All right. Good morning, everyone. I'm Drew Crum. I cover leisure for Stifel, including video games. Our next presentation is with Corsair. Corsair is a leading provider of high-performance gear and technology for gamers and content creators, serving enthusiasts across the $180 billion global video games industry. And joining me on stage is Michael Potter, the company's Chief Financial Officer. Michael's gonna start the presentation with a brief overview of the company, and then we're gonna launch into Q&A. So Michael, over to you.
Thanks, Drew, and, and I'm always more comfortable standing up when I'm going through slides for some reason, so I'll stand up for this part. These are just a few introductory slides. It's a little bit better for people that don't know the company well. The first slide is our product range. So basically, if you think about it, if you have a computer, a gaming computer, you have a case. So the first set of the product lines is from the case and everything inside that we make. DRAM being our oldest and biggest individual product line within our components and systems business. Got power supplies, fans, cooling, and the case itself. So it's a pretty big part of our business.
High-end, a lot of them have RGB lighting elements and such, and they let you run your computer as fast as it's designed to or maybe even a little bit faster. The other side of our business is the peripheral side of our business. So if you think that's everything that plugs into or maybe wirelessly connects to the computer that you have. Traditional keyboards, mice, and headsets, but, you know, gaming keyboards, mice, and headsets, rugged, very set, so with very quick actuation and such, and again, usually with a fair amount of RGB elements around it. Controllers, this is a little bit on the console side. That's our SCUF business. They make very good high-end controllers to use with consoles.
And as well, they've just released, late last year, a SCUF controller for PCs, which has been doing quite well. And just last week, we announced a mobile controller that worked with iPhone. So that's coming out as well, and that'll allow you to play games on your iPhone with joysticks and buttons and such, which particularly with Game Pass and other streaming services that you can now use on your phone, it lets you play the games a lot better. The other side is Elgato, which actually sometimes the guys in back that are running the audiovisual tend to know it. They make streaming gear, and it's streaming for, like, Twitch or YouTube Live. Probably the most famous product Elgato has now is the Stream Deck, which is a controller, like a super macro controller.
It's LCD buttons, so you can see at a glance what the different buttons do. Adds a lot of functionality. I mean, simple stuff, you can turn your lighting off and on, or, you know, turn the gain in your mic up and down or stuff like that, but you can also program it in pretty advanced macro functions. There's a game called Helldivers 2 that's been popular recently. They have something called, I think it's called Procedures. I always... I'm not sure. I think that's what the name is. You have a very complex amount of keys you have to punch on the controller to call it up, to give you a short-term advantage, or you can program it into the Stream Deck, so it's one button. So a bunch of guys that played the game figured out the Stream Deck allowed you to do that.
We have an app store now for the Stream Deck, so that app was very popular for a while as people were using that functionality. Our controller, actually, the SCUF PC controller, does have some of that functionality built in as well, with some macro buttons, which also connect to the Stream Deck infrastructure. And that's sort of like the business we have. We recently bought a company called Drop that does DIY keyboards. So if you want to kind of customize and build your own gaming keyboard, they have the products for that as well. But it's, you know, a pretty broad product suite.
And if you don't want to build your own system yourself, we actually have a part of our business where we will sell you a pre-built gaming PC, either ORIGIN PC, sort of very customized, higher-end ones, or very good, much less customized products in terms of the Corsair line that we do. I think the most important part of the story is growth, and the growth is really fueled by all the white space. The percentage of gamers who own gaming gear still is relatively small, and there's a lot of gamers. So there's lots of room for people to discover you can play games a lot better using Corsair gear, and every year, we see more people coming in in our customer base. We had pretty good results for gamer and peripherals.
Business in Q1, it grew about 20% year-over-year. Gross margins were about 40%. The theme for improving gross margins long term in the company is that our peripherals business, which is higher margin, is growing faster than our systems business. Our market share in peripherals is smaller. We have a lot more room to just gain market share, as well as the TAM is, you know, growing, and it's quite decent size already, and the margins you can make there are higher. On the components and systems side, it's actually a very good. We have very good market position. You know, in, in DRAM, we have about 70% of retail DRAM market share in the U.S., a little bit over 70, as an example.
So we don't have as much market share to gain there, and we're more limited to the growth of the actual market. So long term, we expect the peripherals business to grow stronger. M&A has been a key focus of the company for a while. The Elgato products, the SCUF and Drop that I all mentioned in the introduction, those all came from M&A, and we're always looking for more opportunities to bring in and use our channel to do it. And then just a few different products. So we did this announcement actually today. So Computex is happening now, which is the big annual computer trade show in Taiwan.
