Good morning, and welcome to the Corsair Gaming's Third Quarter 2021 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 morning, everyone, and thank you for joining us for Corsair's financial results conference call for the third quarter ending September 30, 2021. On the call today, we have Corsair's CEO, Andy Paul; 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-Q is on file, the Q3 2021 numbers are preliminary. 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 third quarter business highlights, and discussion on what we are seeing in the market and Michael will then take you through a review of the financials and outlook before we proceed to Q&A. With that, I'll now turn the call over to Andy.

Thank you, Ronald and welcome to our Q3 2021 earnings call. During the third quarter, we delivered revenues of $391 million and gross profit of $101 million, resulting in gross margin of 25.9%. While we continue to see solid demand for our products, our performance was impacted by a very difficult logistics and supply chain environment, particularly the availability of reasonably priced GPUs. And we believe it prudent reset expectations for the year. Michael will walk through our financial results in greater detail later in our discussion. I'd like to spend a few minutes to provide an update on what we're seeing in the market, and why we remain confident that Corsair is well positioned to navigate the current industry headwinds to deliver sustainable shareholder value creation over the long term. First, Corsair is the leading global provider and innovator of high performance gear for gamers and content creators. Our gaming gear helps gamers perform at their peak across PC or console platforms. And our streaming gear enables creators to produce studio quality content to share with friends or broadcast to millions of fans. As gaming and streaming continues to become more mainstream, we believe Corsair is uniquely positioned with our comprehensive product suite to meet the needs of this rapidly growing market. We have maintained our market leadership across most of our product lines, with our relentless focus on enhancing the customer experience by delivering cutting edge technology and creating innovative gaming and streaming gear and related software. Based on outside data, we believe that we gained market share in most categories in Q3. Since the start of 2021, we've maintained an astounding pace of innovation, launching 113 new products, including the addition of several entirely new product lines, which we believe has greatly expanded our total addressable market…

Thanks Andy, and good morning, everyone. During the third quarter, we delivered net revenue of $391.1 million, a decrease of 14.4% compared to $457.1 million in Q3, 2020. But well above Q3 2019 pre pandemic level of $284.4 million. Net revenue for the nine months ended September 30, 2021 $1,293 million, an increase of 21.6% year-over-year. As Andy mentioned earlier, our third quarter results were challenged by a very difficult logistics and supply chain environment. Logistics is slower than usual with many shipping lanes taking over double the normal shipping times and at a much higher cost. At times, we're not able to purchase all of certain semiconductors that we need. Finally, GPUs are difficult to find at or near MSRP. And we believe that many of our customers are waiting to build new systems for the upgrade until pricing returns to more normal levels. We're trying to mitigate delays by getting our inventory and our hubs closer to our markets; it has been difficult to pass costs onto our customers. We estimate the effects of increased supply costs have had a 2% to 3% headwind on our gross margin and resulting EBITDA percent during the third quarter and expect us to continue in the fourth quarter. Ocean freight of 40 foot containers which historically would have been in the $3,000 to $5,000 range have gone up three, four, even five fold. So we're seeing a slight easing in early October, we expect continued elevated freight costs for Q4. Because of this, our adjusted EBITDA in the second half of the year is expected to be 7% to 9% and 10% to 11% for the full year compared to our planned 11% to 12%. Turning now to our segments, the gamer and creator peripheral segment provided $139.3 million of net…

[Operator Instructions] The first question comes from Mario Lu from Barclays.

Great, thanks for taking the questions. The first ones on the fourth quarter revenue guide. I believe that the midpoint suggests down 13% growth year-on-year. So just wondering if you could provide some color in terms of the year-on-year growth rate. You saw exiting the third quarter in September or any early trends in October that you are seeing that adjust 4Q revenue could accelerate slightly versus the third quarter?

