Juergen Stark - Chief Executive Officer John Hanson - Chief Financial Officer.
Mark Argento - Lake Street Capital Eric Wold - B. Riley & Co. James Meredith - Cowen and Company.
Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
Before we get started, we will be referring to the press release filed today with details of results which can be downloaded from the Investor Relations page of our website at corp.turtlebeach.com. In addition, a recording of the call will be available on the Investor Relations section of the Company's website later this evening.
Please be aware that some of the comments made during our call may include forward-looking statements within the meaning of the federal securities laws. Statements about our 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 our operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statements and risk factors contained in today's press release and in our filings with the Securities and Exchange Commission, including without limitation our most recent Annual Report on Form 10-K, our most recent quarterly report on Form 10-Q and our other periodic reports, which identifies specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements.
We do not undertake to publicly update or revise any forward-looking statements after the date of this conference call. We also note that on this call we will be discussing non-GAAP financial information.
We are providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You may find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today's earnings release.
And now, I'll turn the call over to Juergen Stark, the company's Chief Executive Officer.
Juergen?.
Thank you and good afternoon everyone. First I'll share some highlights of another strong quarter before passing the call to our CFO John Hanson, who will provide details on our Q3 financial performance. I will then expand upon our operations and speak more about our increased outlook for 2016.
The third quarter was yet again driven by strong gains in our NexGen headset portfolio led by continued stronger than expected demand for entry-level Recon series headsets, the initial selling of the STEALTH 520 and 420X+ wireless headsets and good overall performance across the rest of our line.
In fact New-Gen headset sales were up 41% highlighting the continued strength of the portfolio, especially considering the year ago quarter represented a significant New-Gen selling period for parts of our new portfolio. Supporting our results recent NPD data shows that we continue to outperform the market.
Year-to-date the console headset market is up 17% on a unit basis while Turtle Beach is up 26%. On a retail dollar basis the market is up 12% and we are up 14%.
Given this performance as well as our entry into two small, but burgeoning new markets in virtual reality and live streaming with our just launched STEALTH 350VR headset, the first and only headset created specifically for use with the new virtual-reality devices like PlayStation VR, HTC Vive and our STREAM MIC, the first professional quality live streaming microphone that works with Xbox One as well as with PlayStation 4, PC and Mac.
We believe we are well-positioned to capitalize on the upcoming holiday season with the most expansive portfolio in our history. In our HyperSound business as previously disclosed we've taken aggressive, but necessary steps to align costs with our revenue.
We are working to evolve HyperSound to a license business and currently have multiple conversations underway. Our goal remains to get the business to net cash flow breakeven by the end of the second quarter of 2017. Ultimately, we believe this will further highlight the strength of our core headset results in 2017 and beyond.
I will have more to say about this and other developments in our business following John's remarks on the quarter. Needless to say we are very pleased with our Q3 financial performance including our continued strong sales, margin and profit growth in headsets and our diligent cost management. Now, I'll turn the call over to John.
John?.
Thanks Juergen and good afternoon everyone. Net revenue in the third quarter of 2016 increased 7% or 8% in constant currency to $38.4 million compared to the same year ago quarter. The increase was driven entirely by headset sales and as Juergen mentioned a 41% increase in New-Gen headsets.
The revenue increase was primarily due to North America, which increased 14% year-over-year. Total international revenue decreased 8% or 3% in constant currently for the quarter due to Brexit impact and the timing of business in Europe associated with our strategic move to a direct sales model into more areas.
LATAM revenue increased in the quarter and offset a portion of the decrease in Europe due to the selling to a new distributor and consistent with our LATAM growth strategy. Our UK business decreased 18% or 5% in constant current due to the effect of the Brexit both on exchange rates and the subsequent effect on our relative pricing.
We continue to closely monitor the economic climate in the UK to anticipate potential changes that may impact near and long-term market dynamics. As we've communicated we have restructured HyperSound and are migrating the business to a license model.
As a result and in accordance with generally accepted accounting guidelines we took the following actions in the quarter. We recorded $7.1 million charge to establish an inventory reserve for both finished goods and component inventories associated with the HyperSound restructuring. This charge impacted Q3 cost of sales.
While we are working on license deals which could result in the productive utilization of these goods and materials, we have decided to fully reserve the balance. We recorded $33.1 million charge for intangible asset impairments and certain other reserves related to the HyperSound restructuring which impacted our Q3 operating expenses.
