Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach Fourth Quarter and Full Year 2018 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] There will be a question-and-answer session after the prepared remarks.

[Operator Instructions] Before we get started, we’ll be referring to the press release filed today that details the company’s 2018 results, as well as the press release announcing the acquisition of ROCCAT, a gaming accessory business both of 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 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 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 reconciliation of the metrics to their reported GAAP results in 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?.

Good afternoon, everyone, and thank you for joining us. What a year it's been. We're debt free, delivered a record year across every financial metric and took key strategic actions to drive our long term growth.

We're making two exciting announcement today; one, covering our record results for the fourth quarter and full year and the other covering the acquisition of a ROCCAT, a leading maker of PC gaming accessories that we expect will contribute significantly to our growth in the future.

As communicated in our pre-release we had a fourth quarter which capped off a truly transformational year for Turtle Beach. We achieved record sales and profits, eliminated our long-term debt and maintained disciplined spending all of which culminated in a dramatic increase in shareholder value.

When you think of where we sit today, compared to the same time in 2018, I think you would agree it's been an incredible year and very beneficial for shareholders. As early as January of last year we detected that the powerful new Battle Royale games led by Fortnite, were driving new gamers and new headset users into the market.

We weren’t sure how Fortnite surge will play out and while we were somewhat cautious in our forecast, we quickly put ourselves in a position to capitalize on the upside if the surge continued. By February we had plans in place with our factory to increase supply to capture the growth, including our market share games.

We spent many months chasing demand even air-freighting product but by midyear we had ramped our production to the point where we had no meaningful supply gaps and could enjoy a record fourth quarter. In March we resolved the loan in covenant issues.

In April, we successfully executed reverse stock split and we were retired the Series B preferred a $19.4 million liability that was growing at 8% a year, all of which contributed to a 3.5 times increase in our market cap from January to April.

As 2018 progressed, we grew more confident that this fortnight surge was not just a blip but rather represented a material and enduring increase in the basic gamers who have a need to purchase headsets either because they are new to this style of gaming or because they wanted to upgrade to a higher quality headset and improve their performance.

Millions of new gaming headset users entered the market last year and we believe that they will now become part of the larger installed base that upgrades and replaces surge heir headsets going forward and of course we've got a great line of headsets for them to choose from.

Looking at the fourth quarter more closely, the industry performed in line with our expectations with NPD reporting that the total console gaming headsets market grew about 49% over 2017. This continued strong growth was not a surprise, but what did surprise us was how we were able to continue growing our market share.

According to NPD, our North American sales outperformed the market increasing about 56% in the fourth quarter with 47% overall market share. We believe this is a testament to our innovative products, distribution and brand, not to mention the strength of our operational capabilities that allowed us to increase supply quickly.

We also ensured that we had supply on hand to cover any potential upside and strategically exited the year with appropriate higher levels of inventory according. We also exited 2018 with channel inventory in a very good place, thanks to excellent coordination with our large retailers.

After John's comments, I will discuss the ROCCAT acquisition in more detail, but I did want to say upfront how excited we are about this strategically important move. We initiated activity last year to look at ways to accelerate our growth plans.

In one move, the ROCCAT deal gives us a strong portfolio of PC gaming keyboards and mice, adds to our recently launched line of PC gaming headsets and gives us a great combined product portfolio with 27 core models to pursue the $2.9 billion market for PC gaming mice, keyboards and headsets.

Before turning it over to John, I'd like to acknowledge every area of our company for doing a spectacular job in 2018.

We more than leverage the strong headset market, based on great execution and I'm very proud of every person at Turtle Beach for their efforts this past year and personally grateful to be working with all of you as we look forward to the new opportunities in front of us.

John will provide the details on fourth quarter and full year results and then I will come back to address how we're looking at 2019, John?.

Thanks Juergen and good afternoon, everyone. Before I discuss the fourth quarter results, let me briefly reference our Form 8-K filing today covering the accounting treatment of warrants issued as part of the transaction to retire the Series B preferred stock back in April 2018.

As part of that transaction, we issued a combination of cash, stock and warrants. The warrants were treated as an equity instrument when we filed our 10-Q for the second and third quarters.

In connection with our year-end audit, we determined that the proper accounting of these warrants was as a financial instrument obligation because of the specific clause that entitles the holder to elect to receive a cash value in the event of a fundamental transaction such as a change in control.

