Hey, everybody, thanks for being here. It's my pleasure to welcome Michael Potter, CFO of Corsair. My name is George Wang. I'm the senior analyst for IT Hardware here at Barclays. So, to start off, Michael has prepared a slide deck he's gonna run through first.
Well, thanks, George, and, thanks everybody for, for coming here. I actually met George in person for the first time just before this talk, so it's one of the benefits of going to a conference: you get a chance to do that. So Corsair Gaming has been around for about 30 years now, very close to 30 years, and we have about close to 30 product lines we do now. So I don't know if it's one product line a year that Andy has targeted, but that's what we arrived at right now. We offer a full suite of products for PC gaming and streaming. And this picture tries to show all the different items, and I can actually make the joke now that we even sell the desk that the things are sitting on now.
We have a very good new product line of gaming desks if you happen to be looking for that as well. Our business is sort of two big main segments. The first is components and systems. That would be the white PC that's on the right side of the slide, and it's basically everything from the case in is components and systems, and the stuff that's outside the case is our peripherals, and streaming gear, our business. Next to the computer, you'll see a whole variety of different products. The traditional peripherals, which is keyboards, mice, and headsets are there. The Elgato products, which are used for live streaming. We say streaming, we mean live streaming or for recording for YouTube, for streaming later, but that type of thing.
We have gaming controllers, SCUF, which was an acquisition a few years ago. They traditionally made it for the console space, and we just introduced a PC gaming controller there, and then a few other different items there, including even the gaming chairs. For the revenue and margin trends, we had a big jump during COVID time, where about $1 billion before COVID and then jumped during COVID, and then came down afterwards. Gross margins, you know, for peripherals and for components and systems, they sort of came down a little bit when business was weaker last year, but they've come back quite nicely.
And the trend, and I'll talk about this in a slide coming up, you kind of look past the bulge and talk about what the bulge really means. It's actually a very, very good story, pre-COVID to post-COVID. And the most important thing to know about, Corsair, if you're looking at an investment, place to go into, it's got solid growth with really good backing behind it. There's about 1.6 billion of casual PC gamers. This is somebody that every once in a while plays a game on whatever PC they have. And then, there's about 160 million, this is globally, regular PC gamers. So somebody who plays a game a little bit more often, on the computer.
But in terms of the people that really spend money on gaming gear, it's about $28 million. So we talk about the white space we can grow into. Anybody that's used purpose-built good gaming gear, that likes to game and, you know, that at least 160 million people, it's important to them, they don't go back. About 50% of the TAM is spent by that small enthusiast group, so there's lots of possibility and lots of white space to grow our revenue into. A lot of people that haven't been fully introduced to exactly how good gaming gear could be. The number of gaming hours have really increased, and this is kinda like... if you ask somebody who's younger today, "Do you game?" They look at you like you're from another planet.
Like, "Why would you ask such a stupid question?" Almost everybody that's younger, games. The amount of hours they spend gaming is fairly high compared to, you know, some of the older generations. Now, I feel like I'm Gen X, and I certainly spend more time gaming in a week than what this slide shows, but maybe I'm somebody who's pulling the average up. But as you get younger, people spend more and more time, and it becomes a main hobby and a lifestyle. It's not just like gaming, being a gamer is part of how they identify. And this goes back to that discussion. This slide here is talking about comparison to during the COVID period and not during the COVID period. So, in Q3, this is total market growth, not Corsair.
It basically was flat year over year for the first time since sort of the COVID bulge had ended, and then business has flattened. But if you look from 2019 to today, there's actually been huge growth. So over 50% growth in our business from before COVID to after COVID. We are asked all the time, "Was COVID just a pull-in of your existing customers?" And that definitely is not true, because if it were true, we'd have almost no revenue today. And actually, our revenue is up 50%. So what it did do is bring a lot of new customers in, and they're buying our gear now. And once they start buying our gear, that continues, so we're quite positive about that.
