Earnings Call: Q3 2020

Nov 10, 2020

Greetings, and welcome to the Corsair Gaming Third Quarter 2020 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ronald Van Bean, Corsair's Vice President of Finance and Investor Relations. Thank you, Mr. VanBean. You may begin. Thank you. Good morning, everyone, and thank you for joining us for Coursera's financial results conference call for the Q3 ending September 30, 2020. On the call today, we have Coursera's CEO, Aimee Paul and CFO, Michael Potter. Before we begin, allow me to provide a disclaimer regarding forward looking statements. This call, including the Q and A portion of the call, may include forward looking statements related to the expected future results of our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include reference 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. This conference call will be available for replay via webcast to Corsair's Investor Relations website at ir.corsair.com. Andy will begin with an overview of Corsair, followed by our Q3 highlights. Michael will then take you through a review of the financials before we proceed to Q and A. So with that, I'll now turn the call over to Andy. Thank you, Ronald, and welcome to our first earnings call as a public company. It was great to meet many of you during the course of our IPO roadshow in September, and we look forward to getting to know all of you better as we go forward. Now as some of you may be new to our story, I'd like to spend a few minutes to take you through a brief overview of who we are, what we do and the growing market opportunity we see in front of us. Please note that this overview will make today's call a little longer than what will be typical going forward. And then I'll provide an overview of our recent progress and performance and then turn the call over to Michael for a financial review of the quarter. We are a leading global provider and innovator of high performance gear for gamers and content creators. Our gaming gear helps gamers perform at their peak across PC or console platforms, and our streaming gear enables creators to produce studio quality content to share with friends or to broadcast to millions of fans. We've served the market for over 2 decades and most of our product lines maintain a top 3 U. S. Market share position with several in number one positions according to data from NPD Group and internal estimates. We have built a passionate base of loyal customers who build and upgrade their gaming PCs using core set components and then use our peripheral products for gaming or streaming. Competitive gaming rewards speed, precision and reliability. As in other sports, specialized high performance gear such as gaming mice, keyboards, headsets and performance controllers allow digital athletes to perform at their best. Modern games also require significant processing power to render high resolution graphics and reward the speed and precision of user inputs, driving demand for powerful gaming components and systems. Further, in a world where the ability to create content is democratized and competition for viewer engagement is greater than ever, content creators, particularly streamers, are increasingly seeking ways to maximize the quality of their video capture and broadcasting, which requires specialized high performance gear. Our solution is the most complete suite of gear among our major competitors and addresses the most critical components for both game performance and streaming. Our product offering is enhanced by our 2 proprietary software platforms, iQ for gamers and Elgato's streamer suite for content creators. These software platforms provide unified intuitive performance and aesthetic control and customization across their respective product families. As gaming has gone mainstream, streaming has followed suit. Games are now broadcast over the Internet at both the tournament level and by gamers at home. Today, 71% of millennial gamers in the U. S. Watch gaming video content on streaming platforms for an average of almost 6 hours a week. Further, there are over 6,000,000 committed streamers in the world today who fuel the over 12,000,000,000 streaming hours watched in 2019 alone. The global market for PC and streaming gear totaled $36,000,000,000 in 20 19. Of that, 83% was spending from competitive and committed gamers. These are players who $1,000 to over $1800 on gaming hardware and accessories. These are our core customers. What's incredible is these competitive and committed gamers, while accounting for 83% of spend, only account for 18% of the worldwide total of 524,000,000 PC gamers in 2019, with the remainder being casual gamers, so often do not yet only specialized gear. This highlights the significant growth potential for our TAM. We see that the average spend of gamers is still fairly low compared to spending on other sports gear and very concentrated at the high end. As casual gamers become competitive and committed gamers, their spending grows. If the average spend of this group of gamers were to significantly move up, then the market for gaming gear could grow by multiples. In gaming, where we see the biggest opportunity in market growth is in peripherals, because while most entry level gamers will have access to a console or some sort of PC in their home, they will likely not