Good morning ladies and gentlemen and welcome to the Turtle Beach second quarter 2020 conference call. Delivering today's prepared remarks are Chairman and Chief Executive Officer. Juergen Stark and Chief Financial Officer, John Hanson. Following their prepared remarks, the management team will open the call up for any questions.

Before we go further, I will like to turn the call over to Sean McGowan of Gateway Investor Relations, Turtle Beach's IR advisor as he heads the company's Safe Harbor that provide important cautions regarding forward-looking statements. Sean, please go ahead..

Thank you Andrew. On today's call, we will be referring to the press release filed this morning that details the company's second quarter 2020 results which can be downloaded from the Investor Relations page at corp.turtlebeach.com where you will also find the latest earnings presentation that supplements the information discussed on today's call.

Finally, a recording of the call will be available in the Investors section of the company's website later today. 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 on 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, the 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 our 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, we 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 and 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?.

Good afternoon everyone and thank you for joining us. I hope you are all healthy and well. The 90 days since our last earnings call have certainly been among the most unusual any of us have ever experienced. So many routines have been disrupted. So many things we took for granted have been suspended. So many plans put on hold.

Against the backdrop of so much uncertainty, one of the clearest and most powerful developments has been that people are playing video games more than ever, both to stay entertained and to socialize with their friends.

Our sales in the second quarter were almost $80 million, not only a record for the second quarter, but more than 30% higher than our previous record of $61 million for the June 2018 quarter at the height of the battle royale driven gaming surge.

So let's talk about this powerful increase in demand for everything related to gaming, including hardware, software and accessories for both consoles and PC and how we were able to not only capitalize on this increase in demand, but to once again outpace the market based on the strength of our products and brand as well as our supply and retail execution enabling us to produce record levels of sales and profits for the second quarter.

And as a result, we are significantly increasing our outlook for the full year to $300 million, which would be a record revenue level for us.

Our continued strong performance in console headsets together with the investments we are making to drive growth in new market segments like PC make us believe that we can even exceed that record revenue level next year.

We think you will agree that gaming has been and continues to be one of the best, if not the best, consumer category in which to be a leader. According to the recent study from NPD Group, three out of every four people or 244 million people in the U.S. play video games. That figure is 32 million or 13% higher than it was in 2018.

Comscore recently reported that the number of U.S. households with a console increased by 31% in May 2020 versus May of 2019 and that time spent on gaming was up 133% in May 2020 compared with May of 2017.

Of course gaming and gaming accessories have been a good growth market over the past years, but the stay at home orders and loss of many other forms of socializing and entertainment have driven a dramatic increase in gaming.

And on top of that, gaming headsets work great for and are being purchased for non-gaming purchases like videoconferencing for work, school or socializing. Note that the growth is not only happening in console headsets but across our entire product line, as I will expand on a bit later.

One of the things that is so noteworthy about this growth is how unexpected it was. The year-to-date growth figures mask the fact that many gaming categories were down in the first two months of the year, consistent with our initial forecast.

We expected this to be a year where console headsets would be down for the first nine or 10 months of the year, we have been calling it an air pocket, as consumers prepare for the launch of new consoles from Sony and Microsoft. Instead, the air pocket has turned into a turbo boost and turned 2020 into a year where we think we will see record sales.

And we believe some of these trends will drive longer term market growth, not just a one-time surge similar to the way the 2018 battle royale surge drove a sustained increase in market size. Based on our extensive analysis, including consumer research we have completed over the past month, we see three drivers of the tremendous surge in demand.

Category one, existing gamers are gaming more and that's translating into purchasing of gaming accessories across our entire product line. While we expect a portion of these purchases may be pulled forwards, we believe that the increase in gaming in general could drive a sustained long term increase.

Category two, lapsed gamers and new gamers are gaming and gaming with headsets. This adds to the installed base of gaming headset users which, if they continue to game with headsets which history indicates is likely, can drive a long term increase in the size of the market.

Category three, non-gamers are buying headsets for working, schooling and video socializing at home. Gaming headsets work great for this. Some of them are also using headsets for gaming. To the extent that these work and school from home trends continue, this is a new source of demand for our headsets.

Our analysis leads us to believe the impact of each of these three factors is roughly equal across the three categories. So each driving roughly one-third of the incremental demand over the past months.

Categories one and two would drive increased demand across all gaming categories, not just gaming headsets which is why we are seeing increases across all of our product categories. This [0:08:34.7] decision to boost their initial production order for PlayStation 5 from six million units to 10 million units by March 2021.

