Juergen Stark - CEO John Hanson - CFO.

Mark Argento - Lake Street Capital Scott McConnell - D.A. Davidson & Company Nehal Chokshi - Maxim Group.

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach Third Quarter 2018 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] Before we get started, we’ll be referring to the press release filed today that details the company’s third quarter 2018 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 the information to be discussed on today’s call. 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 the 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 the 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 quarterly report on the Form 10-Q, annual report on Form 10-K and 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 noted 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 reconciliation of the metrics to their reported GAAP results in the reconciliation tables reported 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?.

Black Ops 4 and Red Dead Redemption 2, the Stealth 300 delivers the superior amplified audio, comfort and durability our customers need to win. Following the Stealth 300, our all new Recon 200 Amplified Gaming Headset hit retail shelves in September.

Not only is the Recon 200 an even more affordable headset option for gamers shopping under $100, but it also happens to be the official headset of a favorite streaming personality and one of Turtle Beach’s esteemed partners, Dr. DisRespect.

The Recon 200 delivers powerful amplified audio, crystal clear chat and has a metal reinforced headband with memory foam ear cushions for added durability and comfort, all for the incredible price of just $59.95. We believe both of these products demonstrate innovation in audio, build quality and comfort at these price points.

In the $200 and up price tier, in September, we launched our new Elite Pro 2 + SuperAmp Pro performance gaming audio system for Xbox One and PlayStation 4. We work closely with some of the biggest Pro eSports teams in the world including OpTic Gaming and Splice on the Elite Pro 2 and SuperAmp.

And it is already garnering rave editorial reviews including a 9 out of 10 from Game Informer.

The Elite Pro 2 headset comes bundled with our innovated new Elite SuperAmp Pro performance gaming audio controller which adds powerful amplified audio with immersive surround sound and also connects to your phone via Bluetooth so you can customize a variety of features and settings to your liking.

Additionally for those looking to step up their audio experience while using their existing headset, the Elite SuperAmp is also available as a standalone product at turtlebeach.com in North America with future availability across participating European territories planned for early 2019.

And last but certainly not least, on October 1 as part of our growth strategy in the PC headset market, we significantly increased our PC portfolio with our all new Atlas line of gaming headsets.

Also designed in collaboration with leading eSports teams including Astralis, OpTic Gaming and the Huston Outlaws, Turtle Beach’s new Atlas line is built for PC and features three different models including the Elite, Atlas Pro Performance PC Gaming Headset, the powerful Atlas 3 Amplified PC Gaming Headset and the versatile Atlas 1 PC gaming headset.

All three Atlas products met our target for shelf space, a key first step and are receiving stellar reviews including a 4.5 out of 5 score with Window Central Choice Award for the Elite Atlas from Window Central, a 9 out of 10 score from Total Gaming Addicts for the Elite Atlas 3, for the Atlas 3, and a 4 out of 5 review score for the Atlas 1 from PCmagazine.com.

We care deeply about delivering the best possible experience for our gamers with every headset we release. And I have to tell you that nothing makes me happier than reading review comments like this is the best $100 headset available. Nailing it for the customer is where it all starts for us.

Before turning it over to John, I’d like to acknowledge every area of our company for a continued job well done. Out innovate and out execution. It’s all coming together beautifully and I couldn’t be more pleased with the performance of our team. Thank you to all of our team members.

I will walk through other business developments and our full outlook after John addresses our third quarter financials in greater detail.

John?.

Hey. Thanks Juergen, and good afternoon, everyone. Net revenue in the third quarter of 2018 increased 107% to a company record $74.4 million compared to $36 million in the third quarter of 2017.

The significant year-over-year increase was the result of strong market demand for console gaming headsets driven by continuing increased usage of gaming headsets, particularly among battle royale players, along with the company’s increase in market share over 2017.

Gross margin in the third quarter increased 610 basis points to 41% compared to 34.9% in the third quarter of 2017. This is the highest third quarter gross margin in Turtle Beach’s history as a public company.