Well, let me answer that question a couple different ways, Mario. So and good to hear from you, by the way, so I'm tracking the velocity of performance gaming products pretty carefully. And we use as a bellwether, for that keyboards and mice. We don't use headsets, because a lot of headsets, a lot bought for the purpose of increasing your skills of gaming. And what we're finding there is the sales both in Europe and in the US are tracking to last year. So that gives us a good indication of the base demand for performance gaming gear. Now, as we mentioned in the release and the remarks earlier, the biggest issue we have at the moment other than the supply chain is that GPU cards are very expensive and very short. And so gamers that want to build a high performance gaming PC, holding back somewhat because they don't want to spend $1,500 or $2,000 for a high end graphics card. So that's really what's causing and it's much worse today than it was in Q4 last year. So that's really what's causing the revenue outlook to be a little soft. It's not really related to the underlying demand. It's just the fact that people can't get cards or they can't get cards and won't be able to build PCs and buy cases and power supplies and memory and cooling products.

Got it, thanks Andy. And then just one on the DDR5 memory. Do we have any color in terms of the timing of that release in 2022? And if there is an increase in ASP, is there a range of magnitude of that increase? And how that should flow to the memory course margins? Thanks.

Yes, I think it's going to be a slow start. We've talked to the memory manufacturers; they're really not going to be in high production until second half of next year. So would expect a few people and let me back up so all the motherboards that are coming out, will support DDR4 and DDR5. And so there'll be a few bleeding edge enthusiasts that want to go DDR5, but there's going to be very limited quantities available. So I wouldn't expect to see anything until next year. And then we'll see how that works. There's no reason. Yes, there's no reason to think that ASPs would do anything, but go up. But that can -- all that can be dwarfed by the amount of memory people are putting into systems. But I'd expect the way consumers are allocating budgets or systems; I think it's going to go up a little bit in memory, just because of the added performance it can give.

Got it, thank you.

But I just to, sort of conclude that the last question I wouldn't expect to see any meaningful effect on margins until very late in '22 from DDR5.

The next question comes from Doug Creutz from Cowen.

Hey. Can you talk about what you're seeing as far as the level of discounting in the market right now? And are there areas, other product areas that are more aggressive or area that are less aggressive? Thanks.

Yes, I'd say it really depends on the category, but we're not seeing in general, a lot of discounting. And where we are, we are not necessarily reacting to it. I mean, in general, we're just coming off of a short supply situation, and starting to have the channel filled up. So we don't see any need to discount heavily. There are some categories where the demand is softer, post work from home, now we're seeing people come back to work. But we don't really, that's a pretty small percentage of our sales. So, I'd say on an overall basis, yes. I haven't seen too much discounting going on so far.

The next question comes from Drew Crum from Stifel.

Okay, thanks. Hey, guys. Good morning, a lot discussion around new products in your preamble, given the supply chain disruptions and logistics issues you're dealing with, how's that affecting the cadence of new product launches? Are you slowing the pace? And then I have a follow up.

No, in fact, we have increased our spending on R&D, and we're cranking out products like nobody's business. So I think we -- would be say 113 this year so far. So far so well in excess of two week. So we're keeping that going. And the supply chain delays. And now what understood, so it just means you have to plan longer ahead, but that's not stopping the pace of innovation or products coming out.

Got it. Okay. And then, Michael, the adjusted EBITDA guidance would imply an uptick in margin for 4Q versus 3Q, anything noteworthy to call out to explain that improvement.

I think the two main things are higher volumes, so we get a little bit better absorption and a little bit better covered to the operating expenses and a slight easing in some of the logistics costs with the beginning of the quarter is probably the two things.

The next question comes from Tim Nollen from Macquarie.

Great. Hi, thanks. I just like to ask again about the supply chain issues. It sounds like you're saying the same thing you said last quarter, which was the issue, is really that the shipping prices have gone way up. And also consumers are holding back on buying things. But just to be clear, it's not a matter of your inability to actually source the products and make them just to be clear on that.