One of the effects of this change in accounting for warrants is the requirement that they be mark-to-market each quarter using a Black Scholes valuation model, with the change included in other non-operating expense or income each period.

As a result of the change in the accounting treatment for warrants and the mark-to-market requirement our net income and earnings per share have been restated for the quarterly and year-to-date periods in the second and third quarters and our fourth quarter net income and earnings per share reflect the impact of this requirement.

This change had no impact on any of the key metrics that indicate the operational performance of the business. Our revenues, gross profit, operating income, adjusted EBITDA and cash flows are unchanged.

Going forward, our guidance will exclude the impact of the mark-to-market requirement given its dependence on future stock prices utilized in Black Scholes' calculations.

Now on to the fourth quarter results, net revenue in the fourth quarter of 2018 increased 40% to a company record $111.3 million compared to $79.7 million in the fourth quarter of 2017.

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

Net revenue in the fourth quarter of 2018 slightly exceeded the high end of the company's preliminary results of $111 million announced last month. Gross margin in the fourth quarter increased 90 basis points to 38.5% compared to 37.6% in the fourth quarter of 2017.

This is the highest level of fourth quarter gross margins the company has ever reported. The increase was primary due to continued higher volumes driving fixed cost leverage. Operating expenses in the fourth quarter of 2018 increased to $17.4 million from $14 million in the same quarter of 2017.

This was due primarily to an increase in marketing spend, primarily related to new PC headset launches, revenue-driven sales-based commissions and expenses and other operational performance-based compensation.

As a percent of net revenue, operating expenses declined by approximately 200 basis points to 16% compared to 18% a year ago, reflecting favorable operating leverage and continued tight management of OpEx. This put our operating margin at 23% up from 20% a year ago. This is also the highest level of operating margin for any quarter in our history.

Net income in the fourth quarter increased 73% to a record $$24.6 million or $1.33 per diluted share based on $16.2 million diluted shares outstanding compared to $14.2 million or $1.15 per diluted share based on 12.4 million diluted shares outstanding in the year ago quarter.

Excluding the impact of the mark-to-market of the warrants our net income was up 51% to $21.5 million and our earnings per share was $1.33.

Note that the above $24.6 million of GAAP net income includes approximately $3.1 million of and unrealized gain through the mark-to-market treatment of the warrants, but this $3.1 million does not get included into GAAP earnings-per-share on a fully diluted basis. So the earnings per share is the same.

Adjusted EBITDA in the fourth quarter of 2018 increased $7.8 million or 45% to a record $25 million compared to $17.2 million in the year ago quarter.

Cash provided by operating activities in 2018 increased by $38.8 million from 2017, mostly as a result of higher gross receipts from the significant increase in revenue partially offset by a resulting increase in inventory levels.

Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $7.1 million with $37.4 million outstanding under our $80 million revolving credit facility compared to $5.2 million in cash and cash equivalent and $38.5 million outstanding under the revolving credit facility one year ago.

Inventories at December 31, 2018, were $49.5 million compared to $27.5 million at December 31, 2017. The increased inventory levels is the result of higher revenue run rate for the business and our intentional effort to have sufficient buffer inventory to capture any further upside in sales.

Total outstanding debt principal as of December 31, 2018 decreased to $37.4 million compared to $72.1 million at December 31, 2017. As a reminder, on December 17, of 2018, we amended our revolving credit facility with Bank of America and paid off the remaining balances on both our term loan and subordinated debt materially de-levering the company.

The only remaining debt outstanding at December 31, 2018 was amounts borrowed under our revolving credit facility.

Net of our cash position net debt including the Series B preferred was $86 million at year-end 2017 and stood at $30 million at the end of 2018, leaving only revolver debt on the books at the end of 2018 and today we have zero borrowings on the revolving.

In addition, the outstanding warrants are classified as a financial, instrument obligation of $7.8 million, which simply reflects the value of the fully pre-paid warrants at the end of the year share price.

We are required to mark-to-market these warrants each quarter using a Black Scholes formula as I discussed earlier for the potential future circumstance of the cash conversion option is utilized.

Our senior debt leverage ratio defined as total term loans and average trailing 12 month revolving debt, divided by trailing 12 month adjusted EBITDA improved significantly to 0.14 times at December 31, 2018, compared to 2.1 times at the end of 2017.

However, subsequent to the end of 2018, we fully repaid the revolver with operating cash flows, making us completely debt free today. A milestone which is very meaningful to Juergen and I after more than five years of work to fix the balance sheet. 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 10% through the expected utilization of net operating loss. If we fully utilize the remaining NOLs through the higher-than-expected pretax profits, we will experience an increase in our 2019 effective tax rate accordingly.

