Good afternoon, ladies and gentlemen and welcome to the Turtle Beach Fourth Quarter and Full Year 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference call is being recorded.

Before we get started, we will be referring to the press release filed today that details the company’s fourth quarter and full year 2019 results which can be downloaded from their Investor Relations page on corp.turtlebeach.com, where you will also find a latest earnings presentation that supplement the information 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 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 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 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 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 could 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 Chairman and Chief Executive Officer.

Juergen?.

Good afternoon, everyone and thank you for joining us. We are coming off a year that was the second best in the company’s history. We continue to lead the console headset market and more broadly are among the leaders in the exciting gaming accessory market with a profitable cash flow positive business.

Today, I will focus my remarks on how we see the headset market evolving this year, our success in that market and our progress in growing our overall portfolio and position in the global gaming accessories market. But first, some brief comments on 2019.

Driven by the massive influx of new invigorated gamers drawn to Battle Royale games like Fortnite and PUBG, our revenues in 2018 nearly doubled to $287 million.

Because we have years of experience modeling the consumer behavior of headset users, we anticipated that the total market for console headsets in 2019 would be down around 20% and that’s roughly what transpired. The market and our own sales performed remarkably close to the forecast we provided this time last year.

While the North American console headset market was down in 2019 compared to 2018, it was still 34% higher than 2017 according to NPD, supporting our belief that the total user base is now considerably higher than it was 2 years ago. Our own console headset sales were down about 25% last year, but were still 38% higher than 2017.

Also accounted for in our 2019 guidance was a slight loss of market share because of how much higher our share was in the entry level price categories and because we believe we get a better job than competitors at keeping our retailers in stock during the spike in demand.

Our market share in 2019 exceeded 43% according to NPD which was more than the market share of the next three biggest players combined. This marks 10 straight years with market share over 40%, unprecedented accomplishment and one that speaks loudly to our reputation for innovation.

A company doesn’t hold 40% market share for a decade unless consumers realize that the products are highly differentiated and the brand is something they seek out year after year. Our retail partners know this well and appreciate how our product strength is complemented by great execution across every aspect of our business with them.

Of course, our more than 150 issued patents in gaming accessories with many more on the way also speak to our continued innovation and differentiation. Our market share strength is both wide and deep.

According to NPD U.S data in 2019, we had all three of the top three best selling models in terms of revenue, 6 of the 10 best selling models and 13 of the top 20 models. In December, we were even more dominant with all 6 of the top 6 best selling models and 7 of the top 10.

Looking at various price points, we had the number one position in virtually every price segment below 150. One of the most important accomplishments in 2019 was our successful expansion into the broader PC accessories market with the acquisition of ROCCAT.

We now have a good baseline of keyboard, mice and headset products for PC gamers to be sold under the ROCCAT brand. This is the large and growing market and we are gaining share more on that later.

With this growing position in PC accessories and our long established leadership in console headsets, we are now a leader top 4 by our estimates in the $4.1 billion global market for gaming headsets, keyboards and mice.

I am now going to turn it over to John to review the fourth quarter financial results and I will come back with comments about how we see 2020 playing out as well as review of our strategy to accelerate our growth in the global gaming accessories market.

John?.

Thanks, Juergen and good afternoon everyone. Most of my comments today will focus on our results for the fourth quarter. Net revenue was $101.8 million or $102.1 million on a constant currency basis compared to $111.3 million in the year ago quarter.

While customer demand remains above historic levels, this decrease was the results of the expected decline from the record levels of demand in the prior year driven by new headset users buying their first headset for Battle Royale games. Gross margin in the fourth quarter was 35.1% compared to 38.5% in the fourth quarter of 2018.

This expected decrease was primarily due to a more normal level of promotional activity compared to 2018 when less promotional effort was necessary in the record-setting Battle Royale boom as well as increased tariff costs and product mix which was partially offset by lower standard freight costs.

Operating expenses in the fourth quarter of 2019 were $22.3 million compared to $17.4 million in the same quarter of 2018. This was primarily due to the addition of the ROCCAT operating costs. Net income in the fourth quarter of 2019 was $20.4 million compared to $24.6 million in the year ago quarter, reflecting the commentary I just covered.