The increase was primarily due to a favorable product and customer mix, continued higher volumes driving fixed costs leverage, a reduction in freight costs and a less promotional environment. A quick comment on tariffs, at this point, Turtle Beach is not impacted by the recent China tariffs.

We are closely monitoring this dynamic situation and are contemplating changes to our supply chain strategy should additional tariffs be put in place that would impact products in our category. Operating expenses in the third quarter of 2018 increased to $14 million from $10.7 million in the same period in 2017.

This was primarily due to an increase in marketing spend related to new product launches including our new PC products, as well as revenue driven commissions and expenses and other performance-based compensation.

As a percent of net revenue, operating expenses fell sharply to 19% compared to 30% a year ago, reflecting favorable operating leverage and continued tight management of OpEx.

Net income in the third quarter increased significantly to a record $14.7 million or $0.91 per diluted share based on 16.2 million diluted shares outstanding compared to a net loss of $0.05 -- $0.5 million or $0.04 per diluted share based on 12.3 million diluted shares outstanding in the year ago quarter.

The improvement was mainly driven by the significant revenue growth and the corresponding increase in gross margin. Note that we’ve included a share account bridge in our Q3 earnings presentation. Adjusted EBITDA in the third quarter of 2018 increased $14.3 million to a record $17.6 million compared to $3.3 million in the year ago quarter.

Cash provided by operating activities in the first nine months of 2018 increased by $34.1 million from the corresponding 2017 period, mostly as a result of higher gross receipts from the significant increase in revenue, partially offset by a resulting increase in inventory levels.

And now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $6.2 million with $3.5 million outstanding under our $60 million revolving credit facility compared to $0.5 million in cash and cash equivalents and $24.8 million outstanding under the revolving credit facility one year ago.

This represents a $27 million improvement in our net cash position versus last year. Inventories at September 30, 2018 were $73.3 million compared to $45.9 million at September 30, 2017 and $28 million at June 30, 2018, reflecting the higher level of expected sales going into the 2018 holiday season.

Recall that we spent much of the first half of the year chasing inventory and airfreighting product because supplies were so tight. We have bolstered and solidified our inventory levels as a result of excellent execution by our factories and operations teams.

Total outstanding debt principal as of September 30, 2018 decreased to $31.4 million compared to $59 million at September 30, 2017. The debt at September 30, 2018 consisted of $15.4 million in subordinated notes, $12.5 million in term loans and $3.5 million of revolving debt.

Our senior debt leverage ratio, which we define as total term loans and average trailing 12 month revolving debt divided by trailing 12 months adjusted EBITDA improved significantly to 0.4 times at September 30, 2018 compared to 2.1 times at the end of 2017 and 2.2 times just one year ago.

Cash used in financing operations in the first nine months of 2018 increased by $27.7 million from the corresponding 2017 period, primarily as a result of an increase in repayments of the company’s revolving credit facility and repayments of outstanding subordinated notes with operating cash flows and proceeds received upon the exercise of stock options and warrants.

Subsequent to the quarter, as Juergen mentioned, we repaid an additional $5 million of our subordinated notes, bringing the outstanding balance to $10.4 million.

Since March 31, 2018, the company has been able to reduce its aggregate term loans, subordinated notes and preferred Series B stock obligations by $28.2 million or 55% from $51.1 million to $22.9 million payments from operating cash flows and the issuance of common stock and fully funded warrants in exchange for the outstanding Series B preferred stock at a discount in excess of 50% of the carrying value at the time of the exchange.

This is supportive of our commitment to further reduce debt and maximize value for our equityholders. In fact, we anticipate using operating cash flows to repay the remaining $10.4 million of our subordinated notes by the end of March 2019.

In our earnings presentation we have highlighted the evolution of our enterprise value, which shows the significant increase in equity values these actions have had on our company since the start of the year. Before I turn it back over to Juergen, let me say a few words about taxes.

