Corsair Gaming Inc
NASDAQ:CRSR
Earnings Call Analysis
Q4-2023 Analysis
Corsair Gaming Inc
The company witnessed a solid revenue increase of 6% for the full year, carrying the momentum led by its sturdy Components business and a late but impactful recovery in Peripherals. Despite a competitive discounts environment, and a tough comparison with the post-pandemic surge, the company has managed to accomplish an 11% growth rate in the last three quarters of 2023.
With a dramatic improvement in Q4, year-on-year revenues jumped by 16%, and adjusted EBITDA notably doubled to $95 million, indicating robust financial health. Looking forward, the company has expressed confidence in achieving further gains in 2024, expecting increases in revenue and steadily improving margins.
The company is entering a new growth phase, aiming to drive revenue over the $2 billion mark in the coming years, with aspirations of reaching double-digit EBITDA margins. This optimistic outlook is fueled by anticipated market share gains and a refresh cycle in consumer spending.
European markets have offered a positive outlook by contributing an increased percentage of revenue in Q4 2023. However, the APAC region, particularly China, has underperformed, which may require strategic adjustments going forward.
The Gamer and Creator Peripheral segment displayed growth in Q4, although the yearly performance witnessed a slight decline. Conversely, Memory products and Gaming Components & Systems experienced an annual uplift in revenue, despite a dip in quarterly contributions. Gross margins of each segment also reflected various impacts, including operational challenges and product mix effects.
Gross profit and margins have seen an uptick in Q4, denoting the company’s ability to manage costs effectively. The overall gross profit for the year 2023 also increased, aligning with the company's trajectory of revenue and profit growth.
The success of new product launches in Q4 led to increased airfreight costs, squeezing gross margins in particular segments. However, the company has managed these headwinds well, showing an increase in gross profits for the Gamer and Creator Peripheral segment and adjusted operating and net incomes for the quarter and the year.
The company projects a revenue range of $1.45 billion to $1.6 billion for 2024, with corresponding adjustments to the operating income and EBITDA. They anticipate that revenue growth will primarily occur in the second half of the year. The company also expects to maintain strict control over operating expenses, leading to a year-over-year expansion in EBITDA for each quarter and improved margins.
Growth expectations for the first half of 2024 are pinned on the Gamer and Creator Peripheral segment, leveraging the momentum from the current product lineup and 2023's strong game releases. Additionally, the recent increase in memory prices provides a favorable tailwind for the year ahead.
Realigning the focus on the company's near-term goals, 2024 is seen as a significant year to progress closer to double-digit adjusted EBITDA margins, emphasizing the company's commitment to profitability and operational efficiency.
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Good afternoon, and welcome to the Corsair Gaming Fourth Quarter and Full Year 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. Please begin.
Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the fourth quarter and full year ended December 31, 2023. On the call today, we have Corsair's CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights for the quarter. Mike 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. Note that until our 10-K has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation to non-GAAP financial information to the GAAP financial information is provided in the press release we issued past the market close today.With that, I'll now turn the call over to Andy.
Thank you, Ronald, and welcome, everyone, to our earnings call. For the full year, we achieved solid revenue growth of 6% in a challenging economic market, led by continued strength in our Components business and a strong rebound in Peripherals towards the end of the year. The first quarter of 2023 was lapping the end of the pandemic surge in Q1 '22 before people generally return to office work, making that a difficult comp. But during the last three quarters of 2023, we grew by 11%. As we noted in previous earnings calls, through much of 2023, our growth in peripherals was held back by heavy discounting from our competitors to clear up excess inventory.For the end of the year, we saw inventories back to normal. And in addition, we saw good consumer spending during the holiday period. This plus some good product launches from us allowed us to make much better progress in our gaming and create a Peripheral segment, and we grew that segment in Q4 by 16% year-on-year. Financially, we bounced back well from 2022 with adjusted EBITDA doubling to $95 million, and we expect further gains in 2024. Some of this will come from increased revenue, but our margins are also steadily increasing as we continue to launch compelling products in our higher-growth product categories.Some of our notable new high-performance products launched in 2023 include our latest PC controller, new feature-rich headsets and multiple new mice and keyboards. We also received a positive response to our first of its kind Elgato Teleprompter for content creators, which comes complete with a display and a two-way mirror, behind which you can [ man ] either an Elgato facecam or any DLSR camera