have specialized peripherals. We have seen the peripherals go for the exploded as teenagers play Fortnite or other online multiplayer games on PCs and laptops. Further, as more and more gaming is watched online, gamers aspire to emulate professional streamers, resulting in incremental spending on gear. Beyond success in gaming, these emerging applications promising avenue for the continued expansion of the streaming gear market opportunity. So moving on to our growth strategy, we intend to grow our business by increasing value to our customers, expanding our market opportunity and further differentiating ourselves from competitors. We believe our brand name, high performance gear and market position will allow us to capture a large share of this market growth, and we intend to continue to make significant marketing investments in leading esports teams, athletes, streamers and social media influencers. Other key parts of our growth strategy include continuing to develop innovative market leading gaming and streaming gear. We intend to prioritize investment in creating innovative gaming and streaming gear and related software to enhance the customer experience by delivering cutting edge technology. Secondly, expanding into new gear and services that grow our market opportunity. Since our inception, we have successfully entered a number of new gear categories, including gaming PC peripherals, streaming accessories, console controllers and pre built gaming PCs and laptops. As the gaming and content creation landscape continues to evolve, we intend to continue to introduce new products and services to address our customers' new and changing needs and to grow our market opportunity. Next, leveraging our software platforms to sell more gear to existing customers. Our software platforms integrate and enhance our ecosystem of gaming and streaming gear, which drives customer loyalty and allows us to successfully sell additional gear to existing customers. Strengthening our relationships with end users by increasing direct to consumer sales. Following our acquisition of Origin and Scuf in 2019, we acquired 2 companies whose sales are primarily generated through direct to consumer channels. While sales from this channel are relatively small contributors to our revenue today, we believe direct to consumer sales represents a significant avenue to drive growth by facilitating increased engagement with our consumers. And finally, we'll continue to grow market share globally. As a globally recognized brand, we have a footprint that reaches customers in more than 75 countries. We will continue to invest in enhancing our sales and distribution infrastructure to expand our leadership position in the Americas and Europe, and we view Asia as a significant long term opportunity. We are a clear market leader in the gaming PC components market, and we have a steadily growing market share in gaming and streaming gear. So with that as a backdrop, I'd now like to review our performance in the quarter. We are very pleased with our strong results in the Q3, which exceeded our expectations, as we achieved net revenues of $457,100,000 a 60.7 year on year growth, and we achieved adjusted EBITDA of $63,700,000 which is a year on year growth of 184.9%. Looking at the business highlights, the market for gaming and streaming gear continues to grow from strength to strength, as people who are spending more time at home are learning how to play games better, how to stream content to their friends and how to build high performance gaming PCs. All of these things require high performance gaming and streaming gear, and so we are massively benefiting from this trend. In fact, we hope we're helping drive this trend. What we learned in Q3 was that the surge in gaming activity, which started in Q2, now doesn't appear to be a pull forward in sales. In other words, our growth in Q2 did not come at the expense of Q3 or Q4. Far from it, what we are learning is that the biggest part of the increased demand is coming from first time buyers. In other words, gamers who have not bought gaming products before. This is evidenced by strong sales for entry level products, which means new gamers and streamers are beginning to invest real money on gear to support their hobby for the first time. And there are many more gamers and streamers who have not bought any gear yet. As we mentioned before, most of the TAM at this point is spent by the top 18% of the market, with the remaining 82 percent of gamers mostly not having bought much of any gear yet. Our estimates are that in the U. S, where we have very good data, the incremental new buyers that have come into the market this year and started to buy gaming and streaming gear represent less than 5% of total U. S. Gamers. Our expectation is that all these new gamers and streamers who are buying our gear for the first time will come back in the following years to upgrade and buy more high performance products from us. Demand was strongly up in all product lines, most notably in the streaming and gaming segment, where we grew by 129% year on year. But our gaming components and systems segment also showed huge growth of 38% year on year and is now at a yearly run rate of over $1,000,000,000 So these incremental new gamers are not just buying peripherals, many of them are buying