And all three categories could drive sustained incremental demand. I think it's important to note that our strong sales performance is not just driven by the growth in the industry, but also by our ability to respond to it.

Most competitors in our product categories are benefiting from the demand surge, but they are not all reporting growth rates as strong as ours. This is driven by a couple of factors. First, as soon as we noticed the uptick in demand back in early March, we immediately worked with our factories to increase production.

Within a matter of weeks, we were able to triple the output from these factories and then within a few more weeks, we were able to achieve roughly five times the planned factory output. Then we had to get the product into our local markets which was an enormous challenge given the drastic reduction in available air freight capacity.

We spent over $4 million extra to do this but as John will outline this was very worthwhile financially and we know that our retail partners value our efforts to get them supply as well. And finally, our team worked around the clock with our retail partners to make sure we were putting the right amount of product in the right locations.

All this while the retail dynamics, who is open versus closed, online versus offline, et cetera were shifting constantly on a country-by-country basis. As I said earlier, it's not just console headsets that are driving our growth. We are seeing very strong growth in our PC accessories as well. In the second quarter, the U.S.

market for PC gaming peripherals, which is headsets, keyboards and mice, was up 123% and retail sales of our PC products were up more than 280%. In fact, we have exceeded the market performance in each PC product category in the U.S. and across the board in most of our major markets.

We executed extremely well across all these dimensions and that enabled us to outpace the market in console headsets and PC gaming accessories in our largest market, the U.S. and many of our other markets.

With that in mind, I would like to again thank our incredible team globally for the great work over the past five months, particularly given all the adjustments each of us have had to make to accommodate working remotely and all the other challenges of the stay at home orders.

With that, I will turn the call over to John to review our financial performance, after which I will come back with some additional comments about what we see for the balance of the year.

John?.

Thanks Juergen and good morning everyone. We are pleased to report another very strong quarter of better than expected results across all of our financial metrics. To give you some idea of how consistent our business has been, consider that our headset business has posted positive adjusted EBITDA on a trailing 12-month basis every quarter since 2012.

Since we stopped our HyperSound investments in 2017, we have reported consolidated GAAP gross margins on a trailing 12-month basis between roughly 33% and 38% for 12 consecutive quarters. And our consolidated adjusted trailing 12-month EBITDA has been positive every quarter for the past 15 quarters.

So while we have seen some ebbs and flows in revenue growth, our business has been consistently able to generate good gross margins, positive adjusted EBITDA on a 12-month basis. Net revenue for the second quarter of 2020 was $79.7 million or $80.1 million on a constant currency basis compared to $41.3 million in the year ago quarter.

The 93% increase put our sales just above the high end of the revised revenue outlook we issued in mid-June and nearly 80% above our initial June quarter issued back in early May.

The sales increase was driven by strength in both console headset and PC gaming accessory, as Juergen covered and reflected our ability to significantly and rapidly increase supply during the quarter.

Gross margin in the second quarter was 36.7%, 480 basis points higher than the 31.9% reported in the second quarter of 2019 and higher than any other June quarter since we became a public company in January 2014.

The increase was driven by several factors, volume driven fixed cost leverage, lower than normal promotional levels given the surge in demand and favorable business mix, partially offset by over $4 million in incremental air freight cost to facilitate the increase in revenues.

Operating expenses in the second quarter of 2020 were $19.3 million compared to $15.5 million in the same quarter of 2019.

The increase was driven by the inclusion of ROCCAT for the entire quarter this year as opposed to essentially one month in the second quarter of last year, volume driven selling expenses and higher personnel marketing cost, including a portion of the roughly $12 million in increased investment to drive future growth.

These were partially offset by lower transaction expenses compared to last year when expenses related to the ROCCAT acquisition were recorded in the second quarter.

As usual, we are committed to operating leverage on incremental any revenue which is why spending to expedite supply is financially beneficial and why continued growth is a key goal for us. Accordingly, adjusted EBITDA in the second quarter of 2020 was $12.9 million compared to $1.6 million in the year ago quarter.

The year-over-year improvement was driven by higher revenue, increasing gross margin and operating expense leverage and includes over $4 million of air freight as well as a portion of our growth investments. Year-to-date, adjusted EBITDA is $10.2 million.

Net income in the second quarter of 2020 was $8.2 million compared to a net loss of $2.4 million in the year ago quarter reflecting the commentary I just covered.

