Corsair Gaming, Inc.
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good morning and welcome to Corsair Gaming Fourth Quarter and Full-Year 2020 Earnings Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. With that, I would like to turn the call over to Ronald van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. You may begin.

[Ronald van Veen:]

Thank you. Good morning everyone, and thank you for joining us for Corsair's financial results conference call for the fourth quarter ending December 31, 2020. On the call today, we have Corsair's CEO, Andy Paul; and the CFO, Michael Potter. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are, therefore, forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release. I would also like to remind everyone that until our 10-K is on file, the 2020 numbers are unaudited. This conference call will be available for replay via webcast through Corsair's investor relations website at ir.corsair.com. Andy will begin with our fourth-quarter business highlights and 2021 outlook, and Michael will then take you through a review of the financials before we proceed to Q&A. With that, I'll now turn the call over to Andy.

[Andy Paul:]

Thank you, Ronald, and welcome to our Q4 2020 earnings call. While we are very pleased with our record results in the fourth quarter, and indeed all of 2020, which exceeded our expectations, as we delivered net revenue growth for the quarter of 70.4% to $556.3 million, adjusted EBITDA growth of 154.7% to $72.5 million, and adjusted earnings of $0.53 per diluted share, up $0.32 or 151%. For the full-year, revenue growth was 52.2% to $1.7 billion, adjusted EBITDA growth of 197.5% to $213 million, and adjusted earnings of $1.60 per diluted share, up $1.25 or 355%. The market for gaming and streaming gear over the holiday period showed the same strong trends as previous quarters with consumers continuing to turn to gaming and streaming while they spend more time at home. All categories showed strong growth, compared to Q4 2019. Notably, including components that gamers are buying to build high-end gaming PCs, as well as gaming and streaming peripherals. Now, this is important because people who step-up and build a $2,000 gaming PC are likely going to be committed to buying more peripherals in the future. In December, we saw YouTube reveal that they had 40 million gaming channels, a number that was far higher than most industry watchers have been estimating.

[Michael Potter:]

Thanks, Andy, and good morning, everyone. During the fourth quarter, we delivered net revenue of $556.3 million, an increase of $229.8 million or 70.4% compared to $326.6 million in Q4 2019. Our strong top line performance was driven by strong growth across both the gamer and creator peripheral segment and the gaming components and systems segment. We believe the strong revenue growth year-over-year is driven in-part by the COVID-19 shelter-in-place orders as consumers spend more time working and gaming at home. The gamer and creator peripheral segment provided $191.8 million of net revenue during the fourth quarter, an increase of $97.8 million or 104% from $94.1 million in Q4 2019, primarily driven by strong growth across all product categories, in particular, sales of our Elgato-branded streaming products, in addition to the contribution from SCUF, which we owned for just the last 2 weeks of Q4 of 2019.

[Operator:]

Yes. Thank you. Our first question is from Mario Lu with Barclays. Please proceed.

[Mario Lu:]

Great. Thanks for taking the question. So, I have one on the fourth quarter results and one on streaming. So the first one, pleasantly surprised to see that most of the revenues would be in the quarter came from PC components rather than peripherals this time around. Any particular drivers you can highlight that's of this upside in PC components? And how long will you typically describe the timing lab -- lags of the gamer who purchase PC components and then peripherals afterwards? And then on streaming, you mentioned some strong YouTube streaming numbers. And Twitch also recently announced that viewers watched over 1 trillion minutes on Twitch streams in 2020, with over 7 million unique creators each month. So, as streaming becomes more and more ingrained in Western culture, how should we think about the level of long-term growth of streaming peripherals? And how confident are you to continue to grow share in this segment? Thank you.