Assuming the pretax income implied in our 2019 guidance, we expect to utilize all of most of the NOLs in 2019. Now I'll turn the call back over to Juergen for some additional comments.

Juergen?.

I'd like to discuss some of our market share dynamics in more detail, our agreement to acquire ROCCAT and our expectations for 2019. our record sales growth in the fourth quarter was fueled by continued strong industry growth, particularly in the console gaming market and by our continued market share gains over last year.

According to NPD our full year North American market share in 2018 increased 370 basis points to 46.1% from 42.4% in 2017.

In addition while the gaming headset market was up 69% on a sell-through basis, Turtle Beach was up 84% again significantly outpacing the rest of the market and once again, we grew more sell-through revenue in 2018 year-over-year than the next closest competitor's entire 2018 console gaming headset business.

We gained share outside the North America as well in combined markets in U.K., France,, Germany, the Netherlands and Belgium. Based on GFK data console gaming headset market revenue is up 50% in 2018 while Turtle Beach was up 57% with a 42% market share.

We were by far the number one selling console gaming headset brand in that combined UK EU set of markets.

Looking at the same combined markets, the UK and those EU countries where we only recently launched our Atlas line of PC headsets, our share of the combined console and PC headset market was 24% up from 21% in 2017 and we were the number one brand in terms of the combined PC and console sales.

Turtle Beach was also the fastest growing brand in PC across those combined markets. Similarly in the U.S., our share of the combined console and PC headset market was 34.8% up from 32% in 2017 and we were the number one brand.

Market share is driven by great products and a strong brand, a few highlights on our product sales in 2018 according to NPD in 2018, Turtle Beach had six of the top 10 selling console headsets, the number one selling console headset on both Xbox One and PlayStation Four, the number one and number two selling Xbox One wireless headsets and the number one selling PS4 wireless headset in North America.

We believe a number of factors helped us boost market share in 2018 including of course strong brand, great products, great distribution, great marketing, but we also believe that we benefited from an even stronger share in the sub-$50 segment which is approximately 48% given that many of the new headset users last year purchased entry-level headsets.

In addition, we think we benefited from having better in-stock position in some of our competitors in the spring. While it's our goal to maintain our market share, we do expect the price pure mix to shift back a bit this year and therefore are base-lining a share of 44% in our forecast model, which our guidance is based on.

With that let's talk about the stock market in 2019. We're very excited about the momentum we bring into the year. We entered 2019 with the best product line, market share position and balance sheet that we've had in years.

As we expected and have communicated on many occasions throughout 2018, we believe Battle Royale games like Fortnite have taken the industry to a significantly higher level than it was in 2017 by attracting millions of new gaming headset users into the market. Per NPD, roughly 9 million console headsets were sold in 2017 in North America.

We do think of the 9 million is the quote "core headset market" prior to the influence of the Battle Royale. In 2018, again according to NPD, this rose to 14.7 million headsets sold. We believe most of the 5.7 million unit increase is attributable to the influx of new gamers and new headset users form Battle Royale games especially Fortnite.

We've referred to this influx as a wave that we expected to crest during 2018. In fact the wave turned out to be higher and last longer than we had estimated a year ago, but it did slow after Q2 as we expected.

We've often communicated that most of the headset sales in our market in a normally year are upgrades and replacement sales and that the average placement cycle is about 24 months with a wide distribution around that average.

This is because gaming headsets are offered at various price points including at increments of around $20 and every step up can deliver better sound and better features.

Our counsel market forecasting process is more complex than what I'm about to describe, but I am going to provide some illustrative math as a backdrop to our 2019 market expectations. I mentioned a 9 million headsets sold in North America in 2017, an incremental 5.7 million sold in 2018.

If you assume half of the 5.7 million incremental headsets sold in 2018 get replaced during 2019 based on an average 24-month upgrade and replacement cycle, this would yield about 2.8 million units that you could add to the core of the 9 million units sold in 2017.

This would yield a forecast of about 11.8 million unit sales in 2019 roughly 30% higher than the 2017 level but roughly 20% lower than the 2018 level.

This math only works if the new gamers to become headset users because of games like Fortnite continue to stay engaged and that the upgrade and replace their headsets at a roughly 24 month average rate. We've communicated our expectation that both premises will hold and we continue to expect that.