In our financial outlook we have assumed an effective tax rate of approximately 9% for the fourth quarter of 2018 and 6% for the full year. Due to the record year we are having, we expect to realize a significant portion or most of the deferred benefit associated with our cumulative NOLs in 2018.

As such, going forward we expect that our effective tax rate will increase and could potentially reach below tax levels in 2019. Now I’ll turn the call back over to Juergen for some additional details on the business and our updated outlook.

Juergen?.

Black Ops, Red Dead Redemption and Fallout 76 this fall and eventually to other new games coming in 2019 should drive a significant increase in the size of the core gaming headset market going forward. So, with these dynamics in mind, I’d like to turn to our increased outlook for fourth quarter and 2018.

We expect net revenue to increase 18% to approximately $94 million compared to $79.7 million in the fourth quarter of 2017. Gross margins are expected to approximate 37% of net sales similar to the $37.6% in the fourth quarter of last year.

Adjusted EBITDA is expected to increase 22% to approximately $21 million compared with $17.2 million in the fourth quarter of 2017. Net income is expected to increase 18% to $16.7 million compared to $14.2 million last year.

Earnings per share is expected to be approximately $1.02 per diluted share based on 16.5 million estimated diluted shares outstanding compared to earnings per share of $1.15 per share based on 12.3 million diluted shares outstanding in the fourth quarter of 2017. On top of the increased net income, two items impact Q4 EPS.

The increase in estimated diluted shares from the prior year is primarily the result of shares and fully funded warrants issued in exchange for the Series B preferred stock obligation, shares issued upon the exercise of stock options and warrants and an increase in the dilutive effect of outstanding stock options and warrants as a result of the increase in our stock price.

In addition, the EPS reflects the change in the effective tax rate. In last year’s fourth quarter, we realized the benefit for income taxes of $0.5 million, whereas the fourth quarter of 2018 we are estimating a provision for income taxes at an effective rate of approximately 9%. Note that the holiday channel fill often starts in late September.

And as we mentioned, was our expectation on the Q2 call. We realized somewhat higher September load in balance, load in because of the major game launches in October this year. Our Q4 revenue expectations reflect this shift.

Now moving into our increased full year outlook, in 2018, we now expect net revenue to increase 81% to approximately $270 million compared with a $149.1 million in 2017 and up from $255 million in our August outlook.

Gross margin in 2018 is now expected to be approximately 37% including the benefits from operating leverage, product mix impacts and several quarters of less promotional market, partially offset by the additional cost we incurred to expedite our products particularly during the second quarter.

Operating expenses are still expected to increase several million in the second half versus second half of 2017 due to the higher variable sales and marketing expenses as well as marketing investments for our new PC products.

Earnings per diluted share in 2018 is now expected to improve another 31% to approximately $2.55 from $1.95 per diluted share in our August outlook. Per share estimates are based on 15.5 million estimated average diluted shares outstanding for the full year 2018. This is compared to a net loss of $0.26 per diluted share in 2017.

This net income forecast assumes an effective tax rate of 6% reflecting the benefit of utilizing most of the deferred benefits associated with our NOLs this year.

Given John’s comments earlier about 2019 being at a higher or possibly the full tax rate given our strong performance in utilization of NOLs this year, we believe that roughly comparable pro forma EPS for 2018 at an assumed tax rate of 25% would be roughly $2 per share.

Adjusted EBITDA in 2018 is now expected to increase significantly again to approximately $54 million, up from $45 million in our August outlook and compared to $11.6 million in 2017. Our full year outlook now anticipates positive free cash flow of approximately $47 million this year.

A few words on 2019 since we get a lot of questions and there is a fair amount of commentary floating around. We provide annual guidance each year after analyzing the fourth quarter results for our company and the entire market. That data is critical to developing the next year’s estimates.

And given our good track record of hitting or beating our numbers, we are going to follow our normal approach and provide a view of 2019 early next year after digesting all of the data from fourth quarter 2018.

That said, let me reiterate and expand on some of the industry dynamics I have discussed on prior calls including a few new pieces of information from our third round of consumer survey data and the latest NPD sell-through results.