[Andy Paul:]

Well, Mario, that's a lot of questions. So let's see if we can take it one at a time. So, I think the first question was you were surprised that the component revenue was higher than the peripheral revenue. I mean, that's been the case for some time, and we do expect that peripherals will grow faster than components, but they're not quite at that level yet. So, the other side of that answer is that, yes, the components revenue – the components segment revenue was high, surprising growth during the year when you consider that people that are buying those components are typically building $2,000 gaming PCs, and that's been the surprising part of this year. It's not just people rushing out buying a gaming headset. It's people getting pretty committed to gaming and building expensive gaming PCs. So, I think that's the first thing. Now the next part of your question, I think, was about streaming and how we see the market evolving. At the moment, as you said, we've seen very strong numbers out of YouTube. We've seen strong numbers out of Twitch. There's clearly a massive white space in this market. In other words, the number of people streaming and the number of channels dwarfs the number of peripherals that are sold, whether it be cameras or microphones. And so, like gaming peripherals, most streamers are streaming from their phones or laptops and do not own any specialized gear yet. So plenty of opportunities to sell. In terms of our progression in the market, we continue to gain market share. We're building up revenue very quickly, gaining market share in every region. We're also adding products to our portfolio. And so far, every product we've launched has been a great success. So, we're pretty confident about gaining market share and very confident that the market will continue to grow.

[Mario Lu:]

Okay. Thanks Andy.

[Operator:]

Our next question is from Matt Cabral with Crédit Suisse. Please proceed.

[Matt Cabral:]

Yes. Thank you. I wanted to dig a little bit into the outlook for 2021. I guess you guys are calling for roughly 10% growth at the midpoint, wondering, first, if you could just talk about visibility and confidence behind that forecast at this point in the year. And then, Andy, I think in the prepared remarks, you mentioned the first half will be stronger than the second half. Wondering if you can just expand on that and talk a little more about the trajectory through the year and, if at this point, you think the business can still actually grow relative to last year in the back half of 2021?

[Andy Paul:]

Yes. So, a number of questions there, but it's all around 2021. Look, I think the first thing is, nobody knows exactly what's going to happen in the second half of 2021 yet, right? We don't know when people are going to go back to work, when restaurants and bars will be fully open. So that's an unknown. What we do know is that the base for gamers and streamers has expanded dramatically, and we do think that there's a lot of – still a lot of white space, a lot of people that have bought small – one peripheral, let's say, and can buy more. So, now having said that, this first half of the year we expect to be the same as most of last year. We don't see any changes. The momentum is very, very strong. People are still spending time at home buying gear. And yes, we'll see how second half plays out. So, I think we're going to have, on one hand, a larger base of people wanting to buy gear. On the other hand, we're going to have some people who spend less time at home. So that's why we think the growth will be moderate in the second half. If we look at Q1 last year, Q1 2020, which was, of course, really pre-COVID in terms of consumer spending, we grew 25%, compared to Q1 2019. So that's the last growth point we have of a non-COVID environment. So, we think that we've got good growth ability, regardless of COVID.

[Matt Cabral:]

Got it, and then a follow-up. I'm wondering if you could just give a little bit more detail around your supply chain. I think you talked about some constraints that you're seeing. Can you just maybe expand a little more on where you're facing the biggest shortages and the impact that's having on the business and just if there's any time line we should think about for supply and demand to come a little bit more in balance going forward?

[Andy Paul:]

Well, I think, in general, look, if you look at the IC level, that's getting tighter and tighter. And we've kind of seen this coming a little bit with 5G and cloud rollout, but we certainly didn't expect the rise in consumer electronics from the last 12 months. So, semiconductor lead times, in many cases, have run out from 10 weeks to 20 weeks, in some cases to 40 weeks or 50 weeks. Now, what that means is that you have to preplan what you're going to do. So I mean, clearly, we're planning to meet our current plans, but it does limit the upside. So, we see a huge surge in the second half of 2021. That could be difficult to execute on. But yes, that's, in general, the situation. We're still – I wouldn't say we're sold out. We were generally sold out for most of last year. We did start to restock shelves in Q4, so we started to catch up. But this year, we expect the first half to be very strong. So at the moment, we're feeling pretty balanced about supply, but we do recognize that what we've planned and placed orders for is largely in many of the high-end products what we're going to produce and then sell.

[Matt Cabral:]

Thank you.

[Operator:]

Our next question is from Rod Hall with Goldman Sachs. Please proceed.

[Rod Hall:]

Yes. Good morning guys. Thanks for the question. I wanted to come back to the supply question, but more related to peripherals. The peripheral segment was below what we expected, and I think it looks to me like probably supply constraint was the main driver there. I'm just curious how much supply – how much you think it affected the peripherals business in the fourth quarter and then also curious how that rolls into Q1? Andy, you said you were restocking in Q4. Do you catch up on some of that demand in Q1? Or what's the flow of supply versus demand in Q4 and Q1? Thanks.

[Andy Paul:]

Yes. So, I think that the first part of the question is a tricky one to answer because everyone was supply constrained. So – but there's no question that the market grew in gaming peripherals faster than our growth for most of the year. Now, you will notice that Q4, we actually grew over 100%, so that's where we started to catch up with the market. And the weeks on hand in the channel has definitely started to increase. I mean, in some parts of last year, we were down to 0 to 1 week. So it's gone now out to a few weeks, still less than we'd like to see, but starting to get on top of that. So hopefully, that gives you some color.

[Rod Hall:]

Do you – Andy, would you – just to elaborate on that, would you think seasonality into Q1 would be better than normal because of the flow here?

[Andy Paul:]

Well, I would say that the – we did actually see a fairly big lift in the market in Q4. So, seasonality from the market seems to be about on par. Seasonality for us, I think, will be a little different, yes, because we really weren't able to participate heavily in Black Friday and Christmas season. So, I think you're going to see a slightly different cadence from Q4 to Q1 than perhaps the last couple of years.

[Rod Hall:]

Okay. And then you made this comment on DTC and early progress there. Could you elaborate on that, what you're doing, what you're seeing with DTC, how you would expect that to grow through 2021 a little bit?

[Andy Paul:]

Yes. I mean, we've got – two of the last acquisitions, as you probably know, are 100% direct to consumer with SCUF and ORIGIN. We've grown our own Corsair direct-to-consumer quite substantially. We more than doubled last year from 2019, and we expect to do substantial growth this year. What we had to do is, put quite a lot of infrastructure in place, and so we do now have a fairly robust CRM system. We've got a lot of data-gathering infrastructure put in place, so we can properly start to keep track of what consumers are buying, what they own and how we market to them, et cetera. So, we're getting a lot more sophisticated in how we do business directly with consumers. So, I'm feeling pretty good about it at this point. But overall, if you look at all the direct-to-consumer business we do, we're getting very close to 10% of our overall revenue. And as we've said before, we think we can get up to 15% in fairly rapid order.

[Rod Hall:]

Great. Okay. Thank you very much.

[Operator:]

Our next question is from Drew Crum with Stifel. Please proceed.

[Drew Crum:]

Okay, thanks. Hi, guys, good morning. So Andy, you termed the pace of new product launches as blistering. Can you talk about what the cadence looks like for 2021 relative to 2020? And are there any product segments that will see more launches or is this more broad-based across the portfolio? And then for Michael, any more detail you can share in terms of the drivers behind your gross margin guidance for 2021? I think you suggested it would be up slightly, and that's following a pretty big gain last year. Thanks.

[Andy Paul:]

Yes. Let's start with the blistering pace. We now have, I think, over 25 different product lines. So, it continues to expand, and each one of those has to refresh products. So, some of our older product lines we've been in for a while, we clearly have most price points and SKUs in place, so we're largely refreshing, bringing new features. Some of the newer product lines, we're adding completely new product segments. So streaming, we're continuing to sort of push the boundaries, offering new both hardware and software solutions. But I expect to be launching roughly a product a week and a fairly major product every month next year.