Net income in the fourth quarter of 2019 included a $7.4 million benefit from the release of the valuation allowances on deferred tax assets.

Net income per share in the fourth quarter of 2019 was $1.29 on 15.7 million weighted average diluted shares outstanding compared to $1.33 on 16.2 million weighted average diluted shares outstanding in the year ago quarter.

Adjusted net income for the fourth quarter of 2019, which excludes transaction and integration costs incurred related to the acquisition of ROCCAT as well as the release of the valuation allowance, was $13 million or $0.83 per diluted share compared to $21.5 million or $1.33 per diluted share in the 2018 period.

Adjusted EBITDA in the fourth quarter of 2019 was $16.6 million compared to $25 million in the year ago quarter. Cash provided from operations during the full year 2019 was $39.4 million down modestly from $42.2 million in 2018.

This continued strong cash flow allowed borrowings against our revolver to remain historically low throughout the year in spite of the cash outlay for the ROCCAT acquisition reducing our cash interest expense.

Now, turning to the balance sheet, at December 31, 2019, we had $8.2 million of cash and cash equivalents with $15.7 million of outstanding debt under our revolving credit line. This compares to $7.1 million of cash and cash equivalents and $37.4 million of outstanding debt under our revolving credit facility at December 31, 2018.

Inventories at December 31, 2019 declined to $45.7 million compared to $49.5 million at December 31 last year. The decrease was driven by the lower level of revenue offset by the addition of inventory from the ROCCAT acquisition.

We did bring in a bit more inventory to mitigate the impact of tariffs and we believe both our inventories and channel inventory of our products are on balance at appropriate levels. During the quarter, we continued our share repurchases acquiring 65,500 shares at an average price of $8.91.

Since our share repurchase program was announced on April 10, 2019, we have repurchased 271,300 shares for $2.5 million or an average of $9.30 per share.

The timing of our buyback activity will of course be subject to regulatory parameters, market conditions and our cash flow and we will continue to prioritize investing in growth and business development. Now, I will turn the call back over to Juergen for some additional comments.

Juergen?.

Warzone, a cross platform free-to-play Battle Royale game which incorporates some of the best elements of other Call of Duty games as well as innovations featured in other popular games from other publishers.

Innovations in gaming like this keep veteran players coming back and the free-to-play model has proven to be very effective at enticing new players into the market. We have also mentioned that Sony has emphasized 3D audio as a key upgrade on their new PlayStation.

And not surprisingly, recent news seems to indicate that Microsoft is going to do the same on their new Xbox. Better audio makes better headsets more appealing and more valuable to gamers and better headsets are a core competence for us. That of course is just the console headset part of our business.

At $1.4 billion in global sales, console headsets represent an enormous market, but it’s less than half of the $4.1 billion global gaming accessory market we now play in.

The market for PC headsets is almost as large as the console gaming headset market and the global market for gaming mice and keyboards is even larger than the market for console headsets. Here is the point. We are just getting started in a $2.7 billion market for PC gaming accessories.

That market is expected to grow over 20% between 2019 and 2021 according to Newzoo. It’s a large growing market for us to pursue and we are making good progress. Our sales of PC accessories in 2019 were more than 2.5x greater than in 2018.

This includes the revenue from ROCCAT products as well as the Atlas headsets we had already developed before buying ROCCAT.

In Germany, a market that we viewed and continue to view as a key leading indicator of what’s possible with the ROCCAT brand, portfolio and team we grew our year-over-year PC sell-through in euros by double-digits and outpaced the market growth by nearly 3x. In the U.S.

market last year, we outgrew the market in dollar sell-through for PC gaming headsets, keyboards and mice by over 2x. And we are really just getting started in that market. Let me say a bit more regarding ROCCAT and our growth plans.

We acquired ROCCAT to get a good base portfolio of gaming keyboards and mice and more importantly, to get the capabilities and experience in designing and developing innovative high-quality PC gaming accessories. In particular, keyboards and mice which are very different from gaming headsets, where we already have world class capabilities.

