Good afternoon, ladies and gentlemen, and welcome to the Corsair Gaming Third 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, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

[Operator Instructions] With that, I would now like to turn the conference over to Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. Please begin..

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

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 our 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 over the call to Andy..

Thank you, Ronald, and welcome, everyone, to our Q3 2022 earnings call. I'm very pleased to report that we achieved a 10% sequential revenue growth in Q3 2022 from Q2 2022, while continuing to deal with higher-than-normal inventory levels.

Sales levels from our channel to consumers were significantly above pre-pandemic levels in almost all product lines and many were above the year ago level. As we have reported in recent earnings calls, this year has been marked by excessive inventory in the channel, especially in Europe.

We continue to report and make comments on consumer sales from our channel as well as our revenue from sales into the channel to provide clarity on the progress we are making. For example, in the US, we have made great progress in reducing this inventory and stock levels are now closer to a more normal level.

European channel inventory position remains elevated, but is also slowly normalizing. Our target is to reduce our worldwide channel inventory overhang by roughly $100 million from the start of 2022 to the end of this year, with a little left more to go in our creative and peripheral segment and our European channel inventory.

As we mentioned in previous quarters, the self-built PC market has been held back over the past two years, with high demand for graphics cards from crypto miners on top of increased demand for computers during the pandemic, which had caused GPU prices to rise in some cases to double.

Now that crypto mining cannot use GPUs as effectively as before, there's been a decline in demand and prices are back to standard MSRP or below.

Additionally, in recent months, there have been launches of new technology platforms through NVIDIA, AMD, and Intel, which look to be accelerating demand in the self-built PC market as our enthusiast customers can now build a better and faster gaming PC for a lower cost than they could over the last two years.

The added positive for Corsair is that gaming PCs built with these new platforms need faster memories such as DDR5, larger power supplies with 1,000-watt capability or higher, and better cooling technology, all product categories that we are expert in and have obtained a dominant market share.

There have also been several recent games launched or updated that take full use of new technologies built into the new GPUs, making them more immersive and more exciting to play. This is also helping to drive higher demand for gaming PCs and peripherals.

In general, as we move through the second half of the year, we are starting to see the market recover from the lower demand seen in the early part of 2022. The US continues to be a strong market and we expect Q4 to see continued growth in all categories.

Europe is still tracking lower than last year, but has shown improvements, and we currently also expect growth in Q4 compared to Q3. Revenue in Asia for Q3 was approximately flat compared to last year. Let me now take a minute to update you on some of our Q3 product developments.

In Q3, we began selling the Corsair Voyager a1600 AMD Advantage Edition laptop. This is our first Corsair branded laptop, and it combines AMD's latest CPU and GPU platforms with our software and technologies to create an unparalleled gaming and streaming experience.

This laptop has been the highest single R&D investment in our company's history, entering the top end of the gaming laptop market. We also launched a new 45-inch OLED bendable gaming monitor developed in partnership with LG.

This incredibly looking display be adjusted from flat to curve by hand for different gaming use cases and is the first of its kind in the market. We expect to start shipping this monitor in first quarter of 2023.

Other launches in Q3 include our new K100 Air wireless mechanical gaming keyboard, and we announced full availability of PC components compatible with NVIDIA's latest 40 series graphics cards.

In summary, while the market environment remains challenging, we are very encouraged by the recent activity in the self-built gaming PC market and we expect elevated demand to continue as new lower-priced models of GPUs get launched in the coming months.

Longer term, we expect a further benefit from the expansion in the gaming gears market numbers of active consumers during the pandemic, which should drive a higher spending base over the next few years.

We've made significant progress in driving down inventory levels, both in the channel as well as internally and expect to reduce these levels further in Q4 as we move back to our normal targets. 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. We achieved 10% sequential revenue growth in Q3 in a challenging environment. This reflects our continued execution, strength of our market position, and sustained underlying demand.

Gross margins were pressured by the recent sharp strength of the US dollars against the European and Asian currencies, but reasonably currencies appear to be more stable. We have taken some actions related to the currency changes that should lead to gross margin improvements going forward.

In terms of the specifics, Q3 2022 revenue increased $311.8 million compared to $283.9 million in Q2 2022. This compares to $391.1 million in Q3 2021.

Our channel partners continue to reduce their inventories in Q3 2022 to current and expected consumer demand and the reduced transit and lead times, thus removing much of the overhang from orders placed due to longer lead times in prior periods caused by the effects of the COVID pandemic.

We also reduced our own inventory by about 15% quarter-over-quarter as we drive our inventory to more historic normalized levels. European markets continue to be softer than Americas, and contributed about 29% of our revenues, well below the historic average in the high 30 percentile, but up from the approximately 25% in Q2 2022.

Turning now to our segments. The Gamer and Creator Peripheral segment contributed $96.8 million of net revenue during the third quarter, up from $89 million in the prior quarter and a decrease of 30.5% from $139.3 million in Q3 2021.

The Gamer and Creator Peripheral segment net revenue contributed 31.1% of total net revenue, a decrease of 450 basis points from 35.6% in Q3 2021. The Gaming Components & Systems segment contributed $214.9 million of net revenue during the quarter, up from $194.9 million in the prior quarter and a decrease of 14.7% from $251.9 million in Q3 2021.

Memory products contributed $115.2 million in third quarter 2022 compared to $115.5 million in 3Q 2021. Overall gross profit in the third quarter decreased by 29.4% to $71.6 million from $101.4 million in Q3 2021. The decrease compared to Q3 2021 was primarily driven by reduced revenues. Gross profit margin was 23% compared to 25.9% in Q3 2021.

We're starting to benefit from the cost actions we announced last quarter, along with the success of newer products we recently released, which we believe will have a significant positive effect on margins moving forward. Some of which we realized in the third quarter.

We're also encouraged by the improving supply chain environment, including a significant reduction in freight rates and supply chain lead times, which are rapidly approaching the same levels as they were pre-pandemic. There is typically a four to five-month lag before these cost reductions are fully reflected in our P&L as our inventory turns.

The Gamer and Creator Peripheral segment gross profit was $31.8 million, a decrease of 34.6% from $48.6 million in Q3 2021, primarily driven by a decrease in revenue and the supply chain and logistics costs I just mentioned. Gross profit was 32.8% compared to 34.9% in Q3 2021.

The gaming components and systems segment gross profit was $39.8 million, a decrease of 24.7% from $52.8 million in Q3 2021 and primarily driven by the decrease in revenue in the same period and higher logistics costs. Gross profit margin was 18.5% compared to 21% in Q3 2021. Our Memory Products margin in this segment was 14.4% for the quarter.

The third quarter SG&A expenses were $66.9 million, a 12% decrease compared to $76.1 million in Q3 2021. We continue to closely monitor all expenses while continuing to support our revenue-generating areas.

Adjusted operating income in the third quarter of 2022 was $5.9 million, a decrease of $20.5 million from operating income of $26.4 million in Q3 2021. Third quarter net loss was $5.9 million, of which $6.2 million is attributable to Corsair Gaming, Inc.

This represents a loss of $0.09 per diluted share as compared to net income of $1.8 million or $0.02 per diluted share in Q3 2021. The Third quarter adjusted net income was $7.6 million or net income of $0.08 per diluted share as compared to adjusted net income 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 compared to $27.6 million for Q3 2021. Turning now to our balance sheet. We ended the quarter with $61.7 million of cash and $245 million of debt at face value with the $100 million revolver fully available.

We spent $7.9 million on CapEx, which includes $5.7 million related to our new headquarters in Milpitas. We expect that this elevated CapEx level is mostly behind us borrowing strategic investment opportunities, we look to bring our cash balance further up over time and resume reducing debt on a more accelerated basis.

In terms of the full year 2022, while we are starting to see signs of improvement, we are slightly adjusting our outlook to reflect the continued challenging market environment and the headwinds I discussed in my comments earlier.

For the full year 2022, we now expect total revenue in the range of $1.325 billion to $1.375 billion compared to $1.35 billion to $1.45 billion prior.

Adjusted operating income in the range of $20 million to $30 million compared to $35 million to $50 million prior and adjusted EBITDA in the range of $35 million to $45 million compared to $50 million to $65 million prior. With the Fed rate hike cycle in progress, forecasting interest expense is more difficult.

Assuming no further debt paydown, we 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.

To summarize, we are starting to see signs of improvement, but the market remains challenging. We're starting to see the benefit of cost reduction actions we previously took, and we're closely monitoring all expenditures, while continuing to support our product and revenue generation.

We believe that, we're being prudent with OpEx, trimming where needed while continuing to invest in product development and marketing to support existing and future product revenue. We'll also carefully managing working capital as we enter the expected higher revenue second half of the year.

Inventory levels are normalizing, and freight costs are coming down, which will have significant positive effect on margins moving forward. We started to see some of this benefit in Q3 and expect another few percentage points margin improvement this year and into 2023.

Finally, the uptick in demand for self-built gaming PCs from new GPU launches and the downturn in cryptocurrency that Andy mentioned, reducing non-gaming demand on GPUs. It's another positive for us moving into Q4. With that, we're happy now to open the call for questions.

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

Thank you. Ladies and gentlemen, we are now at the Q&A session. [Operator Instructions] Our question comes from Drew Crum of Stifel..

Good afternoon. So just your comments around reducing channel inventory going forward, how much is that based on the change in consumer demand or behavior? And how much is that stimulated by promotional activity intended to use through the holiday quarter? And then I have a follow-up..