With SCUF and Origin, they both had a lot of ability to customize their products and make it very individual and personal. So we're expanding that ability and applying it to a lot more of our products. So there'll be a lot more ability for our customers to make something really personal for them and really build a battle station with everything that they want. The SCUF Mobile Controller, which I talked about, we did that announcement about a week ago, and then we did a sim racing announcement also today that's being shown for the first time to the public at Computex now. So those are sort of some of the interesting new products that we're coming out with. So I'll sit down again, and I'm sure Drew has a lot of questions for me.
Yeah. Yeah, thanks for that, Michael. Maybe just starting high level, you know, we're another year removed from peak, peak consumption during the pandemic, and yet sales have been lackluster post-COVID. You know, growth's been really difficult to come by the last couple of years. You know, as you look ahead, how do you see the market performing in 2024? Is there any reason for optimism?
Yeah.
Longer term, you know, what's your view on the market?
So we did grow last year, so year over year, we had reasonable growth last year, which was nice, and our EBITDA more than doubled, and we had pretty solid performance there. In Q1, like I just mentioned, our peripherals part of our business is actually, that's coming back stronger, and that was quite strong in Q1. The components and systems business is certainly slower, and, you know, we were slower than the market had expected in that area of our business, to start the year. It's kind of like maybe two factors. One is the GPU cycle. There's not been a new GPU, higher-end one, for almost two years now. So the NVIDIA and AMD were two years ago at the end of 2022. So there's increasing speculation NVIDIA will have something in Q4 of this year.
So that would match a normal two-year cycle. You know, six months ago, they were guessing the beginning of 2025, now people are talking a little bit more Q4 for this year. Usually, when a new GPU comes out, it spurs a bunch of upgrades and really helps that components part of our business. The second thing is, is that you can't ignore the economy. Although the economy is reasonably strong, certainly there's lots of news that, you know, particularly in the video game industry, there's lots of layoffs and other things. So I think there may be a little bit of hesitation from people to spend $2,000-$3,000 on a new gaming PC, not so much hesitation to buy a new $100 mouse or something like that, particularly if they don't like the mouse they're using.
So there may be a little bit of that in the background as well. You know, without a spur of the new GPU and the real desire to build a whole new system, it's kind of suppressing that part of our business right now. We do think second half of the year it'll be a lot better, and we do expect peripherals to be nice year over year. We've gotten past all of the post-COVID inventory hangovers and everything on that, and a lot of great games last year, people were playing a long time. And because they were playing a long time, they used their keyboards and mice, and if you don't like your keyboard or mouse or headset, and you're on hour 70 of a 100 of some new game, you're probably gonna buy a new one.
If you're not going out as much 'cause you're a little bit worried about the economy and you're trying to save some money, it's easy. You know, playing computer games is relatively cheap per hour, so maybe you want a better keyboard to enjoy yourself more when you're staying home. So we do think it tilts a little bit towards peripherals right now.
Just to piggyback off that response, how would you assess the overall health of a Corsair consumer? And, you know, considering the current macro pressures that you highlighted, how do you see demand holding up in the event the economy were to worsen?
So it's a little bit difficult for us to draw a direct connection to a Corsair customer 'cause we sell through a channel, right?
Mm.
So we sell through the big e-tailers and retailers, so we don't have direct contact, except for SCUF and Origin are almost exclusively DTC, so we do get a little bit more of direct contact with them. And we sell some Corsair and Elgato and other gear on our, our own web store, but as a percentage, it's small compared to the channel. So with that caveat of not having a tremendous amount of direct connection to it, I mean, looking at bulletin boards, looking at the trends of what people are buying and such, I, I think that typically during a recession, people stay home, and then they game more because they're not going out and spending money on other things. I think on the peripherals business, it's still, people will still buy peripherals so they can have more fun gaming.
You know, whether they'll put out really big money for a very expensive gaming PC if it's a bad recession, that's the area that we probably would worry about more than the core peripherals business. And upgrading, I think, will still happen, so throwing some extra DRAM in to give some more RAM, I think that will still happen. But, like, the building of the whole new computer is probably the area that would be more impacted.
Okay, good. So, you know, core to the company's strategy is bringing consumers into the gaming ecosystem, taking those individuals from a casual player to a committed player, right? And, you know, which as you and Andy have discussed with the investor community in the past, yields a higher per capita spend. So talk about what Corsair can do or what the company has been doing to attract more individuals to the category, introducing them to your products, and moving them along this, this continuum so they do become hardcore gamers.
