Good afternoon, and welcome to the Corsair Gaming Second Quarter 2022 Earnings Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording at this time. [Operator Instructions].

With that, I would now like to turn the call over to Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you. Sir, you may begin..

Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ending June 30, 2022. On the call today, we have our Corsair CEO Andy Paul and CFO, Michael Potter. Andy will review highlights from the second quarter and the business environment.

Michael will then review the financials and our outlook, and 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 closed today. With that, I'll now turn the call over to Andy..

Thank you, Ronald, and welcome everybody to our Q2 2022 earnings call. The first half of 2022 has been challenging from a macro perspective. But on the other hand, we have recently started to see encouraging signs with a reduction in supply chain lead times, shipping costs coming down, and consumer activity picking up.

Our revenues for the second quarter came in at $284 million, below our expectations entering the quarter, but this does not reflect the purchases of consumers from our retailers, which was significantly higher. As the channel inventory level normalizes, we will see a return to more balanced sell-in versus sell-through and stronger growth.

We spent much of the second quarter helping our channel partners reduce inventory, which was ordered on long lead times, and when the inventory arrived, the consumer demand in the first half was less than forecasted. This is consistent with the broader macro weaknesses that have been widely discussed.

This was especially prevalent in Europe where the shipping lead times were longest and immediately after the start of the Russia and Ukraine war, demand dropped due to lingering consumer concerns about that war and about rising energy prices.

As we mentioned in our previous earnings calls, the supply chain situation of last year also caused many of the key components that gaming enthusiasts needs to build their gaming platforms to become either unavailable or prohibitively expensive. This in turn caused many consumers to hold off building new gaming PCs.

I'm pleased to report that the shortages are now generally over and the most expensive items, graphics cards and CPUs, are now readily available. We see consumers starting to build and upgrade their gaming PCs again at higher levels than last year as we move into the second half.

This is more in line with the strong underlying fundamentals of our long-term business and why we remain so excited about our long-term opportunities. In fact, during Amazon Prime week this year, which moved to July, we saw significant growth in this area, with only modest increase in promotional spending.

And consumer sales for components used to build gaming PCs were higher than last year in both Europe and the U.S. We expect this trend to continue now during the second half.

Our inventory levels in the channel and in our warehouses is now coming down to more reasonable levels, and we expect that during the second half, our revenues will be more in line with consumer sales out from our channel partners. Let me take a minute now to update you on some of our significant new products introduced in the second quarter.

The most notable is our announcement of our new gaming laptop, the Voyager a1600 designed in partnership with AMD, which combines high-performance gaming features with streaming technology from our Elgato division.

While the majority of our revenue in the past has come from enthusiasts who like to build their PC gaming platforms from components, there is a growing market for gaming laptops. In fact, it's the fastest-growing area in gaming platforms.

This laptop has been the single highest R&D investment in our company's history, and we expect that we will see significant growth in our prebuilt gaming platforms due to this launch, and we plan to start shipments during the third quarter.

We also launched a new gaming keyboard, the K-70 Mini, a 60% keyboard designed to allow gamers to customize switches and key caps, and this is an area that we see significant growth in the market.

And we also launched the partnership with NVIDIA, where we incorporated the new broadcast suite of software onto our streaming products, allowing streamers to significantly enhance their broadcast quality.

We are looking forward to the release of new graphics cards from NVIDIA and new CPU platforms from AMD during the second half, which we believe will stimulate new platform builds and increase gaming hardware purchases.

While there was clearly a surge of activity in consumer spending in 2020 and 2021 due to people spending more time at home during the COVID pandemic, we now see that spending is higher now than before the pandemic started in almost every category that we're in.

Which indicates that new gamers continue to come into the market looking for products that help their gaming experience. This all leads to being very encouraged for an exciting 2023 and continued growth. Let me now turn the call over to our CFO Michael Potter for details on the financials. Michael, please go ahead..

Thanks, Andy, and good afternoon, everyone. In Q2, we delivered net revenue of $283.9 million. This compares to $472.9 million in Q2 2021, which was a record second quarter for Corsair that benefited from stimulus checks and pent-up demand.

Our channel partners continued to reduce their inventories in Q2 2022 to current and expected consumer demand and the reduced transit and lead times. Sales to the European region continues to underperform the company as a whole and contribute about 1/4 of our revenues, well below the historic average in the high 30s percentiles.

As Andy mentioned earlier, we are starting to see positive signs. For example, we continue to see sales out from our channel partners' inventory exceed our sales into them.

This indicates channel inventory is gradually coming down and the inventory overhang is moving towards a more normal level at which point our sales will rise back up to match the level of consumer demand. Turning now to our segments.