gaming PCs or buying ready assembled machines as well. During the quarter, we introduced several new high performance products. These were all listed out in detail in the press release, but they include 2 new keyboards, including the K100 new flagship products, a new wireless mouse, a new haptic headset, a new range of cases, a new family of CPU callers and a new gaming PC featuring the new NVIDIA RTX 30 series GPUs. We expect to continue to launch new performance products at a blistering pace, approximately 1 per week, and use these new products to gain market share. Our new microphones started shipping in volume in Q3 and exceeded our sales expectations. More recently, we acquired the popular app called EpocCam, which allows your iPhone to be configured as a webcam and connect wirelessly to your PC or Mac. This is one of the most popular apps in the Apple Store in the photo and video category. This adds to our video solutions that we already have in Elgato product portfolio. Our main products in this category today is our Cam Link 4 ks, which allows people to connect a high resolution DLSR camera directly to a PC and stream 4 ks video. The EpocCam app allows your phone to be used as a secondary camera or for many people can be the only camera they use for casual video interaction with others. We expect to continue to add to our streaming video solutions in the near future. And lastly, we have made 2 significant steps in our move into coaching and training. Firstly, we partnered with Pipeline, which is a course based education platform to help streamers improve their quality and increase their viewers. We'll be offering these courses bundled with our Elgato streaming products. Secondly, we just announced the acquisition of gamer sensei, which is one of the top platforms for connecting gamers with coaches to help them improve their gameplay. We believe that the coaching and training market around gaming and streaming is largely untapped, and we expect that eventually it should be a similar market size that we see in other sports and pastimes such as skiing, golf or tennis, where lessons are always or almost always part of someone's journey to improve their performance. In closing, I'm obviously very pleased with our strong third quarter results and our progress heading into the end of this year. We continue to execute on our strategic growth initiatives, and we remain focused on capitalizing on tremendous market opportunity before us. Our recent IPO was a significant milestone for us. Although we are very proud of all that we've achieved so far, we acknowledge that this is just the next step forward in serving our customers, employees and shareholders. Thank you for your time and continued support. I'll now turn the call over to Michael to discuss our financial results for the quarter. Thanks, Andy, and good morning, everyone. During the Q3, we delivered net revenue of $457,100,000 an increase of 100 and $72,700,000 or 60.7 percent compared to $284,400,000 in Q3 2019. Our strong top line performance was driven by strong growth across both the gamer and creator peripheral segment and the gaming components and systems segment. We believe the strong revenue growth year over year is driven in part by the COVID-nineteen in place orders as consumers spend more time working and gaming at home. The gamer and creator peripheral segment provided 161 $600,000 of net revenue during the Q3, an increase of $90,900,000 or 128.8 percent from $70,600,000 in Q3 2019. This was primarily driven by strong growth across all product categories, in particular sales of our Elgato branded streaming products. In addition to the contribution from SCUF, which we do not own in Q3 2019. The gamer and creator peripheral net revenue was 35.3% of total net revenue, an increase of 10.50 basis points from 24.8% in Q3 2019. The Gaming Components and Systems segment provided $295,500,000 of net revenue during the 3rd quarter, an increase of $81,800,000 or 38.3 percent from $213,800,000 in Q3 2019, primarily driven by strong growth across all products, including our PSU, cooling, PC cases and DRAM due to the continued strong market demand. Our memory products contributed $141,300,000 of this revenue. Gross profit in the 3rd quarter was $127,900,000 an increase of 67 point $7,000,000 or 112.4 percent from $60,200,000 in Q3 2019, primarily driven by the increase in revenue in these periods, as well as the positive margin impact from sales of higher margin scuff products and streaming gear. Gross profit margin increased by 6.80 basis points to 28% from 21.2% in Q3 2019. The gamer and creator peripheral segment gross profit was $60,000,000 an increase of $40,100,000 from $19,900,000 in Q3 2019, primarily driven by an increase in revenue in the same periods. Gross profit margin was 37.1% compared to 28.3% in Q3 2019. The increase in gross margin was driven largely by product mix related to the strong growth in sales of higher margin streaming products coupled with less promotional activities and the addition of higher margin scuff products. As Andy mentioned, we continue to see a mix shift as gamer and creator peripherals contributed 46.9% of total gross profit in Q3 2020 as compared to 33.1% in Q3 2019. This is a great overall story and formula for continued overall margin expansion as our fastest growing and highest margin segment also sits in our largest market. The gamer components and systems segment gross profit was $67,900,000 an increase of $27,700,000 from $40,300,000 in Q3 2019, primarily driven by the increase in revenue in the same periods. Gross profit margin was 23% compared to 18 point 8% in Q3 2019. This was due to product mix and less promotional activities. Gaming components and systems contributed 53.1% of the total gross profit in Q3 2020 compared to 66.9% in Q3 2019. Our memory products margin in this segment was 18.8% for the quarter. 