Following this charge, goodwill and intangible assets are now valued at zero and while we may generate value from those assets via license deals, we believe the best approach is to value them at zero now. As a result of these accounting actions in Q3 there remains approximately $1.1 million in total assets on our books for HyperSound.
So taking these items into consideration including the charge for HyperSound inventory reserves, gross margin in the third quarter was 10.2% compared to 26.7% in the year ago quarter. Excluding the reserves consolidated gross margin increased 200 basis points to 28.7%.
Gross margin in the headset segment increased 550 basis points to 33.3% as higher-margin New-Gen headsets contributed 92% of revenues in the third quarter up from 70% during the same period in 2015. We are also realizing benefits from our supply chain strategy and other business improvement actions implemented over the past two years.
As a reminder, we have recognized between $3 million and $4 million in fixed costs related to supply chain, logistics depreciation, amortization and stock compensation expense in each of the past seven quarters.
The fixed cost will decline by approximately $1 million per quarter beginning in Q4 2016 due to the impairment charge taken inQ3 2016 related to the HyperSound healthcare product.
As such, consolidated gross margins are expected to be lower in the non-holiday quarter due to fixed cost deleveraging as well as the seasonality of the headset business, but are expected to expand for the full year driven by higher revenue during the holiday season consistent with our target to be at 30% for the full year.
Including the intangible asset impairment and certain HyperSound restructuring reserves, operating expenses in the third quarter were $46.7 million compared to $15.3 million in the year ago quarter.
Excluding impairment and the restructuring reserves, operating expenses in the third quarter were reduced by 11% to $13.6 million due to continued cost management across the business.
Including the $0.65 per share intangible asset impairment charge and $0.16 per share HyperSound related reserves, net loss in the third quarter was $44.8 million or 91% per share compared to a net loss of $15.9 million or $0.38 per share in the year ago quarter.
Excluding the impairment and reserves, net loss in the third quarter of 2016 improved to a loss of $4.7 million or $0.10 per share compared to a loss of $5.4 million or $0.13 per share which includes a $0.25 per share tax valuation allowance.
Fully diluted share count for purposes of per share amounts were $49.2 million in Q3 2016 and $42.2 million in Q3 2015. Adjusted EBITDA on a consolidated basis improved to positive $0.5 million compared to a negative $3.3 million in the year ago quarter.
The improvement was primarily driven by strong New-Gen headset sales and successful business improvement initiative. Adjusted EBITDA for the headset business improved to $3.4 million in the third quarter compared to $0.3 million in the year ago quarter.
Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $3.3 million compared to $3.1 million a year ago. As a result of the availability under our $60 million revolving credit line we generally do not hold large cash balance.
In terms of accounts receivable and inventory management our headset days sales outstanding was 67 days in Q3 2016 a nine day improvement from the year ago quarter. Consistent with our goal to continue to drive operational and supply chain efficiencies, headset inventory turns in Q3 2016 were 3.7 times up from 2.8 times last year.
Our average inventory over the past 12 months has declined $9 million on a year-over-year basis. Outstanding principal debt at is September 30 was $59.9 million compared to $56.3 million one year ago. The debt as of September 30 included $26.3 million of borrowings under our revolving credit facility.
Historically the outstanding balance fluctuates throughout the year being close to zero early in the year before it ramps ahead of the holiday. Subordinated debt totaled $18.8 million and term loans totaled $14.8.
The addition of the term loans in subordinated debt in 2015 provided the company permanent capital reducing our dependency on the ABL revolver. Please note that last Friday we issued an 8-K outlining some amendments to our credit agreements which were executed primarily to accommodate the change in our HyperSound strategy.
The important changes that are with our EBITDA covenant now excludes HyperSound. And the terms of how much of our ABL can be drawn down has been made less restrictive. We believe these amendments give us greater flexibility.
Taking into consideration these amendments, the availability on our line of credit and our expectation to be EBITDA positive on a consolidated basis in 2016 we believe we have sufficient capital to fund our business plans. This is further supported by our continuing business improvement initiatives.
Now, I'll turn the call back over to Juergen for some additional comments on the business and our updated outlook.
Juergen?.