With the ROCCAT acquisition, we fully achieved this goal and I feel extremely good about the talent, capabilities, innovations and core portfolio we acquired. In the past 9 months, we have successfully integrated the teams, processes and capabilities into the company.

We also undertook an extensive multi-year product and brand planning effort with the goal of becoming a leader in the PC gaming accessories markets we are targeting in the coming years. That process led to a decision to utilize the ROCCAT brand for our PC accessories, including future PC headsets.

The process also led to a decision to phase out certain products that don’t fit with our long-term plans, which by the way has some short-term impact on our revenues in the PC market this year.

And the process led to an aggressive 2-year product development plan to fill out our PC accessories portfolio with new innovative products in each of the price tiers we want to target.

For competitive reasons, we aren’t going to share details, but suffice it to say that we are excited about the plans and the level of innovation and design in our upcoming PC products. And so far the reaction from key retailers on our ROCCAT brand and the peak into our portfolio plans that we have shared has been very encouraging.

As we articulated success with those brand and product plans should allow us to attack and grow in a market segment that is more than 2x the size of the console headset segment.

And the fact that we have held the number one market share position by far in console headset business and the extremely strong relationships and track record we have with major retailers gives us confidence in our ability to replicate that success in the PC category over time.

It doesn’t mean it’s going to be easy or quick, but then neither is maintaining 40% plus market share for the past decade in console gaming headsets. We are going to follow the same principles we have followed for years, deliver high-quality products with innovation for all level of gamers and execute well with our retail partners and operationally.

We are going to invest to accomplish the mission of putting ourselves in a position to lead in the attractive growing $2.7 billion market for PC gaming headsets, keyboards and mice.

To give you some sense of what invest means, the 2-year expansion of our PC product portfolio, the continued development of our ROCCAT brand, the expansion into new geographies and the team and talent to do all that represents a roughly $9 million investment this year and the brand marketing portion of those investments will continue next year as we support the multitude of product launches in 2021.

Our expectation is that the investments this year and next will put us on track to continue double-digit growth in our PC accessories sales for the coming years.

And given our expectation that console gaming headset market should grow mid to single-digit percentages in 2021 and 2022 we should be in a position to sustainably grow revenues and earnings in 2021 and beyond. That is our long-term goal, 10% to 20% growth in revenues and 15% to 30% growth in EBITDA.

Given that I frequently get asked about share repurchases and the fact that we announced a $15 million share repurchase program last year, I would like to comment on how we make capital allocation decisions. We are well aware that the stock price reflects a low earnings multiple.

I purchased nearly $750,000 worth of stock myself over the years and my beneficial ownership is now over 5%. So I am fully aligned with shareholders and the desire to create value over time, so are the management team and the rest of the board, we are all shareholders.

We obviously view the stock as an attractive opportunity which is why we announced the plan last year and made over $2.5 million in share repurchases. However, we firmly believe that the best way to increase shareholder value is to put the company in a position to achieve sustained growth.

You can see from 2018 financials that growth in the top line rapidly grows earnings and cash flow. In other words if investing approximately $9 million and put us in a position to enable long-term growth, it’s a higher priority use of capital than the modest reduction in shares that, that same investment would result in.

It’s about focusing on increasing the earnings multiple significantly not modestly increasing EPS.

That doesn’t mean that we won’t continue to opportunistically evaluate share repurchases, it just means that we are taking a long-term view in prioritizing, investing in growth rather than reducing share count because we feel this is the best approach to creating shareholder value over time.

Before I turn to our outlook and wrap up, let me make a few comments about the impact of coronavirus on our business. So far, the supply chain disruptions have been manageable.

The seasonal nature of our business means that this is a relatively slow period for production and our on-hand inventory has enabled us to manage these past few months without any major issues. Our partner factories in China have made good and steady progress scaling their production.

They have communicated that they expect that progress to continue at a rate that will enable them to meet our supply needs. And other than a few pockets of issues they have committed to our supply needs for 2020.

