Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach First Quarter 2020 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] Before we get started, we will be referring to the press release filed today that details the Company's first quarter 2020 results, which can be downloaded from their Investor Relations page at corp.turtlebeach.com, where you will also find the latest earnings presentations that supplements the information discussed on today's call.

Finally, a recording of the call will be available on the Investor 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.

While the Company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially.

So the Company encourages you to review the Safe Harbor statements and Risk Factors contained in today's press releases and in its filings with the Securities and Exchange Commission, including, without limitation its annual report on Form 10-K.

Most recent quarterly report on Form 10-Q and other periodic reports, which identifies specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements. 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, you 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 these metrics to the Company's reported GAAP results in their 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.

Juergen?.

Warzone has done extremely well as a new social multiplayer game. Nintendo's Animal Crossing, which allows voice chat, has also done phenomenally well. We believe customers are also using gaming headsets for two-way communications while learning and working at home.

These factors have led to a sudden and steep increase in demand for gaming headsets starting mid-March. In fact, according to NPD, U.S. console gaming headset retail sales hit an all time high for the month of March, higher even than March of 2018 during the battle royale-driven market expansion.

This partially offset the expected year-over-year decline in January and February, resulting in U.S. console gaming headset sales being down only 4% year-over-year for Q1. In addition to the better than expected sales levels, we also saw a significant increase in our market share.

You might recall that we have had the number one market share in console headsets for more than 10 years and that our share routinely exceeds the share of the next three competitors combined.

We saw an increase in our share based on the popularity of Fortnite in 2018, partially we believe because we did a better job than our competitors of keeping our product in stock at our retailers.

And because many of the new gamers drawn in by battle royale games, we are purchasing headsets in the sub $50 retail price tier, where our market share has been and is even higher than our average share across price tiers. Our U.S. console headset market share rose over 500 basis points in March and over 200 basis points for the quarter.

I mentioned that the market experienced a sudden and steep increase in demand in March, while that combined with our large share gain put us in a position where within a matter of days, many areas of the company were operating at peak volumes.

In March as measured by revenue, all six of the industry's top six selling models and eight of the top 10 models were from Turtle Beach with the Stealth 600 for Xbox continuing to be the bestselling console headset for the third straight year.

We believe the results continued to be a testament to our strong brand, excellent products and our execution at retail. Particularly in times like this where retail, supply chain and operational execution can make such a big difference, both to us and to our retail partners.

Like in 2018, during the Fortnite battle royale market increase, we are extremely focused on doing everything possible to secure increased supply of products for our retailers and our consumers. Given the amazing job, our retail partners have done adjusting to the dynamic retail environment over the past months.

They deserve every bit of effort we are putting into this. Note that I am providing some color on the U.S. console headset market since that's the biggest portion of our business. All of our major markets across console and PC, headsets, keyboards and mice saw growth in consumer demand in March.

And in most geographies and product categories, our sales outperformed the market. So as John will now cover, our first quarter financial results exceeded our expectations across all key financial metrics and the strong market demand has continued into Q2.

I will come back with comments on a revised outlook for 2020 after John provides details on Q1 results.

John?.

Hey. Thanks Juergen, and good afternoon, everyone. Net revenue for the first quarter of 2020 was $35 million or $35.1 million on a constant currency basis compared to $44.8 million in the year-ago quarter.

Sales in the first quarter of last year were still being driven to record levels by the battle royale surge, while down versus last year, our sales in the quarter were about $5 million or 17% above midpoint of our guidance range driven by record setting retail sales in March as Juergen described.

Gross margin in the first quarter was 30.8% compared to 33% in the first quarter of 2019. This expected decrease was primarily due to the continued impact of tariffs and a decline in volume-based fixed cost leverage, partially offset by a more favorable business mix.

Operating expenses in the first quarter of 2020 were $15.8 million, compared to $13 million in the same quarter of 2019. The increase due primarily to the inclusion of costs associated with the ROCCAT acquisition, which was completed at the end of May 2019.

Net loss in the first quarter of 2020 was $3.6 million compared to net income of $3.1 million in the year-ago quarter, reflecting the commentary I just covered. The company typically posts a net loss per share in the first two calendar quarters when sales volumes are relatively lower due to the seasonal nature of the business.