We did a survey somewhat recently, David Cole Associates did it, and we're sort of in the sweet spot for people to build their first systems in 2020, 2021. They're likely, this year and next year in particular, to be building a new system. So that should be a decent tailwind for us. The top 20 games, like the games this year, have required more hardware, which has pushed for more upgrades, which helps us, and they've had a lot more hours of gameplay for the games, and that means people spending more time in front of their computer gaming, which also pushes people towards a buying decision. For our product launches this year, keyboards, mice, headsets has been broadening our existing product line. So we're really offering more options, mainly wireless and more radio.
So headsets, we offer a lot more headsets with Bluetooth, that lets you use it with your phone or with some of the consoles... and for mice and keyboards, either wireless or in the case of keyboards, smaller form factors and wireless as well. So, last year, when times were tougher, we didn't cut back on R&D and, you know, new product development at all. So we've had a really good release suite, suite of, new products this year. We're really looking at doing more customization. There's more margin and, and more possibility. The recent acquisition of Drop is a customized DIY keyboard, but even our existing product lines, we offer, very specific color patterns and ways to customize, the look of our products. Brand new for us is the Elgato Marketplace. Elgato has a leading product called the Stream Deck.
Got about 2 million total installed base for that right now. It's only been out for about a month and a half, and we got about 200,000 users already registered for Elgato Marketplace. You can buy apps to make your Stream Deck better and, you know, make it do even more. And we have about 250 outside developers that are selling products on it. So we didn't really advertise or do much for the launch, and we're already, you know, over 10% of our installed base already. So that could be quite good for us. iCUE Link is an example of the innovation Corsair brings. We really improved wire management and control with a microprocessor in each element.
Makes building a system much easier and much more just like a clicking together Lego-type experience, instead of being difficult to do, so it broadens out PC building to an even bigger base. That is a very quick overview of a lot of new products, and I'll let George ask me his questions. I tried to go as fast as I could so you'd have more time for questions.
Thank you, Michael. That's super helpful. Yeah, just to get started, maybe you can kind of run through some of the Corsair story differentiation, kind of what you bring to the table versus other PC makers.
So the main thing that we bring is three decades now of quality and innovation. We really focus on what gamers and streamers need, so you don't see a lot of extra fluff, and we make our products perform very well for a gamer, and we make it look good so that they feel good about using it. But we only put things in there that helps them do better and helps them win. Because we've been around so long and have such a good reputation for good products and good support afterwards. So if you have an issue, or you want to augment or do more with your product, we have a big user community that's active, that suggests to people what they could do, and then, you know, we also provide very good support.
So that's probably the difference for us compared to other companies, is our long track record of being a leader in this market and a leader in performance PC gaming and a leader in streaming as well.
Gotcha. If we were to take a step back, if you look at the kind of PC market industry as a whole, like, can you kind of run through, you know, some of the puts and takes and the, kind of, you know, how investors should look at the story just, you know, from a kind of PC market standpoint? Maybe you can talk about across the component system versus the, the peripheral side of the story.
So I think in general, just the growth, I mean, PC gaming is a growth area, and gaming in general is a growth area, and it's an area that more people do and they spend more hours doing, and it's more of a, almost a lifestyle or a sport choice. So instead of doing skiing, you know, they, they PC game instead. So it's not just the actual, like, the functional part of the component, but how it looks and, and how what, what it sort of says about the person. So you want something, and Corsair has this, looks really good, that functions really well. So I think that's a very key element of why. I think that the rest of it is just the white space that we've captured, the broad suite of products we offer, and then this...
the improving financial performance that we've had in that backdrop. You can see just a small amount of growth over last year, and not a lot of companies managed to grow over last year, but what we did, and it doubled our EBITDA and, you know, moved us on a non-GAAP basis to profitability very quickly. So we have a very good company platform that provides these great products to the market.
Gotcha. Just in terms of kind of, you know, external factors, like obviously, you know, you guys are influenced by different factors. You cannot control necessarily in terms of the chip cycle, kind of supply, you know, shortage, you know, graphics cards and, you know, macro kind of consumer spending. Can you kind of comment on macro, kind of what you are seeing and, you know, if you go back, you know, over the last few years, maybe you can talk about just kind of cyclical versus sort of secular tailwinds for Corsair?