[Michael Potter:]

And in terms of the margin question year-over-year, we do expect margins to improve year-over-year. It's going to be sort of a tale of 2 halves during the year. First half of the year, there's more supply constraints and freight costs are higher, but we expect that promotional activities will remain relatively low. We sort of have a scenario where things return a little bit more to normal in the back half of the year, and we're going to see a little bit more promotional activity, but freight expenses should come down. So between that, we think that we will be able to improve even with the constrained business environment in the first half to bring margins up year-over-year. We'll also get some benefit because we do expect peripherals, obviously, to keep growing faster than our components and systems business, and those enjoy higher margins.

[Drew Crum:]

Got it. Okay. Thanks guys.

[Operator:]

Our next question is from Tim Nollen with Macquarie. Please proceed.

[Tim Nollen:]

Hi, thanks very much. You've been talking for a little while now about kind of the rising tide of more gamers entering the system, especially now during COVID. I wonder if it's possible to break down in some way how much of your growth in 2020 was that compared with maybe what might have come from this console cycle launch and the rise of more of these cloud gaming services. With Game Pass being platform-agnostic, how much of that might have actually boosted your growth, just anything in addition to COVID within the growth last year that may have come from that?

[Andy Paul:]

Yes. That's a good question. So look, cloud gaming, I think, insignificant at this point. Console gaming, the main part of our revenue that is – revolved around console gaming is our SCUF subsidiary, and that's still a relatively small company compared to our overall revenue. So, and we're in the middle of a console transition there. So, we didn't expect huge growth in 2020, more so in 2021 as a lot of the new platforms get out there. But – so I'd say that pretty much 95% of our growth last year came from traditional PC gaming.

[Tim Nollen:]

Okay. And actually, relatedly, into 2021, I think your acquisition revenue now is getting fairly small after you've come through some recent deals. Just could you give us a breakdown maybe of what is acquisition revenue growth and also if there's a foreign exchange component within the growth guidance?

[Michael Potter:]

Yes. So in terms of the growth year-over-year, we don't have any acquisitions planned in that growth number. That's our existing business. Just as an indication for 2020 for the total growth, it's just over 5% came from acquisitions mainly driven by SCUF. So, most of the growth came from our already owned products. Obviously, any acquisitions that are not announced that we're working on and may or may not happen, we don't include in our numbers for our growth year-over-year.

[Tim Nollen:]

Okay. And if foreign currency impacts baked into the number as well.

[Michael Potter:]

There's a little bit of foreign currency impact baked in. The U.S. dollar has been a little bit weaker. So, when I talk about margin improvement, it makes it a little harder to – because of our supply base in Asia and more heavily in China. So there's a little bit of margin impact baked into that in our assumptions, but nothing dramatic and nothing that we've thought we needed to call out and talk about.

[Tim Nollen:]

Okay, thanks.

[Operator:]

Our next question is from Colin Sebastian with Robert W. Baird. Please proceed.

[Colin Sebastian:]

All right. Thanks, good morning everyone. One question on Q4, just looking at the quarter-over-quarter decline in the peripheral segment gross margin, I am just wondering if product mix is the primary driver of that or if there are other factors. And then secondly, wondering, Andy, if you could provide maybe a little bit more context on what's embedded in terms of pricing and promotional environment for this year, particularly as you look out into the second half, realizing that there's still a lot of questions about what the overall market looks like then? Thank you.

[Andy Paul:]

So, the first part of the question in terms of margin progression, I think you're talking about the fact that the gross margins were about 1% down on gamer and creators -- the gamer and creator segment. I mean, that's down to two factors, really. One is the fact that freight costs. Inbound freight started to go up significantly, and we had to expedite because of the short supply. And the second thing is I think the products, you can imagine, that are in most shortage are the high SP full-featured products with high semiconductor content, and so that naturally is going to have a slight adverse effect. But overall, it looks like it was about a 1% change and 6% growth over the year. So, we weren't too disappointed with that.