Number one, we expect the influx of new gamers and new headset users this year to create a larger core console gaming headset market going forward. Using NPD unit sell-through data for U.S. and Canada, 8.5 million console gaming headsets were sold in all of 2017.

Year-to-date 2018 through September, 9.5 million units were sold, already exceeding the full year 2017 in units and exceeding by 4.1 million the number of units sold year-to-date through September. 4.1 million incremental console gaming headsets sold year-to-date through September, which is almost 50% of 2017’s full year sell-through.

This is driven impart by millions of new gamers and new headset users that are now part of the installed base of gaming headset users. Number two, our data and analysis indicates that console gaming headset market every year is primarily driven by replacement and upgrading of headsets.

In fact, our latest survey data shows about a 23 month average upgrade or replacement cycle for console gaming headsets. Keep in mind, this is in average and there are gamers who will upgrade or replace in months and some that will never replace or upgrade.

Interestingly, our latest survey results show that Fortnite players, particularly those who play three plus hours a week replaced at a somewhat faster rate than the average console headset user. Our survey data also shows that about 30% of first time headset users plan to replace or upgrade within 12 months.

If you look at the product portfolio slide in our company in quarterly earnings presentation, you can see that gamers get significant features and capabilities with as little as a $20 step ups in price.

This is why gamers are motivated to upgrade headsets over time and why we expect the increase in headset users in 2018 to drive a step function increase in the core market size going forward. We believe our portfolio of great products that lead every price tier from $20 to $199 allow us to follow these gamers as they upgrade over time.

Number three, the higher headset usage triggered by Fortnite is not dependent on Fortnite, but rather driven by any and all games that are multiplayer and benefit from enhanced audio queues.

As I mentioned above, strong success of other multiplayer games like Call of Duty, Red Dead and Battlefield should continue to fuel headset usage including upgrading and replacement over time.

We view this as a very positive set of trends for gaming headsets and remain excited about 2019, particularly with our strong market position and great portfolio of products. We also intend to drive long-term growth outside of console gaming headsets, first and foremost in PC gaming headsets in our core North America and European markets.

We’re executing on this strategy with our new Atlas line of headsets. And as I mentioned, I’m pleased with the retail shelf space and stronger reviews out of the gate on those products. In addition, let me repeat a key fact from before. We expect to produce about $47 million of free cash flow this year.

We anticipate that strong cash flow to enable us to pay down our remaining subordinated debt and even to pay-off all of our long-term debt by March 2019 if we so choose. That’s a vastly different profile and creates vastly different set of opportunities than the $51 million in long-term debt in Series B obligations we had in March of this year.

And as a market leader with the reputation for high quality products and one of the best hardware brands in a $135 billion global gaming market, we hope to have opportunities to leverage those assets in the broader market over time. Given this outlook, I’d like to reiterate our strategic priorities for the remainder of 2018.

First, continue to lead the roughly $1.5 billion core console headset market. We hope to do this by continuing to out innovate and out execute.

We’ve released a great slate of products for the upcoming holiday season and we will continue to focus on our brand, distribution, merchandising and all of the operational capabilities that we believe make us a leader in our segment. We also plan to continue to make investments to nurture and broaden our brand.

Second, continue to drive our presence in the burgeoning eSports market. During the third quarter, we announced broadening presence through partnerships with Obey Alliance, NASR eSports and Manchester City eSports.

As the leading brand of gaming headsets in our core markets including measuring console and PC headsets together, we are one of the top brands providing headsets and other gear to professional eSports teams, players and their fans. So, forging these additional partnerships is key to driving our brand awareness in this fast growing market.

Third, expand our addressable market by about 50% by increasing our focus and portfolio on the PC gaming headset segment in our core markets first. As noted in my prior comments, we’ve secured the retail shelf space that we targeted in our launch plans and the products had received strong reviews.