Thanks John. As I mentioned in my opening remarks, strong sell-through in our headset business continued into our third quarter. In addition to the stats I shared my opening that shows Turtle Beach continuing to outpace a healthy double-digit growing gaming headset market we also grew our number one market share even higher.
At 41% revenue share year-to-date 2016 we are up 80 basis points from the same period in 2015 and up 30 basis points from the first six months of 2016. On a unit basis our share was 32% up significantly from 29.9% in the comparative period in 2015 and up 20 basis points from the first six months of 2016.
As intended, our Recon series of headsets have driven very strong share gains in the under 50 retail price segment explaining part of the difference in unit and dollar growth dynamics. In the UK Chart-Track shows that the console gaming headset market year-to-date through third quarter was up 12% in dollars while Turtle Beach was up 20%.
Our dollars here in the UK console headset market year-to-date is up more than 300 basis points from the same time last year. Keep in mind since we are the industry leader these growth rates are on a level of volume and revenue that is as much as 3 to 6 times larger than others in the console gaming headset category.
As market share leader by far, we believe that the strong performance of our portfolio has directly helped drive the strong overall console gaming headset market growth this year.
Among several other leading product positions we continue to have the top-third-party models domestically in the gaming industry as confirmed by NPD for the first nine months of 2016. Our XO FOUR STEALTH headset continues to be the highest selling third-party headset followed by our XO ONE headset and now Recon 50X product.
Several million gamers from entry-level to hard-core are now enjoying our latest New-Gen products and the related perks our innovations provide. In addition to our Recon series headsets the new STEALTH 520 and 420X+ wireless headsets we launched this quarter are off to a good start. We also had success with our new 350 VR and STREAM MIC products.
Both debuted last June at the Electronic Entertainment Expo or E3. These products are focused on two hot growth markets in gaming today.
In our view audio is half the overall virtual-reality experience and our STEALTH 350 VR is designed specifically to elevate VR audio from good to great with features like large over the ear 50 mm speakers amplified audio with base boost and full 3-D surround sound.
With the launch of PS VR, HTC Vive, Oculus Rift and other upcoming devices, VR technology is an important part of the future of gaming and we are pleased to have a part in this growth market with the successful launch of our dedicated VR gaming headset. Our STREAM MIC product also represents a new category of gaming audio accessories for our company.
While a much smaller market than headsets, it continues growing at a rapid pace over 70% year-to-date in the U.S. with more and more gamers live streaming their matches for friends and fans to watch or creating game walk-throughs or how-to videos and more.
With the STREAM MIC we've delivered the first professional quality plug and play desktop streaming MIC for consoles and PC platforms and the first live streaming MIC that works with Xbox One. We are intensely focused on making sure every new product is high quality, delivers best first only innovations and is loved by our consumers.
With Amazon ratings of 4.7 and 4.4 stars respectively, both the STEALTH 350 VR and STREAM MIC are off to a great start. We've also expanded the number of products that offer our signature superhuman hearing sound mode with the launch of our STEALTH 520 and 420X + headsets for PlayStation 4 and Xbox One respectively.
We've added this Turtle Beach only feature to our mainstream wireless products so more players can gain a true competitive advantage through better audio. Hear everything, defeat everyone as we say. And of course we launch our Elite Pro headset and tournament audio controller earlier this year which delivered a whole new level of gaming audio.
We continue to receive incredibly positive media and tech reviews of those products with many reviewers citing the headset as the best gaming headset ever.
I'll tell you as a frequent business traveler the Elite Pro headset is so comfortable and does such a good job blocking noise it is now my go to headset for flights having displaced the noise canceling headset I've been using. Before I turn to HyperSound let me discuss two more macro items for the headset business.
In Q3 Sony made a pretty significant platform upgrade. The end of life of their original PlayStation 4 console and released a new slimmer and lower priced PS4 on September 15, which no longer features an optical audio port.
The slight dropping the optical connector, we were largely able to accommodate this audio connectivity change via software updates to a small selection of our products affected by Sony’s hardware change.
We believe this is a good indication of the two points I've made in the past on why we don’t expect future console changes to be nearly as disruptive as this past change was on our business. Number one, this new generation of platform uses a fairly standard audio connectivity, which we believe is unlikely to change.
And number two, many headsets now have the capability to be updated via software upgrades.