[Colin Sebastian:]

Thanks. And just in terms of the pricing and promotional environment for the second half, what's embedded in your expectations?

[Andy Paul:]

Yes. So look, we – like we said, we don't – it's tough to plan on the second half at this point. But assuming the world goes back to normal and we do slightly more promotional activity that would also almost imply that the freight costs come down significantly. They're very elevated at the moment with the amount of consumer electronics coming to the country. And so roughly, what we expect is the increase in promotion will roughly cancel out – be canceled out by the decrease in freight costs. So, expect it to be somewhat neutral.

[Colin Sebastian:]

Thank you.

[Operator:]

Our next question is from Doug Creutz with Cowen and Company. Please proceed.

[Doug Creutz:]

H, thanks. Just wondering, as the market continues to evolve very rapidly, are there any areas of your business where you feel like some strategic M&A would make sense? Thanks.

[Andy Paul:]

Well, that's an interesting question because we've got a lot of targets in terms of product categories, which we don't really want to reveal yet, and you have to find the right partners to show up. So we're constantly looking and evaluating. I would say if I look across all the companies we're talking to, and that's quite a few, most of them are evolving around software and services, either to do with gaming or streaming. So, we're not really planning to do a lot of major consolidation. I mean, we're not looking around to buy the next three biggest power supply companies or case companies or anything like that. It's more about expanding and having some more richer offerings for consumers that we're looking at.

[Doug Creutz:]

Okay that’s helpful Thanks.

[Operator:]

Our next question is from Tevis Robinson with D.A. Davidson. Please proceed.

[Tevis Robinson:]

Thanks so much and congrats on a great quarter. Last quarter, you talked about the notion that, based on your conversations with retailers, you're confident that you're driving sales to new customers in gaming versus like repeat or refresh purchases. Do you think that was the case once again in the fourth quarter? And if so, was it across all of your categories or specific to 1 or 2 areas? Thank you.

[Andy Paul:]

Yes, that's a good question. Our sense is that it was much the same. And I think the thing that surprised us mostly was how many people stepped up to start building gaming PCs. Now that historically has been not a huge growth industry, 5% or 10% a year, and so we were very surprised to see the amount of growth that was happening, especially in the second half, but we saw many months where – when we look at the MPD market in the U.S., for example, we see 60% to 80% growth month, compared to the month in the previous year. So that was the most surprising thing, the amount of people that were stepping up to build $2,000 computers, which is typically what people are building with our components. So that indicates a fairly heavy commitment to gaming or streaming. I think that was the most surprising thing. I mean, we knew people were going to start buying a lot of headsets and peripherals. That always happens when there's a surge in gaming. But yes, the system components was sort of surprising thing for us. We also saw very strong activity in streaming. So streaming, of course, we've got two things going on. One is, the number of people streaming content is exploding, people streaming gaming is exploding, and people streaming non-gaming is also exploding. I think we mentioned the number of streaming channels that YouTube now has, which is 40 million gaming channels. It's just astounding. So, I think those are some of the things that we saw through the year.

[Tevis Robinson:]

Thanks so much for taking my question.

[Operator:]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Andy Paul for closing remarks.

[Andy Paul:]

Well, thank you. Look, in summary, Corsair is at the forefront of a massively growing market centered around gaming, e-sports and streaming. With our unparalleled brand and quality of products, we think we are uniquely positioned to take advantage of this exploding market. Today, the global and passionate community of gamers and streamers is engaged in the relentless pursuit of better performance. We're proud to be a leading provider, an innovator of high-performance gear for this new era of entertainment. We are committed to give gamers and streamers the tools they need to play their best game, produce their best content and have fun doing it. Thank you for your interest in Corsair, and thank you for joining us on the call today.

[Operator:]

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.