Net income in the second quarter of 2020 was $0.52 on 16.2 million weighted average diluted shares outstanding compared to a net loss per share of $0.16 on 14.6 million weighted average diluted shares outstanding in the year ago quarter.

Note that the higher share count is primarily a result of shifting from a loss to a profit for the comparable quarter as the diluted share count is higher in profitable quarters than in quarters with a net loss.

Adjusted net income for the second quarter of 2020, which excludes transaction cost and adjustments related to the acquisition of ROCCAT as well as changes in the fair value of contingent consideration were $6.8 million or $0.42 per diluted share, compared to an adjusted net loss of $0.9 million or $0.6 cents per diluted share in the 2019 period.

Cash provided from operations during the second quarter was $31.9 million. This continued strong cash flow allowed us to have zero borrowing outstanding on our revolver throughout the quarter. As I mentioned back in March, our effective tax rate could be higher if we exceed the full year guidance we provided on that call.

We are significantly increasing our financial outlook for the year, as Juergen will cover, so the full year tax rate for 2020 is now expected to be approximately 28%. Now turning to balance sheet. At June 30, 2020, we had $21.2 million of cash and cash equivalents with zero debt under our revolving credit line.

This compares to $3.4 million of cash and cash equivalents and $10.8 million in outstanding debt under our revolving credit facility at June 30, 2019. Inventories at June 30, 2020 were $45 million compared to $50.4 million at June 30 last year.

The decrease in inventory was driven by the strong increase in sales reducing our stock levels and in fact a significant portion of this inventory at the end of the quarter was en route to our distribution centers as retail inventories remain low. Now I will turn the call back over to Juergen for some additional comments.

Juergen?.

Thanks John. I will finish with some comments on what we see for the second half of the year and beyond.

While there are significant market economics and pandemic related dynamics that create a higher than normal level of uncertainty and variability in outcomes for the rest of the year, we expect to have a very good second half and are significantly increasing our full year outlook as a result.

We also continue to be very optimistic and excited about 2021 and believe we are well-positioned for the future. I will expand on these points now. As John said, retail inventories of our product remains very low and we have a significant amount of product that has arrived and continues to arrive since the end of June.

So Q3 started and continues with strong channel refill. I talked through our analysis covering the three key drivers of incremental headset sales over the past months.

Our view for the second half is that while there is likely to be some buy-ahead amongst existing gamers, the higher level of gaming activity overall, the new and lapsed gamers being added as headset users, as well as non-gaming headset buyers are likely to result in a sustained higher demand for gaming headsets.

In addition, we expect to be able to continue to outpace the console headset market given our brand, supply chain and retail execution, as well as several exciting new console headsets that we will be announcing shortly.

And given the statements by Sony and Microsoft that they expect to launch the new consoles as planned, if that holds, we expect the above items to be net incremental to our prior holiday sales estimates for console headsets.

We also believe our PC business will exceed our earlier expectations, given current sales trends, our performance in the past months in the PC accessories market and several exciting new products in our PC lineup coming this year.

In fact, while we will continue to report on our progress in PC on an annual basis, when we report full year results in March, we can say now that in 2020 we expect to more than double the roughly $14 million in ROCCAT related revenues we had in 2019, both in products we acquired and new products that we have developed through the fully integrated organization.

As you know, we are making investments to significantly expand our PC portfolio and to market the ROCCAT brand and we are already seeing the first benefits of those investments and have factored that into our increased outlook for our PC lineup for Q3 and Q4.

As a result, we are increasing our sales outlook for the year to approximately $300 million from the prior estimate of $224 million to $234 million. $300 million would put us at over 27% year-over-year topline growth and a five-year average growth rate from 2016 of over 11%, consistent with our long term objective to drive 10% to 20% topline growth.

Given the continued pandemic dynamics and the preventative measures that continue to be taken, we do expect retail patterns to remain unusual this year. We expect sales to continue to skew more to online channels including our own online store.

In addition, as retailers plan how they will handle holiday sales, we expect some retailers to buy earlier than normal and spread out concentrated sales events like Black Friday over longer periods to reduce crowd sizes in stores. As an example, several large U.S. retailers have announced plans to be closed on Thanksgiving.

We expect this could shift the distribution of revenues between Q3 and Q4 well beyond the normal yearly dynamic and estimate Q4 will therefore be roughly one-third of our annual sales.

But that revenue phasing could easily vary from our estimated range without impacting the full year, which is why we are again providing guidance for combined second half, like we did last year. Tying to the $300 million full year revenue guidance, our second half revenue guidance is $185 million.

To continue to facilitate rapid recovery in supply, we also expect to have higher than normal air freight cost with an estimated $4 million to $5 million incremental in second half for a total of $9 million to $10 million for the year. In addition, the full year results include an estimated impact of $2 million to $3 million in tariffs.

We do expect promotional activities to return to normal for the holidays. So for the full year, we continue to expect gross margins to be in the low-30s, reflecting gains due to operating leverage, but also significantly higher than normal air freight cost to enable revenues.

Note that given the supply chain initiatives we started two years ago, we now expect to have more than half of our product supply originating outside of China this year.

In terms of spending, given the excellent progress we are making, we are also increasing our investments to drive future growth, including further product portfolio expansions as well as brand and marketing investments from roughly $9 million to $12 million this year.

We continue to feel very good about the prospects for these investments to drive future growth as I have discussed. As a result of the above increased revenue estimates and updates on margins and investments, we expect adjusted EBITDA to be roughly $30 million for the full year, more than double our prior guidance of $9 million to $14 million.

This implies second half adjusted EBITDA of approximately $20 million. With our expected CapEx and cash taxes, this level of EBITDA should generate over $20 million in free cash flow. We expect net income per diluted share for the full year to be approximately $0.85 and adjusted net income per diluted share to be roughly $0.80.

Needless to say, we are very pleased with our progress and position for 2020. It's one thing to have a market tailwind drive growth but I am very proud of how we positioned our products and brands and then executed to capture the opportunity.

So to summarize, our goals for 2020 are, one, continue to lead in console gaming headsets and nimbly respond to shifts in demand as we prepare for the exciting transition to new consoles.

Drive 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 enhance long term shareholder value.

Number four and given this extraordinarily dynamic environment, continue to execute well across retail, supply chain and operations with diligent analysis and quick adjustments as needed.

Looking ahead to 2021, while this year's expected very strong results obviously increases the challenge, the launch of new consoles, the fact that the increase in gaming and gaming headset users could easily sustain itself after things "return to normal" and the excellent progress we are making in PC with more exciting products coming in 2021 has us optimistic and committed to achieving topline growth for 2021.

As I have 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 accessories market and beyond.

And I believe the first half of 2020 has been and the second half will be continued examples of our ability to execute well in dynamic situations. With the ROCCAT integration going well, the excellent team we have here and our strong continued execution, we plan to continue to make investments and take actions to enable and drive long term growth.

Our long term growth targets remain 10% to 20% average revenue growth over time and 15% to 30% average growth in adjusted EBITDA. And finally, but importantly, I would like to once again thank the global Turtle Beach team members who have done an incredible job under extremely challenging conditions.

You are all truly what makes this company succeed and I am very proud to be a part of this great team with you. Operator, we are now ready to take questions..

[Operator Instructions]. And our first question comes from the line of Mark Argento with Lake Street Capital..

Hi Juergen. Hi John. Congrats on an incredibly strong quarter. Few different questions for you.

First one, I wanted to just talk a little bit about how you are viewing the next-gen, the PS5 and then the Xbox growing out? And what kind of assumptions do you have in terms of attach rates in terms of new headset sales related to the sell-through of box for, call it, the first year or two? And is that any different given the environment we are in right now?.

Okay. Mark, you said you had a couple of questions. So we will start with that one and appreciate the compliments on the quarter. So new consoles overall, we are very excited about the new consoles.

More has been released over the last few months and I personally think that those new platforms now kind of start to cross a bridge from games and simulation that looks computer-generated to something that looks like it's real life, just with the graphics performance increase.

So even though every platform, every new set of consoles ups the processing and the graphic, I think my personal feeling is that we are crossing a threshold where the level of realism is just now incredible and tough to distinguish from real life.

So we are very excited about what's coming and we think that kind of transition and improvement will drive a lot of people to buy the new consoles over time. In terms of headset sales, we have factored in that they are launching on time which they have communicated they intend to.

But we also believe there will be some supply constraints for this year. And while they drive new sales, the new consoles and obviously we factored that into Q4, remember that the vast majority of the installed base of console users are on the existing generation platforms.

So the biggest impact of new consoles really happen in the first full year and then the next full year afterwards. So we are excited about them. We think they are going to drive a good long term growth trend, but have some conservatism built into our numbers for this year..

And in your prepared remarks, you had mentioned, is the next-gen is, I think, going to be incremental to guidance, if it hits on time? Or just maybe you could provide a little clarity around that comment..