to make it easier for people to create broadcast content or do a video call. Another area we are very excited about is our expanding Stream Deck ecosystem.In addition to launching new models, including a co-branded limited edition model with Starfield, we launched a fast-growing application marketplace for our popular Stream Deck. This new marketplace allows our growing installed base of Stream Deck users to buy apps and plug-ins from both our in-house creators and from hundreds of third-party programmers and creators who have also partnered with us. This is doing better than expected and already 35% of the Stream Deck installed base have opened accounts on the Marketplace website. As we continue to gain a critical mass of applications, this will make our already popular Stream Deck a must-have item, driving new hardware sales and will create a very meaningful new revenue stream from the applications.We have made several moves to increase our operational efficiency. During the year, we moved production of many of our SCUF controllers to our factory in Taiwan. This allowed us to close an expensive factory located in the UK. At the same time, we expanded our Atlanta facility where SCUF is headquartered, and we have added a warehouse and shipping hub there to support shipments to the East Coast. This year, we will move our ORIGIN production site currently in Miami to the new facility in Atlanta.Our Atlanta facility has also undergone an expansion to add capacity for production and warehousing, which provides us with the strategic opportunities to support Corsair's long-term growth. This follows the successful completion of our state-of-the-art facility in Taiwan, which is now in full production and capable of delivering personalized gaming peripherals in the same way they can do today on the SCUF controllers. All these changes will give us a strong competitive advantage in the marketplace.Lastly, I am pleased to report our integration of our Drop acquisition is largely complete, and our teams have begun actively collaborating to leverage Corsair's global sales and distribution channel and to maximize new development opportunities. We expect Drop to contribute more significantly to our overall revenue and profit growth moving forward. We've done about seven acquisitions over the years. So M&A is part of our growth strategy. We expect to be active in 2024 if the right opportunities exist, which is in line with our view that consolidation will continue to happen over the next few years.Looking forward to 2024, we expect that the Gaming Components & Systems segment will be similar to last year since we are in mid-cycle to new GPUs and the next big GPU launch and demand surge is likely to be 2025. For the Gamer and Creator Peripheral segment, we expect significant growth, especially from new products that we recently launched and more that we're about to launch. In addition, we will be entering two new product categories in 2024, SIM racing and mobile controllers.We expect the overall gaming market to now enter a new growth phase as we enter a refresh cycle from the surge of consumer spending that occurred during the shelter at home years. This, plus our expected market share gains should allow us in the next few years to drive our revenue to over $2 billion with double-digit percentage EBITDA margins.Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead.
Thanks, Andy, and good afternoon, everyone. Overall, the year developed in line with our expectations. We more than doubled our adjusted EBITDA, turn profitable on a GAAP basis and tripled our EPS on a non-GAAP basis. Growth in peripherals resumed, and we clearly benefited from demand for new products. As expected, we benefited from reduced promotional activities from other industry players and improved inventory levels. I'm pleased to report that with regard to inventory, we've returned to target levels in both the channel and our warehouses, and we're actually light in some categories, including some of our more recent product launches.This should be an added tailwind for us in 2024. We expect to bid on this positive momentum in 2024 with a strong demand outlook for our new products, improved profitability and continued growth in adjusted EBITDA. In terms of the specifics, Q4 2023 net revenue was $417.3 million compared to $398.7 million in Q4 2022. For the full year 2023, net revenue increased 6.2% to $1,459.9 million from $1,375.1 million in 2022. European markets contributed 38.6% of our Q4 2023 revenues compared to 36.5% in Q3 2023, which is back to the level prior to the start of the conflict in Ukraine, while the APAC region was only 9.9% of our Q4 revenues, largely due to the softness in the China market.The Asia market was weaker than we expected during the year, particularly in Q4. Turning now to our segments; the Gamer and Creator Peripheral segment contributed $136.8 million of net revenue during the fourth quarter compared to $117.8 million in Q4 2022. For the full year of 2023, Gamer and Creator Peripheral segment revenue was $394.9 million compared to $437.8 million for the full year 2022. The Gaming Components & Systems segment contributed $280.5 million of net revenue during the quarter, which was relatively flat with $280.9 million in Q4 2022. Memory products contributed $145.5 million in Q4 2023 compared to $158.1 million in Q4 2022.For the full year 2023, Gaming Components & Systems segment net revenue increased to $1.65 billion from $937.3 million for the full year of 2022 with revenue from memory products increasing to $517.4 million from $504.6 million. Overall gross profit in the fourth quarter was $102.7 million compared to $97.9 million in Q4 2022, reflecting the higher revenue in the current quarter. Gross margin increased to 24.6% compared to 24.5% in Q4 2022. We continue to benefit from further improvements in freight costs and high demand for both new product introductions and popular lines like our Stream Deck and Webcams.Overall gross profit increased to $360.3 million for the full year 2023 compared to $296.6 million for the full year 2022. Q4 was negatively impacted by the success in new products Andy mentioned, as we had to use more than planned airfreight to get those products to market. The Gamer and Creator Peripheral segment gross profit was $50.9 million compared to $39.7 million in Q4 2022. Gross margin was 37.2%, up 350 basis points compared to 33.7% in Q4 2022. The Gaming Components & Systems segment gross profit was $51.8 million compared to $58.2 million in Q4 2022.Gross margin was 18.5% compared to 20.7% in Q4 2022, reflecting mix and some cost headwinds. Our Memory Products gross margins in this segment were 13.5% for the fourth quarter compared to 18.1% in Q4 2022. Fourth quarter SG&A expenses were $73.8 million compared to $68.5 million in Q4 2022, while R&D expenses were $16.7 million, up 6% compared to Q4 2022 as we continue to invest in support of new category leadership products in both our Components and Peripheral segments. GAAP operating income in the fourth quarter of 2023 was $12.1 million compared to $13.6 million in Q4 2022.Fourth quarter adjusted operating income increased to $31.8 million from $29.6 million in Q4 2022. This was another area of significant improvement as adjusted operating income more than doubled to $85.4 million for the full year 2023 from $34.6 million in 2022. Fourth quarter net income attributable to common shareholders was $6.2 million or $0.06 per diluted share as compared to net income of $12.5 million or $0.12 per diluted share in Q4 2022. On an adjusted basis, fourth quarter net income improved to $23.2 million or $0.22 per diluted share compared to $20.7 million or $0.20 per share in Q4 2022.For the full year 2023, adjusted net income improved to $58.3 million or $0.55 per diluted share from $18.4 million or $0.18 per diluted share in 2022. Finally, we increased fourth quarter adjusted EBITDA to $33.7 million compared to $32 million for Q4 2022. For the full year 2023, adjusted EBITDA more than doubled to $95.1 million from $46.5 million in 2022. Drop was about $1 million negative again in Q4, totaling about $2 million negative for the year. But with the integration behind us, we expect it to be neutral to start the year and then slowly grow. Turning now to our balance sheet; we ended Q4 on a strong financial position with a cash balance, including restricted cash of $178.6 million.We ended Q4 with $199 million of debt at face value and our $100 million working capital revolver remains fully undrawn and fully available. We further reduced debt in Q4 and plan to continue doing so over the coming quarters. We remain in an excellent position with a strong balance sheet and working capital position to support our organic growth opportunities and to pursue outside opportunities if there are a strategic fit and align with our business goals. For our outlook, in terms of the full year 2024, our financial outlook reflects cautious optimism.We expect total revenue in the range of $1.45 billion to $1.6 billion, adjusted operating income in the range of $92 million to $112 million and adjusted EBITDA in the range of $105 million to $125 million. Assuming we maintain the same debt and cash balances in 2024, we expect to have approximately $2 million of net interest expense per quarter. We're using an effective tax rate of approximately 18% to 22% for 2024 and the full year weighted average diluted shares outstanding of approximately 107 million to 110 million shares. In terms of more specifics around our 2024 outlook, we expect 2024 to follow a typical seasonal pattern for revenue.We expect the majority of the year-over-year revenue growth at the top end of our guidance to be in the second half of the year, with the first half only slightly up to flat compared to 2023. We expect the margins improvements from 2023 to carry forward into 2024, and we will continue our tight control of operating expenses. So we expect EBITDA to expand year-over-year in every quarter. Even on a flat year-over-year revenue environment, we expect EBITDA percent to improve. We expect CapEx spending to be back to its historical level of under 1% of revenues, and we expect stock-based compensation expense of approximately $36 million for the year.Drilling down to our segments, we expect the first half growth to come from our Gamer and Creator Peripheral segment as momentum from our product lineup and strong game releases in 2023 continues. We are amid the typical hardware refresh cycle, so expect minus 5% to plus 5% revenue growth in our Components & Systems segment from the bottom to the top end of the range. We expect Gamer and Creator Peripheral segment year-over-year sales to grow across the entire expected revenue range. We also saw memory prices increase for the first time in two years in Q4, which if that continues as expected, should be another positive for the coming year. Finally, we expect 2024 to be a good step to get our adjusted EBITDA margins closer to double digits, which is our near-term goal.With that, we're happy to open the call for questions. Operator, will you please open up the call for Q&A.