We also have non-China based production up and running and will have a significant portion of our products manufactured outside of China this year in accordance with the plans we started implementing back in 2018. So while we may have a few issues to manage as long as there is no drastic change, we don’t expect a significant impact at this time.

We will of course continue to monitor the situation very closely and take prudent necessary steps to protect our employees as long as the virus remains a concern. Turning now to the specifics of our outlook for 2020.

For the first quarter of 2020, we expect revenues to be in the range of $29 million to $31 million reflecting a console gaming headset market decline ahead of new console launches partially offset by continued growth in our other gaming accessory revenues. We expect adjusted EBITDA to be in the range of negative $6.5 million to negative $7.5 million.

We expect the loss per diluted share to be in the range of negative $0.73 and negative $0.81 and the adjusted loss per diluted share – fully diluted share to be between $0.72 and $0.80.

For the full year 2020, we expect revenue to be in the range of $214 million or $224 million reflecting a console gaming headset market decline ahead of the new console launches partially offset by the continued growth in our PC and other gaming accessory revenues.

We expect adjusted EBITDA to be in the range of $5 million to $10 million reflecting the investments in future growth I covered earlier plus the small buffer for anticipated expediting costs due to coronavirus.

We expect net loss per diluted share to be in the range of $0.13 to $0.46 and we expect adjusted loss per diluted share to be in the range of $0.12 to $0.45. Despite anticipating a pre-tax loss for the year, we do expect to show modest provision for income taxes because of various taxes in certain jurisdictions.

So to summarize, our goals for 2020, number one, continue to lead in console gaming headsets as we prepare for the transition to new consoles with a great portfolio of products for existing consoles and the upcoming launches.

Number two, drive growth in PC accessories, including making significant investments in brand and portfolio this year and next to put ourselves in a position to lead that market over time. Number three, maintain a healthy balance sheet and prudently manage our capital to create long-term shareholder value.

We have a terrific position in a great market. We have a strong brand and a leadership position in console gaming headsets and are committed to and investing in extending that leadership more broadly to the $4.1 billion gaming accessories market. And frankly, I have strong faith in the great team we have here at Turtle Beach.

We positioned ourselves well to drive future growth with a long-term target of 10% to 20% per year on revenue and 15% to 30% per year in EBITDA. Finally, a big thank you to the fantastic team of colleagues across the company for the great work they do and their dedication to delivering the best gaming products for all our customers.

I am grateful to be working with all of you and appreciate all that you do. Operator, we are now ready to take questions..

Thank you, sir. [Operator Instructions] Our first question comes from Thomas Forte of D.A. Davidson. Your line is open..

Great. Two questions on coronavirus.

So the first question I had was between the tariffs and the coronavirus how should we think about the role of China in the long-term as it pertains to your supply chain? And then I think you commented on the supply chain elements as far as near-term disruptions? Should we also assume that there has not been any near-term disruption from a sales or demand standpoint? Thank you..

Sure. So on China, long-term role for us. So we, as I mentioned, were fully up and running now on non-China production and we will actually this year already have a substantial portion of our supply coming from non-China countries.

That’s an initiative we have started in 2018 and now of course that’s helpful with the coronavirus even though the Chinese factories are fully committing to our supply needs for the rest of the year.

And of course, having non-China production also enables us going forward to have the ability to flex production between China factories and non-China factories and gives us just simply a more diversified supply chain which is something we have been working on since 2018. On the demand side, we have not seen any meaningful impact on demand.

It’s something we are watching closely especially in countries that are hotspots. I will just say that it’s not clear that while retail sales might suffer, online sales might counteract that.

And remember that gaming is something that people do at home for entertainment so just by its nature, it’s hard to judge whether that’s going to have an impact on us or not, but it’s something we are watching very closely..

Thanks for taking my question, Juergen..

Thanks, Tom..

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

Hey, guys. This is John on for Mark. Thank you for taking my questions.

Two kind on the PC business overall, first, how do you see gross margin trending both overall and on a seasonality basis as PC becomes the larger portion of the mix? And number two now that it sounds like you have ROCCAT fully integrated and you are positioning yourself to make investments in growth, what are some early signs that give you confidence that you will not only be able to kind of grow with the market, but also be able to take share from your competitors in the PC accessories market? Thank you..