Over the long-term we expect to benefit from the extension of the new-gen cycle driven by the introductions of Xbox One S, PlayStation VR, PlayStation 4 Pro and Microsoft’s upcoming Project Scorpio expected to be available in holiday of next year, which should result in stronger gaming engagement for the next several years.
Second our view on international markets, as John mentioned Brexit caused a sharp decline in the British Pound impacting our results purely in terms of a 4x hit. Unlike last year, the Euro was not directly impacted and it has even strengthened relative to the pound. So the impact is expected to be isolated to the U.K.
where we are direct with many retailers. In addition to straight currency impact, the strong U.S. dollar raises market prices and compresses distributor margins in regions where our product costs are driven in dollars. While we are continuing to monitor our U.K.
business closely, the weekend pound is one driver of our more conservative year-over-year growth assumptions in Q4, which I’ll speak to momentarily. In Q2, we also announced the restructuring of our distribution channels across Mainland Europe as part of a plan we started in 2015.
This quarter we’re pleased to announce that we’ve completed this significant move and have new distribution partners in France, Germany, Spain, Italy, Belgium and the Netherlands.
This strategic project was completed on schedule enabling us to work in close partnership with our key retailers across all key markets to build a strong platform, not only for success this holiday, but also for our long-term goals in Europe.
Now moving on to our HyperSound business; as I indicated in late September, we have started the process of restructuring our HyperSound directed audio business in an effort to reduce costs and align spending with revenues.
We intend to continue pursuing multiple opportunities for our groundbreaking HyperSound technology while evolving the business to a licensing model.
This is expected to require less capital while still allowing for revenue generating opportunities, including retail sales of HyperSound Clear 500P, our test pilot at the major consumer electronics retailer Abt Electronics in Chicago area is off to a positive start, which is expected to help demonstrate sales potential of that product to perspective licensees.
We are also pursuing HyperSound’s newly revealed potential to alleviate Tinnitus symptoms. FDA clearance of the HyperSound Tinnitus feature was received in August and we are in discussions with multiple hearing healthcare providers.
The HyperSound commercial retail display sales is an area that continues to generate consistent monthly sales with a solid pipeline of opportunities, despite very limited resources assigned to that business. Finally licensing the technology for HyperSound Glass and other application remains an opportunity.
Being able to create highly directional audio using glass opens up many potential revenue channels including integrating into desktop monitors commercial displays desktop speakers and automotive dashboard glass to provide warning specifically at the driver. Pretty much anywhere there is glass there is a potential for directed audio.
We’re in discussions with multiple potential licensees on these opportunities. In short, we will continue to seek revenue opportunities for these amazing technologies, but in a way that preserves our capital and underscores the strong sales and profit growth of our headset business.
As such, we continue to consider strategic alternatives for HyperSound working with Piper Jaffrey and will continue seeking licensing agreements across the various fields of use.
By reducing spending at HyperSound, we believe that the strength of our core headset business will become even more apparent to the investment community and we intend to take whatever actions are needed to ensure HyperSound does not become a drag on our earnings or detract from our focus on our headset business in 2017.
With all of this in mind, I’d like now address our financial outlook for the fourth quarter and full year 2016.
As I’ve discussed actions have been taken to significantly reduce HyperSound operating expenses going into October and monthly cash expenses on a direct cost basis related to the HyperSound segment are expected to be below 300,000 per month by January 2017.
This excludes corporate allocations, which are expected to be phased out and redistributed to the headset said business by year end. We are targeting to be cash burn breakeven with respect to our HyperSound segment on a direct cost basis by the end of the second quarter of 2017. So the following outlook takes these assumptions into consideration.
Starting with Q4, we expect net revenues to range between $78 million and $86 million compared to $84.6 million in the fourth quarter of 2015. Included in this range is the fact that we sold in holiday 2016 units somewhat earlier than in the past with some of the revenue we would have otherwise booked in Q4 being booked already in Q3.
The earlier loading in of the channel is very intentional and beneficial to our company because it helps us avoid typical logistical challenges as we get closer to holidays. Trucks, warehouses, et cetera, all start to get backed up during November.
It also takes into consideration weaker performance from the recent slate of game releases and somewhat lower than expected holiday retail traffic over the past weeks with an assumption of some recovery over the holiday period. With all that said, we continue to expect headset gross margins to increase from last year’s fourth quarter.