Fourth, over time expand our addressable market by roughly another 50% by entering PC gaming headsets outside of our core markets. This would include new geographies like China. China is the biggest gaming market in the world and virtually untapped by us. We’re making some modest investments this year that will further ramp in 2019 in this category.

Finally and more longer term, we expect to add roughly another $1 billion to our addressable market via non-headset gaming products, things like keyboards, mice and other gaming accessories and/or even expand into other gaming hardware categories.

We have one of the best hardware brands in gaming with a track record for quality and innovation as I’ve mentioned, so we would naturally look to bring this strength to any new segments we enter.

And of course, given the significant improvement to our balance sheet and financials, we are now in a much better position to drive growth efforts going forward. In summary, I’m proud that we put ourselves in a position to take advantage of the great market we’re in.

And I’m grateful to be working with such a talented, dedicated group of colleagues and I’m very excited about our future. Operator, we’re now ready to take questions..

Thank you, sir. [Operator Instructions] And our first question will come from Mark Argento of Lake Street Capital. Please proceed..

Congrats on a solid quarter. I have a couple questions around. So, if you look at the sales trends through the first nine months of the year, Q1 you guys were up a 184% I believe, Q2 up 219%, Q3 107%.

If we look at the Q4 guide and you’re up 18%, could you just talk a little bit about how you’re thinking about the holidays? I know it’s a little bit of a wild card, but what you’re hearing from retailers to think that the growth rate would decelerate to 18% when it’s been such a high clip going in?.

Yeah. Sure Mark. Glad you asked actually. I’ve mentioned this in the past; there is a dynamic to this year where we’ve got new gamers entering the market based on these new games like Fortnite and PUBG. That and you can look at that as like a number of millions of gamers or a set amount of rough revenue for us.

The key thing with Q4 is that the core underlying market is much, much larger in Q4 than other quarters during the year. It’s larger in Q3 than Q2 and Q1. So, that kind of that new installed base as a percent of the total market is much smaller in Q4. So, that’s what drives the numbers.

Remember that in typical Q4, the market does about 50% of all the revenues for the year in that market. So, it’s basically your denominator is much, much higher in Q4 than it is even in Q3 and particularly than in Q1 or Q2. That’s the driver. But you asked me also by the way about retail expectations, everybody is super excited.

The new games are getting good reviews. There is a lot of excitement from retail. And we see upgrade trends from consumers already who have entered the market earlier this year that all are contributing to what we view as a very strong Q4.

The other thing I’ll mention and just reinforce from the comments is that we’ve secured -- now fully secured inventory including long lead components for our forecast plus as we’ve comment in the past prior quarters an upside scenario in case the market is stronger than our guidance would forecast that we would be able to provide inventory to hit an upside revenue scenario..

That’s helpful. I know historically -- I think in years past retail has been almost the counter indicator in terms of over ordering or under ordering, I know in the past couple of years it seems like they were over ordered.

How do you guys manage going into what’s a pretty robust environment right now with retail? Do you guys have to put retailers on allocation or how you’re managing through like you said in an environment even though from a percentage basis the growth decelerated, but on an absolute unit basis and dollar basis still pretty strong?.

Sure. So, we -- number one, you asked about retail sentiment and I will tell you the first part the answer is we don’t pay attention to retail sentiment. The sentiment is what drives the retailers to order more or less on either on the positive or negative side.

What we pay attention to is detailed analysis and modeling of what we expect sell-through to be that gets updated on a weekly basis by retailer by model by price tier across all of our core markets. And that’s what we use to estimate what the retailers need in terms of their inventory levels.

And we interact with the retailers to give them guidance, to let them know they’re over ordering they’re under ordering. And given that, over the past two years, we have tended to be right based on our analysis. We’re hopeful that they will listen to us and we will try to modulate their ordering in the right place.

By the way, you’ll never get it perfect. This is one of their 5% in Q4, can be a big portion of Q3 and a 5% accuracy level ending inventory would be pretty damn good for Q4 in a dynamic market. So, you never get it perfect which is another reason why we don’t give guidance for 2019 until we’ve seen where everything comes out for Q4..

Great. Thanks guys. I’ll hop back in the queue..

Thanks Mark..

Thank you, Mark..

Thank you. Our next question comes from Scott McConnell of D.A. Davidson. Your line is open..

Great. Thanks so much for taking my question guys.

So, it’s still real early on, on the sale of the PC headsets in retail, but can you talk about how the competitive landscape has been in the PC headset market and how that’s differed from console headset market? And then if you have any updates on how much of that addressable market you hope to capture? Thanks..

Sure. Thanks Scott. PC market is just like console market, it’s very competitive. It doesn’t have any players that have the level of share that we do. It tends to be a little bit more evenly distributed among a number of the stronger players in the market. So, in that regard, we view that as a positive because the market is growing overall.

So, we can grow revenues without taking share, but over time obviously, we hope to take share from the other players. And it’s -- for us it’s -- we’d much rather be competing against them than they probably would be competing against us given how strong our share is in console.

In terms of our expectations over time, keep in mind that the console gaming headset market is larger in our core geographies than the PC gaming headset market, roughly double the size. So PC, as we gain share will become a more meaningful part of our numbers, but it will take a while.

And we’ll start -- once it becomes real meaningful, we’ll start to indicate how we’re doing. But for now, small changes in console will outweigh anything that happens in PC for our overall business just based on the size of the relative market.

Lastly, over time I would hope that we would be able to get 10% to 20% market share in the PC gaming headset. That would be put us in the top couple and that is over time it would be great to lead the category like we do in console, but for us more realistically in the next couple of years we hope to get in that kind of share range..

Great. Thanks for taking my question..

Thanks Scott..

Thank you..

Thank you. [Operator instructions] Our next question comes from Nehal Chokshi of Maxim Group. Your line is open..

Thanks. And nice guidance here, I do have a question on that.

But before I get to that, I’d like to get your perspective on how fast has the Turtle Beach headset installed base been growing prior to the Fortnite phenomenon?.

You know I don’t have that number off the top of my head, but I would estimate that the Turtle Beach installed base over the last couple of years has grown probably at mid-to-higher single digit percentage rate would be a fair estimate. And then obviously this year’s market share gains would have made that growth rate much faster obviously.

Gaining almost 5 points a share given our strong position is I think quite impressive and speaks to our product portfolio..

Definitely. And then from analysis of the overall console headset market, do you -- clearly it’s grown much faster than the high single digits historically.

What’s your best guess as far as what has been that installed base growth rate during the Fortnite phenomenon?.

Sure. So, I mentioned a couple of numbers which would be useful to the analysis here on purpose to give everyone kind of an idea of the rough magnitude. So, I’ll just reiterate here. 2017 8.5 million console gaming headsets were sold and this is U.S. and Canada NPD sell-through data in units, 8.5.

This year through September 2018, 4.1 million incremental gaming headsets were sold versus the same period in 2017. So, those two -- 4.1 million is almost 50% of the 8.5 in a full year of sales. Now some of the 4.1 million is not brand new headset users, it’s existing users or brand new games, it’s a mix of two things.

It’s new gamers coming in and buying headsets and it’s existing gamers who start to use headsets that weren’t using headsets before. And so, that set of numbers should you a decent idea of how the incremental units have progressed even through September..

Okay, all right.

And then the revenue guidance of 18% year-over-year, you mentioned that the assumption there is that you will have the same percent or same number of incremental new headset users in the December quarter, which one was it?.

Restate that Nehal if you would?.

Sorry. So, usually I guess in the December quarter you might have like 20% of your revenue attributable to incremental users or is it a dollar amount that’s typical? That’s the question..

That is -- that’s a tough number to nail down. In the past we’ve said, our rough modeling would indicate $20 million to $30 million worth of new gamers, new headset users that came into Q1 and Q2 for example. And that math roughly works with kind of our performance for those two quarters.

But that’s a hard number to try to figure out and peal back from existing users who are upgrading headsets and all of that..