We recently again surveyed over 4,000 gamers and the survey results shown intend to upgrade among Fortnite players that is actually slightly higher than the 24-month historical average.

The survey also indicates even those that have stopped playing Fortnite are playing other games and are gaming at similar levels of engagement as the average console gamer. Those are good indications, they are here to stay. As we expected a year ago, other videogame publishers have released Battle Royale games, which are engaging gamers.

As early as the beginning of February last year, there were tweak leek suggesting that Red Dead Redemption 2 would have a Battle Royale mode, which turned out to be true and it was very popular. Grand Theft Auto Online released a Battle Royale mode and Battlefields 5 has one coming.

The Monster title, Call of Duty Black Ops 4 released a Battle Royale mode called Blackout during the holiday season and our survey indicates that over 50% of the Blackouts 4 players are playing the Blackout mode. Most of us in the industry have been impressed by how quickly the Battle Royale franchise Apex Legends has garnered a huge player base.

It reached 25 million users in just the first week after its launch early last month and climbed over 50 million as of last week. There are several reasons why it's good for Turtle Beach that this genre of games is gaining popularity.

First, these games are bringing new gamers into the market and retaining the interest of existing gamers so the TAM should increase over time. Second, the games are a great social experience and it's essential to have a least a basic chat headset to have a really good social experience.

Finally, and most importantly, having a higher quality headset helps to do better in these games and all three of these factors are good for the future market as a whole and for Turtle Beach as the market leader. In other words, the wave may be cresting but the tide is staying high.

So again while our market modeling internally is much more sophisticated than the simple math I went through, the overall dynamics provide a basis for our expectations that the console gaming headset market will be lower in 2019, but significantly higher than 2017.

Note that a faster than expected upgrade or replacement cycle by the new headset users is the largest potential driver of an increase in our market forecast and a slower rate would obviously driver a reduction.

In addition, our expectation for the 2019 headset market in particular the fourth quarter assumes the typical every other year dynamic in terms of the strength of the holiday AAA game launches, which were very strong in 2018.

The wildcard here is whether any of the AAA franchises will move to a free model like Fortnite and Apex which could create an upside in users and budget available for headsets. Finally we've also assumed a modest market slowdown in the second half given the rumors of potential new consoles in 2020.

We may know more as the year progress about any future console launch. There a good slide in our quarterly presentation that lays out the simple model I walked through and the dynamics that could impact the overall console headset market this year.

Before moving into the details of our 2019 outlook, let me talk about our exciting progress in expanding into the PC accessories market to build $100 million business in the coming years. This afternoon, we announced a definitive agreement to acquire ROCCAT, a German and Taipei based company with a great line of PC keyboards, mice and headsets.

I believe this is the perfect match for us and will enable us to significantly accelerate our PC market plans.

In one step we had a strong portfolio of PC gaming keyboards and mice and we add to our recently launched portfolio of PC gaming headsets, leading to an impressive combined portfolio of 27 core models to pursue in the $2.9 billion addressable market in PC gaming headsets, mice and keyboards and of course that's on top of our console gaming headset business, where we dominate the 1.8 billion addressable market.

Not that these market sizes are from a recently updated and increased set of estimates from [indiscernible]. In addition to a good product portfolio, ROCCAT has a talented and experienced team in PC accessories from design to development, to manufacturing, to marketing and sales.

While their largest market is Germany, where there are vaults in keyboard and [indiscernible] Miles we're best sellers at Holiday. They have a presents in other major European PC markets, some presence in the US and the presence in key Asian PC markets like Korea and Japan.

We see the distribution footprint as highly complementary and synergistic in both directions, including giving us an opportunity to accelerate future plans in the Asian markets. Finally, the cultural fit seems quite good. The ROCCAT team has the same focus on innovation and quality as we've always had.

They had many first over there 11 years in business and have contributed to a variety of innovations in PC gaming keyboards and mice over the years and personally as you might guess from my heritage, I'm a big fan of German design and engineering. I've been very impressed by the team and thankfully their English is much better than my German.

ROCCAT's 2018 net sales were roughly $25 million based on pro forma estimate as a standalone entity versus the current state, which is highly integrated with their key distributor and shareholder. Note, we are targeting revenues from ROCCAT product in 2020 at over $30 million with positive EBITDA and positive net income.

