Drew Crum
Good afternoon. So simply your feedback round lowering channel stock going ahead, how a lot is that based mostly on the change in shopper demand or conduct? And the way a lot is that stimulated by promotional exercise supposed to make use of via the vacation quarter? After which I’ve a follow-up.
Andy Paul
So if we’re speaking about how a lot channel stock has been decreased based mostly on shopper demand versus promotional. Let me reply that another way. The rise in stock was brought on by over ordering from the channel coupled with, in some elements of the world, particularly Europe, a slight discount in shopper demand after the Ukraine warfare. In order that’s been the principle impact.
Now the discount has primarily been simply delivery as per regular. We have carried out a bit little bit of promotion, however not extreme quantities, I might say.
Drew Crum
And Andy – go forward.
Andy Paul
Yeah. So in different phrases, the best way to consider it’s that, clearly, we have shipped into the channel lower than we usually would have carried out in order that the sell-out to shoppers eat among the stock.
Drew Crum
Obtained it. Okay. After which if I heard you accurately, there’s extra stock – extra of a list overhang with the gaming peripheral enterprise. When would you count on that to normalize?
Andy Paul
Most likely — actually, the one factor left is there’s a bit little bit of an overhang with gaming peripheral, and it is largely in Europe, and we might count on that to resolve itself by Q1.
Drew Crum
Okay. Okay. After which, Michael, simply on gross margin, you noticed a sequential enchancment in 3Q versus 2Q with the fee actions that you just outlined, the contributions from new merchandise and a few aid on provide chain. Is it honest to imagine the enterprise experiences additional gross margin enchancment in 4Q? And the place do you assume that leaves the enterprise for the yr? Thanks.
Andy Paul
I imply the distinction in freight charges alone because it sort of works via the stock. That is a pair like 2 to three proportion factors over the subsequent quarter or two enchancment. And we’ll get a bit bit extra from economies of scale with the upper income. So with out making an allowance for what the ultimate market sentiment is, we must always get just a few proportion factors enhance with stock ranges happening, this could put us in a greater place as we enter subsequent yr.
Drew Crum
Obtained it. Thanks, guys.
Operator
The following query comes from Mario Lu of Barclays.
Mario Lu
Nice. Thanks for taking the query. The primary one is seasonality. There’s been lots of shifting elements within the enterprise over the past couple of years and simply had been gentle usually. It appears just like the midpoint of the fourth quarter information is up 20% Q-on-Q. Is there a framework we may use when it comes to how we must always take into consideration seasonality into fiscal 2023? Thanks.
Andy Paul
Properly, hello, Mario, I used to be taking a look at this this morning, the factor is, when you take a look at the final 5 years of historical past, the Q3 to This autumn cadence is wherever from 15% to 30% up. So we’re roughly in the course of that. However the different factor I might say is that the seasonality is predicated on shoppers. And so our gross sales into the channel in Q3 was clearly decrease than sells out to shoppers from the channel. And This autumn, that distinction must be rather less — in order that’s why we usually count on to get a bit little bit of a pickup in income simply due to the very fact we’re adjusting stock much less. And we might count on someplace 20% to 25% raise from simply shopper exercise based mostly on historical past.
And we do not see any cause that is going to be much less, in reality, as a result of all the brand new applied sciences and platforms have simply launched from NVIDIA and Intel and AMD, there is a good likelihood that that is going to be even increased. However that is a means to consider it.
Now 2020, I would not think about must be any completely different from that the common that I simply informed you about. However Q1 clearly, within the near-term, there is a honest likelihood that demand goes to be sturdy as a result of we’re nonetheless seeing new platforms launch. So we had the 4090 simply launched a few weeks in the past, which is the graphics card high of the road. After which in two weeks’ time, we have the 4080 being launched. After which I feel the 4070 will come out in of Q1. So there’s lots of launches which might be going to drive folks with completely different budgets to start out constructing.
Mario Lu
Nice. Thanks.
Operator
[Operator Instructions] The following query comes from Franco Granda of D.A. Davidson.
Unidentified Analyst
Hello, I am William in for Franco Granda. How ought to we take into consideration the margin profile?
Andy Paul
Hello.
Unidentified Analyst
Hello. How ought to we take into consideration the margin profile for among the new merchandise which might be popping out which have got here out just like the laptop computer and the Flex monitor?
Andy Paul
Properly, I might say that we’re attempting to convey new merchandise out usually at increased margins than the equal merchandise in the previous few years. And that is clearly what each firm does, try to make increasingly more margin.
The monitor itself, I do not wish to get into specifics of that exact one. However I might — you possibly can think about that, clearly, merchandise like gaming PCs and screens, usually going to have a decrease margin than a few of our different elements and peripherals.
Unidentified Analyst
And second query. A few of your friends have launched merchandise catering to cloud gaming. What’s your present stance and outlook on the cloud gaming market?
Andy Paul
Properly, we predict it is marvelous. Extra folks that play video games, we predict is the higher, as a result of what we have seen is the folks that play video games at an early age on telephones via the cloud, finally migrate to a PC platform. So we see the largest impact that cloud gaming is going on right this moment is in that entry stage of cell sector.
We do not usually spend lots of our useful resource on roadmaps in these areas within the entry stage, however we’re definitely taking a look at it. So I feel — I do not see an enormous alternative for us when it comes to income within the short-term. However long-term, we count on extra folks gaming goes to drive them into shopping for higher PC platforms.
Unidentified Analyst
Okay. Thanks for taking the questions, guys.
Finish of Q&A
Operator
Okay. Thanks. Women and gents, only a remaining reminder [Operator instructions] Gents, we don’t appear to have any additional questions on the traces. Women and gents, that concludes right this moment’s question-and-answer session. I might now like to show the convention over to Andy Paul for closing remarks.
Andy Paul
Thanks, everybody, for becoming a member of the decision right this moment and to your continued help. If in case you have any follow-up questions, please contact on — division and we look ahead to updating you subsequent quarter. Thanks, and have a great night.
Operator
Thanks. Women and gents, that concludes right this moment’s convention. Thanks to your participation. And it’s possible you’ll now disconnect your traces.