Good afternoon, and welcome to the Corsair Gaming's Third Quarter 2023 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 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 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 third quarter ended September 30, 2023. On the call today, we have our 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 and 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 will now turn the call over to Andy.

Thank you, Ronald, and welcome everyone to our earnings call. The key takeaways for Q3 are; first, we achieved strong revenue and profit growth with Q3 revenue growth of 16.5%, and adjusted net income growth of 75.7% on a year-on-year basis. Second, we continue to drive gross margin expansion. We're seeing an uplift in ASP and margin from new products, along with a return to healthier inventory level of more normal promotional practices across the industry. Third, the full slate of major new titles being released continues to drive new demand from gamers for both our peripheral systems. New popular releases like Starfield, Diablo IV, Baldur's Gate and Cyberpunk serve as positive catalysts given the increased hardware requirements needed to run these games at maximum settings. Overall, we're pleased with our progress and the momentum we're building. Now, let me take a few minutes to expand on these points. First, our strong growth in Q3. While we're seeing that consumer markets in general are softer in 2023, we can see that gaming hardware and spending is close to 2022 and far elevated compared to pre-pandemic periods, in fact, roughly 50% higher for both gaming peripherals and components compared to 2019. At this point, we are beating the market with growth and that reflects the momentum we are getting from our new product launches. A recent survey from DFC Intelligence found that 84% of PC enthusiasts and gamers who built PC systems in 2020 within the high-speed segment plan to either build or buy new PCs over the next 24 months. This agrees with our observations. We believe that the pandemic added a significant number of gamers who started to spend on competitive hardware to enhance their game play. We believe that these new competitive gamers and hardware enthusiasts will continue…

Thanks Andy, and good afternoon everyone. Our strong Q3 results reflect the continuation of the substantial year-over-year financial improvement that started in the first half of the year. Revenue, gross margin, and adjusted EBITDA all improved over the prior year, with very encouraging gross margin recovery in our core peripherals products. We further reduce debt in Q3 and we continue to expect liquidity to remain excellent for the rest of 2023, allowing us to be flexible as opportunities present themselves. In terms of the specifics, Q3 2023 net revenue was $363.2 million compared to $311.8 million in Q3 2022. For the first 9 months of 2023, net revenue increased 6.8% to $1,042.6 million from $976.4 million in the year ago period. European markets continue to be softer than America's but did show signs of improvement and contributed about 36.5% of our revenues, which is an increase from 32.3% in Q2 '23. Turning now to our segments. The gamer and creator peripheral segment contributed $90.4 million of net revenue during the third quarter compared to $96.8 million in Q3 2022. For the first 9 months of 2023, gamer and creator peripheral segment revenue was $258.1 million compared to $320 million for the first 9 months of 2022. The gaming components and systems segment contributed $272.8 million of net revenue during the quarter, an increase of 26.9% from $214.9 million in Q3 2022. Memory products contributed $131.7 million in 3Q 2023 compared to $115.2 million in 3Q 2022. For the first 9 months of 2023, gaming components and system segment revenue increased to $784.5 million from $656.4 million in the first 9 months of 2022, with revenue from memory products increasing to $371.9 million from $346.5 million. Overall gross profit in the third quarter was $89.4 million, compared to $71.6 million in…

[Operator Instructions] Our first question will come from George Wang with Barclays. You may now go head.

Hi guys. Thanks for taking my questions. Yes, just firstly, can you kind of give more color in terms of the Drop integration and synergies you guys alluded to, generating positive EBITDA in calendar 2024? So just curious if you can double click on the revenue and the cost synergies going forward?

Well, firstly, George, nice to meet you. We haven't spoken yet. So great to have you on board. So, we're not really giving out too many details on Drop. It was obviously a small acquisition. It was slightly negative EBITDA when we bought them. We expect to be able to move that fairly quickly in '24 to a slightly positive EBITDA. And I would say it's not so much cost as most of the synergy is going to come from revenue expansion. So both selling our products on the Drop platform and selling some of Drop's products in our channel.

Okay, great. I just have a quick follow-up. As we're heading to the holiday season, can you comment on the retail channel restocking any sort of update on the promotional environment? It's encouraging to see the promo environment has normalized in the third quarter versus the first half of this year. But kind of - where we stand today, just any kind of thoughts on the overall retail environment as it relates to the kind of higher end of your guidance?

Well, I would say that at this point, we're pretty positive on what we're hearing. I put a chart in the deck this time to show that the growth or softness in gaming hardware for all the inputs that we get, mostly the U.S. and Europe, is about 3% down. So that's for Q3. So, we're tracking to basically be on par with last year. We think Q4 is going to follow the same pattern. There was a little Prime Day - October Prime Day that Amazon had. And we noticed the gaming hardware was roughly the same as last year, maybe a little bit stronger. So at the moment, the channel is stocking up in anticipation for a pretty good holiday season. Certainly similar to last year.