So if we're talking about how much channel inventory has been reduced based on consumer demand versus promotional. Let me answer that in a different way. The increase in inventory was caused by over ordering from the channel coupled with, in some parts of the world, especially Europe, a slight reduction in consumer demand after the Ukraine war.

So that's been the main effect. Now the reduction has mainly been just shipping as per normal. We've done a little bit of promotion, but not excessive amounts, I'd say..

And Andy – go ahead..

Yeah. So in other words, the way to think about it is that, obviously, we've shipped into the channel less than we normally would have done so that the sell-out to consumers consume some of the inventory..

Got it. Okay. And then if I heard you correctly, there's more inventory – more of an inventory overhang with the gaming peripheral business.

When would you expect that to normalize?.

Probably -- really, the only thing left is there's a little bit of an overhang with gaming peripheral, and it's mostly in Europe, and we'd expect that to resolve itself by Q1..

Okay. Okay. And then, Michael, just on gross margin, you saw a sequential improvement in 3Q versus 2Q with the cost actions that you outlined, the contributions from new products and some relief on supply chain.

Is it fair to assume the business experiences further gross margin improvement in 4Q? And where do you think that leaves the business for the year? Thanks..

I mean the difference in freight rates alone as it kind of works through the inventory. That's a couple like 2 to 3 percentage points over the next quarter or two improvement. And we'll get a little bit more from economies of scale with the higher revenue.

So without taking into account what the final market sentiment is, we should get a few percentage points increase with inventory levels going down, this should put us in a better position as we enter next year..

Got it. Thanks, guys..

The next question comes from Mario Lu of Barclays..

Great. Thanks for taking the question. The first one is seasonality. There's been a lot of moving parts in the business over the last couple of years and just were light in general. It looks like the midpoint of the fourth quarter guide is up 20% Q-on-Q.

Is there a framework we could use in terms of how we should think about seasonality into fiscal 2023? Thanks..

Well, hi, Mario, I was looking at this this morning, the thing is, if you look at the last five years of history, the Q3 to Q4 cadence is anywhere from 15% to 30% up. So we are roughly in the middle of that. But the other thing I would say is that the seasonality is based on consumers.

And so our sales into the channel in Q3 was clearly lower than sells out to consumers from the channel. And Q4, that difference should be a little less -- so that's why we normally expect to get a little bit of a pickup in revenue just because of the fact we're adjusting inventory less.

And we'd expect somewhere 20% to 25% lift from just consumer activity based on history. And we don't see any reason that's going to be less, in fact, because all the new technologies and platforms have just launched from NVIDIA and Intel and AMD, there's a good chance that that's going to be even higher. But that's a way to think about it.

Now 2020, I wouldn't imagine should be any different from that the average that I just told you about. But Q1 obviously, in the near-term, there's a fair chance that demand is going to be strong because we're still seeing new platforms launch. So we had the 4090 just launched a couple of weeks ago, which is the graphics card top of the line.

And then in two weeks' time, we've got the 4080 being launched. And then I think the 4070 will come out in of Q1. So there's a lot of launches that are going to drive people with different budgets to start building..

Great. Thank you..

[Operator Instructions] The next question comes from Franco Granda of D.A. Davidson..

Hi, I'm William in for Franco Granda.

How should we think about the margin profile?.

Hi..

Hi.

How should we think about the margin profile for some of the new products that are coming out that have came out like the laptop and the Flex monitor?.

Well, I would say that we're trying to bring new products out typically at higher margins than the equivalent products in the last few years. And that's obviously what every company does, try and make more and more margin. The monitor itself, I don't want to get into specifics of that particular one.

But I would -- you can imagine that, obviously, products like gaming PCs and monitors, typically going to have a lower margin than some of our other components and peripherals..

And second question. Some of your peers have introduced products catering to cloud gaming.

What is your current stance and outlook on the cloud gaming market?.

Well, we think it's marvelous. More people that play games, we think is the better, because what we've seen is the people that play games at an early age on phones through the cloud, eventually migrate to a PC platform. So we see the biggest effect that cloud gaming is happening today is in that entry level of mobile sector.

We don't typically spend a lot of our resource on roadmaps in those areas in the entry level, but we're certainly looking at it. So I think -- I don't see a huge opportunity for us in terms of revenue in the short-term. But long-term, we expect more people gaming is going to drive them into buying better PC platforms..

Okay. Thanks for taking the questions, guys..

End of Q&A:.

Okay. Thank you. Ladies and gentlemen, just a final reminder [Operator instructions] Gentlemen, we don’t seem to have any further questions on the lines. Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the conference over to Andy Paul for closing remarks..

Thank you, everyone, for joining the call today and for your continued support. If you have any follow-up questions, please contact on -- department and we look forward to updating you next quarter. Thank you, and have a good evening..

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. And you may now disconnect your lines..