The acquisition is structured as an asset purchase and we are paying approximately $14.8 million in cash, net of the working capital adjustment, $1 million in software cash at our option, plus up to approximately nearly $3.4 million in earn-out payments based on various 2019 and 2020 performance parameters.

The deals in euros so these values are estimates based on the 1.13 exchange rate and the net working capital adjustment could also change some between now and closing. Our plan is to close the deal in the next few months and we've included $20 million to $24 million of ROCCAT's partial year net revenues into our guidance this year.

While we expect that revenue to be roughly breakeven on the EBITDA line in 2019, we expect one-time costs related to the deal this year to be about $3 million and another $2 million in non-cash expenses like amortization that are included in our GAAP net income guidance for 2019.

We'll be integrating the ROCCAT team and beginning work on a combined PC portfolio as well as an integrated branded marketing strategy with the target of having those in place next year well in time for the 2020 holiday season, very exciting.

As I mentioned this deal significantly accelerates our plans and growth potential in the large PC peripherals market and you'll recall we launched the new line of PC gaming headsets in October. We achieved the retail placements we targeted and slightly beat our internal revenue plan for PC headsets in 2018. So we're off to a good start there.

Once we have a consolidated branded portfolio of keyboards and mice, we have an opportunity to present a full lineup at retail, which we've said will benefit PC gaming headset sales. Before deciding on the ROCCAT deal, we also looked at how our brand plays into the PC gaming keyboard and mouse segments.

We believe we have good opportunity to leverage the strong brand we have among gamers from our position as the leader by far in the console headset category. In Newzoo peripheral brand tracker, a consumer insight surely, we looked at our core US and European markets to measure purchase funnel scores.

Purchase funnel asks consumers to rate awareness, they know the brand, consideration they would consider buying and preference, they pick one brand as the preferred.

The market survey shows we have high awareness and purchase consideration for PC headsets and more importantly we are tied for second in purchase preference in the combined core US EU markets and number one in purchase preference in the U.S.

And for PC keyboards and mice, where we don't play today, we have an advantage among the large installed base of existing Turtle Beach headset users in our core markets where we are first in purchase consideration for mice and tied for second in keyboards.

This indicates to us that our brand creates loyalty based on a long history of providing high quality, innovative headsets, which spills over into mice and keyboards. With our with PC headsets and the product and capabilities and distribution ROCCAT brings is to build $100 million in the coming years.

Now moving to our outlook, for purposes of our outlook discussion, we're going to assume that we close the ROCCAT acquisition around May 1 and that it delivers about $20 million in the $24 million in the partial year, in partial year your net revenue this year.

We are not going to be breaking out details of rocket ROCCAT every quarter as though it were a separate business because it's not going to be managed. We see ROCCAT as just one part of growing integrated set of PC gaming accessories. For the full year 2019, we expect total net revenue in the range of $240 million to $248 million.

This is based on the market dynamics in assumptions I laid out earlier with the partial year ROCCAT estimates folded on. Gross margin in 2019 is expected to be in the 33% to 34% range compared to 38% last year and about 34% in 2017.

The slight decrease in gross margin somewhat lower fixed cost leverage, one purchase accounting-related impacts from the vision and greater promotional allowances, which were lower than normal in 2018 given the rapid market growth and short supply. We expect operating expenses to increase $11 million to $13 million in total.

This reflects roughly flat OpEx related to console headset and increased spending related to ROCCAT. spending related to growth initiatives which include marketing costs for Turtle Beach PC headsets as well as the operating expenses for ROCCAT are estimated to be $10 million to $12 million.

In addition the company expects one-time transaction costs associated with the ROCCAT acquisition of about $3 million in 2019. We look at the summonses investments that will help us drive long-term growth. As a result, we expect adjusted even to be in the range of $27 million $31 million.

GAAP earnings per diluted share are expected to be between $0.70 and $0.90, adjusted earnings per diluted share in 2019 are expected to range between $0.90 and a $1.10. Adjusted EPS Outlook exclude transaction costs related to the acquisition of ROCCAT and excludes the impact of marking the market the warrants as John explained earlier.

Net income and EPS outlook as John mentioned assuming an effective tax rate of 10%. Looking at the first quarter of 2019, we expect net revenues to be approximately $42 million.

We expect first quarter gross margins of around 32%, reflecting somewhat higher promotional spend than last year, including for the upcoming new product launch replacing one of our main product models. We expect adjusted EBITDA for the first quarter of 2019 to be about $3 million.