In Q3 2016, we reduced our operating expenses and HyperSound continued to be tightly managing the costs in our headset business. As such we expect consolidated OpEx to be slightly lower than last year’s fourth quarter.
As a result, adjusted EBITDA is expected to increase 30% to 50% and range between $13 million and $15 million compared to $9.9 million in the fourth quarter of 2015. Net income for the fourth quarter is expected to range between $0.13 and $0.17 per diluted share.
This would be comparable to $0.08 per diluted share in the fourth quarter of 2015, excluding a goodwill impairment charge of a $1.17 per share which brought diluted EPS last year Q4 to a loss of $1.09.
We are again raising our full year outlook and now expect net revenue to increase 4% to 9% and range between $170 million and $178 million for 2016 up from $168 to $178 million in our previous outlook stated in August and compared to $162.7 million in 2015.
Included within these expectations is anticipated 27% to 31% growth, up from 24% to 30% previously in new-gen headset revenues to $157 million to $163 million, which was $154 million to $161 million previously, a 71% to 77% decline in old gen headset revenues to $7 million to $9 million which was $8 million to $10 million previously, approximately $1 million in HyperSound revenue was $1 million to $2 million previously, and approximately $5 million in other headset and accessory revenue.
Keep in mind, this year’s strong revenue performance is offsetting over $20 million of revenue decline due to the drop in old-gen headset sales year-over-year. Consistent with our prior guidance, we also continue to expect our headset gross margins to improve to 30% for the year.
We now expect to generate positive $1 million to $3 million in consolidated adjusted EBITDA in 2016, up from $0.5 million to $2.5 million in our August outlook and then applied a loss in our March outlook.
This compares to consolidate adjusted EBITDA negative $11.4 million in 2015, so clearly a significant improvement consistent with our stated priority to improve profitability and reach positive consolidated EBITDA this year. We expect HyperSound EBITDA investment to be roughly $10.5 million.
Headset EBITDA in 2016 is therefore expected to be in the range of $11.5 million to $13.5 million, roughly 5x increase compared to the $2.4 million in 2015.
Net loss in 2016 is expected to range between $1.87 and $1.91 per diluted share based on $48.6 million diluted shares outstanding compared to a net loss of $1.96 per share – diluted share in 2015.
Excluding $1.30 per share in year-to-date goodwill impairment charges and $0.15 per share in inventory reserves associated with the HyperSound restructuring, net loss is now expected to arrange between $0.42 and $0.46 per share, improved from $0.45 to $0.49 per share range in August outlook.
This would be comparable to a net loss in 2015, of $24.6 million or $0.58 per diluted share, which excludes tax valuation expense and goodwill impairment.
For the remainder of 2016 with the product portfolio transition behind us as well as the expected final drop in lower margin old-gen headset sales, growing new-gen headset sales and the strategic process initiated for our groundbreaking HyperSound technology, we believe we are well positioned to drive top line growth and increase profitability.
Thanks as always to a fantastic team of colleagues at Turtle Beach for their continued contributions and dedication. Operator, we’re now ready to take questions..
Thank you, sir. [Operator Instructions] And our first question will come from Mark Argento with Lake Street Capital Markets. Please proceed..
Hey, Juergen, hey John, nice job on the quarter. Good to see continued strength in the headset business.
Any thoughts around this holiday in particular and any I think kind of anecdotal commentary you've been getting from retail or how are you thinking about maybe takeaway through the holidays relative to your inventory position?.
Yes, so a couple of thoughts, first Q4 – remember that Q4 year-over-year is now comping and as is Q3 to some extent, against a very good Q4 selling and sell through of our couple of new models, the Recon series in particular, as well as PX24. Those models have done extremely well.
In fact, we’ve taken something like 15 points of share in the sub 50 segment, a segment we had some models in before, but didn’t participate in as fully as we have this year.
So that by the way we think has actually driven part of the growth in the whole market as introducing a very high quality set of sub $50 headsets, and has driven a lot of the success this year as well as the overall market growth. So that’s number one.
So the comps are going to be – now we’re competing against somewhat tougher comps for ourselves, Q3 partly, but also very much in Q4.
We mentioned that we had an intentional strategy to have some earlier load of the channel, particularly with a couple of retailers who in the past few years have tended to get, I’ll call it clogged up, and that’s resulted in difficulty in getting them product, so that we executed that polled in some millions or revenue from Q4 to Q3.