The gamer and creator peripheral segment contributed $89 million of net revenue during the second quarter, a decrease of 42.6% from $155.2 million in Q2 2021. The gamer and creator peripheral segment net revenue contributed 31.3% of total net revenue, a decrease of 150 basis points from 32.8% in Q2 2021.

The gaming components and systems segment contributed $194.9 million of net revenue during the quarter, a decrease of 38.7% from $317.7 million in Q2 2021. Just over half this revenue came from memory products which contributed $99.1 million.

Overall gross profit in the second quarter decreased by 72% to $36.5 million from a record $130.4 million in Q2 2021. The decrease compared to Q2 2021 was primarily driven by reduced revenues, an incremental $19.5 million inventory reserve charge, increased logistic costs and a return to a more normal promotional activity.

Gross profit margin was 12.8% compared to a record 27.6% in Q2 2021, mainly due to significant increases in logistics costs, especially ocean freight, higher promotional activity, and lower absorption on reduced volumes. Adjusting for the increased inventory overhang reserve charge, gross margin was just under 20%.

We are working to offset the impact of inflation by raising prices where appropriate and expect to continue such actions in Q3. Logistics costs headwinds have continued to moderate during Q2, though as discussed before, there is typically a 4 to 5-month lag before these cost reductions are reflected in our P&L as inventory turns.

The gamer and creator peripheral segment gross profit was $10.6 million, a decrease of 80.7% from $54.6 million in Q2 2021, primarily driven by a decrease in revenue, the inventory reserve charge, increased supply chain and logistics costs, and a return to more normal pre-pandemic level of seasonal promotions.

Gross profit margin was 11.9% compared to a record 35.2% in Q2 2021, largely due to the previously mentioned inventory reserves, supply chain and logistics costs and rebate levels. Adjusting for inventory reserve charge, gross margin was about 28%.

The gaming components and systems segment gross profit was $25.9 million, a decrease of 65.8% from $75.7 million in Q2 2021, primarily driven by the decrease in revenue in the same periods and increased logistics costs. Gross profit margin was 13.3% compared to 23.8% in Q2 2021. Adjusting for inventory reserve charge, the gross margin was around 16%.

Our memory products margin in this segment was 9% for the quarter. Second quarter SG&A expenses were $73.4 million, a slight decrease of 8.5% compared to $80.2 million in Q2 2021. The impact of outbound freight costs due to reduced revenue was offset by increases in outbound ocean and air freight rates.

Adjusted operating loss in the second quarter of 2022 was $14.2 million, a decrease of $63.5 million from operating income of $49.3 million in Q2 2021. Second quarter net loss was $51.8 million, of which $52 million is attributable to Corsair Gaming, Inc.

This represents a loss of $0.62 per diluted share as compared to net income of $27.7 million or $0.28 per diluted share in Q2 2021. There was an impact of approximately $0.08 on EPS in Q2 2022 associated with iDisplay, largely due to accounting for put rights.

Second quarter adjusted net loss was $19 million or $0.20 per diluted share as compared to adjusted net income of $35.7 million or $0.36 per diluted share in Q2 2021. Adjusted EBITDA for the second quarter of 2022 was a loss of $11 million compared to earnings of $51.6 million for Q2 2021. Turning now to our balance sheet.

We ended the quarter with $35.9 million of unrestricted cash, an increase of $6.8 million over the last quarter, no draw on our $100 million revolver, and $246.3 million of debt at face value. We spent $7.6 million on CapEx, which included $3.4 million relating to our new headquarters in Milpitas.

Barring strategic investment opportunities, we look to bring our cash balance to Q3 or Q4 2021 levels over time. 2022 has so far been challenging, and we've already taken actions to adjust to the lower revenue level in the first half of 2022 and our expectations for the remainder of the year.

We have proactively taken actions to reduce operating expenses, including a small layoff, and we have adjusted product ordering and took a $19.5 million reserve against potential inventory overhangs.

We believe our business fundamentals remain strong with a positive long-term outlook, and we continue to believe that the self-build gaming PC market will begin to accelerate in the second half of 2022.

Despite the headwinds we've been facing, we have continued to invest in product development and have and will continue to release innovative and what we believe to be industry-leading products. In terms of the full year 2022, we are updating our outlook as follows.

We now expect total revenue in the range of $1.35 billion to $1.45 billion, adjusted operating income in the range of $35 million to $50 million, and adjusted EBITDA in the range of $50 million to $65 million. There are some changes to the additional modeling details underlying our outlook.

We believe that we continue to be in an inventory correction, but further advanced it in the first half of the year.

And particularly, we believe that components inventory in the channel is close to normalization, and this should help lift our second half revenue in combination with GPUs starting to become reasonably priced and the release of AMD's new AM5 platform.