The reduction in adjusted EBITDA compared to last year as a function of higher promotional allowances and increased marketing spend to support our retail momentum including that upcoming product launch. We expect GAAP EPS in the first quarter to be about $0.02 per share. Again this outlook excludes the impact of the warrant mark to market.

Adjusted EPS in the first quarter is expected to be $0.05 excluding approximately $0.6 million in transaction costs related to the acquisition of ROCCAT.

We do expect the phasing of quarterly revenues to be similar to 2016 but somewhat more frontloaded given the momentum from the strong recent holiday launches flowing through Q1 and the assumptions I described with the every other year strength of the AAA launches on Q3 and Q4 this year where first half revenues were just over 30% of the year in 2016, we expect first half revenue to about 35% this year.

Accordingly, we expect second half revenues to be about 65% of the year with Q4 in the low 40s versus 42s in 2016. Lastly let me reiterate our goals for 2019; number one, continue to dominate our core console headset market.

We have more great products coming this year and we will continue to focus on our brand distribution, merchandising and all of the operational capabilities that make us the leader in our segment. Number two, invest to drive future growth, specifically in PC gaming headsets and now mice and keyboards.

This goal is helped and accelerated by ROCCAT as I covered in detail. Three, drive our presence in the burgeoning e-sports and VR markets.

We'll continue to leverage our position as the key arms dealer to e-sports teams and pro players everywhere as we happen and we're keeping an eye on VR gaming, which we continue to believe has tremendous potential as a gaming platform in the future.

Financially, our goals are to drive double-digit revenue growth, maintain gross margins in the mid-30s, diligently manage OpEx but with sufficient investments to drive growth and generate flow-through to EBITDA so that EBITDA growth outpaces revenue growth. In summary, I want to again thank our terrific employees for a fantastic job in 2018.

We're very excited about 2019 both because of the great position we have in our core console headset market and the growth opportunities before us in the PC accessories market. Operator, we're now ready to take questions..

[Operator Instructions] And one first question comes from Mark Argento with Lake Street Capital. Your line is open..

Hey guys, this is John on for Mark. Appreciate taking my questions and congrats on the year.

First one for me is just wanted a little bit more color on OpEx plans for this year, if you could kind of drill into where you think you can find the most leverage as far as the growth spend in the PC, thank you?.

Sure so we mentioned OpEx we expect to be $11 million to $13 million higher than 2018 and that includes about $9 million from ROCCAT plus the $3 million roughly of transaction expenses.

The OpEx by the way on the TB side on the BBB side is roughly flattish and with sales in G&A going down somewhat, but marketing and R&D going up somewhat year-over-year and then the ROCCAT OpEx that is a partial year obviously of adding that based on a May 1 closing, more than half of that OpEx is in marketing and R&D, which we view is very good because that's obviously drives product innovation and growth in the future..

Got it. Okay.

And I know you guys touched on it a little bit but any more potential color on ROCCAT's product mix, geographic mix and if you think -- your thoughts on being able to leverage that into greater international sales going forward?.

Yeah sure. So there is a good page in the investor document that shows the product portfolio of both companies in the PC category. So I'll just reiterate a couple of things.

So it's got about nice core mouse models, PC gaming mouse models, eight keyboards and five headsets and you add to that our five headsets and you end up with 27 core models of mice, keyboards and PC gaming headsets to go after whole TAM $2.9 billion TAM. So that's opportunity number one and we can first of all drive sales synergies there.

We're very strong in the U.S., in the U.K. and obviously in Europe. Their strength is in Germany although they're represented in the other regions.

So right out of the gate we will look at ways to leverage the distribution in our core markets and then very interestingly they have over 10% of their revenues right now in Asia with some products that are well liked in some of the core countries like Korea and Japan which for us has become a higher priority, even China because of various dynamics and so the future opportunity is to leverage the fact that they've got account managers and distribution in those markets to actually help drive the TV side of the product portfolio.

And then lastly as I mentioned, we're going to -- one of our priorities is not to disrupt the business but drive synergies obviously out of the gate.

We will look to have a combined integrated portfolio, brand, merchandising, all of that without forcing that it intermediately, look to that have that completed during 2020 and in place well in time for 2020 holidays..

Got it.

And then finally just maybe some more thoughts on how you're approach E Sports during the year and your outlook on the markets and is there going to be more attention or investment paid now that you're starting to make a bigger push into the PC market?.