[Operator Instructions] Our first question comes from the line of Drew Crum with Stifel.
So you noted a recovery in the gaming peripheral market. The '24 guidance would imply your business grows at a mid-teens clip. If that's accurate, how does that compare to your expectations for category growth and assuming you're a share gainer what are the sources of increase for Corsair? And then I have a follow-up.
Yeah. Well, it's a combination of market share gain, which we're pretty confident of. And we do expect some small market growth. It's obviously a little difficult to say what that could be. We know historically, if you go back pre-pandemic, the gaming peripheral market was growing at 15% to 20%. And certainly, all the underlying drivers of that are still in place. But we've got to deal with the surge, obviously, of COVID. And so it's difficult to forecast what that could be. We expect eventually it's going to return back to the same growth numbers because the white space is so huge. But what it's going to be this year, I mean, obviously, we've got our own models, which we're probably not going to share, but let's just say that there's a combination of market share gain and market growth in our forecast.
And Andy, do the new product categories you referenced, the SIM racing and mobile controllers have a meaningful impact on that part of the business this year?
We haven't built that in so -- if possible they would have, but those are not really built into our models in any meaningful way.
Okay, got it. And then -- and Michael, just real quickly on gross margin. It looks like the midpoint of the range for this year is 27%, which, if I'm accurate here represents a nice step-up versus last year and would approach a peak for Corsair, at least as a public company. Can you talk about what's driving the expected year-on-year increase?
Yeah. For the most part, it's the recovery in our Peripherals segment. We were quite low compared to historical average at the beginning part of the year, and we ended the year a lot closer to where we normally are. So I'm expecting that to continue in 2024. And then the growth compared to our Components segment should pull the overall margins up. Essentially just a story, the momentum we started getting towards the end of '23, continuing through '24.
Our next question comes from the line of George Wang with Barclays.
Just I have two quick ones. Firstly, just by looking at your long-term model, obviously, nice to see a kind of upward trajectory. Just curious kind of what timeframe would you be targeting and any thoughts on cadence to get to the long-term model?
Well, I'm not going to share the details of our models like that. We've said long-term guidance, and we mean a few years, obviously, not decades. A lot of this depends on how fast the market returns to growth and how much growth we get from the market because, as I said in the last question, this is a combination of market share gain as well as market growth. So hopefully, that helps. The cadence of how we get there is really going to be a steady growth, very similar to what we expect this year. In other words, continuous upward margins, upward momentum of margins and some regional expansion as we look to gain some traction in Asia. And also we mentioned a new move into more customization and personalization.
Okay, great. I just have a quick follow-up. In terms of the Peripherals, it's nice to see growth rebounding to double-digit level over the next couple of years. Just kind of as the new sort of refresh cycle just getting underway from the kind of COVID refresh. Just maybe you can double click on that. Just what are you seeing from sort of macro standpoint in terms of the kind of health of the consumer Peripherals and how strong rebound do you think the industry can enjoy and also, obviously, on top of additional share gains by Corsair?
Yeah. So if you look at last year, clearly, 2022 was the first year after the surge in -- from the pandemic, even though 2022 was still significantly up, I think, 40% or 50% compared with 2019. So the market was bigger, but it was less than it was during the surge. And 2023 was more of the same. Now some of the things that happened in '23 was there was a lot of continued clearing out of inventory at discounts. Now when that happens, if you've got a lot of discounts going, the ASPs go down. I'm talking about industry-wide.So therefore, the TAM is a little less than it should be when those discounting stops. And so there's more recovery that we're seeing on industry reports, more recovery on ASP than there are on units, meaning that it drives revenue up. So that's the first thing that we've seen. And then as we move through the year, we were pretty encouraged by activity around -- not Prime Day, but Black Friday and Christmas, a lot of activity there at pretty reasonable prices. So we lend in on Black Friday because we could do it without having to over discount and had pretty good results. So that's the sort of first thing.The market is definitely recovering from a decline. Again, much bigger than it was before COVID but a decline since the surge. Now for us, we've got a number of things going on in Peripherals, right? One is that we've launched some really key products at the right price points that we know is the center of gravity for Peripherals, especially on keyboards. The second thing is that, as we mentioned, we're going to be further launching or further rolling out customization. As you may know, the acquisition we did on SCUF was quite strategic.And last year, about 50% of the products were sold to consumers were customized or personalized in some way, either with graphics or with other features such as switches and paddles and that sort of thing. And we're going to do the same thing with the rest of our Peripherals, starting around the middle of the year. So we think there's a huge opportunity there. And the same thing happened with Drop this company we just bought about four months ago, they're specializing in limited edition Drops. And so the key thing for us was to get our factory sorted out so that we could take advantage of that at a fairly low cost premium. Those are the main things we expect to happen.
[Operator Instructions] Our next question comes from the line of Doug Creutz with TD Cowen.
Just wondered, if we go back two years, you had an Analyst Day and you kind of gave longer-term guidance of, let's say, low teens revenue out into the future. Obviously, your guidance for this year is basically 0% to 10%. You talked about being mid-cycle. Just wondering how to line up what you're expecting this year with that guidance you gave two years ago have -- how things changed and you no longer feel that guidance appropriate. Just whatever color you can give around that would be great.
Yeah. So I think, obviously, history in the [indiscernible] gives you more details, right? So what we now know is what happened during the pandemic and after the pandemic. And we're now sort of back to normal, I think. But we still do have a hangover of inflation. We've obviously got to deal with that. We see that with all the consumer markets. We do think that there's going to be a refresh cycle. We've talked about that quite a lot. We're now four years after pretty much exactly four years after pandemic started, and that was when a lot of people started buying new entry-level Peripherals, we expect them to start upgrading.So that's why we think the immediate growth. And then I think once we're through this sort of Belgian [ trough ] or Belgium pullback, then we'll get back to normal drivers. And as I said earlier, I don't see why, given the amount of white space we've got in gaming and the fact that it's growing generationally -- it wouldn't surprise me, it's for gaming to get back to 15% or 20% growth per year. But we're not going to see that this year. I don't think with the inflationary situation going on and the interest rate is pretty high. So once that gets ironed out, I think we'll get to a better market growth. Now in the interim, I do think we've got an opportunity now to really grow some market share. And there's a lot of things that are in our favor for that.
[Operator Instructions] Our next question comes from the line of Aaron Lee with Macquarie.
So you talked about a few of your initiatives like the Stream Deck marketplace and Drop. And I know we're still early days, but just looking for any color really on your strategy to advance those through the year and any major milestones that we should look out for?
Yeah. I mean they're still pretty early. I think the first -- let's talk about marketplace first. So very early stages. We just launched it four months ago. We already have about 35% of the installed base that have signed up for a marketplace account and a lot of downloads. I think we mentioned just 5.5 million downloads so far. So the next rollout there, we've already started to showcase some products that are -- that you have to pay for. And so the move now is to see how many people we can move from getting free plug-ins to paid for plug-ins.And of course, once you go past there, then you can start thinking about subscription models and that sort of thing. But I think it's kind of a wide open opportunity. We want to try and make sure that the Stream Deck is as useful as possible. When the [ Stream Deck ] was launched, it was launched as a streaming aid. And so for creator -- content creators that were streaming that was the main use case. We're now seeing all sorts of incremental use cases even in office spaces and general use cases. So that's going to be the next expansion. But we'll keep everyone posted as we go through the year on significant metrics.This year, we don't expect any huge revenue from it, but it is starting to generate some revenue. On Drop, we've just finished the integration, so now everyone's working together. And there's really two things that we're looking forward to. One is taking the Drop products into retail, into our channels, and that's going to start happening very quickly in the next few months. And the second thing is we're going to experiment with some of our customized products, putting them on the Drop website. So these are the initial setup. Obviously, we've had to sort of do all the integration and get everybody working together, which is largely complete, as I said. So more to come on that, and we'll keep everybody posted as we go through the year.
[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Andy Paul, CEO, for closing comments.
Thank you, everyone, for joining on the call today 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.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.