Sure. No, the $300 million revised revenue guidance reflects the consoles launching on time this year with reasonably good demand but some supply constraints..

Got it..

That answer your question?.

All right. Yes. that's helpful. And then just more of kind of a bigger picture question. In terms of the longer term targeted EBITDA margins, I know back in 2018 when you guys pushed a similar revenue number, about $287 million, I think you ended up shaking out at roughly 20% EBITDA margin and realize that there is a lot of puts and takes there.

This guidance is roughly a 10% EBITDA margin. I am assuming the difference, about half of it's probably coming from some of the air freighting and the other the investment.

Long term, how do you think about EBITDA margins and balancing the investments relative to margins?.

Yes. Great question. And I appreciate the comments on 2018. So just to answer the question directly, our goal for EBITDA margins are in the teens and ideally kind of in the mid-teens. And over time, as we gain revenue leverage to be in the upper teens. And that would reflect good economics of the core business, but also making investments.

There are two big factors this year, both of which you mentioned. One of them is $10 million-ish, $9 million to $10 million in air freight, very worthwhile economically, as we have indicated, but that obviously impacts the EBITDA line. And the second is higher than normal level of investments.

So we have raised the $9 million to $12 million, roughly, in investments to drive long term growth, PC product portfolio, brand marketing and some other new initiatives we started this year, given the strong performance. And we feel very good about that because we are already seeing benefits of those investments.

I made the comment that the ROCCAT business, which did just over $14 million this year, we will more than double that amount of revenue this year, both in products that we acquired and developments we have made with our increased investments this year. So those two factors obviously are a bit abnormal for this year.

While every year we would expect to make some level of investments, the level is probably higher than normal this year..

Great. I will hop back in the queue. Thanks guys..

Thanks Mark..

Thank you Mark..

Thank you. And our next question comes from the line of Elliot Alper with D.A. Davidson..

Great. Thank you. I wanted to ask about sales cadence in the quarter.

Did you see sequential growth through the quarter? And to what extent were you able to see sales correlated with some of the reopening phases in different geographies of the country?.

Yes. Good question, Elliot. So the sales in Q2 were basically driven by supply. And we think this is industrywide, by the way, but certainly in our case. As I mentioned, we more than 5X the factory output.

A lot of that supply was starting to hit at the end of the quarter, starting to arrive and we now even today have significant amount of inventory that's en route in transit that will start hitting the shelves soon.

So it's actually tough to judge the natural demand in the market for products when consumers often can't actually buy if they want to buy. So what we have seen is sell-through dropped off for the whole market, by the way, in June, including consoles.

But we think that is less of a reflection of the natural demand and more of a reflection that there were stockouts among a lot of product categories including consoles by the way. You almost can't find a console to save your life right now.

And when we saw when we push more inventory into retail, especially in the last few weeks that the demand would immediately tick up again..

Okay. Great. I thought it was interesting, a third of the sales in the quarter were from new consumers, if I heard that correctly.

I wonder if you could talk about kind of how that has trended historically? And then with an influx of new gamers as well as the remote learning demand, should we expect a more normalized sales cycle and refresh cycle in the future? Thank you..

Yes. So when we did the analysis and said roughly a third existing gamers, a third new and lapsed gamers, a third non-gaming users. So that that was a measure of the incremental demand. So the normalized level demand always include some new gamers coming into the market.

So the one-third incremental demand was above and beyond the normal amount of new and lapsed gamers coming into gaming.

And so that could slowdown and we factored in that that starts to slow down now as things "go back to normal", the same way, by the way that the Fortnite surge in 2018,you had a lot of new incoming, millions of incoming new gamers that obviously have a first-time purchase. They buy a headset for the first time.

The key thing though is that they then become part of the installed base. And all of the historical surveys and research we have done indicates that they then start to upgrade and replace headsets over time.

So while we have prudently estimated that these trends will start to normalize over the rest of the year, we are factoring in that a substantial part of the new gamers become part of the installed base going forward. And this is exactly, by the way, what we saw in 2018 to 2019. 2019 was up 30%-something over 2017.

Just the run rate of the industry was up because the 2018 battle royale surge caused a large increase in the installed base of gamers. And that's exactly the same kind of trend we are seeing now..

I appreciate it. Thank you..

[Operator Instructions]. Our next question comes from the line of Jack Vander Aarde with Maxim Group..