3rd quarter SG and A expenses were $65,300,000 an increase of $25,500,000 or 64.1 percent compared to $39,800,000 in Q3 2019, primarily driven by SG and A expense from SCUF, an increase in outbound freight costs due to the increase in revenue and an increase in personnel related expenses. 3rd quarter product development expenses were $12,900,000 an increase of $3,400,000 or 36 point 5% compared to $9,500,000 in Q3 2019, primarily driven by an increase in personnel related expenses and and the acquisition of Scuff. Operating income in the Q3 of 2020 was $49,700,000 an increase of $38,800,000 from $11,000,000 in Q3 2019. Adjusted operating income in the Q3 of 2020 was $61,400,000 an increase of $40,500,000 or 193 point 7 percent from $20,900,000 in Q3 2019. 3rd quarter net income was $36,400,000 or $0.40 per diluted share as compared to net income of 1 point 5 $2 per diluted share in Q3 2019. 3rd quarter adjusted net income was $48,500,000 or $0.54 per diluted share as compared to adjusted net income of $10,000,000 or $0.13 per diluted share in Q3 twenty nineteen. Adjusted EBITDA for Q3 twenty twenty was $63,700,000 an increase of $41,400,000 or 184.9 percent compared to $22,400,000 for Q3 2019. Turning now to our balance sheet. On September 25, 2020, we completed the initial public offering of our stock at a price of $17 per share. We and certain selling stockholders completed the sale of 15,100,000 shares, including 1,100,000 shares issuance to the exercise of the underwriters' option to purchase additional shares. The IPO raised proceeds net of underwriting fees of approximately $118,600,000 for Corsair and $120,700,000 for certain selling stockholders. Dollars 86,600,000 of Corsair's IPO proceeds were used to pay outstanding debt. As of September 30, 2020, we had cash and restricted cash of $120,100,000 $48,000,000 capacity under our revolving credit facility and total long term debt of $376,100,000 As of September 30, 2020, consolidated total net debt was $259,900,000 Last 12 months consolidated adjusted EBITDA was $168,900,000 indicating a consolidated net leverage ratio of 1.5 times. Last week, both our rating agencies upgraded the rating on our outstanding debt. We plan to reduce our debt load over time while preserving cash for growth. Turning now to the guidance for the full year of 2020. Total revenue in the range of $1,616,000,000 to $1,631,000,000 total adjusted operating income in the range of $178,000,000 to $184,000,000 and adjusted EBITDA in the range of $187,000,000 to $193,000,000 We also expect interest expense to be approximately $5,000,000 per quarter, assuming we don't pay any debt. We expect to have an effective tax rate of of approximately 20% to 22% for Q4 2020 and we expect our full year weighted average diluted shares outstanding of approximately 91,000,000 with approximately 100,000,000 for Q4 of 2020. Overall, we are pleased with the progress we have made on our strategic initiatives and performance of the business. With that, we're now happy to open the call for questions. Operator, will you please open the line for Q and A? Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Ron Hall with Goldman Sachs. Please proceed with your question. Yes. Hi, guys. Thanks for the question and congrats on a great Q1. I wanted to I guess I wanted to start off the problem doesn't seem to be demand, it's supply. So wanted to see if you could talk a little bit more about the supply situation, what products are out of stock and what are your expectations for getting things back into stock and so on? And does that have any effect on your balance sheet or other financials? I guess probably not, but just to double check that. And then I'm just curious too, as we head into the holiday season here, what products are selling the best? Can you I know Andy, you went through a lot of the new products. What are the ones you have the highest hopes for? How are you doing in the different categories do you think from a share point of view? Just kind of curious what's going on competitively now that some of the new products are out there in the market. Thanks. Yes. Hi, Rod. Nice hear from you. So a few questions there. I think from a supply standpoint, I would say that much of the year has been supply constrained. And that's true not just for us, but with our competitors as well. So generally, if you've been into a Best Buy or tried to shop on Amazon, you'll see there's a lot of stockouts, a lot of empty shelves. Clearly, we didn't expect to grow 50% this year, right? So when we set our supply chain up and gave forecasts out, we didn't put them in at that level. So really what it comes down to is a lot of our complex products, peripherals that have got controllers in them, microcontrollers, etcetera. Some of those