Net loss per share in the first quarter of 2020 was $0.25 and $14.5 million weighted-average diluted shares outstanding, compared to net income per share of $0.09 on $16.3 million weighted-average diluted shares outstanding in the year-ago quarter.

Adjusted net loss for the first quarter of 2020, which excludes transaction and integration costs incurred related to the acquisition of ROCCAT was $3.4 million or $0.23 per diluted share compared to adjusted net of $2.2 million or $0.13 per diluted share in the 2019 period.

These results significantly exceeded our guidance for adjusted net loss per diluted share, which was a range of $0.81 to $0.73. Adjusted EBITDA on the first quarter of 2020 was a negative $2.7 million, compared to positive $4.3 million in the year-ago quarter.

Adjusted EBITDA was significantly better than our prior guidance of negative $6.5 million to a negative $7.5 million. Cash provided from operations during the quarter was $17.5 million.

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

Regarding our reported taxes, the full-year tax provision for 2020 is expected to be in the range of $1 million to $2 million depending on actual results for the year with the higher provision corresponding to the higher end of our guidance range. And now turning to the balance sheet.

At March 31, 2020, we had $8.7 million of cash and cash equivalents with $0.3 million of outstanding debt under our revolving credit line. This compares to $10.2 million of cash and cash equivalents and zero outstanding debt under our revolving credit facility at March 31, 2019.

As of today, we have over $10 million in cash on hand with zero outstanding debt. Inventories at March 31, 2020, declined to $39.3 million compared to $44.4 million at March 31 last year. The decrease was driven by the better than expected sales, partially offset by the addition of inventory from the ROCCAT acquisition.

Going into 2020, we had brought in a bit more inventory to mitigate the impact of tariffs and that has helped us accommodate increased demand during the quarter. Now I'll turn the call back over to Juergen for some additional comments.

Juergen?.

Thanks, John. The environment continues to be highly dynamic. As we speak, some states across the country and some countries around the world have begun to ease the COVID-19-related restrictions on consumers and retailers.

How quickly other states and countries open up, how the retail landscape might be impacted and how consumers will behave in the coming economic environment are unclear at this point.

A key priority for us right now therefore is to continue our disciplined analysis, monitoring market trends at both retailer and country level and adjusting our supply plans accordingly.

This upsurge in demand is unlike past demand increases when a slate of strong games induced gamers to buy headsets or an innovative genre like battle royale comes along. In those cases, there were strong, but relatively smooth curves in terms of demand for gaming accessories that once detected could be extrapolated and modeled. This is different.

There has been and continues to be a significant increase in demand as was the case during the Fortnite surge, but we expect this demand increase to evolve and potentially change quickly once stay-at-home orders end.

Plus the increase in demand is currently combined with the retail landscape, which in some areas is actually constraining fulfillment of that demand. Where for example, stores are closed or e-commerce fulfillment infrastructure is struggling to keep up with orders and deliveries.

However, consumers seem to be doing a great job finding supply and are quickly shifting their buying habits accordingly, including significant shifts to e-commerce both through our retailers and directly on our Turtle Beach and ROCCAT brand websites.

As I previously stated, our retail partners have done an extraordinary job adjusting their business models, ramping e-commerce capabilities and adapting at record speeds to the changing environment. We are fortunate to have such great retail partners as our top customers.

We expect many of these retail and consumer dynamics to continue to change once stores are able to reopen and we believe our strong performance over the past few months is a good indication of our ability to execute well and thrive in a variety of retail landscapes.

In addition, supply chain, and particularly air cargo capacity and logistics have been and could continue to be impacted.

Fortunately, our excellent team hasn't been able to successfully leverage a variety of options to significantly increase supply and expedite its arrival across multiple channels, including our now significant manufacturing capacity outside of China.

Since the initial impact of COVID-19 on our manufacturing partners earlier this year, we are pleased that our partner manufacturing capacity has been back on track for many weeks now. In fact, we've managed to scale production rapidly to meet the increase in demand.

I would like to offer my thanks to our manufacturing partners for their excellent execution on this. The fact that Asia-based suppliers have been able to resume operations may also bode well for the upcoming launches of Sony and Microsoft's new consoles.

In fact, we believe the strong uptick in demand for gaming across the Board will also encourage Microsoft and Sony to maintain the anticipated timing of their console launches.