Okay. Great. Thank you.

Our next question will come from Aaron Lee with Macquarie. You may now go ahead.

Hi, good afternoon. Thanks for taking my questions and nice result with the revenue growth. We wanted to touch on your product launches. So obviously, you've launched a bunch of new products this year. I'm curious, how should we think about the cadence of product launches for 2024? Was this year unusual at all in terms of the number of new product introductions? Or could you maintain that cadence next year or even increase? Thanks.

Well, I think the comments we made were more about the fact we brought out products that you know hit the marks in terms of price and performance. And so we had two products that we launched that were pretty significant. One was the HS80, HS80 Max headset line, which are doing very well. In fact, we're sold out at the moment, so we're having to air freight them in. And the other one is a product called K70 CORE, which is a full feature mechanical keyboard, which is being retailed for $99. And so that is using our own switches. We've now bought out Corsair switches both in mechanical, optical, and magnetic. So that's a new thing for us. So, those were some of the main things. I think we also alluded to some of the Elgato products that were launched. Teleprompter was sold out the first three days. We launched a SCUF controller, especially the PC enthusiast that was sold out in the first day. So, I think we typically get about one new product out a week on average. And we'd expect to do the same or more next year. And but we've had a lot of products recently that have just really hit the marks, or have been in new segments, like the PC controller and the teleprompter. Obviously, those are not refreshes. Those are brand new segments.

Got you. Perfect. That's helpful. And then on the Elgato Marketplace, which you've recently launched, and I know it's only been a month, but anything you can share on the early days on the uptake and the usage of it and how you plan to ramp this up in 2024?

Yes, well, it's been a couple of years bringing this thing to market. It is quite complicated. But did - we were happy to launch with over 240 third-party providers or creators. There's a huge number of apps. It is, as you say, very early days. The interesting thing we've seen so far is that the ASP, or the, spend per person or per order is pretty high. So, we've got people spending $100 on plug-ins, and that the ASP is not on average, but up to $100. So that was higher than we thought. What we don't know yet is how to model, the amount of dollars that the average Stream Deck user is going to pay per year. We don't know whether that's $5 or $100 or $1,000. I mean we just don't know what that is yet until we get some more data. So, we'll keep you appraised as we go through Q4. I think by early next year, we'll have a good sense of what the model looks like in terms of how many people that own Stream Decks are jumping on this marketplace, and also how the marketplace affects the sell-through of Stream Deck hardware.

Okay. Perfect. Thanks. Looking forward to it.

Our next question will come from Drew Crum with Stifel. You may now go ahead.

Hi. It's David on for Drew. Thanks for the question. Can you provide the puts and takes on the implied 4Q revenue outlook?

You mean what does the top end of the range means compared to the bottom end of the range in terms of market conditions? Is that?

Yes.

Yes. Well, I think it's all down to how strong the - how strong the holiday season is. As we get closer to it, these days, the holiday season in Black Friday is not just on Friday, people start promoting earlier. So, we'll get to see that. And as people get more and more confident in spending, then they're going to load up more. But I think at the moment, we're pretty comfortable with what we're seeing and pretty comfortable with the range we've given out.

Okay. And you touched on this a little bit, but I was hoping to get a little bit more color or detail around the Prime Day. What did you learn in terms of the health of the consumer or consumer demand coming out of Prime Day?

Well, it's a bit complicated, right? I think the net of it is that the spending this year is similar to last year. Unfortunately, what's starting to happen with some of these holidays, now we get so many of them, is that you get people stop buying a few days before. Then you get a spike, and then no one buys the day after. So you end up with almost a neutral number. But the key thing is that we can see the interest level for consumers. And that seems to be on par with last year.

Got it. Thank you.

[Operator Instructions] Our next question will come from Doug Creutz with Cowen. You may now go ahead.

Hi, Thanks. As you noted, this year has gone pretty much according to what you expected. You're headed towards the middle of your initial guidance range, which suggests that your ability to forecast is sort to back to normal levels after several years where things were disrupted. Given that, as you sort of think about next year, do you think the industry is going to be headed back to its historical long-term growth trajectory that you talked about at your analyst's day and if not, you know, what do you still see out there that you think could hinder that? Thank you.