lead times are starting to stretch out to as long as 16 weeks. Typically, even without shortages, we tend to sort of want to give 8 to 12 weeks of visibility to our supply chain. So the point is that sales in September, the forecasts for those are made in May or June. And this was really Q2 was start of people really focusing on gaining and streaming and buying gear. So that's a little bit of what happened. Clearly, now we've got much of the year under our belt. We're pretty comfortable or a little bit easier to forecast what's going on. And we're seeing that this is not a pull forward. In other words, it's not people that would have bought products in Q3 that bought in Q2. This is a big surge in gaming and streaming activity, mainly from new people coming into discovering gaming and streaming for the first time. So now we've raised our forecast quite considerably in the supply chain and we're gradually moving the stock levels up. Now in terms of what products are selling well, we're pretty happy with all the new products that we've introduced. I think some of the brand new categories, we just went into the microphone category. We launched that from our Elgato subsidiary, I think, in June, started shipping that in July. So Q3 was the 1st quarter. Those shipments, we're really happy with the results of that. We had to double the supply chain almost instantly. Typically in Q4, the things that are more seasonal are those products that tend to be given as gifts and that tends to be peripherals. As I always joke, parents don't tend to buy their kids power supplies and memory modules for Christmas. So we don't tend to see as much of a seasonal activity there. But I think out of all the product lines, headsets is probably the easiest thing that gets given as gifts. So we usually see a higher number in Q4, more seasonal nature. So hopefully that answers most of the question. Other than that, there's no issue on the balance sheet or financials with the supply chain. We know all the numbers are bigger. All right. That's great. Thanks, Andy. Yes, my daughter wants a power supply, but I guess she's a strange one. So anyway, thanks for the answers. Appreciate it. Thank you. Our next question comes from the line of Matt Cabral with Credit Suisse. Please proceed with your question. Yes. Thank you. Andy, you mentioned this in your prepared remarks. I think you even hit it on the last question. But I'm wondering if you could expand a little bit more on just how much of this year's growth do you think is from new gamers that maybe have the potential to become more committed over time versus just the existing user base? And I know you said you haven't seen a pull forward impact in Q3, Q4. I guess as we roll forward to start thinking about next year, I'm just wondering how to balance the risk of maybe some normalization from this year's surge in demand versus sort of sustainable underlying levels? Yes. I mean, obviously, we don't have completely clear crystal balls, right? So the thing we can see just from the mix shift this year in particular is that there's a lot more entry level products going out. And when we talk to our retailers, they tell us the same thing. In other words, it's new gamers coming to the shops, people that have never bought stuff before or people that are just discovering streaming. So that's encouraging. Even for experienced gamers that are upgrading, I think this is not a one time thing, right? What we see in general is like any sport or hobby or pastime, if you have a little bit more time to learn to get into it in the 1st place, that's not a short term effect. So if, for example, your friends take you skiing and you like skiing, you'll probably ski for a while and continue to buy gear. And this is what we sort of expect is going to happen, at least we hope is going to happen, is that all these new people that have been introduced or perhaps gamers that have never built a gaming PC before and now they've discovered how to do it will now upgrade in the future. So we think for a lot of people this is the beginning of a long term spend cycle. And then a quick follow-up. Wondering if you could talk a little bit more about what growth in Elgato looked like in the quarter? And maybe just more broadly, where you think penetration of streaming gear sits right now? And how much of the opportunities within your existing customers versus maybe reaching a different audience than you typically sell to? Yes. We don't break out our Gatto products separately. But I mean, obviously, we're really happy with that acquisition. And I think we spotted a trend that when we first went into this, we imagine that everybody that was streaming was trying to be the YouTube star and would pay for their gear advertising proceeds. So it would be like a sort of small B2B. But in fact, that's not really what's happening. When we look at all the number of channels, the vast majority of channels, streaming channels have less than 100 viewers. And so what it's turning into is more of a social sharing mechanism, sort of a bit like Facebook, where people are just in small groups sharing gaming content or whatever they're doing with their friends. And that means that we've got a massive opportunity in terms of the number of people that could start streaming. And the other thing that's happening is that for all of us, even if you're not a gamer or you don't want to be a YouTube star or stream at all, everyone's now getting completely familiar with video calls. I mean, I'd say 90% of the conversations I have now with people, I'm using video rather than just on the phone. So as everybody gets more comfortable with how that works and how to set it up, I think we'll continue to see more and more people turning to video streaming gear. Thank you. Our next question comes from the line of Mario Lu with Barclays. Please proceed with your question. Great. Amazing quarter and thanks for taking the questions. I have one on streaming and one on the full year guide. So the one on streaming, besides the acquisition of Epicam, are there any other updates in terms of adding a video camera to the Elgato portfolio? Are there any streaming products that currently you think is still missing that you could potentially add over time? And then on the full year guide, it's implying that 4th quarter year on year growth of 46% or 4% growth sequentially, which I believe is below the seasonal pattern historically of roughly 20% growth sequentially. So I guess, Michael, if you can provide more detail on what is embedded in the full year and 4Q guide, whether it does include some pull forward demand or if it's assuming that the number of new entrants coming to the market is still remaining elevated? Thank you. Yes, it was 2 parts to that question. I think, I don't really want to comment too much on new products. Clearly, in the streaming world, video is a very important part of it. Now, one of the products that Elgato is most famous for is a product called Cam Link, which sells for about $129 and that allows you to connect a very high quality DSLR camera to your PC. And we sell a lot of those, surprisingly a lot of those. So that's what people at the high end tend to do. The best streamers are not using webcams. They're using DSL cameras. So we're already in that business. EPUB CAM was a slightly different application, we wanted to start exploring some of the mobile applications. And look, we're going to continue to invest in all streaming gear. We're trying to maximize our footprint there. So yes, anything you could imagine that would make sense doing streaming, we're probably already working on. Now in terms of the Q4 cadence, you're absolutely right. Normally Q4 is bigger than Q3. And obviously, this is a slightly different year. We've got stock outs everywhere. We've got to consider the effects of how much our supply chain can react, and it's already pretty stretched. And so that's how we've arrived at the guidance. As I said, we're not in a situation now where we are demand constrained at all. This is purely a supply driven back half of the year. Thank you. Our next question comes from the line of Tom Forte with D. A. Davidson. Please proceed with your question. Great. Thanks for taking my question. Congrats on the quarter. When we think about your long term margin opportunity and we think about your non gaming revenue, coaching being an example you gave, how accretive can that be versus maybe a traditional hardware model? And how should we think about your non gaming revenue in general and how that may drive your hardware revenue as well? Thanks. Well, when we've looked at coaching and training, what we've realized is that most other sports or hobbies or pastimes, however you want to phrase this, contain a significant amount of training revenue. In fact, many sports, the spend that people have compared to gear and lessons can be 30% of its own revenue. So we don't know how big that can be. What's clear to us is that the existing market for training and coaching is kind of ranges from free lessons on YouTube to just people on the Internet trying to sort of help, right? But if you can imagine being a golf instructor and not being associated with a golf shop or a golf course or a ski and not associated with a ski slope, it would be very, very difficult to get a lot of business. So we think that the right place for offering coaching and training or lessons is the same place as you go to buy your gear. So we'll have to see how that works out. We're pretty bullish about it. We're investing quite heavily. You can see we've made our first announced our first acquisitions and partnerships just recently. I'm sure there'll be more. So, yes, that's how we think about it. Now, clearly, in terms of how that works with hardware sales, you can just imagine that if you're taking golf lessons and the Golf Pro suggests you what clubs you should buy, you're probably going to take his advice. And so we expect the same thing. In fact, any higher level of engagement that we can have with our customers is going to be beneficial. Thanks for taking my question. Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question. Okay, thanks. Good morning, guys. So Andy, you recently launched a headset for the Xbox. Can you talk about the company's plans to expand your presence in the console headset category? And any commentary you can offer in terms of general demand you're seeing with product tied to the console transition? And then separately, the 4Q guidance, at least at the mid point, the implied adjusted EBITDA margin is 10.4%, if my math is correct, which would imply a step down from the 13.9% reported in 3Q. I just wonder if you could offer any commentary as to why that's lower on a sequential basis? Thanks. Yes, sure. I'll take those in 2 parts. So, headsets is an interesting one. It turns out that over the last few years, a lot of retail and e tail have been merging headsets. In other words, console and PC because at the low end where you've got a 3 pole jack plug connecting, the interface is the same thing. So historically, the notion was that it's good to have licensed products because for a lot of people, especially in the holiday season that are buying gifts and may not quite understand the interfaces, it's easier to have a package with Xbox on it, and you can only do that if you have a license. So it's really an experiment. We you don't have to do that. In fact, the biggest guy currently specializing in console headsets doesn't necessarily use licenses on most of their products. So it's a bit of an experiment. But we certainly ship quite a few headsets into the console space and it's being bought for console use. Now what we expect during the transition, I think that we're seeing that more with our SCUF subsidiary, which is making controllers that are 100% going into high end consoles. I'd say this year due to the price points and the limited availability of the new Xbox X and PS5, we don't expect the transition to be quite as severe. Most people knew that Xbox was compatible forwards and backwards, and there's a certain amount of compatibility on PS5 versus PS4 as well. So we don't expect it to be so severe, but we'll find out. You won't really know until people start shopping in Black Friday in December. I think the other part, do you want to take the EBITDA? So the for the EBITDA, the difference 1st of all, Q3 obviously was a lot stronger than we expected. So when that happens, you tend to overachieve because your OpEx is sort of what you expected and everything else is higher, so that helps. But specifically for Q4, if you look at the gross margin line, a combination of higher airfreight because bigger demand in Q4 and a lot more than expected demand in Q3 means we'll better airfreight more things for our customers. And obviously, there's a little bit more promotional activity traditionally in Q4 than in Q3. On the OpEx side, if you think this is our Q1 as a public company, so there's going to be some increased public company expenses there compared to prior quarters. We're also spending more on product development for new products coming out next year. We're sort of accelerating some spending there and a little bit extra marketing spending around some branding and other initiatives we're doing. So that's the main components of the difference between actual Q3 and the implied forecast. Got it. Okay. Thanks, guys. Thank Our next question comes from the line of Doug Krawetz with Cowen and Company. Please proceed with your question. Hey, thank you and good morning. Big week for gaming, obviously, the new consoles are shipping. And one of the things that reviewers have consistently said about the PS5 is that the haptic feedback controllers are quite impressive. I was just wondering with your stuff line, is that something that you'll be able to do at some point with the stuff controllers? Is that something you're planning to do? And how important is that do you think to being able to maintain your dominant market share position on PlayStation with SCUF? Thanks. Yes, yes, thanks. Good question. Turns out that most of the people that are pretty competitive on console turn haptic off. And so for people that are really trying to concentrate on in gameplay, it's kind of annoying. So that's the first thing, but we'll have it. Most of the products that Scuf makes today are modified versions of the PS4 and Xbox and will be modified versions of PS5. So we can keep or lose any part of it. Normally, we basically allow people to take the whole haptic module out of the hand grips and a lot of people do that. So it's we don't think it's a big deal, but we'll have it anyway. Our next question comes from the line of Tim Nollen with Macquarie. Please proceed with your question. Hi, thanks. Couple of questions. One, another follow-up on the consoles coming out. I wonder if it's possible, hopefully quantitatively, but at least qualitatively maybe to pull together some of the comments you made thus far and just give us an idea of what the console launches of Xbox and PlayStation 5 will mean for your growth, I. E. Incremental peripheral sales, whatever that might be? And then secondly, I might have missed this, but is it possible to provide a number on, call it, an organic growth number for Q3 because I know there are some acquired revenues, I guess scuff was in there. Just what was an organic growth figure for Q3, please? Yes, okay. We'll come back to the organic growth in a second. In terms of console cycle, this is the first one for us. And actually, we've watched all the different companies around this space for quite some time, notably, Turtle Beach and Mad Catz when they were around. So we've seen this and it's always quite different. But I'd say in general, what tends to happen with consoles is that when the new consoles launch, people spend money on the console. And in the following year, people start buying more accessories for it. Now what I think is going to be and