Both have reinforced their intentions to launch the new consoles as planned before holiday, although there maybe lower demand for the new console as – out of their expected premium pricing, depending of course on the state of the economy.

We continue to be very excited about the new consoles and the start of what we expect will be a new console market growth cycle later this year and going into 2021.

So our plan in this unprecedented and dynamic environment is to continue to analyze, adjust and execute accordingly to serve our retail partners well and keep our excellent products flowing into the hands of our consumers. Turning to our increased outlook for 2020. We expect to have a very strong Q1.

For the second quarter of 2020, we expect revenue to be in the range of $42 million to $47 million. This reflects the recognition that demand continued to be exceptionally strong as stay-in-home guidelines and orders remained in place in many markets through the end of April.

We expected as local and state government relax those measures demand could subside. Channel inventories are low so there will be a need to replenish stock even as demand returns to more normal levels.

The estimated revenue range also reflect our current expectations on product supply, including significant use of air freight, which could vary up or down given the dynamic cargo situation. As I mentioned, our priority in times like this is to get supply to our retailers and customers, even if we need to spend extra to expedite.

We expect adjusted EBITDA to be in the range of negative $2 million to breakeven for the second quarter including the anticipated incremental expediting costs and the longer-term growth investments we are making this year.

We expect the loss per diluted share to be in the range of $0.17 to $0.27 and the adjusted loss per diluted share to be in the range of $0.14 to $0.24. For the full-year 2020, we now expect revenue to be in the range of $224 million to $234 million. This is $10 million higher than our previous guidance.

While we recognize that our first quarter beat our guidance and our second quarter sales forecast is well above the consensus of published estimates, we are approaching the full-year estimates with some prudence as a few factors remain unclear.

First, we don't know at this point how long the unusually strong demand for gaming accessories will continue. If life goes back to something more normal and people are spending less time at home, it's logical to assume that the level of gaming will subside and go back to “normal”.

Second, we are not sure of the degree to which strong sales we have experienced so far this year, it might actually have been sales that would otherwise have happened later in the year. So we are factoring in some amount of pull forward of purchases in our guidance.

Third, it's unclear what the economic environment, including unemployment will be in the second half of the year and whether or not the gaming market will prove to be as resilient in the midst of challenging economic environment as it has been these past months.

We now expect full-year adjusted EBITDA to be in the range of $9 million to $14 million or about $4 million higher than our prior guidance, reflecting the investments and future growth I covered in detail last quarter and some higher estimate – higher cost due to COVID-19, including expediting supply more than offset by the higher revenues.

We continue to be on track for our plan $9 million investment this year to expand our market share in PC accessories and open up that significant additional market opportunity in the future. Those efforts are well underway.

We expect net income per diluted share to be in a range of a loss of $0.22 to a profit of $0.03, compared to our prior estimate of a loss of between $0.46 and $0.13.

We expect adjusted net income per diluted share to be in a range of a loss of $0.16 to a profit of $0.09 compared to our prior forecast of a loss of $0.45 and $0.12 based on approximately 15 million diluted shares. So to summarize our goals for 2020.

Number one, continue to lead in console gaming headsets and nimbly respond to shifts and demand as we prepare for the exciting transition to new consoles. 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. And number four, given this extraordinarily dynamic environment continue to execute well across retail, supply chain and operations with diligent analysis and quick adjustments as needed.

As I've said many times, I believe we have a terrific position in a great market. We have by far the leading brand and market position in console gaming headsets and are committed to and investing in extending that strength more broadly in the $4.3 billion gaming accessory market.

And I believe Q1 has been and Q2 will be another example of our ability to execute well in dynamic situations. We believe we are well positioned to drive future growth and continue to have a long-term growth target of 10% to 20% per year in revenue and 15% to 30% per year in EBITDA.

And finally, I would like to once again thank our employees who have done an incredible job under extremely challenging conditions. You are all truly what makes this company succeed and I'm very proud to be a part of this great team with you. Operator, we are now ready to take questions..

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

Hey, Juergen. Hey, John. Just a couple of quick ones. I think you touched on it a little bit, and I apologize, bouncing between a couple of calls.

