Turtle Beach Corp (HEAR) Q1 2024 Earnings Call Transcript Highlights: Strategic Moves and ...

• Revenue: $55.8 million, up 9% year-over-year.

• Adjusted EBITDA: Improved to $1.4 million from a loss of $2.8 million in the previous year.

• Gross Margin: Increased to 31.8% from 27.5% year-over-year.

• Net Income: $0.2 million, or $0.01 per diluted share, improved from a net loss of $6.7 million, or $0.4 per diluted share.

• Cash and Cash Equivalents: $17.8 million as of March 31, 2024.

• Net Debt: $32.1 million at the end of the quarter.

• Inventories: $69.5 million, with a significant part from the PDP acquisition.

• Free Cash Flow: $26.6 million.

• Full Year 2024 Revenue Outlook: Expected to be between $370 million to $380 million.

• Full Year 2024 Adjusted EBITDA Outlook: Projected to be between $51 million and $54 million.

• Warning! GuruFocus has detected 3 Warning Signs with HEAR.

Release Date: May 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• First quarter revenue increased by approximately 9% year-over-year to $55.8 million, driven by sales of controller and simulation products and incremental revenue from the PDP acquisition.

• Gross margin improved significantly from 27.5% to 31.8% due to lower freight costs, product costs, promotional spend, and return reserves.

• Adjusted EBITDA improved to $1.4 million compared to an adjusted EBITDA loss of $2.8 million in the year-ago period, reflecting better operational efficiency and cost management.

• Strong market growth in gaming accessories, with double-digit year-over-year revenue growth in Q1 for both US gaming headset and gaming controller markets.

• Successful integration of PDP acquisition, enhancing Turtle Beach's product portfolio and market position, and expected to drive future revenue and cost synergies.

Negative Points

• Console headset revenue was down year-over-year as the company intentionally reduced channel inventory levels ahead of new product launches.

• Operating expenses increased to $23.5 million from $20.6 million a year ago, partly due to costs related to the PDP acquisition.

• Inventory levels rose to $69.5 million from $65.2 million in the previous year, reflecting the addition of PDP inventory, which could pose risks if not managed effectively.

• Despite overall revenue growth, the core Turtle Beach product lines (excluding PDP) experienced relatively flat performance, indicating potential challenges in these segments.

• The company is in a transitional phase with significant product launches and SKU rationalizations, which could lead to short-term disruptions or execution risks.

Q & A Highlights

Q: Can you delve a bit more into the product refresh and restocking in terms of inventory and some of the new products you guys are launching? A: (Cristopher Keirn - CEO, Turtle Beach Corp) In Q1, we proactively reduced channel inventory ahead of significant new product launches in Q2, including refreshing our wireless lineup at key price points. This strategic reduction was managed without excessive promotions, and we're now in the process of reloading the channel. We expect channel inventory to normalize in Q2 with the introduction of new products.

Q: What does the overall guidance imply for the core Turtle Beach products, considering the inclusion of PDP? A: (John Hanson - CFO, Turtle Beach Corp) The core business is expected to grow in the mid-single-digit range. This growth, combined with the acquisition of PDP and cost improvement initiatives, is projected to deliver significantly higher EBITDA than in the past.

Q: Could you provide more details on the revenue contribution from PDP in the first quarter? A: (Cristopher Keirn - CEO, Turtle Beach Corp) PDP contributed approximately $5.8 million in the first quarter, primarily in the latter half of March. This acquisition is expected to drive strong growth within our guidance for the year.

Q: Can you update us on the SKU rationalization strategy, especially in relation to the integration of PDP? A: (Cristopher Keirn - CEO, Turtle Beach Corp) The SKU rationalization includes both Turtle Beach and PDP products. This strategy leverages the complementary nature of both companies' portfolios, optimizing synergies in cost and revenue, particularly in discussions with retailers who are excited about the broader product offerings post-acquisition.

Q: What is the status of the share repurchase program? A: (John Hanson - CFO, Turtle Beach Corp) We've increased the size of the authorized share repurchase program and plan to be opportunistic in buying back shares throughout the year to enhance shareholder value.

Q: How do you explain the decrease in headset shipments in Q1 despite strong industry numbers? A: (Cristopher Keirn - CEO, Turtle Beach Corp) The decrease was strategic, as we reduced channel inventory in preparation for new launches. Despite this, sell-through growth remained strong. We anticipate a significant recovery and normalization of inventory levels in Q2, aligning with our robust product launch schedule.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.