Hi. Good morning. Congrats on the solid quarter and thanks for taking my questions. So Juergen, I believe you mentioned the 2Q and someone else just asked this question or a similar question, but I wanted to dig a little deeper. I believe you mentioned in the 2Q performs upside, the equal distribution of those three core drivers that you mentioned.

As you look at the remainder of 2020, do you expect a similar equal contribution from these three categories? Or would you expect some shift there? Which of these categories you have the greatest confidence in as the revenue drivers for the remainder of the year?.

Sure. And again, let me just to reiterate that those were the drivers of the incremental increase in demand over the last month, not a third of the total sales, right.

So we look at what we would have expected sales to be and the actual sales were significant, sell-through was significantly higher and the analysis we did goes at, okay, what are the sources? And we are communicating roughly one-third.

We know that a lot of others in our market listen to our earnings calls and probably use a lot of what we say for their own forecasting.

So we have done extensive analysis and we have projected, we have broken out those three categories intentionally and we have more precise numbers, obviously, than we are communicating because each of those three segments, we are factoring a different level of change and incremental sales activity for the second half and it's also informing, those three groups are also performing how we look at 2021.

And so just for competitive reasons, I am not going to give a lot more detail into the analysis we have done and how we are looking at the three groups beyond just to say that we certainly expect all of those trends to come down somewhat in the next few quarters and each of them to come down at a different level and have a different impact on long term demand..

Got it. Thank you for the clarity too. That's helpful.

And then just on that front too, as it relates to the performance, the outperformance this quarter and then as you look into your raised guidance for the back half of this year, any comments around console gaming headsets in the premium tier? Any change there in terms like what your market share trajectory is? And how is that coming along? And then also from the ROCCAT acquisition too, you mentioned there is strong contribution there.

Is there a similar market share in the analysis there between lower tier versus higher tier in terms of what you guys, your core or your strongest areas are?.

Sure. So yes, we have raised our annual outlook by over 30% and over 35% from our initial guidance. So we factored in for that. It is a very, very detailed level of analysis. And I think reasonably prudent. All of these various trends, including performance and expected sell-through in each of the price tiers.

Again, for competitive reasons I am not going to go into our assumptions at that level of detail, but we have tried in our revised guidance to be prudent and recognize that more expensive products are likely to have more of an impact from an economic downturn than lower priced products, for example, which I think is maybe what you are asking.

Of course, we do well and frankly have a leading share by far in all price tiers from $150 down where the vast majority of revenues for the market are. And while as new gamers come in, like they have in the last months, you do tend to see a bit of a mix shift down.

But we expect that to kind of go back to normal as the kind of the market dynamics overall and certainly by next year return to normal..

Yes. That's helpful too. And then just lastly. On the gross margin front, you expect $4 million to $5 million of incremental air freight for the second half of 2020? So that, on a quarterly average, that's less than what the air freight was in 2Q alone. We saw gross margin over 36%.

So just to clear, there is a rather material level of conservatism may be built into this gross margin outlook, unless I am missing something. I know there is some extra tooling or certification cost as well.

Can we talk about just what level conservatism may be built into that? Or what would be driving that in the low-30s as opposed to mid-30s?.

Sure. Good question. And I wouldn't say it's conservatism, it's the math behind our estimates and we are trying to give a range that we expect to reasonably land. The big difference, Jack, is that in Q2 the biggest driver is less than normal promotional activities.

When demand surges and everybody is low on stock, you are not running the normal level of discount sales and all that. That happened every week, every month, every quarter as a normal part of consumer electronics business.

So the lack of normal promotional activity has a large impact on the gross margin that more than offsets the $4 million of increased air freight, as an example, in Q2. Plus you get operating leverage obviously, when you deliver Q2 that's near $80 million.

So certainly built in to our back half assumption, as I mentioned, is that now that demand is not surprising anybody anymore or at least shouldn't be.

Stockouts, as we get through the next, let's say, months stock levels should start to return to normal and therefore promotional activity will return back to normal, including for the holiday where people will be running Black Friday specials, all of that.

So then the air freight is impacting the margins plus part of our investments that we are making are above gross margin costs, right. Tooling and other items like that. And so that has points of impact on the gross margin this year. And all of that's kind of factored into our back half assumption.

But again, the big driver of the difference is the level of promotional activity in the market..

Understood. That's helpful. That's it for me. Again, fantastic quarter and I appreciate the time..

Thank you..

Thank you..

[Operator Instructions]. And I am showing no further questions at this time. I will now turn the call back over the Chairman and CEO, Juergen Stark, for any 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 third quarter results in November. Thank you very much..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect..