Q1 2023 Corsair Gaming Inc Earnings Call

Participants

Andrew J. Paul; Co-Founder, CEO & Director; Corsair Gaming, Inc.

Michael G. Potter; CFO & Principal Accounting Officer; Corsair Gaming, Inc.

Ronald Van Veen; VP of Finance & IR; Corsair Gaming, Inc.

Aaron Lee; Analyst; Macquarie Research

Andrew Edward Crum; VP and Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Eric James Sheridan; Research Analyst; Goldman Sachs Group, Inc., Research Division

Jack Butler

Presentation

Operator

Good afternoon, and welcome to the Corsair Gaming's First Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. (Operator Instructions)
With that, I would now 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 afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the first quarter ended March 31, 2023.
On the call today, we have Corsair's CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights from the quarter, Michael will then review the financials and our outlook. We will then have time for any questions.
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 we issued after the market close today.
With that, I'll now turn the call over to Andy.

Andrew J. Paul

Thank you, Ronald, and welcome, everyone, to our earnings call. We are pleased to be off to a strong start in 2023 with a 33% improvement in adjusted EBITDA compared to the year ago period. We're also pleased to see that enthusiast-level consumers continue to build new gaming PCs at a rate significantly above pre-pandemic levels. Recent third-party data shows that Corsair continues to gain and hold market share positions in most of our categories -- of components used in those gaming builds.
The broader market for gaming critical is also holding up at a level significantly above pre-pandemic levels, although slightly behind 2022, most notably in Europe, while the U.S. market is largely recovered. This is in line with what we have talked about on prior quarters, where Europe was impacted by the Russian-Ukraine conflict and economic weakness. From a product standpoint, we continue to drive the high level of innovation and premium quality products that enthusiast turn to Corsair for.
During Q1 2023, we started to ship our 45-inch Flex OLED bendable monitor engineered in partnership with LG. We also expanded our industry-leading gaming headset lineup with the new wireless HS65 and HS55 models. These are lightweight headsets with great gaming audio and multi-platform compatibility. We launched Corsair Build Kits, a new initiative allowing customers to skip the research and hunting for parts when building a new PC. This should grow our self-built TAM by providing an easy out-of-the-box solution to people that have interested in building a PC, but without the experience to do it alone.
With 6 different kits to start off with, the enthusiast can get everything they need to build a high-performance gaming PC, including CPU, graphics card, motherboards and all the other components of memory made by Corsair. These kits are supported by an in-depth tutorial build videos with easy to follow clear step-by-step instructions.
We launched a marketplace for Streamdeck, which allows third-party plug-ins and applications that run on our world famous Streamdeck to be available to our content creators directly from the Elgato website. Developers will now be able to easily access Elgato's large and rapidly growing Streamdeck installed base. We believe that these added plug-ins and applications will dramatically increase our installed base of Streamdeck users.
We also entered into a multiyear partnership with Nick Kolchoff, better known as Nickmercs, the well-known personality in the gaming community with over 15 million followers at an average daily viewership of 60,000. Nick will exclusively play and stream using Corsair's high-performance gaming and streaming gear, including Scuf Controllers, Elgato streaming hardware and gaming PCs from Origin PC.
Back to our markets, with lower-priced GPUs, such as the NVIDIA 40-60 and 40-70 coming to the market and exciting new game titles being released this year, we're confident that the gaming market will continue to grow off the higher recent levels. And we believe that with our product roadmap, Corsair can continue to grow market share in many of the new categories we are entering.
Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead.

Michael G. Potter

Thanks, Andy, and good afternoon, everyone. We were able to build off the good start to the year and continue to improve our financial strength and flexibility with momentum expected to continue into Q2 2023. Revenue and gross margin were in line to slightly above our expectations as we benefited from strong demand for our components used to build gaming PCs.
In terms of specifics, Q1 2023 net revenue was $354 million compared to $380.7 million in Q1 2022. European markets continue to be softer than Americas, but are improving and contributed about 32% of our revenues below the historic average in the high 30 percentile, but up from 30% in Q4 2022.
Turning now to our segments. The gamer and creator peripheral segment contributed $88.9 million of net revenue during the first quarter compared to $134.1 million in Q1 2022. The gaming components & systems segment contributed $265 million of net revenue during the quarter, an increase of 7.5% from $246.5 million in Q1 2022. Memory Products contributed $131.3 million in 1Q 2023 compared to $132.2 million in 1Q 2022.
Overall gross profit in the first quarter was $85.4 million compared to $90.8 million in Q1 2022. The decrease was primarily driven by reduced revenues. Gross profit margin increased 30 basis points to 24.1% compared to 23.8% in Q1 2022. The gamer and creator peripheral segment gross profit was $26.6 million compared to $43.1 million in Q1 2022. The decrease primarily driven by reduced revenues. Gross profit margin was 30% compared to 32.1% in Q1 2022.
We believe that access promotions by some leading competitors on gaming peripherals showed signs of easing near the end of the first quarter, which we hope will lead to further improvements in margins later in 2023. The Gaming components & systems segment gross profit was $58.8 million, an increase of 23.2% from $47.7 million in Q1 2022. Gross profit margin was 22.2% compared to 19.3% in Q1 2022. Our Memory Products margin in this segment was 15.8% for the first quarter compared to 15.9% in Q1 2022.
We are starting to see the benefit of cost actions we took last year with operating expenses down almost 10% year-over-year. First quarter SG&A expenses were $67.5 million, an 11.3% decrease compared to $76.1 million in Q1 2022, driven in part by reduced freight rates and freight costs out to our customers on lower revenues.
This also reflects the impact of some prior 2022 headcount reductions along with our continued close management of all expenses as we support revenue-generating areas. Our cost control actions last year during a period of excess channel inventory have put us into a better position this year to invest and market our products. We will continue to be prudent in our spending. But we expect to and are able to slowly increase spending as the market improves.
First quarter R&D expenses were $16.8 million, flattish with the year ago period, but up 7% from Q4 2022 as we continue to invest in our new products. GAAP operating income in the first quarter of 2023 was $1 million compared to GAAP operating loss of $2.5 million in Q1 2022. First quarter adjusted operating income was another bright spot for us, increasing 36.3% to $18.2 million compared to $13.3 million in Q1 2022. We reduced our first quarter net loss attributable to common shareholders to $1.1 million or $0.01 per diluted share as compared to a net loss of $5.1 million or $0.05 per diluted share in Q1 2022.
On an adjusted basis, our first quarter net income improved to $11.9 million or $0.11 per diluted share compared to $9.2 million or $0.09 in Q1 2022. Finally, we increased first quarter adjusted EBITDA by 1/3 to $20.6 million compared to $15.4 million for Q1 2022.
Turning now to our balance sheet. The positive start to 2023 allowed us to continue to reduce debt while increasing capital to invest further in growth. We ended Q1 with a cash balance of $182 million that was partially driven by a return to more normal working capital levels after our inventory reduction efforts in 2022.
After paying down $10 million of debt, we ended Q1 with $230 million of debt at face value, approximately $50 million of net debt and our $100 million working capital revolver remains fully undrawn and fully available. In terms of the full year 2023, we are reiterating our previous outlook of flat to up revenue. We continue to expect total revenue in the range of $1.35 billion to $1.55 billion, adjusted operating income in the range of $75 million to $95 million and adjusted EBITDA in the range of $90 million to $110 million.
As we noted on our last earnings call, we expect to see revenue distributed more as it was in the past before the pandemic, with Q2 being the lowest quarter of revenue and the second half of 2023 being stronger than the first half.
With that, we're now happy to open the call for questions. Operator, will you please open up the call for Q&A?

Question and Answer Session

Operator

(Operator Instructions) First question comes from Eric Sheridan with Goldman Sachs.

Eric James Sheridan

I would love to ask maybe a big picture one to kick us off Andrew. You talked a little bit about bringing more enthusiast gamers and widening out the addressable market for the gaming components and systems market.
How do you think about elements of where you can control sort of continuing to widen the addressable market and lowering friction to bringing more people into the category as folks who can build their own gear for the medium to long term against the broader secular tailwinds we're seeing in gaming more broadly? I'd love to get your perspective on that.

Andrew J. Paul

That is a very long question, Eric, and welcome, by the way. This is the first earnings call for you'd be on. So I think the general question is about how to expand the self-built PC market. The good news is it is expanding.
And the way we can help is we're making PCs easier to build. Clearly, the driving forces between building a PC in the first place is whether there's a compelling reason to gain with the new GPU and CPU, and that's been made a lot easier this year with availability and prices at slightly better cost than they were the last couple of years.
But our job is to make it easier. And that involves the way we put together cases and power supplies or with different connections between them, fans, making it easier to put those together. And so that's what we try and do. And we've got a lot of things in the works that are going to make it easier moving forward as well.
So most people, in terms of building a PC versus buying it, the question is, can they actually get the PC built? And if you don't know anybody that can help them, it can be a bit of a daunting task. So the easier we make it, the better. That's why these build kits that we launched comes with the whole build kit and the details of how to put the things together in easy 1, 2, 3 steps. So that's really the idea. We think most people would rather build their own PC than buy one if they felt they could do it easily.

Operator

Next question, Drew Crum with Stifel.

Andrew Edward Crum

So Andy, the declines in the peripheral segment appear to be a function of excessive inventory by your competitors and unwillingness on the part of retailers to restock, if I'm understanding your comments correctly. In light of that, what have you seen in terms of core share performance across the segment? And then more broadly speaking, what is your confidence level that, that business rebounds in the second half and you can outperform the market?

Andrew J. Paul

Yes. Well, this complex question there. Because we've got a core business that is quite profitable and we have very high market share in it, and that's the memory business and the components business. We don't need to ship parts at a loss, I mean, in categories that are a bit soft in the market.
So for example, there's no reason for us to just hold market share in keyboards or headsets if certain price points are running at a loss in the market. And that's what's been happening. Once you -- once the market in general has excess inventory, then everybody tries to discount their way into holding share or selling the inventory. It's a good deal for consumers. But it just means that things often become half off. And we saw that through most of the second half of last year. Once we had cleared the majority of our excess inventory, then, we decided there's no point in shipping certain categories.
And this -- and when I say current categories, what I mean is the price points between sort of $50 and $100 tends to be the casual entry level. Price points more in the $100 to $250 level tends to be more, I suppose, you could say, consumer or enthusiast purchases. And that wasn't under so much of a problem.
So yes, that's basically what we did. We stepped away from that market. Now we think that this is generally being -- the markets are coming back. So we see this in U.S. already. And in Europe, it's starting to happen in certain countries. So as the markets strengthened and also our competitors burn up their excess inventory, which we've already done, then we should see a much more return to healthy markets. And I'd expect that to happen in the second half of this year.

Operator

(Operator Instructions) Next question comes from Aaron Lee with Macquarie.

Aaron Lee

So you highlighted the partnership with Nickmercs. He's a big name, so congratulations on that. Any color you give on the partnership and whether we should expect you to be putting more focus on streaming partnerships like this or if this is just more normal course of business?

Andrew J. Paul

Yes. I think that we've experimented with a lot of different marketing methods over the last few years as have some of our competitors. I think when we first started moving into gaming peripherals; the thought was that tournaments and e-sports teams would be the natural way to do this. And this is what you have -- you see obviously in other sports areas.
But the e-sports teams have really struggled to get to profitability. It's been quite a long ride. And so what we concluded is that there's really not a great return on investment doing that. So we've backed away from that. In fact, this year, we're only sponsoring a handful of teams. And we've noticed the same thing with a lot of our competitors.
But what has worked for us in the past, both in our component sales and peripheral sales is what we call third-party endorsers or influencers. And that's proven to be successful. So we're going back to, if you like, our roots. But there's -- so many players now like Nickmercs, who've gone from being a really good player to an online influencer and streamer. They are highly influential, especially to younger audience.

Aaron Lee

Yes, that makes a lot of sense. And then just also with respect to your recent launch of the third-party marketplace for the Elgato Streamdeck. Can you just talk about how you expect this to impact the installed base?

Andrew J. Paul

Well, I think it's going to go up a lot, honestly. And right now, the installed base is about 1.5 million units. We've only been shipping it for 3 years or something. And that's a Streamdeck hardware unit. We actually do have a Streamdeck available on software version on the phone, which allows people to try it out, try out the functions. We would expect it to expand not only in the traditional streaming applications, but also into business applications. So for example, we've just been working on both Teams and Zoom plug-ins. And we have teams released now. Actually Microsoft is pushing that as well for us.
And so as we start to look at other applications that are different from streaming, i.e., anything that's using these complex workflows. Zoom and Teams are not that complex, but there are things that if you're sharing your screen, you don't want to be fumbling around with windows to try and mute or raise your hand or that sort of thing. So that's where people really like to have an external button to do it.
So I think that's the sort of thing we're going to be launching. Adobe is another great example where there's, fairly complex workflows. It's really nice to have some dedicated buttons to do some functions and simplify the workflow. So I'd expect to see more activity and more people buying Streamdecks that are outside our typical customer base.

Operator

(Operator Instructions) Next question, Mario Lu with Barclays.

Jack Butler

This is Jack Butler on for Mario. I wanted to get into some of your recent product releases and maybe get a sense of what you might look to lean into in the future. So this was another quarter with some exciting product announcements.
I guess, I was just curious if maybe you could share some color on your recent launches these past couple of quarters. If there are any product lines or product specifically that have been performing exceptionally well or maybe any products or product lines that have lagged your expectations a bit? And then maybe what you're most excited about moving forward?

Andrew J. Paul

Yes. That's a good question. Well, I think the high-value items that we launched -- I mean, we launched a $3,000 laptop. We launched a $2,500 monitor right in the period where people were thinking about maybe a recession was coming. So that wasn't the most brilliant timing. So those haven't gone as well as we expected.
Having said that, the Flex monitor has actually been sold out ever since we launched it, although in fairly limited quantities, and that's more just getting that production cranks up. The things that we feel good about are Streamdeck, because we see the opportunities there. So Streamdeck marketplace we've been working on for a couple of years, getting that ready, I think that's going to be terrific.
Headsets, we've just managed to redo most of our product line, and so we've got some really good SKUs there now. So we're pretty happy about the last 2 wireless headsets we launched. And obviously, that's a big market. The headset market is about half of the total peripheral market.
In terms of cameras, again, we launched a very high-end camera probably the best 4K60 webcam that's out there and that's a $299 price point, so again, expensive for the current markets. And as you've heard from some of our competitors, the webcam market has shrunk dramatically but we're doing very well there. Again, we sold out as many as we can make we sell.

Operator

There are no further questions. I would like to turn the floor over to Andy Paul for closing remarks.

Andrew J. Paul

Well, thank you, everyone, for joining us on the call and for your continued support. If you have any follow-up questions, please contact our Investor Relations department and we look forward to updating you next quarter. Thank you, and have a good evening.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.