I guess at the end of the day what I’m trying to drive is that the December quarter guidance more or less embed slowdown in that installed base growth rate because you don’t know exactly how that Fortnite phenomenon will continue to play through in the December quarter?.

Yeah. Look at it this way, and I’m just going to use some example math. These are not the right numbers, but just to create a clear picture.

So, if it’s $20 million or -- yeah $20 million of increased net revenues based on these new incoming gamers and people using headsets for the first time, $20 million versus the normal Q1 like if you look at 2017-2016, you got to look back a couple of years for us because every year there are some kind of tail adjustments in Q1.

But $20 million of incremental is 80% of $25 million for Q1. A normal Q4 in the past might be around $90 million and $20 million is 22% of $90 million. So, because the underlying core is a much larger number, just using some sample net revenues for us, by definition you get a lower percentage in Q4.

Does that make sense?.

Yeah, it does. My last question is that the -- so you’ve lost PC headsets here presumably during the channel fill, you mentioned you hit your shelf space targets.

Can you give us a concrete number as far as what’s the expectation for the contribution for the PC related products?.

Sure. So, we’ll talk more about that in the future. We just launched, literally 30 days ago. So, it’s too early even for us to get a good read on the headsets. The most important thing is that there are two key steps at the start and I’ve talked investors through this in the past. Number one, you’ve got to get shelf space.

And we hit our target in terms of getting the shelf space that we had intended to get or wanted to get in our launch plan. That’s very good, and that’s not a given by the way. And then number two, like we do on every product we launch, we want to nail it with the products.

And given the reviews if you search Elite Atlas for example, you will see rave reviews and that is exactly the way we want to start as we put focus into this new market..

Okay. That was it for me for now. Thank you..

Thanks Nehal..

Thank you. Our next question comes from Mark Argento of Lake Street Capital. Your line is open..

Hey. Just wanted to follow up quickly just on the balance sheet.

And John, maybe you could just touch base or just walk us through, are there any prepayment penalties on any of the debt here in terms of our expectations if you pay that down over the next couple of quarters? And then dovetailing on that, in terms of the free cash flow generation here, it’s like you’re going to start throwing off a decent amount of cash, any thoughts on a buyback or any other type of constructive use for excess capital going forward?.

Sure. So, let me cover your first question here which is around prepayment penalties. The only early payment penalty or premium that we have in any of our -- any of the debt facilities is with the $12.5 million term loans that are with Crystal Financial. All the other -- and it’s several hundred thousand dollars….

Those reduced I think after January next year..

And they’re sliding over the life of the loan..

Yeah. And they wouldn’t -- they wouldn’t meaningfully impact our decisions on what we do in terms of that loan..

That’s correct..

So, second you asked -- yeah, you said starting to generate good cash flow. We’ve been generating really good cash flow. And as I mentioned, we anticipate about $47 million of free cash flow this year. So, yeah, we’re going to be in a position to pay down the sub-debt and even all of the debt as we mentioned if we decide to do so in Q1 of 2019.

And then what we -- the next priority for the cash flow would be investing in the business and driving long-term growth, which is fully on our radar and very actively underway like any category leader would in our position.

What we do beyond that would be a better topic for probably Q1 or Q2 next year once the cash is in the bank and we’ve done what we want to do on the loans and funded the growth efforts..

And just one last one for me.

Any changes in terms of full time equivalent or headcount?.

Yeah. So, we’ve mentioned in the past we have about a 150 people. We have increased that a bit, but not meaningfully. And I’m frankly given the level of volume we’re doing, I can’t tell you how pleased I am to only have small increases in headcount dealing with a 150% higher volumes in a lot of cases.

And again, I’m really thankful to the team who’ve been working really hard all year to make that happen without significantly increasing our permanent OpEx..

Thank you..

Thanks Mark..

Thanks Mark..

Thank you. 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..

Great. Thank you very much for joining our call. We look forward to speaking with our investors and analysts when we report our fourth quarter results in March. Thank you..

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..