So and then in Q4, I mentioned in my prepared remarks that while it’s too early to call the ball and always a little bit dangerous to kind of forecast how the holiday season is going to do in gaming based on October and the first week of November, the game launches have not performed very well.
You may have noticed that from some of the large software publisher, earnings reports as well as GameStop. So with that that results in lower traffic than we expected at this point in time. It doesn’t directly affect headsets, but we do see it a bit in lower than expected increase in sell through.
Normally we get a big pickup in sell through when there’s a big successful game launch. And so that’s factored into – all of those things are factored into our guidance for Q4 and we’re by the way assuming some recovery in the sell through of the games and the store traffic and all of that with our with our Q4 guidance.
Okay kind of a long-winded answer, but I think it's important given that we've got 50% of our business to go and especially when you look at quarter-over-quarter comps it's really important to understand the dynamics..
Sure, sure okay and I know it's helpful.
And then when thinking about 2017 I know you haven’t provided official 2017 guidance yet, but could you help us think through a little bit kind f the run rate kind of cost for HyperSound in 2017 and any initial thoughts on what you guys would hope to be able to potentially grow the headset business and in a kind of normalized environment in 2017?.
Sure, let me first comment on HyperSound consistent with the past couple of earnings calls and my comments our comments today. We have a goal and we will execute to make sure that HyperSound does not become a drag on earnings next year. So assume 300,000 a month in cash spend maximum and that ramping to cash flow breakeven by the end of Q2 2017.
So if you do the math they are yes 1.5 to 1.8 million max net kind of EBITDA drag that we would allow to happen next year. So with that said, there's multiple ways of accomplishing that.
We can generate licensing business that offsets the cost to become cash flow breakeven or if we're not successful there, we will take actions to focus the business on headsets and not let the cash burn exceed the numbers that I've mentioned. And licensing business is again consistent with the comments I made earlier.
We continue to believe in the technology and the value of HyperSound direct audio. The problem is that we don't - you need capital to extract that value and we don't have sufficient capital. We have no interest in raising equity. I've stated many times we will spend and stay within our checkbook and that's what we're going to do.
So that may mean at the end of the day that we don’t achieve the value for HyperSound that it potentially has because we can't accomplish that within the capital structure that we have in the business.
So I would focus next year really by modeling the headset business and in headsets very difficult to give guidance without having Q4 under our belt, that's why we don't do it. I would, we had a very, very strong Q1 last year, especially with Recons selling very, very well in the year-over-year comps from 15 to 14 and Q1 will show that.
And we won't next year we're not addressing, kind of a large new segment or somewhat new for us like we did this year with the Recons. We are now kind of really well represented in all of the priced tiers in headset, so I would expect more modest growth over the overall headset category and for us as well in the headset business.
And then of course we've got VR and the STREAM MIC. So VR is a small market, essentially call it zero today because we it's just starting. But we expect that longer-term that's going to be a very attractive platform over the next few years.
So for us in VR, the 350 VR headset and starting to think about headsets designed specifically for VR is for us a multiyear strategy versus something that's going to somehow create a massive new market next year. So I would advise some cautiousness there and a multiyear look.
We do believe VR is a very attractive new platform to add audio to over the next couple of years on top of the attractive core console gaming headset market.
And then on the STREAM MIC, STREAM MIC simple interesting market, very small, way smaller than headsets by the way, but growing 70% year-over-year we're able to leverage a ton of our secret sauce into the STREAM MIC product including as I mentioned it is the only plug-and-play product that works on Xbox One and so that for us is also that market segment will grow over the next couple of years and for us it was cool and important to establish a position for ourselves in that market.
Okay, so that's again a long-winded, I apologize, but hopefully that adds some color for next year..
All right and then I'll get one to John, so he stays awake..
That's not a problem..
Just in terms of the balance sheet, I know you guys have made some could you just at a high level like what kind of availability do you have right now in terms of going into the holidays and maybe just again growing out again the weeds on it but kind of turn availability and sounds like you are comfortable with where you stand in terms of being able to execute against your guidance?.
Sure, yes so a couple of things, relative to availability obviously that fluctuates week to week at this point of the year as we're obviously bringing product in ahead of the holidays and then revenues are ramping.