Yes, that's a great question because we're just starting our planning for next year. So right in the thick of that. So we assume that eventually growth rates will get back to where they were. What gives us some positive feelings is that we reference this survey that just came out from DFC, which is confirmation of what we thought would happen is, in other words, there would be an echo of the COVID bulge one refresh cycle later. And one refresh cycle later, which for us is about three to four years, is '23 and '24. So we do expect a bulge. I think what's happening at the moment is a lot of the new gamers or gamers for the first time were buying hardware during lockdown, there's an increased number of those and they're starting to refresh and re-buy. And that may be offsetting perhaps some softness in the overall market. And the net of that means that we end up with a market today that's pretty flat. We would hope that this bulge would continue into next year and we'll start to see some growth. So I think we're modeling still, not a lot of growth in the first half, but we'd expect it to pick up. I'm hoping by '25 and '26 we get back to the traditional, 15% plus growth for gaming peripherals and 5% to 10% for components. So that's as best as we can forecast it at the moment.

Thank you.

Our next question will come from Colin Sebastian with Baird. You may now go ahead.

Good afternoon, Andy and Michael. It's Reese on for Colin. We have two questions. I guess the first one would be, could you guys provide an update on D2C revenues and the overall mix of the company, especially given how that might change with Drop next year, presumably, it's going higher. And then I guess second, maybe more around the state of the consumer and what you guys are seeing, I guess it sounds like things are going well around the gaming launches and things like that. But maybe more specifically, have you seen changes in behavior from gaming launch to gaming launch? If you were to take a gain that launched this year versus a gain that launched last year, are you seeing a difference in consumer behavior from that end? Thanks.

Okay. So two different questions. So the first one in D2C percentage. D2C percentage is actually maintained about the same as it was last year. We obviously are hoping for some growth with Drop. Drop is not a big acquisition or a big revenue number. So it will not be hugely significant. We're running right now, I think, about 10% overall is direct-to-consumer. And obviously, we've got goals of raising that up to 15% plus and Drop will have a small positive effect on that. The second question was more around what are we seeing related to some of these launches. We haven't seen anything from an individual game. In other words, not like when Fortnite launched, everyone was rushing out to buy headsets. But what we have seen is a lot of engagement. So I think Starfield's probably the one that's had the most number of hours. Baldur's Gate, I think, was the biggest surprise in terms of number of players that jumped in. And I think all of these things help with hardware. All the new games have got requirements that need more memory. So there's a lot of push right now for 32 gigs of DRAM, which is helpful for us because the data we've seen from Steam, who collects what people's configuration is that 80% of people have 16 gig or less. So we are in the cycle of people upgrading, and I think the other part of it is people building new machines using the latest graphics. So all these games help, but I wouldn't say that there's one in particular that's outstanding that's driven. It's just that we've had a lot of games between Baldur's Gate, Starfield, Cyberpunk, there's a lot of new games that have come out that have been pretty high level.

Got it. All right. Thank you.

[Operator Instructions] Our next question will come - a follow-up from Aaron Lee with Macquarie. You may now go ahead.

Hi. Just a quick follow-up. I wanted to touch on the survey you highlighted about the refresh cycle. In your experience, is there a difference in the refresh cycle between components and peripherals? Or do you find that people generally refreshing one kind of leads to refreshing the other?

No. They're not coupled. Typically, we've seen three to five years for systems. People have spent $2,000 on a gaming system. Anywhere from three to five is when they upgrade. For peripherals, it's more like a three-year cycle and some being much faster. So we've seen, in some cases, especially at the lower end of the entry level of headsets, people tend to sit on them and break them. So those can be as low as 18 months. But three to four years for peripherals, three to five years for components is usually where we model it.

Got you. Thanks. Perfect.

Our next question will be a follow-up from George Wang with Barclays. You may now go ahead.

Hi. Just to have a quick follow-up. Just in terms of the sort of new product categories into next year. And just curious, any more white space in terms of the peripherals? So obviously, you guys launched quite a bit of new products. Just curious kind of - kind of high level over the next couple of years, which sort of gap or kind of you guys can potentially feel if you were to launch new products kind of to compete with the competitors in terms of any additional white space you guys may potentially be targeting?

Yes. I think we've talked about this before. The two areas that we're looking at that will probably be the next products categories to launch is sim racing and mobile gaming.

And I think you could see from the Envision controller that we just did from Scuf, mean when Corsair does something, we do something better than what the market is used to. A lot of people's PC controllers are just coffee of a console controller, but we added a lot of extra functionality into ours that made it really a good controller for PC games. So that's the type of stuff that we're good at is that when we do come out with a product like that, we really hit what the market needs and add some innovation to it.

Okay. Great. Sounds good. Thank you.

[Operator Instructions] It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Andy Paul for any closing remarks.

Well, thank you, everyone, for joining the call today and for 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.