Sure. So a question on margins, our target for the company remains mid-30s gross margins. This year, our guidance is a few points lower than that and that’s reflective of some impact of tariffs and additional air freight is the biggest impact. That takes a few points off of our kind of our normal target run-rate.

PC we said before we are targeting lower 30s gross margins and that’s mainly because we are attacking the segment, not but because we believe the segment long-term can have a margin profile that’s in the mid 30s.

So that may have a small impact on our average gross margins as PC becomes a bigger and bigger part of our business, but we are still targeting in the long-term margins in the mid 30s range. So, that’s on the margins and then give me the second one is I think you asked for signs of success.

And I mentioned two things so – and these are I think important leading indicators, Germany where ROCCAT really had its core focus before the acquisition. ROCCAT is one of the key players in the market. They are one of only three players in the largest retailers to have a dedicated area of the stores, for example.

And in 2019, we outpaced the market growth in Germany in PC accessories by 3x. So that means that we obviously grew enough share in Germany to outpace the market growth and we achieved double-digit growth in our PC accessories there. And then I mentioned the U.S.

market, we outpaced the market there by 2x, which means we gained share in the overall PC accessories category in the U.S. as well and there obviously the base is small, but it’s a good sign of progress in a market where we are really just getting started..

Thank you, guys..

Thanks, John..

Thank you..

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

Yes, thanks. So you guys beat your calendar year of ‘19 free cash flow by a massive $16 million almost 2x, it looks like that’s largely a result in the contraction of that cash conversion cycle.

Should we be looking at that as a sustainable compression, any thoughts on there?.

Well, I think coming out of – hi, Nehal, it’s John. I think coming out of 2018 obviously, we did expect to see some benefit from working capital management in 2019 which you are seeing, but we would expect that to moderate a little bit..

Yes, it’s largely the result of just normal working capital shift back as that happens with a lower market size and lower revenues..

Right, right.

And so the reason why I am trying to detail this is because does this impact the calendar year ‘20 free cash flow relative to the EBITDA?.

Free cash flow – now the cash flow so you were talking about operating cash flow before, free cash flow will follow the rough same formula we have had in the past. So it’s EBITDA minus 4ish so of CapEx.

This year CapEx will be higher because we are spending on tooling and some other items associated with new product launches and then minus cash taxes..

Okay, cool.

And then – okay, and then so the $9 million incremental investment in PCs for calendar ‘20, was it a gestation time for return on investments?.

So that’s part of a 2-year effort as I mentioned, Nehal to drive growth in both the portfolio and make investments in brand, so that when those products launch over the next 2 years, some this year, more next year, the brand will be there to support it and then we will continue the brand investments in next years.

Well, we may have some additional portfolio in the growth investments, but really, it’s part of our 2-year plan that kind of aggressively grow our position in PC.

The gestation period, what I would expect from that, is that starting number one it enables continued double-digit growth in PC revenues over time and that it helps enable the company to grow at our target of 10% to 20% revenue growth..

And as we didn’t make that investment, what kind of growth in PC would you have – would you expect on a long-term basis then?.

I don’t know that there is an easy way to judge that. We have a good position in PC with the portfolio that we have and we do well with the products that we have in the price tiers, particularly keyboards and mice in the price tiers that we have products in.

And so our view is expanding that product portfolio in the different price tiers with more varieties of the products is going to be a very worthwhile investment. And then – and brand is obviously something that needs to be built particularly outside of Germany. The ROCCAT brand is very strong in Germany. It’s known in Europe.

It’s less known here, but our consumer testing showed that that it’s known actually among PC gamers and has very positive attributes. And so it’s kind of like other investments of that type, it’s kind of hard to separate out if we didn’t promote and market the brand what would happen to the business.

Our conclusion very simply is that, that is a very worthwhile investment to support the revenue growth over time..

Alright, thank you. I will get back in the queue..

Thanks, Nehal..

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Stark for closing remarks..

Thank you. We look forward to speaking with our investors and analysts when we report our first quarter results in May. Thank you..

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