Sure. So two things or three things, so E Sport is it's all about marketing and brand marketing like as I said before the market to sell the professional gamers is very, very small. That's not why you do it. We have an approach that's worked very well for us to focus on quality, not quantity of teams we work with.

So we pick some of the best obviously throwing ROCCAT into the mix, we will leverage our E Sports partnerships across their product as well and so we think that'll be quite positive. One other interest in E-Sports is René Korte, the CEO of ROCCAT was himself a professional gamer for many, many years.

So he in additional run the company for the last 11 years, he brings a very good skill set to the company and we're looking forward to having him on the team..

Thank you. And our next question comes from Nehal Chokshi with Maxim Group. Your line is open..

Yeah. Thank you and it looks like a very exciting acquisition, congratulations.

When did you guys start working on it?.

We started working on it in earnest in Q3 of last year.

We have by the way been, once we recognize last year, that probably around even late Q2, that we're going to have an ability to start making some investments, all of the focus and attention that John and I have spent on fixing the balance sheet got shifted into all right, how do we use that bandwidth to start looking at ways to accelerate our growth.

So we actually started looking at other potential acquisitions even during Q2 last year. We've had an ongoing engagement with Wedbush as we noted in the release on ROCCAT to look at companies many of them didn't fit.

We turned down a lot of opportunities, but ROCCAT ended up being a great opportunity, a perfect match for us and then of course once we determined that which was later last year, it takes quite a while to get an agreement signed and figure out exactly how you're going to do everything..

Okay. Great.

And what is the IP that ROCCAT has especially on keyboards and mice?.

Yeah. Good question. They have and don't quote me on the numbers, but they have around 20 core patents in PC, keyboards and mice that's at least my latest understanding. We're still working on getting their exact portfolio in which ones we would kind of count in the way we count patents because some of those maybe design patents.

Maybe more interestingly, they have been a key participant and Rene himself the CEO in driving a lot of innovations in the years in PC gaming, everything from the design of mechanical switches and keyboards to how the mouse sensors work and the design, they have a design shop and a clay and modeling shop in Germany, dataset of skills that not only gives us the portfolio, but gives us a very, very good capability to continue to drive innovation because the ROCCAT team know exactly what keyboard needs are and what mouse needs are and have been participating with a lot of the unique innovations over the years.

Lighting as well by the way, they have an integrated lighting platform that goes across the mice keyboards and headsets and software to control all of that.

All of these things by the way if we, part of the reason we're doing the deals, if we had to build that organically to find the skills all of that, it's probably I would guess a two plus year acceleration in our ability to get into PC, keyboards and mice and I mentioned by the way maybe last point there are what I've been asked this question in the past what do you need to be in keyboards and mice? No, but it provides two big advantages.

The first one is you can show a combined integrated full portfolio at retail. So instead of having a couple PC headsets unpaged you have got an opportunity at least because you have to convince retailers to do this with you to have a bay that features your headsets, keyboards and mice that gives you a retail shelf space advantage.

And then the second thing is PC software, which can integrate the capabilities across keyboards, mice and headsets like lighting. So with ROCCAT as I mentioned accelerates our plans in that regard by several years..

Okay. Great.

And my last question, I'll get back in the queue would be that your March queue revenue guidance implies it will be down 62% Q-over-Q versus if you exclude March '18 which clearly there was something you had to hold Battle Royal among becoming enrolled there, but on average it looks like between 72%, 83% Q-over-Q decline, so this appears to be much better than typical seasonality.

What is behind that?.

Nehal, I am not following your numbers exactly, so let me just reiterate, Q1 net revenue guidance is around $42 million, so that's roughly even with 2018, in fact up slightly 2018.

The dynamic last year that's important to know when you look at as we laid out some of the percentages first half, second half that will give you guys an opportunity to roughly lay out the quarterly revenue phasing. The important note is that Q1 the Fortnite effect was starting to hit in earnest in February. So Q1 was very high last year.

Q1 this year is quite high as well because of really strong slated game launches in Q4, which tends to always spillover into Q1. Q2 last year was stunningly high because that we would say was the peak of the Fortnite new gamers, new headset users coming in and there were some shortages that we had to sell in that we had to make up for in Q2.

So Q2 had kind of a double whammy on the positive side last year.

The last thing I'll mention on, on the revenue is when channel retailers carry a set number of weeks of supply and so when the market grows, you get a double benefit because you not only have to fulfill the higher sell-through but the channel inventory, the amount goes up as the market increases.