Some of the largest and most successful retailers have struggled to actually call the right inventory levels and believe that we have appropriately responded to changing circumstances and the changes in market demand caused by inflationary pressures.

Revenue has been quite difficult to forecast as we believe that the end market demand has not fallen as much as our orders from our customers have. Like inventory, logistics costs have slowly reduced during the year and will be a positive impact on gross margins in the second half of 2022 compared to the first half.

We will continue to invest in new product development in order to maintain a rigorous release schedule. We will moderate other operating expenses in tune with the current business environment.

2022 annual EBITDA range is not a good indication of a more normalized run rate as the lower-than-expected first half is essentially not contributing to the annual number. With the Fed rate hike cycle in progress, forecasting interest expense is more difficult.

Assuming no further debt paydown, we now expect interest expense of approximately $3 million to $4 million per quarter, an effective tax rate of approximately 15% to 20% for 2022, and full year weighted average diluted shares outstanding of approximately 98 million to 100 million shares.

To summarize, our Q2 results were below our expectations, but we're starting to see signs of improvement in our channels. We expect that the second half will show improvement over the first half, but at lower levels than we expected at the start of the year.

In particular, GPU prices have moderated and GPUs are generally available now to our end customers. That coupled with the expected exciting product releases from us for our product lines, plus new AMD motherboards and NVIDIA GPUs, should provide a good foundation for improving results in our components business.

We've seen a slow easing of logistics costs through the reduction of container rates and also to less need to airfreight products. Higher revenue will help margins as absorptions will improve, and our mix, including new product releases, should improve overall margins through the second half.

If consumer end demand continues to hold up, we expect that the end of 2022 will provide a good foundation for 2023. With that, we're now happy to open the call for questions.

Operator, will you please open the line for Q&A?.

[Operator Instructions]. Your first question comes from Mario Lu with Barclays..

This is Jessie on for Mario. Two from me.

First, in light of weaker-than-expected trends in the second quarter, can you guys talk a little bit about if market share gains are continuing and how the competitive landscape has shifted in both the components and peripheral segments of the business? And then second, you guys mentioned some price increases to offset margin pressure.

With consumer walls starting to tighten against the current macro, have you guys started to see customers trade down in terms of product ASPs? Or do you think the premium gaming market is fairly insulated from recessionary type environments?.

Yes. Two types of questions there. In terms of competitiveness, we are very competitive on components and memory. In fact, we increased our market share over the most recent months. In fact, in memory, we're now in the U.S. at about 7% market share. So that's done very well.

On gaming peripherals, we obviously have some bigger competitors who have similar inventory overhangs in the channel, and some of them have been very aggressive at clearing inventory. We've been trying to balance margins and revenue on peripherals, and so we stepped back a little bit in market share because of that.

We expect to gain that back once everyone has cleared out their excess inventory. In terms of pricing, there's been a few things going on. Pricing went up a little bit on some of our bulky items, things like chairs and cases, because of shipping and in some cases because of tariffs. That does not in itself tend to sort of stop consumers buying.

If you think about it, if you're buying the components for building a $2,500 gaming PC, you're very focused on things like graphics cards and CPUs, which are the most expensive items, and those have obviously been coming down recently. I think that the other part of your question, are we seeing people trade down, and the answer is not really.

Other than the fact that we've got competitors discounting heavily and so people are able to pay a little bit less. In general, we've seen in the past that categories like this, enthusiast categories, people tend to prioritize those over some of the other spending they're doing..

Next question comes from Rod Hall with Goldman Sachs..

I guess I wanted to come back, Michael, to the $19.5 million, just kind of check that reserve against inventory.

Could you give us any more detail on that? Like what kind of inventory you're reserving against? Is it mainly peripherals you're worried about? Or is it kind of across the board? Or just any more color you can give us on that and why you're taking the reserve here.

Obviously, there's the inventory correction, but I guess what you're saying to us is you think there's some risk that maybe the inventory doesn't sell through in the end or something like that. I just kind of want a little bit more color on that, then I've got a follow-up..

It's more heavily weighted in the peripherals area than the components area. And the peripherals have more variation for products to come out a little bit more quickly than components.

Sales out are a little slower than you expected, and you have new products coming out later in the year and the beginning of next year, you want to get rid of the old products a little faster.

That was more of what we looked at when it came to taking the reserve, realizing we'd get lower sales prices if we wanted to move quicker on some of the ones that are going to be replaced by better products in the future. Now that happens all the time in consumer electronics companies, you kind of expect us to have new and better stuff every year.

We just have to adjust our pricing strategies to fit with the channel inventory and end market demand..