It kind of goes back to the second part of your question, which is sort of like how components and peripherals differentiates. So components and systems we have been competing in for longer, and we're the market leader in many cases. So last year, when we got the inventory under control, our competitors were a lot smaller, so what they did didn't matter as much to us, and that business came back to a much more steady stream, growing business without excessive discounting in the marketplace. So that actually was a very stable business and growing business for us over the last year, and it was influenced by one great new graphics card. So NVIDIA and AMD came out with great graphics cards at the end of last year, and that spurred new system builds.
The second was just more general availability of the graphics cards and other PC components compared to, honestly, it was much more Ethereum and cryptocurrencies and stuff that was influencing the availability during COVID. So once that sort of went away, when they changed the way they process it, things were much more available for our customers, and they built more systems. In the space of peripherals, we're a leader, but we're not the leader. So we have a lot of market share we can gain, but we're also a little bit more subject to the outside conditions of what our competitors are up to. Unfortunately, our competitors did not react as fast as we did last year when things turned down, and they had more inventory for longer. They didn't slow down purchases fast enough.
So when they went into the beginning part of this year, they were still excessively discounting compared to the normal discount in the first half of the year. We're a premium brand with premium pricing, and we didn't have any inventory issues, we didn't have to sell things, so we didn't go in there, and we purposely lost a little market share. Now that prices are stabilized, I think, and we have a chance to regain this market share. So in components and systems, maybe it's a 5%-10% longer term growth rate type of area. Peripherals, we think, is more around 15% for us, and that's because we can gain a lot of market share, and the market is still relatively new in terms of people buying gear in that space.
So now that things return to normal, we think that maybe Q4 will be the inflection point where our peripherals business will finally grow year-over-year, where there was a lot of headwinds because of the inventory in the channel at the beginning part of the year. So that's kind of like the differentiation for it. We think there's more white space and more market share that we could grow in peripherals, so we have a higher growth expectation for it. It ties back to financial performance finally, as if the margins are higher there. So as the margins—as the amount of revenue grows and the percent of our revenue grows for peripherals, it'll overall pull our margins up.
That makes sense. It just kind of for segue into kind of the forward-looking, you know, kind of long-term models, you know, stays intact. You know, you have the components, also, you have the peripheral with higher, faster growth. And maybe you can sort of, you know, elaborate on, sort of, accelerating the financial trend going forward as, you know, various factors are getting normalized. Kind of, you know, long term, you're looking at committing, you know, CAGR for the peripherals, maybe kind of, you know, single to high single, mid-single to high single digit for component systems. Maybe you can sort of talk about kind of, you know, as we lapping some of the headwinds with the COVID kind of bulge, as things normalize, you know, things should accelerate going forward.
Yeah, I think that I talked a little bit about the reason why we can grow faster in peripherals, and obviously, that has a good impact on our financial performance. So if you just look at it, we were able to do more revenue a couple of years ago with the base of spending and employees we have today. So for the next few years, as the revenue grows and, and we grew this year, so 2023 is, okay, growth is resumed, and it should start trending over time to more regular PC gaming growth. We won't be expanding our OpEx as fast as the revenue grows, and the margin profile should improve, so we get more dropping to the bottom line more quickly. So we're quite confident we can get into low double digits% EBITDA, you know, reasonably quickly as a percentage.
And then, you know, we've, we've been trying to get to low teens, sort of a longer term, you know, five years plus out type of thing. We talked about that a few years ago at the Analyst Day. So really, our growth rates, our base growth rates for the industry and our targets overall for performance haven't changed very much. We got advantage of a lot of tailwinds, of falling shipping prices and a more normalization of, the channel over the last year. For the next few years, it's gonna be capturing better ASP opportunities and really growing our higher-margin peripheral business, and that'll keep lifting our gross margins overall. So that's sort of the backdrop on, on the financial things.
The rest of it, I mean, we also can grow faster in a few areas through M&A, which I'll talk about, I'm sure, when you have a few more questions. But we do have a chance of growing organically, and we've got a very good track record in the past of good growth through M&A. Small, but good M&A, so I'll wait until you, I'm sure you have some questions on that near the end, because I always get asked about that.
Gotcha. Yeah, just, just a super good point in terms of the margin kind of shifting to the light as the whole portfolio shifts to higher margin peripheral business. You know, as one of the slides you alluded to, kind of latest gaming title releases, you know, should continue to drive kind of peripheral sale growth. So maybe can you double-click on the latest gaming title release, both so they have and all, and also maybe a few more in the future, kind of how that sort of, you know, tie into faster and the refresh for the peripherals?
So first of all, you need great games to actually want people to have great gaming gear. So it, it kind of is married, right? So if you have really good games and people want to game, they want to play them, so they want to use the gear they have. What's happened this year is that the requirements to get the higher level of graphics and performance have jumped up a lot. Memory is pretty much doubled. It used to be 16 GB is enough, now they want 32 GB. They want SSDs, so they're no longer loading from a hard drive, they want loaded from SSD. And the graphics card requirement has jumped, which means the power and the rest of the system around it needs to be better as well.
So that's been a trend for pretty much all of the Triple-A releases this year. I think the biggest performance pusher next year is gonna be the new Microsoft Flight Simulator, which is not enormous, and we don't make flight, the actual gear. But in terms of computer performance, that, that program has always really pushed the envelope for how powerful you need. This year, the other big trend for the games, I mean, I think the first big hit this year was Hogwarts Legacy, Hogwarts Legacy, and then Starfield was the latest one. All the Triple-A ones seem to have hit pretty well this year. They had pretty good acceptance. I think Baldur's Gate III was a surprise hit, but nobody was, like, super surprised. It just did better than what people expected.
There's just a ton of content in all these games, so people are spending 100+ hours playing the game. So imagine if you have a keyboard or a mouse or something that you're not as fond of, or you just have never bought one before, and you're spending a lot of time, and one of your friends says, "Yeah, you'd do a lot better with a gaming mouse."... So that's what sort of drives the overall revenue growth, that people spend a lot of time sitting in front of their computer, playing the game. It's part of, like, the devoted that part of their life. It's important to them, so then they spend more money on the gear that goes with it.
Sometimes you can point to a direct correlation, like when Fortnite came out a few years ago, headset TAM pretty much doubled, because everybody needed a headset so they could play Fortnite properly. The rest of it is just these great games, gorgeous graphics, good sound, and you want the gear to go along with it to make your experience better. And if, you know, you play two of the games that were good this year, it's 200 hours. I can't imagine somebody with a mouse they don't like, spending 200 hours clicking away and not wanting to get something new.
Gotcha. Yeah, just, just staying on topic of peripherals, and I think, so more sort of medium to longer term, kind of, maybe you can talk about the kind of software services attached, kind of higher margin, and also maybe some of the growth levers driven by Stream Deck and the kind of B2B upside over the medium term.
So traditionally, the software, which is usually drivers and extra functionality that comes with the product, in the computer hardware space, it's come with it. So when you buy a keyboard, if there's extra software you need to run, like control the RGB, that's expected to come with it. So we have very good software that's well regarded, so that helps make the user experience better, and it's not an irritant to buying. In this case of something like the new Envision controller, the game controller that SCUF has, it's a PC gaming controller. It doesn't even work on consoles, it just works on PCs. It has a lot of macro functionality and extra buttons you can program, and the iCUE software that we've had to program and use our gear in the past works with it.
A lot of people are not used to having software that's that good and that fine control, so they use our controller and go, "Wow, I can almost replace the keyboard and mouse with this controller, because all of the extra functionality I can do." That's an example of we have this great iCUE software that pulls all of our products together, synchronizes all the lights, makes it easy to use the features. You add a product like the controller on top of it, and yet we have this great software base we can use it. Elgato is an even better situation. So when we bought Elgato a few years ago, I think it was like 40 software engineers and one hardware engineer, because really, for audiovisual, the software is the most important part of the product.
That's why they can command higher margins, because it's very hard for other people to have that base of great programmers that can make the really, really good gear. For the Stream Deck, it's a sort of a super macro keyboard, is the easiest way to explain it. It's a very powerful macro driving product with LCD buttons, so you could see visually what each button does easily and remember quickly. You could actually write apps, and it could be.. app could be easy, just icons on the screen, or you can write, like, very well-written macros behind the scene that control Adobe Premiere or Adobe Photoshop or Twitch or something. People are willing to pay for that because it really makes your life easier.
We created a marketplace where if you develop the software, you could sell it, and some of the software we've developed, we can also sell. It's just a question that we have about 2 million Stream Decks out there. We wanna get that to 5 million as quickly as we can because we think it'll increase the base of people that'll need these apps. Now, there's 200,000 people already signed up for the store, and there's about 50,000 any particular week that are in there looking at stuff and kicking the tires and maybe buying stuff. We don't know how big it'll be. You know, will it be $1 million worth of revenue or $50 million worth of revenue?
It's really hard because it's so new, and it's something we haven't really done before, but we do know that it'll increase the desirability of the Stream Deck product. If it does become a hit, more and more developers are gonna wanna come in, and it's sort of a virtuous cycle, where the more developers offer good products, the more people wanna buy the product, the more people wanna buy the hardware that drives it.
Gotcha, that makes sense. And the last quarter, you guys called out channel inventory normalizing, much less promotions. I think that's a super strong data point. Kind of what are you seeing kind of heading to next year, 2024? Do you think that should continue with, you know, much less discounting, kind of higher ASP, less promotional environment can be additive to sort of the margin and the kind of overall, you know, dynamic for the industry?
Yeah. So based on the discounting percentages that happened and how broad the discounts were during Black Friday, it looks like the peripheral space is back to normal. So there's always some specials during Black Friday. It's traditional, and it's what you do, you know, for your customers, who are the retailers and e-tailers, you provide some specials to kind of, like, draw people in. There wasn't crazy activity. Last year was very, very super low discounts, very broad. This year is targeted and not, you know, and not so low. So I think that's a sign. Now, only one of our competitors really is public right now, and they've publicly said that they believe their inventory is finally under control, and the other one's not public anymore. We only can guess what's happening from the market.
So I think peripherals were in much better shape overall. Now, we were in great shape already, but now overall, the whole market's in better shape. That gives us the ability to realize the right pricing and to attract customers because we don't have to discount excessively to keep our higher prices still in range, and we don't damage our brand by excessive discounting. So we're quite... We're much happier, and I think we're in much better position because of that.
Yeah, I would be remiss not to talk about the capital allocation, as you alluded to earlier. Just, maybe you can talk about, you know, with excess cash flow, kind of, as sort of things normalize, and how do you balance, kind of doing some bolt-on acquisitions like, you know, Drop, recently, and also maybe paying down incremental debt?
Yeah. So the first use is like cash for us, we look for growth, because we're a growth company, so the first thing we think about, what are you going to use the cash for? It's always going to be growth. For M&A, we're very straightforward with what we want to do with M&A. We're very good at buying smaller companies that have a great product, and they're slightly profitable, but they can't grow fast enough because they can't get to the channel. So we're really good at taking a company like Elgato, who had amazing products, and then bringing them into the channel and getting them very broadly distributed through Amazon globally, to bigger customers like Best Buy or MediaMarkt, or Dixons, or whatever we happen. So we're very good at taking the companies of that size and making them broader and bigger.
So we focus more on revenue synergy than cost cutting, because we find that cost cutting in a small company, I mean, you save a little bit of money, but it doesn't move the needle anywhere near as much as this revenue synergy does. Drop was kind of interesting. They had a good DIY keyboard, which, you know, our customer base, so we're in that space, liked, but they also had very good, D2C software platform. I mean, they were set up to be a broader DTC company. A lot of money had been spent, and the team there had gained a lot of experience in running that. So for a very little investment, compared to what was originally spent on them, we're able to bring that technology and the team, in-house.
We also had this product, DIY keyboard, which we could get the revenue synergy on. So they were slightly unprofitable, which I talked about during the Q3 call. So Q3, Q4, it's about a $1 million EBITDA headwind for us each quarter, but once we get past that, should be neutral and then growing reasonably quickly. And we've got this great team of very experienced people. Otherwise, for capital allocation, we spend very little on CapEx. We're very asset light. We use ODMs for most of our manufacturing, even our factory in Taiwan, which we do make products, very little spending on actual CapEx. Most of our CapEx investment, the last few years, has been software platforms, actually, not physical hard CapEx. So we don't spend a lot of money on that.
So obviously, if we don't have an M&A opportunity today, and we're not spending a lot of money on CapEx, and we have enough cushion in case the world isn't as good as we hoped it would, so safety is taken care of, then we'll pay down debt. And we've actually, I mean, we started off before the IPO with about $500 million of debt. Now, we have just over $200 million worth of debt, and our net debt is almost zero. So I think that's something that we could save interest cost on, but we're in pretty good position, so we don't have to be super aggressive to pay anything down.
Got you. So being a global company like CORSAIR, maybe you can talk about Europe. And obviously, Europe kind of, you know, as a percentage revenue, kind of, you know, around the thirties, give or take. You know, some of the nuance kind of associated with Europe versus North America. So maybe you can talk about your sort of mindset and strategy in other regions outside of the U.S..
So traditionally, we were close to 40% Americas, 40% Europe, 20% Asia. Rough numbers, and we varied a few % around that. When Russia invaded Ukraine, there was a big drop in Europe. U.S. was fairly stable at the time. Asia was somewhat stable as well, but there was a big drop in Europe. Europe has come back, so the economies have strengthened. The initial shock of the invasion has kinda worn off, and it's come back. It's not quite where it was, but it's come most of the way back. If anything, Asia's been the weaker area right now. The economies in some of the big markets there are just not as strong. Coming out of the COVID, the very high COVID restrictions and stuff, the economies are suffering a little bit there.
But we've also noticed that in terms of who's willing to spend money on, on good gear, the ASPs in the U.S. and Europe, people are willing to spend money on that. A lot of the more developing markets, people are not willing to spend as much money on items. So whereas the total user base is higher, the amount of people willing to buy gear is lower. So we've actually grown... Even when people thought we were saturated, we've grown very fast in the U.S. market because it's not actually saturated. There's so much white space, and they're willing to spend so much more money. We've put our marketing and, and our product development efforts there. That said, there are a couple of markets in Asia we are targeting over the next couple of years. We're making a few product tweaks to, to meet some of the localization.
Each market has particular desires for what they want a keyboard or a mouse or something to be. So we're making sure we have a good enough product, so we can compete very rigorously in some of the very key markets there. So Asia should be good for us, but the U.S. and Europe are going to drive more of the growth.
Yeah, so we have one minute left. Just curious if there are any questions from the audience, we can pass on the mic. Yeah.
Yeah.
Yeah. What would your message be to investors on gaming as a whole, who are looking for a subject?
I mean, if you're bullish on gaming as a whole, everybody needs equipment to—or gear to game on. And in terms of the company that's got the right products, that's been around for a while, and you can do research and see for a long time, we've been a leader. Corsair is a very good choice there. And there's a lot of reasons why gaming, you know, it's a little bit more recession-proof. If you stay home, you tend to spend more time gaming. There's a lot of good reasons to like gaming just as a sector, but if you want hardware exposure, there's not a lot of choices. And for somebody who concentrates pretty much only on gaming, it's really only Corsair that's, I think, the choice you can make right now, that's a size and scale and then broad.
Thank you, Michael, for being here and taking some time out to speak with us.
Well, thanks a lot, George, and it was nice to meet you in person.