Well, that's 95% accurate. What we found over the last year is the products that have the highest semiconductor content, which of course, the highest ASP products, things like our flagship keyboards and wireless headsets with Bluetooth and standard wireless, those have been a struggle to keep in the shelves. We are now in pretty good shape. And that's been a fairly recent development. So yes, in general, we're feeling in reasonable shape, we've increased inventory to take care of the delays. The costs, obviously, still a big issue and they're probably now as worse as they've been, we do hope to see some of [Indiscernible] and we're certainly doing less effort. But yes, that's a situation. So it's not necessarily stopping us at retail, other than a few products that are still a bit tight.

Okay, no, I know, you said before --sorry.

Yes, it's all of this is really dwarfed by the amount of PCs that are getting built. And that's really a situation of the graphics card. So I mean, that's two thirds of our revenue, right is from components in memory that go into gaming PCs.

Yes, no, I know you've caught up before you were in pretty good shape, supply chain wise coming in. So just want to make sure how things sit now, and then follow up, you call that $100 million of missed revenues, basically, and some pent-up demand it's building and I know you're not talking '22 numbers yet. But it sounds like we can't really call the timing of this supply chain getting back into normal, but I guess it spills into next year? How should we start to think about what demand looks like into next year? I mean, if underlying growth is x, and then you add $100 million to that, is that the right way to think about where your real growth trend is going?

Yes, I think so. I mean, it's very difficult to know exactly what's in consumers' minds. I mean, we, like I said, we think that we saw the growth last year, right, so about 70% increase in gaming hardware activity in the US, and that was across all product lines. And talking market numbers now. And then this year the PC builds are about level with 2019. So drop back. So you could argue that if there have been plenty of GPU cards available the bills could have been 50%, 70% higher if they match last year. So we were using a pretty conservative number, where we think 10% about the right of that number that we missed. And what we also don't know, of course, is how quickly graphics cards will get back to normal supply. There are two things going on there, right. One is a semiconductor issue, because there are obviously a lot of semiconductors on those cards. And also the fact we've got Bitcoin mining that's absorbing a lot of the supply. So hopefully both those things release next year, and we'll see a pretty healthy market. But it's very difficult to say, I think the only way to think about it for a fact basis is the fact that with cards of $1,000 to $1,500, people are still building PCs at the same rate as they were in 2019. So how we model that for next year? We'll have to wait and see how we get there. But we do expect there to be a big surge of demand, yes.

Okay, cool. Can I just squeeze in one more, please? And that's, you've have some interesting new product releases in categories you haven't necessarily been in before. Could you just give a little bit of color on how these are different and better than competitors? So I'm thinking the memory gaming monitor that you just mentioned, and like the Elgato FaceCam. How are these different better than your competitors' products?

Well, so let's take the Elgato camera first, FaceCam that has been designed from the ground up for streamers. Whereas as you probably know, most of the webcams on the market were designed for pretty casual videoconferencing. And that means because the people at the high end of the market were using pretty expensive DLSR cameras. And with that, you get a whole bunch of different settings, you can adjust white balance, you can adjust exposure, et cetera, we built all of that into the FaceCam. And the settings stored inside the FaceCam, so you can basically treat it like a DLSR camera; it's got a very, very fast refresh to it. So if you wave your hand in front of FaceCam, you can see your hand moving, if you wave it in front of a standard webcam, you see a blur. So yes, it's been very well reviewed 4.5 stars on Amazon. So people are really liking it. And we're basically making as many as we can, gain quite a bit of market share already on that product. So pretty happy with that, the monitor is very new, we've just launched it just starting to sell it obviously, that's a big, heavy product. So we had to make a decision early on how many we were going to load into the channel. And we didn't want to get too aggressive. So that's really too early to say how that's going to go. But it's basically we picked the high end of the monitor market. So very high refresh rate, 32 inch monitor, built some really nice features into the mechanical parts of it for cable routing, and camera mounts. So it's really designed for high end enthusiasts. And then the DDR5, we've basically taken all the standard technologies that we put into our normal modules in terms of over clocking, and RGB control, and we've added those for DDR5 platform, that DDR5, the chips themselves are very, very fast and got a huge amount of room for over clocking. So we do expect that's going to excite all enthusiasts. In terms of differential, the main differential that we offer is enhanced speed, and really nice IQ control, which means the RGB lights synced with everything else. As you probably know we have a massive market share now on memory. So we are almost at 60% market share. So we're not necessarily looking to differentiate any more than we already do.

The next question comes from Thomas Forte from D.A. Davidson.

Great. So one question and follow up. My first question, I wanted to hear your current thoughts on the progression of your core gamer. Are you still seeing acceleration in timeline from mobile to consoles to build your own?

Well, it certainly looks like it. I think we've mentioned before that the gaming hardware is growing faster than software, which is growing faster the number of gamers so there's a steady acceleration of people that game moving into ChronoTab and building gaming PCs. So we didn't see anything different. And it's roughly three to one in terms of the pace of growth. So yes, we're seeing a steady movement. One of the things we just did recently was a survey among PC gamers. The interesting thing is that almost 90% of PC gamers also play on console also plays on mobile. So I don't think it's not quite the situation of people migrating from one to another. They're just doing more things and but as far as we can see, once people can afford to build a gaming PC, they'll go ahead and do it.

Great. And then my follow up question is I think in the press release, you talked about the ability to take price or times reviews felt like you couldn't take price to adjust for some of this inflation. Can you talk about your product portfolio, and your ability to take price within different segments?

So -- are you asking whether we were able to pass on cost increases in the form of price increases?

Yes, and if you think that there's certain segments you operate in where you feel like you can take price versus others really feel like you can't take price.

Yes, I think that in the -- yes, it's quite simple, really, I think in the categories where we've got big healthy competitors that are more like us. I think most people are waiting on prices. So keyboards, mice, headsets, typically those prices we're not seeing being raised. The companies are simply absorbing the cost. With smaller competitors that we see with our components and let's be if we get this specifically down to things like chairs, you have to increase prices. So otherwise people will go out of business. So, yes, we've got smaller competitors, we are seeing prices go up to reflect that to a certain extent. So we've got some mitigation against the cost, but in the peripheral areas and the streaming areas. We haven't seen people passing on a lot of costs yet. I think everyone's sort of waiting to see how quickly the shipping costs go back down. I mean, it's sort of inconceivable to think that container prices would be $15,000 forever. So I'm pretty sure that eventually otherwise, we'd all start off container companies. So I think that's probably going to change pretty quickly.

The next question comes from Rod Hall with Goldman Sachs.

Hi, this is RK on behalf the author of fraud. Thanks for my question. Andy, I wanted to follow up on underlying demand. Could you give us more color on how you track that? Which areas were strong? And I think you also mentioned some categories were softer. And, Michael, to follow up on the pricing question, why is it harder to pass on the price increases, given the demand is too strong?

So let's take the second one first, I think that it's not necessarily hard to pass on price increases mechanically. But in a competitive environment, like I said, just now you've got larger competitors that have helped me balance sheets. And the motion is that the shipping cost will ease within a year, a lot of times where you've got products that are very heavily entrenched in retail, there's no point asking the retailer to raise MSRP by $10, and then taking it down again in six months. So that's where we tend to not see price increases. The other products things like cases and pacifies and chairs, something, yes, in general, those prices have been rising up. In many cases, we've got situations where our retailers buy containers from us FOB in China, and they're incurring the costs themselves. So that naturally tends to lift prices up. And the first part of the question, I missed I'm sorry.

Oh, I wanted to ask on underlying demand. So how do you track that and which areas were stronger and softer?

Yes. Sorry. So yes, very straightforward. Look, we collect NPD data in the US; we collect GFK data in Europe and many parts of the world. We do various surveys. And of course, we see what's happening on point of sale. So that's -- we have a pretty good line on that. And as I said earlier, what I tend to focus on are performance products, those products that people are buying to improve their gaming. And we see those rose by 70%, from '19, to '20. And they're currently holding at the same levels as '20. So which is pretty remarkable, because I think we all --- we are a little nervous that perhaps that was a one time surge that would relax back when people went back to work. But that hasn't happened. Now, we don't know what the true underlying demand is of gaming PCs, for people build them. But just think about it if prices are pushed up to 50% to 100%, over standard MSRP. You can imagine that the demand is well in excess of the supply. And the current build rate in the US and Europe is about the level of 2019. So we know that it's somewhere in between '19 and '20 levels could be more than '20, quite honestly, but I'd expect it's more likely closer to '20 if graphics cards were at the normal prices. So that's basically how we're figuring it out.

And you mentioned that some categories were softer in underlying demand.

So you said say some categories?

I thought you mentioned --

So I think that yes, sorry. It's been muffle. Yes, no, I understand the question. Yes, when we look across all of the different categories that we're in, you can see that products that were used for work from home and perhaps not gaming so webcams for example. Those were a bit softer. We're not really in that market, but we're looking at it because we just launched the camera, right. And some of the streaming products like lights and things that were bought by people, not just gaming. So we've seen that ease a little bit. But in general, all the things that are related to performance gaming have remained steady.

The next question comes from Colin Sebastian from Baird.

Great, thanks. This is Dalton on for Colin. I had two questions, if I may. The first, can you talk a bit about how the supply chain constraints are impacting the gaming components and the gamer and creator peripherals differently? So it sounds like there's no more of a connection to PC build cycles. And that demand getting pushed back for the component side. But how much of the gamer and creator peripherals demand is tied to that kind of new PC builds cycle? And are you seeing, is it a matter of inventory constraints in both segments there or just kind of wondering why we're seeing the same declines in gamer and creator peripherals as the components? If underlying demand trends are still healthy there?

Yes, so I think it's complicated question. So firstly, those two segments are disconnected, right? I mean, people don't tend to build a gaming PC, and then at the same moment, buy a new keyboard and mouse. So those things are asynchronous. And, yes, the component we got, I mean, there's no problem with supply in, let's say, 95% of our components, we are still short on things like very high wattage power supplies, but in general, we're in pretty good shape. And it's more of an issue of graphics card prices that dictates that, but that has no effect on the volume of gaming peripherals. So as I said some other categories that are a little bit lighter in demand, we've also got SCUF subsidiary that we bought a couple of years ago, we're still going through the transition of PS4 to PS5. And so that's a little bit of held back sales with that, but that should rebound in 2022.

Okay, great. Thanks. And then you previously commented on some of your supply chain lead times. I know we talked about the shipping cost increases recently, but what are you seeing in terms of lead times versus normal? And as you're looking ahead to planning the 2022, and this increase in demand? How are you thinking about kind of planning inventory ahead of that? And are you stocking up ahead of that in order to be prepared for when GPU supply things normalize a bit?

Yes, well, we think about it two ways. In terms of finished goods, we increased inventory two different ways. One is you calculate your inventory needs on the refresh, reload time. So that's had to go off a little bit. We also have probably six weeks of inventory in containers on the water extra compared to last year, because lead times have general gone from 6 to 12 weeks in terms of container shipments. So that's how we how we deal with it, in terms of raw materials with our subcontractors; yes, we have many situations where microcontroller, a lot of semiconductors we use are anywhere from 6 to 12 months lead time. So in those cases, we've just bought ahead. So I'd say we got you know, pretty good handle on the supply chain in this case. It does mean that, like I said earlier, was a question on new products. We have to plan a little bit further ahead for volume, but at least we know where we stand now. This concludes the question-and-answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.

Okay, well, I'd like to thank everybody for attending the call. Thanks very much for your interest, we are obviously looking forward to a very exciting next 12 months and we look forward to seeing you again.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.