But Juergen, in terms of the supply chain, are you guys comfortable that you can get enough product in the market? I know you had mentioned air shipping in a product to various DCs or other areas where it might be a little bit center, but just maybe talk about your ability to get the amount of product that you're seeing in Canada spots that you're – the areas you need it right now?.

Sure. Hi, Mark. So the supply chain team as I mentioned has done just a phenomenal job, increasing supply. Q2 will be constrained from a supply standpoint and that is even with a more than 3x increase in factory output between March and May. Just to give you some sense of the amount of the increase. So we will be constrained this quarter.

We expect and depending on demand, that will either be subside as we go into Q3 or not. But our goal obviously is to continue to ramp supply and get it here quickly, including using air freight wherever we need to.

And we know that our retailers recognized the work we do here and they appreciate the effort and the spending we put into getting them in supply even when markets have gone up by multiples in a matter of a week or two..

Got it. And then in terms of just managing kind of current-gen product versus next-gen product, obviously you're going to have new headsets and time for the launch of the new consoles. But I'm assuming – I think you guys even say in your presentation about the backwards compatibility here.

So maybe just talk about the need to discount kind of current-gen product and versus kind of getting ready for launching the next-gen product, and if they're backwards compatible, maybe we don't see as much discounting this year and also given the amount of demand you've seen upfront.

So from a margin perspective, maybe less dramatic of a margin in a gross margin degradation than we've seen in past transitions, is that kind of a fair way to think about it?.

Absolutely, Mark. Both new consoles have confirmed that they have 3.5 millimeter audio jacks on them, which means all of the wired products are fully forward and backwards compatible. We also expect the wireless products to be forward and backward compatible. And therefore, we don't expect to have any major kind of console transition issues.

And as you mentioned, while we will have some products for the new consoles, the high rate of sales will actually help us not – we believe not head into the console transition with inventory that needs to be discounted.

We can never be sure, but we certainly believe that this will be not like the last transition and that will be very on top of managing all of the product transitions during holiday here..

Great. Thanks, guys..

Thanks Mark..

Thank you, Mark..

[Operator Instructions] And our next question will come from Elliot Alper of Davidson. Please go ahead..

Great. Thank you.

Could you talk about your sales trends pre-COVID and how that changed in the back half of March? And then any sales trends in April as well as the first week of May?.

Sure. So we mentioned on the call, Elliot that January and February the market sales overall were down and given the high market share we have – we track roughly with the market.

We're down, I don't have the numbers in front of me, but we were estimating around 20%, but that – during March, the market shot up so much that the quarter closed it only 4% down despite January and February being down.

So we had noted that the jump in market sales and then on – in February and March, and then on top of that, we gained 500 basis points of revenue share using the U.S. NPD numbers, which made our growth even more dramatic than the market growth.

And then in terms of post the quarter, I mentioned the stay-at-home orders have been in place through April and the strong demand has continued through this week here..

Okay. Great.

And then was curious if you're seeing much higher volume to your DTC channel, any comments there? And then as retail remains closed, are you seeing success – seeing success through e-commerce? Could this change your physical footprint strategy going forward?.

Sure. So we have seen an increase in e-commerce sales both our partner, retail sites, Amazon, WalMart, Target, Best Buy, GameStop, who all have e-commerce fulfillment capabilities just to mention a few, and turtlebeach.com and roccat.com websites. So e-commerce has definitely gone up.

Keep in mind though that a number of retailers around the world have been able to remain open like WalMart and Target for example, because they have groceries and other retailers stick with U.S. examples like Best Buy and GameStop have very quickly shifted to an order online and pick up at front of store, touchless delivery.

It's been astounding how well and how quickly the retail landscape be at brick-and-mortar or e-commerce has adjusted, and if that wouldn't have happened by the way, March wouldn't have been able from a market standpoint to set a record including versus the Fortnite boom in March of 2018.

And even with the demand increase, there are still some key areas as I mentioned where demand was still constrained by the ability to get product, right, for supply and fulfillment through to the consumers.

But in general the retail environment has just adapted and adjusted extraordinarily well, and consumers have adjusted to continue to be able to just find product wherever they could get it to result in a strong March that the whole market seen..

Great. Thank you..

Currently, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Stark for closing remarks..

Thank you. We wish everybody safety and good health in these unprecedented times. We look forward to speaking with our investors and analysts when we report our second quarter results in August. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Thank you for your participation..