So you're seeing the ABL or revolver increasing as would be expected but obviously we're also, we have a lot of assets around inventory and they are by which to have availability and access to capital.
So the action that we took with the amendment that we announced that was released through and 8-K about a week ago, actually enhanced our availability due to changes in the block.
So we believe that those changes associated with the blocking how the ABL works going forward which is a result of the HyperSound restructuring activities that we've taken does give us sufficient liquidity here to fund business..
Great, thanks guys, good luck in the holidays..
Thanks Mark..
Thank you, Mark..
Thank you. And our next question will come from Eric Wold with B. Riley. Your line is now open..
Thanks guys.
So a couple of followup questions to those make some add-ons to make, just thinking about 2017 I know you are not giving guidance to 2017 yet, but just at a high level thinking about the pressures that we've seen from FX, overseas issues, old-gen kind of what should we rethink in terms of the magnitude of those pressures continuing next year? How much of a drag could they be and when do you think you'd kind of get some work of normalized trends about them?.
Yes, good two important ones, so old-gen we expect this year to be $7 million to $9 million and next year most that will be gone. So the revenues next year will need to accommodate a much, much smaller drop off, right? This year was over 20, the year before that was like 40 or something like that.
So we're now at the very tail end it will still be a little bit of kind of negative revenue going into 2017 full-year, but much smaller now. And then the pound, so we are looking at what pricing changes we need to make and that could have an impact on the UK and in particular in Q1, so UK I think is about 15% of our business.
So not huge, but it's our second largest market and as we get through the holidays here and we give guidance for 2017 we will then factor that in..
Okay and then two more questions on HyperSound, one I'm sure I missed it but what is the EBITDA drag or impact from HyperSound in your Q4 and now the updated 2016 guidance?.
Yes the updated 2016 guidance the HyperSound EBITDA investment is about $10.5 million..
For this year?.
For this year, yes. And then as I mentioned in my response to Mark for forward-looking purposes it will be under $2 million in 2017..
And I know I could probably go back and do the math and to save me a step what it did in Q4?.
About $1.2 million to $1.5 million..
Okay.
And then last question just kind of a higher level one, you talked a lot about the strategic review on HyperSound and moving towards licensing and seeing where it makes sense to stay in the company, assuming it does stay within the company you move towards a licensing model and kind of remove any kind of P&L drag or CapEx or your spending drag from the company, is there a long-term synergistic relationship between HyperSound and the headset market that could be, that you could still kind of taken advantage of them or if you move towards the pure licensing model sure you just need to really consider that just kind of a side investment that's generates licensing revenue for the company?.
That's actually, that's a great question. You know we originally got introduced to the HyperSound and Parametric sound. Because of the future potential to do some products for gaming like a gaming sound bar with directed audio.
So, and I would say HyperSound it’s a very unique and highly patented new kind of audio technology and there could be some potential fit in the future with gaming.
And so for us we will retain the patents no matter what we do and as we continue to improve the profitability of our headset business, reduce our debt, live to fight another day is the way I would look at it..
Perfect, thanks guys..
Okay, thanks Eric..
Thank you. [Operator Instructions] And our next question will come from James Meredith with Cowen and Company. Your line is now open..
Thanks, hi guys and thanks for taking my questions. A lot of them have been answered, but I wanted to ask a little bit more detail about if you could provide a little more detail on the go-to-market change in Europe and sort of how far like what inning of the game are we in on that and I may have a followup on that as well..
Yes, sure, so glad to. We – looking back we started this effort in 2015 as exchange rates became more challenging across the board including with just strong dollar against the euro, that compressed the distributor margins. There's an advantage in going direct.
We get an advantage and also having more direct access to the retailers in some of the non-UK countries. So we have completed that restructuring.
We went direct with a few pan-European customers in 2015, so that was kind of the start of the project and then this year we have replaced a distributor who represented us in France, Spain, Belgium, Italy and partially in Germany with new distributors that allow us more direct access to our retail customers and run the market not in a completely direct way, because we still move product through them, but it's a different kind of distribution partnership in most of those countries and it works much better with a stronger dollar and is kind of consistent with the way we want to run Europe going forward.
So those moves are done and while we could still tweak a few things in 2017 we now essentially have accomplished what we wanted to accomplish setting out in 2015..
Okay great, thanks for that.
And I think you mentioned your Latin American strategy, could you just talk about that a little bit more?.