As the market slows down, then you have the opposite effect, you have less sell through that you're fulfilling but your channel inventory level also comes down somewhat.

So when you look at our overall 2019 guidance like at the simplified model I went through explains sell through and of course it actually ties quite well with our revenue guidance, but you have to take into consideration the channel fill effect..

[Operator Instructions] And our next question is from Elliot Alper with D.A. Davidson. Please proceed..

Great. Thanks for taking my question. You laid out the math for your 2019 guidance and it sounded like there's nothing in there for completely new users, is it fair to say your guidance does not currently assume any new gamers other than and you mentioned the onslaught of players downloaded Apex Legends.

Are you seeing that effect has that demand for new gamers? Thank you..

Sure. So two things, we are definitely not implying that there are no new gamers coming in '19. I would -- that's under what I said a couple of times which is the real market dynamics and the way we forecast everything is much more sophisticated than the kind of the simple model I went through.

It would take an hour by itself to explain all the dynamics.

So the rough math works well as an overall kind of illustrative example, but in reality every year the market is made up of replacement upgrading which drives the vast majority and some new entrants right, which we expect this year and also some exits during the year as people get older, go to college, stop gaming whatever. So that's number one.

And then Apex, yeah, we're very excited about Apex. It's been for two reasons, one is it's a really engaging great game that is keeping the headset users engaged very consistent with what we expected and we think there will be more things like that coming.

It doesn’t necessarily drive an additional sales of gaming headsets because if a Fortnite player moves over and plays Apex, there is a very high probability 80% from our survey data that they have a headset already, right and so that's the effect, the unusual affect last year is the millions of new gamers who came in or gamers that weren’t headset users starting to use headsets right.

So even as you have great new games coming, what that does is keep everybody engaged, that's important. The second thing we love about Apex is it's a great game that is following in Fortnite's footsteps in terms of the free model.

So you get the gave for free and they make money while you're playing the game and what that encounter to some of the large AAA titles where you have to shell out $50, $60 to get the game and what that does is free up budget to replace upgrade headsets and that to the extent I mentioned like Q4, normally this year would be a weaker slate of games that's built into the market guidance, there is normally an every other year kind of dynamic here.

So we're in the other one of those this year. But the wildcard as I mentioned is that any of the other AAA major games decide to follow suit, because Apex has obviously been very successful in the free model that could create some upside.

One last comment about this year, coming off last year it is not all that easy to figure out what this year is going to look like. That one of the reasons we went through the simple model. I did indicate that the replacement rate is really important driver of the market this year.

If you assume that the average goes -- drops a lot from a 24-month average, that would have a positive impact. If you assume that the replacement cycle is slower, of course it would have the obvious -- it would have the opposite effect. So that's going to be an important dynamics to where in our opinion to where the market comes out this year..

Thank you. And ladies and gentlemen our next question is from Nehal Chokshi from Maxim Group. Please go ahead..

Based on the parameters that you talked about for ROCCAT I think you said that initially it will be gross margin dilutive, it will all sort of corporate average, plus I think exciting about overall about $12 million of OpEx.

It sounds like at least in calendar year '19 this will be about $5 million dilutive to non-GAAP net income, Is that about right?.

I'll have to double check the $5 million, but there's about $3 million of transaction expenses, There's about $2 million of non-cash OpEx depreciation, amortization comp up all of that. So I think your $5 million is correct and on the margin point, the way we're doing the deal is an asset purchase we but their inventory all that.

There's a lot of inventory valuation dynamics that are included in acquisition that are one time effects and so I believe our forecasting on the ROCCAT revenues has gross merges that are around 20% because of those effects where our ongoing outlook for ROCCAT once you passed all of that acquisition purchase stuff is very comparable to our historic mid-30s range..

And what will be the delta that's in the acquired acquisition and once you flush through the acquired acquisition..

Yeah this is John. So it's primarily purchase accounting treatment of the beginning inventory balances. So until the inventory that comes with the acquisition is pushed through the business and we have new inventory at a new cost the margins will be lower. But no impact it's some acquisition artifact essentially..

Thank you. At this time, this concludes our Q&A session. I would now like to turn the call back to Mr. Stark for closing remarks..

Thank you very much. So as I mentioned, we're very excited about the year.

The acquisition is going to be terrific and I'm really looking forward to having the ROCCAT team as part of our group at our next earnings call and so we look forward to speaking with our investors and analysts when we report our fourth quarter results -- first quarter results in May. Thank you very much..

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