Yeah. It still remains a little bit of a word of mouth. You know, people that game talk to their friends that game and convince them that they really should be using the better gear, so that's still a great way to expand and pull people into it. Obviously, selling through the channel, so you can go to one of our people that sell, like a Best Buy, and actually put your hands on the products and feel the mouse and feel the keyboard and such. We do know from surveys and comments and such, once people use better gaming gear to play games and they realize how much better the experience is, they tend to stick with it. So you tend to be fairly sticky once a customer comes over.
Like, the first time somebody's built a PC, they tend to be highly likely to build their next PC. So it's sort of like getting them over the finish line to do it the first time. And we do, you know, marketing where we can. You know, we market on social media, we use influencers. If you're interested in the games and you watch Twitch or YouTube Live, a lot of the people there will use our gear so you can see it, and maybe they'll talk about it. So we do what we can to pull people in, but it's still very word of mouth, and your friend just got a great new keyboard, and he says, "You gotta try this," and, you know, you get excited about it and buy one yourself.
Okay. You know, one of the hallmarks of your company is its perpetual pipeline of new products, new categories, testing white space opportunities, bringing innovation to existing segments where you already have a presence. You know, you touched on some of the new product categories in your slide deck. Wanted to give you an opportunity to expound upon those, just in terms of launch timing, TAM, margin profile, anything else you can share with respect to sim racing and the mobile controllers.
I mean, it could take up to two years to design a new product.
Mm-hmm.
If it's something you haven't done before, it might take a little bit longer. That's why M&A for something you haven't done before is attractive. Like, to get the software expertise that came with Elgato when we purchased them, that would have been very difficult. But maybe the hardware we could have figured out, but to get the software working as well would have been very, very difficult. And, you know, I talk about you play a lot of games, a lot of hours, it's easy to buy a new keyboard, but our teams that, you know, designed the new keyboards and mice and headsets worked pretty hard the last couple of years. So if you looked at... You know, those releases, we tend not to do a big press release about because it's a keyboard.
But the breadth of the types of keyboards we offer to hit some different segments of what gamers really want, so smaller keyboards, keyboards without ten keys, wireless keyboards, more wireless mice, different radios in the headsets. A lot of people like to be able to use their headset to connect to their phone as well. They may not wear it out in the street, but when they're in home or using their computer, it's kinda nice to be able to switch over to your phone and take the phone without having to pull the headset off and putting earbuds or something in. So we did a lot of that type of innovation.
You know, we designed our own line of switches that allow us to put a lot of extra functionality into the keyboards that we couldn't do before, so that's another innovative thing we've done in the last couple of years. So that's just something that Corsair usually does. We listen very carefully to what the gaming public wants, and we turn that into, like, good product ideas, and we're constantly coming out with something new we hope excites them. So I think our success in peripherals, you know, partially it's because it was a great year last year for the gaming releases, and I think the other part of it is that, you know, our teams came up with really good products that people wanted to buy.
Beyond sim racing and the mobile controllers, any other products or categories you're particularly enthusiastic on?
I mean, we've looked at a few other places-
Mm.
Like VR, for example, in the past. It's still a little bit too small of a market to be something very exciting for us to go after. I think, you know, between the sim racing and the new controller lines, we have a lot to go after. Sim racing, we think it's about a billion-dollar market TAM, so there's a big market to go after and chase into. So that's probably the area we'll concentrate a wee amount of effort in the next little while, including potential M&A in that space. And the controller, you know, we have one PC controller. There's other variants and stuff we can do there, and we have a brand-new mobile controller that just came out.
So we think it's a great mobile controller, but the market always tells you what you can do better. So, you know, we're hoping we get rave reviews, and it'd be even better if it had this thing, and then it'll allow us to keep innovating in that space as well.
Just to get into the segments in a little more detail, you referenced the gamer and creator peripheral segment getting off to a really strong start with 1Q revenue up better than 20%. That's now two consecutive quarters of double-digit increases for that business, record gross margin in 1Q, and your guidance suggests more of the same over the course of 2024. Just talk to us, you know, what is driving that business and the enthusiasm you have for it over the next couple quarters of the balance of the year?
On a macro level-
Mm
... if there was a COVID hangover of anything, it was in the peripheral space. There was too much inventory in the channel.
Mm.
And that finally corrected itself last year. It fully corrected itself. We took early action on it in 2022. Our competitors took longer to kinda get through their inventory issues on it, but really by the beginning part of last year into the middle of last year, it was finally cleaned up, so the environment is better. The pricing is more reasonable, and the pressure you can introduce a lot more new products, so you don't have old products you're worried about making even harder to sell. The rest of it, I think, is really great games, 'cause great games always make people wanna buy more peripherals, and the good design choices we made in the current versions of the products we're selling.
I think we really listened carefully to what the customers wanted and delivered more directly the features they were asking for, which made our products more popular with them. We've been around a long time. Corsair has a very long history of being active in whatever form gamers talk about what they like, and then, you know, engaging in conversations there and listening very carefully and then coming and doing what we need. If you go into our offices, you know, we have a relatively young workforce and a lot of people, most of the people in our workforce game in some way or another. So we're gaming enthusiasts in the company as well, and that helps for the products.
... Is the category on the brink of a refresh cycle, or is that happening as we sit here today, or is it something you're anticipating coming?
Peripherals kind of refresh-
Mm-hmm.
A lot. I mean, we probably have more stream of new small tweaks to products and peripherals, compared to components, which is a little bit more. There is innovation there, like, you know, the iCUE LINK we just came out with, somewhat recently. So which makes, you know, building the PC in all just one wire and everything, a much easier experience. But, I think there's just more change in the peripheral space, and more quicker change naturally. I don't know how much of there is an upgrade cycle versus it's, it's a smaller dollar, more of an impulse purchase, whereas the whole PC, gaming PC, it's tied to CPU cycles. It's sort of like how many CPU cycles do you wait till you buy a new gaming PC or build a new gaming PC? Is it one, which is every two years?
Is it 2, which is every 4 years? Or do you kind of, like, limp along to 5 years with the same computer? So that, that's kind of around what it is for, for the components and systems business.
Do we know the timing of the launch for the new chips? Is it, you know, second half this year, early 2025? You know, what are your thoughts there?
So the CEO of NVIDIA doesn't call me and tell me his product plans, unfortunately. You know, I used to, I used to ride the train from where I lived, and there was a bunch of NVIDIA guys on the train that lived near me that were going down to their offices, and I could listen in, but I'm not on that train even anymore, so I don't have any special insight to exactly when it's coming out. Based on the comments they've made publicly, it and the, you know, what I see online, it seems more likely to be the the latter half of this year.
Mm-hmm
... than the beginning of next year. But again, you know, it's up to them when they do it. I know that we'll be well prepared, and, you know, we'll have all of the extra equipment to make those GPUs run as good as possible, when they come out.
Okay. Yeah, I mentioned earlier the record gross margin performance in Q1 for the gamer and creator peripherals business. It, you know, was up more than 1,000 basis points year-on-year to 40%+. How are you thinking about gross margin for this segment and its impact on the company's gross margin going forward?
So we believe that gross margins will stay elevated this year. It's - the channel is just much healthier-
Mm-hmm
... so the discounting is much more reasonable. Our product suits that, you know, our products we came out with are much better designed to, to meet the different price points, which is sort of forming there, so that helps us as well. And, you know, our mix towards more Elgato, more SCUF Gear, those have higher margins, so that's, that's pulling up the overall margins. Q2 is always our lowest quarter of, revenue for the year, so usually there's a little bit of absorption pressure on margins in Q2 compared to the other quarters, but we expect it to be a good year for gross margins and peripherals in total.
Okay. Okay. You mentioned a couple of the acquisitions that have been consummated over the course of the last several years, and the company's been relatively inquisitive. 2018, 2019 being the peak with the acquisitions of SCUF and Origin and Elgato. Deal activity has been a little bit more tempered the last couple of years, but, you know, how are you thinking about M&A going forward? Are there any specific categories where you have an interest, and, you know, what does your pipeline look like?
You know, funny enough, like I mentioned, we looked at sim racing fairly hard for a while-
Mm-hmm.
because we're very interested in that space, and it's got a pretty big TAM, and it fits well with our customer base. It's very enthusiast, willing to spend a fair amount of money on gear, and a big TAM to go after. And then we never found anybody to do anything with, so we designed our own gear. So we have. We just announced that at Computex. We have our own gear in that space. Recently, Fanatec became available, and we've been working on a process with to try and acquire them, so that process is still ongoing. You know, they're a public company in Germany, so they've made a couple of filings, so you can check up on those as well.
But basically, we're waiting to see where exactly the process leads because it's a legal German process in a lot of ways. So, right now we're concentrating on, like, supporting and stabilizing it so that the employees and the customers of Fanatec can feel strong, like the company has a future, and that it has a strong backer behind it. And then the rest, we'll have to see how it plays out. You know, we're hopeful, but it, that's where these forward-looking statements that we believe and we hope and stuff come in fairly strong because you don't know how the process is actually gonna work out.
Aside from M&A, how would you prioritize uses of cash over the near term?
Yeah.
Do you see that changing in any way, longer term?
The number one thing is growth.
Mm-hmm.
So if we can find a way to grow, so there's some M&A to do, that's always the best use of the cash we generate. You can also grow your gross margin by maybe doing something in the supply chain. Like we bought a majority of iDisplay, which is the company that makes the Stream Deck, for example, a couple of years ago. So that's an M&A we did. It doesn't drive the top line, but it really helps gross margin and gives you access to a better core of engineers and such. You know, if we don't find something good to buy, we do have a little bit of debt left. We can always pay down debt and reduce our interest expense a little bit. Otherwise, we'll keep a certain amount of padding to absorb ups and downs in business.
You know, the ability to invest in inventory a little bit in advance of when you think a strong cycle will be, can save you a lot of money on air freight and help you capture additional revenue because, you know, if your customers sell out, if you have more inventory to ship, you make the sale. If you got to wait 8 weeks for it to come from Asia, then maybe you don't get the sale that time. So if you have a decent cash balance, which we've had for a little while now, then you have a little bit more flexibility in sort of stocking up for that.
Just that, you know, on debt reduction, at the end of 1Q, around $53 million net debt, that's down significantly from four years ago, at $450 million plus. What is the optimal capital structure for this company? Is the goal to be net cash positive? You know, are you comfortable keeping some debt on the balance sheet, or do you wanna-
Yeah. So I've worked in quite a few places that have higher debt levels. Obviously, I wasn't comfortable with the debt level when I started because, you know, it's great until you have a bad, like, you know, a bad year or two in a row, and suddenly you're under a lot of pressure. At the level we're at now, I'm quite, I mean, it's quite manageable and quite comfortable. I sort of think if you bought something three to five years later, maybe you're not getting the same growth from that anymore, and maybe the debt associated with it should be gone. As long as you keep doing small acquisitions, then there'll always be some core amount of debt in it.
Our large competitors, like, you know, the Logitechs of the world, don't have any debt at all, and they have a lot of cash on their balance sheet, so it is a little bit of a strength that they have sometimes, that they can make a quicker investing decision and have more cash available to deploy, so it's, it's good to have cash. But having some debt is not that big a deal.
Okay. Just a couple of minutes left. Any questions from the audience? No one. Okay. Okay, I will continue then. Michael, maybe we could just kind of go around the world and address the state of the market across your key geographies: North America, Europe, APAC.
So our Americas has actually been quite strong. I think that's pretty common if you read the financial press, and you look to see what's happening. I mean, the economy in the U.S., in particular, has been very strong for a long time. The consumers there are quite willing to spend money on gaming gear, so we've done quite well in the U.S. Europe, there was a sharp reduction when Russia invaded Ukraine, and then that since recovered, so it's come back close to the levels that it used to be. Probably the weakest market we have right now is China. The economy is not particularly great in China, and I think, you know, the youth unemployment is fairly high, so our core customer base doesn't have as much spending money. So that business is down for us.
Other places in Asia are doing well. We're starting to do much better in Japan and Korea and some other places there, so we're sort of, like, making up a little bit. But I'd say Asia is probably the worst-performing region for us right now, although it's maybe hit a bottom, and it's on its way back up.
Okay. You know, title cancellations, studio closures, layoffs were a part of the industry news flow during the first part of 2024. What are your thoughts on the state of the industry as far as rationalization is concerned? And for Corsair, where is the company in terms of headcount, staffing? Are you at optimal levels? Are you looking to add to your staff or
Yeah, I mean, I'm a CFO, right? So I'm usually looking at the bottom line.
Mm-hmm.
Having less people, you always can make more money, at least short term. I mean, maybe it hurts you longer term. So we're always pretty careful when it comes to staffing. I think the earlier days of being a memory company and having relatively low margins and being a little bit more cash focused, sort of permeates across the company there. So I think our staffing is okay. Certainly, there's probably room to add in some areas we're a little bit behind and maybe adjust in some other areas, but I think that that's kinda natural. I think overall, the industry... We don't do software, and we're not making the actual games, so that's not as much direct impact on us.
I mean, less games being released, maybe there's a little bit less demand, but the market has sort of gravitated to sort of tentpole large games to begin with, and they really have a big effect on driving the use of more gear. I mean, the most recent example is Fortnite, that when it got popular, headset sales exploded. But, so I'd say that's more... I mean, I don't like to see the news, and it's, you know, I live in the West Coast, near San Francisco, and it's kind of a West Coast type of thing. So obviously, you never like to see people losing their jobs, but it hasn't seemed to have a direct effect on us.
Okay. Well, we're about out of time, so we'll stop there. I thank everyone for their participation, and thank you, Michael.
Thanks, Drew.
Yeah. Thanks.