usually that's the console comes one control. So the first thing you can incentivize is another controller. So that's what we would expect. Certainly, we would think that next year would be a stronger year scuff than this year. But having said that, this year was pretty good because there's a lot of people playing games at home. So I don't think that really answered the question. It's tough to get to super granular on that because it's just too early in the cycle. I will say the numbers are being talked about for PS5 and Xbox X seem pretty supply constrained. I think there's going to be a lot of people still buying PS4 and old Xboxes for a while and the same thing with accessories. In terms of the organic versus inorganic, organic growth was about 51.7%, about 9% lower. So if you take out the items that we had in 2020 that we didn't have in 2019, growth would have been about 9% lower. So consistently for us, our growth has been driven heavily by our own products or if we bought something a couple of years ago, our ability to ramp up and move that better to our channel. So hopefully that answers your question. Yes. And one follow-up, just to clarify on consoles. The only peripheral outside of scuff that we sell that is largely used by console players is headsets. Obviously, you don't use a keyboard and mouse for the console. And the ASP tends to be much lower on consoles. They're much typically much simpler. And most headsets are just jackpot going into speakers. So very little electronics in them. We really can't tell when we're buying those at retail, we're buying them for console PC because it's generally the same product. So as I said earlier, we did see a fairly big surge this year of entry level, dollars 30, dollars 40 headsets, whether that's by people playing console or PC or in fact both it's difficult to tell. We have seen in terms of the surveys that there's a vast crossover, in other words, something like 70% or 80% of people that are PC gamers also play on console. So it's difficult to the market is not one or the other. Our next question comes from the line Colin Sebastian with Robert W. Baird. Congrats on the IPO again and a strong quarter to kick things off. I wonder how much crossover in sales you're seeing between gaming and streaming product consumers, if that's something you're able to measure and if there is a reinforcing or beneficial impact there as streamers purchase gaming gear and vice versa or are they somewhat distinct? And then secondly, looking further ahead in terms of the direct to consumer offering, can you talk about how e commerce fits into that and the roadmap in terms of marketing or technology upgrades required to capture more direct traffic and sales? Thank you. Yes. Well, let's take those questions in reverse order. So firstly, we just went live yesterday with our CRM system. Traditionally, we've been a channel company as has Elgato. So other than sort of chat on forum and tech support calls and that sort of thing, we haven't known too much about our customers. But both Skuf and Origin are 100% direct to consumer. And we're trying to ramp up our direct to consumer as much as we can just to get higher engagement. So we're going to learn a lot more as all that data flows into our CRM system. We'll be able to see what people are doing individually on the website. We can also see to a certain extent what products they own to our IQ systems. So yes, direct to consumer is important because obviously we've got the opportunity to not just sell one thing but sell an array of products. Now in terms of crossover, it varies. There's a lot of people that are streamers that have never built a gaming PC. And so the historical customer base is a little bit different. A lot of streamers are not particularly technical people. But there is some crossover, and we're finding more and more gamers want to stream and share to their friends. So I would say when we bought El Gallo, the estimate is that probably 95% of the people buying streaming gear were streaming live gameplay. As you probably know, the majority of over 90% of the traffic on Twitch is gaming. But we are starting to see just from social interaction and talking to people that there are a lot of people buying streaming gear for non gaming activities, whether it's broadcasting, cooking, makeup, fitness, those sorts of subjects. So and obviously, those are people that historically wouldn't have been buying our gear. Thank you very much. Thank you. We have no further questions at this time. I'd like turn the floor over to Andy Paul for closing comments. Yes. So thank you very much. Look, CorSo, we are at the forefront of a massively growing market centered around gaming, esports and streaming. And with our unparalleled brand and quality of products, we think we're uniquely positioned to take advantage of this exploding market. Today, the global and passionate community of gamers and streamers is engaged in the relentless pursuit of better performance, and we're proud to be a leading provider and innovator of high performance gear for this new era of entertainment. We are committed to giving gamers and streamers the tools they need to play their best game, produce their best content and have fun doing it. Thank you for your interest in Corsair and thank you for joining us on the call today.