Okay. Yes, that makes total sense. And then I wanted to come back maybe, Andy, and ask you about the -- you guys are cutting the guidance, but you're pretty optimistic on gamer PC builds later in the year. And I want to kind of try to juxtapose those 2 things together.

Are you saying that most of the pessimism here in the reduction in guidance is peripherals? Or do you also think -- just help us understand kind of how you see the back end of the year developing as we sit here today..

Yes. We're already seeing a strong pickup in activity around people building gaming PCs. Most of this is because graphics cards have now come down to MSRP, and in some cases, below MSRP. Because NVIDIA we think will be launching a new series of graphics cards in the next few months, so they've got to clear out inventory. That's the positive side.

Clearly, in Europe, we still have a market that's a little shell shocked from the war and they're experiencing higher inflation than we are here. That naturally will reduce a little bit of spending. Those 2 balanced together are what leads us to the numbers.

What we're pleased about is that now we're through the pandemic completely, and we can kind of really see what's happened. There was obviously a surge in 2020 and 2021, where people were stuck at home playing gaming more. But in every category that we're in, the consumer sales is quite significantly higher now than it was pre-pandemic.

And so now we can look back over the last few years and sort of get an average growth that is pretty compelling..

[Operator Instructions]. Your next question comes from Drew Crum with Stifel..

Andy, can you remind us what the growth profile in TAM are for the gaming laptop category? And just to go back to the previous question, just want to clarify this. Are you suggesting that the self-built gaming PCs for your business grow in the second half year-on-year? And then I have a follow-up..

Yes, you asked a couple of questions there. The self-build PC market clearly will be growing second half of this year as last year because second half last year, graphics cards were 150% of MSRP. Unless we get another war starting, we would expect that to continue to rise. And we've already seen the start of that.

Prime Day was really, or Prime Week, if you like, was the first part of it, and we saw quite significant growth this year compared to last year. So that's that. Now the gaming laptop market, we've talked before about the total platform market of gaming PCs and laptops.

It's, in very, very rough terms, it's almost 50/50, and we're talking about a $40 billion to $50 billion market. Of the gaming PC market, that's also split 50/50 between self-built and prebuilt. Laptop is pretty much 100% prebuilt. You can't really -- there's no DIY laptop market. It's a pretty good size.

Now, the vast majority of laptops, gaming laptops I'm talking about, are $1,000 to $1,500. We're not going to be really targeting that. This is going to be much more like we do with our ORIGIN and systems business where we're targeting the top end of the market, the more than $2,500 to $3,000 level.

But that's what we're coming out with, as you've probably seen. It's packed with features, with canopies and stream back features in it. We think it's going to be a winner. But we're pretty conservative in terms of how we're taking that to market. We'll be conservative this year.

And then next year, you'll see what the reception is like and if it's good, then we'll double down..

And Drew, specifically the TAM for that very high-end gaming laptop area, we estimate about $2 billion, and that's based on price more than anything when they segregate it. That segment that our laptop is coming into, about a $2 billion TAM..

Okay. Got it. And then, Michael, I think you mentioned the company has proactively taken actions to reduce OpEx, and you mentioned a modest layoff.

Are there more costs to be taken out of the business? Will we see more activity in the second half?.

I think at the current run rate we're expecting, we audit and continue to be very careful about hiring and where we spend. We're sort of at the level we expect we need to be. Obviously, if things deteriorate more from where they are, we'll take more action.

But I do think that we're better positioned now for the second half and sort of adjusted to the lower revenue that we had in the first half..

[Operator Instructions]. Next question comes from Franco Granda with D.A. Davidson..

Just a couple of questions from me today.

Could you perhaps give us some clarity on whether the jump in Prime Day sales or Prime Week sales were due to heavier discounting than previous years or real demand? And then second, I might have missed it, but did you provide an indication of where you think revenues would have come in at I guess under a normal inventory environment?.

Two questions.

I think the second question was if our sales in were matching our sales out, what would that delta have been? Is that what you're asking?.

Correct..

Yes. I would say on a worldwide basis, roughly 20%. It does vary by country and region, Europe having the biggest, but that's probably a reasonable number as best we can estimate. And the first question was about the Prime Day discount..

We didn't use excessive or more than normal discounts in Prime Day. We actually didn't participate as strongly in some categories because we -- our products are high-end and the customers we aim them at is not really a discount seeking customer.

We were sort of strategic in a few areas, and those areas did well, but we didn't super heavily discount compared to prior years, no..

[Operator Instructions]. Thank you. I would now like to turn the floor over to Andy Paul for closing remarks..

Okay, thank you. Well look, thanks everyone for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department, and we look forward to updating you next quarter. Thanks and have a good evening..

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation..