Good afternoon, ladies and gentlemen, and welcome to the Corsair Gaming Third Quarter 2022 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. [Operator Instructions] With that, I would now like to turn the conference 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 third quarter ending September 30, 2022. On the call today, we have Corsair's CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights from the third quarter and the business environment. 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 our 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 closed today. With that, I'll now turn over the call to Andy.

Thank you, Ronald, and welcome, everyone, to our Q3 2022 earnings call. I'm very pleased to report that we achieved a 10% sequential revenue growth in Q3 2022 from Q2 2022, while continuing to deal with higher-than-normal inventory levels. Sales levels from our channel to consumers were significantly above pre-pandemic levels in almost all product lines and many were above the year ago level. As we have reported in recent earnings calls, this year has been marked by excessive inventory in the channel, especially in Europe. We continue to report and make comments on consumer sales from our channel as well as our revenue from sales into the channel to provide clarity on the progress we are making. For example, in the US, we have made great progress in reducing this inventory and stock levels are now closer to a more normal level. European channel inventory position remains elevated, but is also slowly normalizing. Our target is to reduce our worldwide channel inventory overhang by roughly $100 million from the start of 2022 to the end of this year, with a little left more to go in our creative and peripheral segment and our European channel inventory. As we mentioned in previous quarters, the self-built PC market has been held back over the past two years, with high demand for graphics cards from crypto miners on top of increased demand for computers during the pandemic, which had caused GPU prices to rise in some cases to double. Now that crypto mining cannot use GPUs as effectively as before, there's been a decline in demand and prices are back to standard MSRP or below. Additionally, in recent months, there have been launches of new technology platforms through NVIDIA, AMD, and Intel, which look to be accelerating demand in the self-built PC…

Thanks Andy and good afternoon everyone. We achieved 10% sequential revenue growth in Q3 in a challenging environment. This reflects our continued execution, strength of our market position, and sustained underlying demand. Gross margins were pressured by the recent sharp strength of the US dollars against the European and Asian currencies, but reasonably currencies appear to be more stable. We have taken some actions related to the currency changes that should lead to gross margin improvements going forward. In terms of the specifics, Q3 2022 revenue increased $311.8 million compared to $283.9 million in Q2 2022. This compares to $391.1 million in Q3 2021. Our channel partners continue to reduce their inventories in Q3 2022 to current and expected consumer demand and the reduced transit and lead times, thus removing much of the overhang from orders placed due to longer lead times in prior periods caused by the effects of the COVID pandemic. We also reduced our own inventory by about 15% quarter-over-quarter as we drive our inventory to more historic normalized levels. European markets continue to be softer than Americas, and contributed about 29% of our revenues, well below the historic average in the high 30 percentile, but up from the approximately 25% in Q2 2022. Turning now to our segments. The Gamer and Creator Peripheral segment contributed $96.8 million of net revenue during the third quarter, up from $89 million in the prior quarter and a decrease of 30.5% from $139.3 million in Q3 2021. The Gamer and Creator Peripheral segment net revenue contributed 31.1% of total net revenue, a decrease of 450 basis points from 35.6% in Q3 2021. The Gaming Components & Systems segment contributed $214.9 million of net revenue during the quarter, up from $194.9 million in the prior quarter and a decrease of 14.7%…

Thank you. Ladies and gentlemen, we are now at the Q&A session. [Operator Instructions] Our question comes from Drew Crum of Stifel.

Good afternoon. So just your comments around reducing channel inventory going forward, how much is that based on the change in consumer demand or behavior? And how much is that stimulated by promotional activity intended to use through the holiday quarter? And then I have a follow-up.

So if we're talking about how much channel inventory has been reduced based on consumer demand versus promotional. Let me answer that in a different way. The increase in inventory was caused by over ordering from the channel coupled with, in some parts of the world, especially Europe, a slight reduction in consumer demand after the Ukraine war. So that's been the main effect. Now the reduction has mainly been just shipping as per normal. We've done a little bit of promotion, but not excessive amounts, I'd say.

And Andy – go ahead.

Yeah. So in other words, the way to think about it is that, obviously, we've shipped into the channel less than we normally would have done so that the sell-out to consumers consume some of the inventory.

Got it. Okay. And then if I heard you correctly, there's more inventory – more of an inventory overhang with the gaming peripheral business. When would you expect that to normalize?

Probably -- really, the only thing left is there's a little bit of an overhang with gaming peripheral, and it's mostly in Europe, and we'd expect that to resolve itself by Q1.

Okay. Okay. And then, Michael, just on gross margin, you saw a sequential improvement in 3Q versus 2Q with the cost actions that you outlined, the contributions from new products and some relief on supply chain. Is it fair to assume the business experiences further gross margin improvement in 4Q? And where do you think that leaves the business for the year? Thanks.

I mean the difference in freight rates alone as it kind of works through the inventory. That's a couple like 2 to 3 percentage points over the next quarter or two improvement. And we'll get a little bit more from economies of scale with the higher revenue. So without taking into account what the final market sentiment is, we should get a few percentage points increase with inventory levels going down, this should put us in a better position as we enter next year.

Got it. Thanks, guys.

The next question comes from Mario Lu of Barclays.

Great. Thanks for taking the question. The first one is seasonality. There's been a lot of moving parts in the business over the last couple of years and just were light in general. It looks like the midpoint of the fourth quarter guide is up 20% Q-on-Q. Is there a framework we could use in terms of how we should think about seasonality into fiscal 2023? Thanks.

Well, hi, Mario, I was looking at this this morning, the thing is, if you look at the last five years of history, the Q3 to Q4 cadence is anywhere from 15% to 30% up. So we are roughly in the middle of that. But the other thing I would say is that the seasonality is based on consumers. And so our sales into the channel in Q3 was clearly lower than sells out to consumers from the channel. And Q4, that difference should be a little less -- so that's why we normally expect to get a little bit of a pickup in revenue just because of the fact we're adjusting inventory less. And we'd expect somewhere 20% to 25% lift from just consumer activity based on history. And we don't see any reason that's going to be less, in fact, because all the new technologies and platforms have just launched from NVIDIA and Intel and AMD, there's a good chance that that's going to be even higher. But that's a way to think about it. Now 2020, I wouldn't imagine should be any different from that the average that I just told you about. But Q1 obviously, in the near-term, there's a fair chance that demand is going to be strong because we're still seeing new platforms launch. So we had the 4090 just launched a couple of weeks ago, which is the graphics card top of the line. And then in two weeks' time, we've got the 4080 being launched. And then I think the 4070 will come out in of Q1. So there's a lot of launches that are going to drive people with different budgets to start building.

Great. Thank you.

[Operator Instructions] The next question comes from Franco Granda of D.A. Davidson.

Hi, I'm William in for Franco Granda. How should we think about the margin profile?

Hi.

Hi. How should we think about the margin profile for some of the new products that are coming out that have came out like the laptop and the Flex monitor?

Well, I would say that we're trying to bring new products out typically at higher margins than the equivalent products in the last few years. And that's obviously what every company does, try and make more and more margin. The monitor itself, I don't want to get into specifics of that particular one. But I would -- you can imagine that, obviously, products like gaming PCs and monitors, typically going to have a lower margin than some of our other components and peripherals.

And second question. Some of your peers have introduced products catering to cloud gaming. What is your current stance and outlook on the cloud gaming market?

Well, we think it's marvelous. More people that play games, we think is the better, because what we've seen is the people that play games at an early age on phones through the cloud, eventually migrate to a PC platform. So we see the biggest effect that cloud gaming is happening today is in that entry level of mobile sector. We don't typically spend a lot of our resource on roadmaps in those areas in the entry level, but we're certainly looking at it. So I think -- I don't see a huge opportunity for us in terms of revenue in the short-term. But long-term, we expect more people gaming is going to drive them into buying better PC platforms.

Okay. Thanks for taking the questions, guys. End of Q&A:

Okay. Thank you. Ladies and gentlemen, just a final reminder [Operator instructions] Gentlemen, we don’t seem to have any further questions on the lines. Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the conference over to Andy Paul for closing remarks.

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

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. And you may now disconnect your lines.