Sure, a couple of important elements there. We – Latin America market is not huge by the way. It is a pretty small market, but it's a market and we've got product that fits well there and we took some actions last year to essentially stop sales into LATAM and here's why. Typically you are selling through distribution.
It is often US-based distributor and with the way web sales work today, especially Amazon, the marketplace on Amazon there was way too much, essentially leakage of product that was supposed to end up in LATAM that distributors would just turn around post on the marketplace at Amazon and disrupt pricing for the products and it caused a more widespread degree of frustration by our legitimate online retailers and brick-and-mortar retailers, especially when Amazon and Walmart every matches prices right away all of that.
So we stopped it at last year and have engaged with a new distributor and much better control and assurance that the product will end up in LATAM where it is supposed to end up and not leak back into other territories and disrupt pricing.
So it's not a large market, but it is a successful kind of operational change we made that has contributed now as we have sold into that new distributor in Q1. Sorry in Q3 in this last quarter here..
Okay, thanks and I do have just one more, it is actually kind of a two part question.
Can you, are you able to quantify the Brexit hit in terms of dollar sales lost and offsetting that are you able to quantify the amount of early selling that kind of boosted the Q3 numbers?.
Yes, so let me start with the later one first. The early selling and again this is a logistical move, it’s arranged with the retailers, they want to have a truck show up earlier, there are a couple of them that have literally trucks that are miles long to get into warehouses and to make the operations function more smoothly for them and for us.
We sold in somewhat earlier. That amount is about $3 million, but I will tell you that a lot of revenue moves between Q3 and Q4 for lots of different reasons. So it also, you start loading in new product sales in Q3, so the new MPIs that you launch it literally sometimes a day difference can move $1 million, $2 million between the quarters.
So for us I would stay focused on our full-year guidance, that has taken all this stuff into consideration versus trying to quantify exactly what would happen in Q3..
I guess what I was getting at was its tremendous to see the guidance lifted rightly despite Brexit and so I'm trying to kind of trying to see, I mean you beat the consensus in the quarter and you raised numbers for the year despite Brexit, so it's really that that I'm trying to get at how much of a Brexit headwind have you overcome?.
Okay, so I'm going to pass to John for the numbers, but the two important things on Brexit. First of all we have performed really well relatively speaking in the UK. Our market share is up over 3 percentage points, very hard to accomplish with the shares we have and I think the market is up 11%, we are up 20%.
So partly the strong performance of our portfolio has offset some of the Brexit impact.
The second thing is that there is a delayed impact of 4X changes because retailers and distributors and even our own warehouse needs to sell through of the products at kind of the old exchange pricing and then when the new pricing kicks in and sometimes things get shipped from China. There is sometimes long leads here.
So for us we did take part of a hit from Brexit. I'll pass it to John. He can quantify, but it's also more likely to have an impact in Q1 as we have now flowed through a lot of the inventory that was at a lower exchange rate and everybody is now buying at a higher exchange rate including us..
Thanks..
Yes, so the revenue impact of Brexit in the quarter Q3 was $0.5 million and year-to-date would be $0.8 million. And so just to also keep in mind that our UK operation we bill about 50% of the of the revenue in our UK would be in sterling and the other 50% is actually in the Euro. So our UK business is not solely or exclusively tied to the Pound.
We actually have a bit of a blend there. So we haven’t experienced. That helps us to mitigate some of the severity of the 4X change..
That's fantastic color. Thank you very much..
It could be another….
Yes, we think by the way just one other point. Q4 could be about another million dollars of impact from ForEx..
Yep..
And then the bigger impact in Q1 it sounds right..
Yes, Q1 is some of the numbers we've given you are ForEx hits. It is exchange rate hits. In Q1 the more of the result will be the pricing changes and impact every product if you have to raise the price which many, many companies are doing now or and I suspect those that aren’t will do it in Q1.
Your price elasticity, so every headset slightly more expensive and the market will buy somewhat less..
Understood, yep understood. Thank you..
Thanks..
Thanks, James..
Sure, thank you..
Thank you. And at this time this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Stark for closing remarks..
Thank you very much. As I mentioned, very pleased with Q3 results and now in the middle of our most important quarter here and feel like we're well-positioned. We look forward to speaking with our investors and analysts when we get our – when we report our fourth quarter results in March. See you all then..
Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation..