Juergen Stark - President, Chief Executive Officer, Director John Hanson - Chief Financial Officer, Treasurer, Secretary.

Analysts:.

Good afternoon, ladies and gentlemen and welcome to the Turtle Beach first quarter 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

Before we get started, we will be referring to the press release filed today that details the company's first quarter results which can be downloaded from the Investor Relations page at corp.turtlebeach.com. On that website, you will also find an earnings presentation that supplements today's results.

Finally, 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 this call may include forward-looking statements within the meaning of the federal securities laws.

Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements.

These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from the management's current expectations.

The company encourages you to review the Safe Harbor statements and risk factors contained in today's press release and in their filings with the Securities and Exchange Commission, including without limitation, their most recent quarter report on Form 10-Q, Annual Report on Form 10-K and our other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements.

The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. The company also notes that on this call they will be discussing non-GAAP financial information.

The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a consolation of these metrics to their reported GAAP results and the reconciliation tables provided in today's earnings release and presentation.

And now, I will turn the call over to Juergen Stark, the company's Chief Executive Officer.

Juergen?.

Thanks. Good afternoon everyone and thank you for joining us. Our first quarter results exceeded our expectations.

Despite facing the dual headwinds of a relatively soft industry sales and higher inventory levels at retail following the holidays, our revenue declined less than anticipated and we kept adjusted EBITDA flat with last year, while improving net earnings despite the lower revenue level.

This was primarily driven by our decision late last year to transition HyperSound to a licensing model and our simultaneous reduction in operating expenses that were shared between the businesses. We have also continued to drive supply chain and cost of goods improvements and diligently managed expenses in all areas of the business.

I can't say enough about the great team of talented people we have at all levels here. Despite industry softness, we remain the consecutive year-over-year market leader in console gaming audio by far with strong retail presence and partnerships across the board.

In fact, data from NPD confirms that six of the top 10 selling third-party gaming headsets in Q1 2017 were all Turtle Beach. Of the five top-selling Xbox One headsets, four were from Turtle Beach and of the five top-selling PlayStation 4 headsets, three were from Turtle Beach, all measured by revenue.

The first quarter reflected the operation of HyperSound under its new licensing model with operating expenses wound down significantly.

We are still pursuing additional revenue generating opportunities for this business including licensing the technology for HyperSound Glass and other applications, but have reduced operating expenses to a point where they are expected to be immaterial to our overall business.

We are also continuing to explore strategic alternatives for the HyperSound business, but considering the expense reductions that have already taken place, we now have more flexibility in terms of the type and timing of any alternative we may pursue.

We continue to expect significantly improved adjusted EBITDA and net income despite somewhat lower sales in 2017. We are excited about multiple new product launches that will carry us into 2018 with good momentum. Before speaking more about our first quarter performance and our 2017 outlook, I would like to turn the call over to John.

John?.

Thanks Juergen and good afternoon everyone. Net revenue in the first quarter of 2017 was $14.4 million compared to $24 million in the first quarter of 2016.

The decrease was due largely to lower sales of marquee games during the 2016 holiday season leading to higher than normal channel inventory entering 2017 as well as mid-cycle console releases and upcoming new technology introductions disrupting consumer purchasing behavior.

Higher channel inventory heading into 2017 has declined in Q1, but there will be some continued impact in Q2. Juergen will provide more color on this in a few minutes. Gross margin in the first quarter improved 140 basis points to 15.4% compared to 14% in the year ago quarter.

The increase was due to cost in the year ago quarter associated with the launch of HyperSound Clear 500P that did not re-occur as well as the supply chain and logistics improvements in our headset business that Juergen just mentioned. Gross margin in the headset segment was 19.5% compared to 19.9% in the year ago quarter.

Supply chain cost improvement initiatives and a more favorable year-over-year new-gen product mix 92% versus 86% in the year ago quarter was more than offset by approximately 250 basis points of fixed costs that were not absorbed due to the lower sales volumes.

Operating expenses in the first quarter were reduced by 22% to $10.3 million compared to $13.1 million in the first quarter of 2016. The reduction was due to a continued focus on cost management across the business. HyperSound related operating expenses in the first quarter of 2017 were $0.5 million and are expected to decline further going forward.

Net loss in the first quarter improved to $9.9 million or $0.20 loss per diluted share, compared to a net loss of $12 million or a net loss of $0.26 per diluted share in the year ago quarter. The improvement was primarily driven by lower HyperSound investments and the cost management initiatives across the entire business.

Adjusted EBITDA improved slightly to a negative $6.2 million compared to a negative $6.3 million in the year ago quarter. Now turning to the balance sheet. We ended the year with cash and cash equivalents of $3.6 million compared to $3.2 million a year ago.

In addition, inventory was down 14% compared to the first quarter of 2016 with higher new-gen inventory more than offset by inventory and reserve reductions in the other inventory categories. Outstanding principal debt at March 31 was $34.4 million compared to $35.5 million on the same day in 2016.

The debt consisted of $14.4 million in term loans and $20 million in subordinated debt and we ended the quarter with a zero balance on our $60 million revolving credit facility. Historically the outstanding balance of our revolver fluctuates throughout the year. Recently it has been at or near zero in Q1 and then ramps up ahead of the holiday.

Taking into consideration the full availability on our $60 million of credit and our expectation to be significantly more profitable on a consolidated basis in 2017, which Juergen will discuss in more detail shortly, we believe we have sufficient capital to fund our business plan.

This is further supported by our continued business improvement initiatives. Now I will turn the call over to Juergen for some additional comments on the business and our updated outlook.

Juergen?.

Battlefront II are expected to launch in November. We anticipate sales of these games to be quite large and to drive strong headset attach rates. Our focus on expense discipline should also allow our second half sales strength to deleverage insignificant product growth.

With this in mind, for the second quarter of 2017, we expect net revenue to range between $17 million and $18 million compared with $29.4 million in the second quarter of 2016.

This reflects the lingering impact of the soft 2016 holiday retail gaming sales environment and related headwinds discussed earlier as well as a slate of exciting new product launches planned for us in early third quarter.

We believe these launches will impact Q2 sales as we pullback on the to-be-replaced product sales in preparation for those launches. Adjusted EBITDA is expected to improve to approximately negative $5.5 million compared to negative $6.3 million in the second quarter of 2016.

Net loss for the second quarter is expected to improve and range between $0.17 and $0.19 per diluted share, compared to a net loss of $0.86 per diluted share in the second quarter of 2016, which included a $0.63 per share non-cash goodwill impairment charge.

Excluding this charge, net loss was $0.23 per diluted share in the second quarter of last year. We are reiterating our financial outlook for the full year 2017. We continue to expect net revenue to range between $155 million and $160 million compared to $174 million in 2016. A few key assumptions to call to your attention.

This reflects an approximate $6 million to $7 million year-over-year decline in old-gen headset sales, bringing our old-gen business to essentially zero in 2017. We expect new-gen headset revenues of approximately $149 million to $154 million and approximately $6 million in other headset and accessory revenues and no material revenue from HyperSound.

We expect gross margins in 2017 to be comparable to 2016, reflecting lower operations costs and continued cost of goods improvements, but some loss of operating leverage due to the lower revenue levels. We expect again significantly improved consolidated EBITDA at an estimated $10 million to $12 million for 2017 compared to $4 million in 2016.

HyperSound is expected to have a roughly $1 million negative impact on EBITDA which is factored into these estimates. [AUDIO GAP] To summarize, DFC's latest March 2017 estimates forecast Xbox and PlayStation unit sales slowing slightly, about 4% and the installed base rising 17% this year.

We assume attach rates will rise leading to mid to high single-digit growth in the overall console headset market. While not accounted for in our outlook explicitly, we think new hardware launches could also boost sales, particularly because they enable lower pricing of the economy models of Xbox One and PlayStation 4.

All-in-all, assuming good sales of marquee game titles in the holiday period, we see a very strong holiday season for our headset business. So we remain very optimistic about the long-term growth trends in our business and look forward to reporting our progress year unfolds.

Thanks as always to a fantastic team of colleagues at Turtle Beach for their continued contributions and dedication. Operator, we are now ready to take questions..

Operator:.

Thanks. I just made the closing remarks. But let me reiterate here. So I want to thank everyone again for joining. We look forward to speaking with our investors and analysts when we report our second quarter results in August. Thank you very much..

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation..