Earnings Call: Q2 2021

Aug 3, 2021

Good morning, and welcome to the Coursera Gaming Second Quarter 2021 Earnings Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. With that, I would now like to turn the call over to Ronald Van Bean, Coursera's Vice President of Finance and Investor Relations. Thank you, sir. Please begin. Thank you. Good morning, everyone, Thank you for joining us for Corsair's financial results conference call for the Q2 ending June 30, 2021. On the call today, we have Corsair's CEO, Andy Pall CFO, Michael Pollard. 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 references to non GAAP financial measures. Additional information, including reconciliation between non GAAP financial information to the GAAP financial information is provided in the press release. I would also like to remind everyone that until our 10 Q is on file, the Q2 2021 numbers are preliminary. This conference call will be available for replay via webcast through Ferchera's Investor Relations website at ir.corsair.com. Andy will begin with our Q2 business highlights and Michael will then take you through a review of the financials before we proceed to Q and A. With that, I'll now turn the call over to Andy. Thank you, Ronald, and welcome to our Q2 'twenty one earnings call. Well, overall, I'm very pleased with our Q2 performance where we delivered net revenue growth of 24% to $473,000,000 as well as 24% gross profit growth to $130,000,000 which is our best second quarter ever. Our results highlight the strength of the underlying fundamentals of our business as gamers continue to purchase and upgrade their gear Even as entertainment outside of the home and travel began to open back up. We experienced growth in every category Despite key component shortages in the market such as graphics cards for enthusiastic gaming PCs as well as semiconductor shortages, logistics issues and port delays. We are now at a $2,000,000,000 run rate compared to our 2019 revenue of $1,100,000,000 which speaks to the strong momentum in our business. We therefore are continuing to We are extremely excited by the recent launch of our first camera, which has received an overwhelmingly positive response from the creator community. We've launched over 75 New products so far this year, which is just an astounding pace of innovation. Our new Elgato camera called Facecam is designed specifically for streamers and content creators and outputs uncompressed 1080p video at 60 frames a second, which is, of course, significantly higher quality than a standard webcam. It has many features similar to a DLSR camera With software that controls contrast, white balance, zoom, etcetera, and all those settings can be stored in the camera, again, unlike a standard webcam. Facecam also features a multilayer coated lenses and a high end Sony camera. We also introduced our 7,000 series full tower case, which allows for multiple radiators so that an Ultimate gaming PC can be built for maximum performance. And the Virtuoso RGB XT, our new flagship Gaming headset offering incredible sound and impeccable clarity now includes Bluetooth as well as our proprietary slipstream Low Latency Wireless Connection. NPD data continues to show year over year growth in the gaming peripherals market With recent data showing keyboard and mice growing faster than headsets, we believe this is Further evidence to support our conviction that as gamers spend more time playing games and improving their skills, The PC gaming peripherals have been running at about 24% per year in the U. S. And a similar rate in Western Europe, where we're able to collect detailed market data. Now in 2020, with lockdown, this increased to approximately 80%. These growth numbers are substantially higher than either the increase in new gamers to the market or the rate of growth in video game software. So what we believe is happening is that after people learn to play PC games for a while and get good at them, they start to want better specialized gaming gear. And because the market is still at an early stage and the penetration is so low, That's why we are seeing such high growth rates in gaming hardware due to the low base. If we look at Gaming headsets, which is the most widely purchased peripheral, then only 20% of gamers playing premium games in the U. S. Have bought those in the last 3 years, which is roughly the refresh cycle, with the other 80% yet to come to the market. So our belief is that the situation in 2020 early 2021 where gamers clearly spent more time in their homes learning to play games better, That should establish a higher base of consumers ready to step up and upgrade their gaming setup, which includes peripherals as well as gaming PCs. Headsets tend to be the 1st peripheral that gamers buy to make the game more immersive, but as skill improves, The next purchase tends to be high performance gaming mice and keyboards. The market for gaming PCs and laptops in the last 12 months It's been phenomenal. 1 of the fastest growing consumer electronics categories according to NPD. High end graphics cards were very difficult to buy in the last 6 months, and we believe there is a large number of gaming enthusiasts who are in the wings waiting to build a new See, on top of the elevated numbers of people that actually did build a new gaming rig. In creator peripherals, we continue to be the market leader in video capture cards and lighting. Our Wave microphone, which we launched last year, has gained significant market share quickly. Our Stream Deck has now become the standard for home broadcasting, We now have several apps from 3rd parties that can use Stream Deck. Turning now to our outlook for the year. The guidance for the full year of 2021 remains unchanged from Q1 with total revenue in the range of $1,900,000,000 to $2,100,000,000 representing growth of 11.6% to 23.4 percent, Adjusted operating income in the range of $235,000,000 to $255,000,000 and adjusted EBITDA in the range of $245,000,000 to $265,000,000 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 Q2, we delivered net revenue of $472,900,000 an increase of 24.3% compared to $380,400,000 in Q2 2020. The gamer and creator peripheral segment provided 155 $200,000 of net revenue during the 2nd quarter, an increase of 40.9 percent from $110,100,000 in Q2 2020, driven by strong growth across all product categories, including sales of our SKUF branded console products. The gamer and creator peripro segment net revenue contributed 32.8 percent of total net revenue, an increase of 3.90 basis points from 28.9 percent in Q2 2020. The Gaming Components and Systems segment provided $317,700,000 of net revenue during the 2nd quarter, an increase of 17.6% from $270,300,000 in Q2 2020, primarily driven by strong growth across all Product categories as consumers continue to buy and build gaming PCs. Of this revenue, memory products contributed $158,700,000 Gross profit in the 2nd quarter increased by 24.1% to $130,400,000 from $105,100,000 in Q2 2020, which is a 2nd quarter record. The increase over Q2 2020 was primarily driven by increased revenues. Gross profit margin remained flat at 27.6%, The positive impacts of mix shift towards the gamer and crater purpose segment was offset by significant increases in logistic costs, particularly Ocean Freight. The gamer and creator peripherals segment gross profit was $54,600,000 an increase of $15,900,000 from $38,700,000 in Q2 2020, primarily driven by an increase in revenue in the same periods. Gross profit margin was 35.2%, flat with Q2 2020. We continue to see a mix shift as gamer and creative peripherals contributed 41.9% of total gross profit in Q2 2021 as compared to 36.9% in Q2 2020. This remains a great overall The Gaming Components and Systems segment gross profit of $75,700,000 an increase of $9,400,000 from $66,300,000 in Q2 2020 was primarily driven by an increase in revenue in the same periods. Gross profit margin decreased to 23.8 percent from 24.5% in Q2 2020, primarily due to freight costs. Gaming Components and Systems contributed 58.1% of the total gross profit in Q2 2021 as compared to 63.1 percent in Q2 2020. Our memory projects margin in this segment was 17.7% for the quarter. 2nd quarter SG and A expenses were $80,200,000 an increase of $23,300,000 or 41.1 percent compared to CAD56.8 million in Q2 2020, primarily driven by an increase in outbound freight costs due to increase in revenue and increase due to expenses related to being a public company and an increase in personnel related expenses. 2nd quarter product development expenses were $15,500,000 an increase of $3,600,000 or 30.8 percent compared to $11,800,000 in Q2 2020, primarily driven by an increase in personnel related expenses as we continue to focus on bringing an increasing number of products to the market. Operating income in the Q2 of 2021 was $34,700,000 a decrease of $1,700,000 from $36,400,000 in Q2 2020. Adjusted operating income in the Q2 of 2021 was $49,300,000 an increase of $1,900,000 from $47,400,000 in Q2 2020. 2nd quarter net income was $27,700,000 or $0.28 per diluted share as compared to net income of $22,600,000 or $0.26 per diluted share in Q2, twenty twenty. 2nd quarter adjusted net income was $35,700,000 or $0.36 per diluted share as compared to adjusted net income of $32,300,000 or $0.37 per diluted share in Q2 2020. Adjusted EBITDA for Q2, 2021 was $51,600,000 an increase of $2,000,000 or 4% compared to $49,600,000 for Q2 2020, resulting in an adjusted EBITDA margin of 10.9%, a decrease of 2 10 basis points for year over year. Turning now to our balance sheet. We continue to convert our strong financial performance into an opportunity to further strengthen our balance sheet. In Q2, 2021, we generated 31 point $6,000,000 in cash from operations and use it to reduce debt by an additional $25,000,000 with face value now at $274,000,000 and net debt at $139,400,000 resulting in a net leverage ratio of 0.5. We did this while growing quickly and leaving sufficient resources to further accelerate growth in the future. We expect to continue to reduce debt in 2021 subject to business conditions and any need for additional growth capital. We're also looking to reduce the carrying costs of our existing debt significantly. As of June 20, 2021, we had $48,600,000 capacity under our revolving credit facility, Total GAAP long term debt of $270,000,000 and cash excluding restricted cash of $134,600,000 The additional modeling details underlying our outlook remain the same as we discussed in our Q1 earnings call With the exception of a now further reduced interest expense and a slightly lower effective tax rate due to deductibility of options exercised. For ease, I'll repeat them. We expect gross margins to slightly improve year over year and operating expense to increase as well to support our higher revenue level, the need to continue to innovate at a larger scale and a full year of public company costs. Assuming no further debt pay down, we now expect interest expense of approximately $4,100,000 per quarter. As noted, we've already paid down $53,000,000 of our debt and expect to pay down approximately an additional $47,000,000 for a total of $100,000,000 of debt reduction in 2021 subject to business conditions and any need for additional growth capital. The $4,000,000 patent trial win in Q1 2021 is not in our outlook. This amount could vary depending on what the judge rules, is subject to appeal and the timing of recognition of a gain, if any, is uncertain at this time. An effective tax rate of approximately 20% to 22% for 2021 and full year weighted average diluted shares standing of approximately 100,000,000 to 102,000,000 shares. Overall, we're pleased with the continued progress we have made in our strategic initiatives and With the exception of a number of our premium products with high semiconductor content, the channel is much better stock now. And with Prime Day at the end of Q2, Coupled with the upcoming holiday season, we expect a more normal promotional environment. In Q2, shipping expenses were much higher than normal and we expect that to continue for the rest of 2021. Finally, memory chip prices started moving down near the end of Q2 and that normally lowers margins on our memory products while prices are moving down. These are expected to somewhat counterbalance the Strong demand we have from our loyal existing and new customers. With that, we're now happy to open the call for questions. Operator, will you please open up the line for Q and A? Certainly. We will now begin the question and answer session. The first question comes from Drew Crum with Stifel. Please go ahead. Okay. Hey, guys. Good morning. Wondering if you're willing to address your competitive performance in the quarter, whether you added or lost share during the period. And then separately, any guidance you can give concerning revenue and adjusted EBITDA phasing by quarter in the second half? Thanks. Well, let's start with the I think the second part is going to be no, The first part of the question, we actually did pretty well in Q2. It varies by product type. But in general, we did quite well in components. In peripherals, we stayed roughly even. And I think as you probably have gathered, The situation that us and most of our competitors are in right now is trying to get enough products In from Asia, on what's now very expensive containers. And so We also have, as you know, semiconductor shortages. So what we've been faced with over the year is We tend to have high market share on our high ASP categories And lower market share on very low ASP categories. In other words, we're not typically an entry level player. And so the initial surge last year was a lot of entry level products. And so And so that changed the dynamics a little bit. But now we're starting to get some more supply of our higher ASP, high semiconductor content products. It's helping with market share. In terms of the guidance for by quarter, we don't give quarter guidance, we give annual guidance. Last call, when asked a similar question, we pointed to seasonality. Like for example, Q2 tends to be the one of the lower quarters of the year. And you have to take into account timing of things like Prime Day and such as well. But normally the second half is Stronger than the first half for normal seasonality. And normally, you tend to sort of ramp as you come out of the Summer and as you go into the holiday season. Got it. Okay. Thanks, guys. The next question comes from Mario Lu with Barclays. Please go ahead. Great. Thanks for taking the question. So yes, I know you guys only guided for full year numbers, but Since the 2Q revenue came in a little bit below the street, just curious how it performed relative to your own expectations. Any strengths or weaknesses within certain product lines that is worth highlighting? Thanks. Yes. I think the most obvious thing is that We talked about semiconductor shortages and that's not just related to components that we buy. Semiconductors go into our components. So As you probably know, there's been a huge shortage of high end CPUs and graphics cards. So it's actually been quite difficult For the most extreme gamers that are building these $2,000 $3,000 $4,000 gaming PCs, It's been difficult for them to build. And so we actually think we've got a huge amount of people waiting in the wings to build as these cards start to become available. So what we saw happen was that NVIDIA and to a certain extent AMD allocated a lot more products into the finished PC manufacturers, Alienware, Dell, etcetera. And not so much product into Amazon and the Retail segment. So that's now starting to change. So the point is, the components side of our business, we had quite a few headwinds with not all the components being available So that people build PCs. The peripheral market is still pretty strong. And at the moment, the MPD data is showing that So peripherals are same size, in some cases, bigger than last year. So we're now lapping You know, COVID quarters and streaming continues to be very strong. So hopefully, that gives you a Slight indication of what's going on. That's helpful. Thanks, Andy. The next question comes from Matt Cabral with Credit Suisse. Please go ahead. Yes, thank you. You guys have called out supply constraints and logistics issues several times already. I'm just wondering if there's any way to quantify the impact Both of those factors, both as we think about revenue in the quarter as well as kind of looking further down at gross margin. Yes. I mean, it's really difficult to give an exact number because Certainly, it's in the tens of millions. But we haven't sort of gone through and done the math to see Exactly what we thought we would have shipped if we'd had full supply and our competitors had full supply. But I think the biggest issue right now Numerically, it's probably the lack of graphics cards that's holding back the component market and stopping the building PCs. The second issue is that we're really not yet in a situation where our highest end products or highest fee products Fully in stock. And then we have very expensive freight to deal with. Some of the freight costs obviously get offset because as we introduce new products, we're able to adjust pricing and some of our competitors. But it's meaningful numbers. Got it. And then just a follow-up if I could. I guess Trying to understand how to think about normalized profitability for the business. I guess if I look at EBITDA over the last 12 months, you guys have been a little bit above 13% versus if I go back before COVID prior to 2020, it was more like mid to high single digits. And I I know things have changed. There's been M and A and obviously the big surge in demand over the past year. I guess I'm just trying to think through What steady state profitability is for the business? And if it is higher than that pre good baseline, I guess help us just understand the factors underneath that. Yes, I think we've always We wanted to be in the low teens and perhaps get to the mid teens. Obviously, we had a little bit of a tailwind last year With the market ramping up faster than we could possibly expand the business, right now we're in a fairly hefty Expansion mode in terms of R and D and marketing because the business has got so much bigger. So we're not we're nowhere near sort of a mature Business will tell you that we've got an exact target in mind, but somewhere in that range is how we try to manage the business? So that would be above pre COVID levels, but not right now today the same level as Q1, which we talked about in the Q1 that was a particularly strong quarter and we hadn't finished investing in the business yet. But we think that what we did in Q1 is achievable. We just need to grow the business And keep putting out good high margin products and they'll help. Also, I'll note that we are seeing a shift towards more higher margin gamer and creator peripherals, which Continued in Q2, and that's going to be lifting our margins overall over time. So that The next question comes from Tom Forte with D. A. Davidson. Please go ahead. Great, thanks. So I have four questions. They're quick. I'll go one at a time. So the first one is on the pressure, cost pressure from logistics, How should I think about it? Is this leaning into air because of demand? Or is it how should I think about The cost, can you give a little more, I guess, granularity? So I think last year was a lot of airfreight, that's right, Because we were so short on the supply. The most recent quarter, it's more just the cost of containers. So The cost of containers is probably 3 to 4 times now what it was 2 years ago. And we Certainly expect that's going to be somewhat of a temporary situation. Otherwise, we'll be starting up container companies. But Probably for until the whole consumer electronics surge dies down, I expect that to continue for some time, but it's extraordinary high levels at the moment. Thank you. Yes. Very helpful, Andy. All right. So then the second question is, when you think about the cost pressure then from logistics, how should we think about your ability And your interest in taking price across your portfolio. Yes. So that's a good question. And this all depends on the time frame, And the same is true with our competitors. So if we see cost increases in that are fundamental, that are going to stay there, we obviously adjust that into the pricing. If we see cost increases that are temporary, it's difficult to go and adjust retail MSRP price points On a short term basis, so we're looking at that. But so far, we haven't made any huge changes. And obviously, it's a bit of a mixture because a lot of our bigger retailers are buying from us Directly in Asia and then paying for the containers themselves. But so far, we haven't and in fact, Most of our competitors haven't made any wholesale changes in MSRP. I think the general sense is that we're going to weather it for the next couple of quarters until Yes, we see what the natural level is. But the container prices right now are very elevated and they almost certainly would have to come down by the end of the year, Good. All right. So last 2. So from our vantage point, when we think about secular shifts, We really see this self broadcasting as accelerating. There's a lot of anxiety among investors Tough compares for gaming, but this secular shift towards consumer self broadcasting, using your products to help them Broadcast when they play Fortnite, things like that. So I guess, do you agree with that assertion that that trend is accelerating? And then what are the implications for Corsair? Well, look, we've just doubled down, right? We announced our first camera last week, And that's clearly the biggest part of the self forecasting, as you say. We call it self forecasting, live streaming or whatever. But the biggest part of that TAM is the camera. And so we've literally jumped into that. It's probably close to $1,000,000,000 market TAM We've never been in before. So not only is that market continuing to grow, But we've increased our footprint. Now as you probably realize, there's some parts of the Self forecasting market that gets a little bit confused with people at home doing Zoom calls. And so we think that the vast majority of the products that we sell Actually going into gamers and content creators rather than home offices. But clearly, some products get bought But that market will certainly be dying down. So I think what we're going to see with the streaming and content creators There's a strong tailwind from the secular shift to people sharing and sharing content and streaming, and a Little bit of a headwind from those people that were buying microphones and cameras for their home office. All right. So Andy, sorry, you now you maybe have a 5th question. So before I get to my last, how should we think about the relative gross profit margin in the camera versus the rest of your portfolio? The camera is a brand new product. So usually when you're ramping a new product into the channel, it's a little lower margin than it will achieve when it's A little bit more normalized, but it's right in line with the other creator peripherals. So it's much higher than the corporate average. Excellent. All right, last question and thanks for taking all my questions. So you talked a little about it, but how is your performance on Prime Day this year? And historically has that been an important sales day for Coursera? So can you repeat that? I missed the performance. Yes. Sorry, Andy. So Prime Day. How is your performance on Prime Day historically is that important sales day for you? Yes. So it can be. This year actually was not a great Prime Day for Amazon, as you probably know. And mostly because for us, a lot of the Products that we normally line up for Prime Day sales were pretty light on stock. So we actually didn't participate heavily in Prime Day. And actually a lot of our competitors were in the same situation. So it ended up being less important this year than it normally is. Let's put it that way. Great. So Andy, Michael, Ronald, thanks for taking my questions. Thanks. The next question comes from Tim Nollen with Macquarie. Please go ahead. Hey, guys. Thanks. This is Sean on for Tim. My question is around the product cycle. So you've launched 75 products this year so far. Any more comments on The release cycle in the back half as well as anything on usage outside of gaming. I know we talked about live streaming a bit, but anything on like general streaming, Yes, I think we're going to stay on that pace. We've built up a pretty good momentum. And as we keep adding more Categories, they all have to be refreshed and new categories come in. So I wouldn't expect that pace to change, if anything, may accelerate. And in terms of new categories or things we're doubling down on, clearly, look, we've just introduced our first camera. Yes, you'll see more of those over the next year or 2. We've you'll see more microphones. So yes, we still Think that the biggest growth out of all the segments we're in is in streaming, and we want to own that market. Most of the component areas were in refresh mode. And In the peripheral market, we still have a few price points that we're not present on. So still some more TAM that we can increase our footprint sizing? I think just Generally, right, there's been some new consoles that have come out. So you would expect that Scott would have new console controllers at some point. And there's obviously a newer memory standard that's going in more towards the end of the year. And we've been in the lead for memory, Particularly gaming memory forever. So you would expect to see something for that as well. But really it's Continually innovating in our existing portfolio and increasing our TAM. We have a new microphone product that lets Use your own XLR microphone, but take advantage of our great software that Elgato has put together. That's the Wave XLR that just came out. And even Stream Deck, which is selling very well for us and is very well liked in the market, we came up with a newer version that's a little bit better form factor And a little bit easier for people to use in different uses because it seems that more and more people are discovering Stream Deck and want to use it not For streaming, but for other applications as well. Great. Thanks. The next question comes from Doug Creutz with Cowen. Please go ahead. Thanks. A lot of concern in the market right now about what's going on over in China with respect to the government's Sort of actions and words about video games. Can you remind us how big of a percent of your business China is? And whether you're seeing anything in terms of your business there recently? We're Sarah recently. Not related to what you're talking about. We haven't seen the effect. China is 5%, 6%, something like that, with our business. We're not very heavy in gaming peripherals. We're more components in China than gaming peripherals directly. And that's more impacted by the DIY market and how that's going. So and we all obviously sell game software, we wouldn't be as affected by that type of pronouncement from the government. China has never been a big gaming market in terms of culture Compared to U. S. And Europe and other parts in Asia. Okay. Thank The next Question comes from Rod Hall with Goldman Sachs. Please go ahead. Yes. Hi. Thanks for the question. I wanted to just check On inventory levels, like where you're out of stock, what types of products. It looks to me just doing a cursory search like maybe power supplies are short, but I'm just curious what things you're having hard time putting on shelves or populating inventory with? Yes, that's a good question. For sure, high end power supplies Very low in stock and that's more a reflection of, obviously, some increased demand, but just the difficulty with building them because of some of the doctor shortages. Typically, it's the high end products. We were out of stock on our flagship keyboard for the longest time. We've now finally got that back We are not where we'd like to be on our high end headsets, but we're getting there. So there's a steady increase in inventory, but certainly, I would say not yet targets For the products that we really make a difference in market share. Okay. Thanks, Andy. Michael, were you going to say something? No. Amy answered the question. Yes, okay. I wanted to just check I expected to see the same thing with headsets, But I did a quick Amazon search and it seems like they're in stock there. I'm curious where in what channels are you having the hardest Time for keeping inventories at physical channels like Best Buy, that sort of thing? Or where would we expect to see the Inventory light. And then as we move into the holiday season, do you think that do you think you'll have enough Product on shelves by then or do you think this will just persist right on through the end of the year for you? No, I think we're going to gradually get back into good shape. So look, the first question, we obviously have inventory targets On every single SKU, and in places like Best Buy or Target or Walmart, We've got targets for every store and how many and typically there's 3 or 4 products in some stores depending Popular stores have a few more. So oftentimes, you may be able to find it in stock. But if there's any one there, so 4, for example, then we're on target. And that will cause them to be out of stock certain days, A number of days in a month. So that's the way we think about it. If you're searching on Best Buy and something's out of stock, that's a real problem. So the second part of the question was, I mean, Rod, when you're talking about When you might have the inventory in stock In the channel, will you be there for the holiday season? Or do you think this will continue to be a problem by then? Well, obviously, it depends on demand versus supply, but I certainly hope so. I mean, we've spent the last year ramping up the supply lines. And so certainly I would expect so. Okay. Thank you. Looks like, yes, it should be okay. All right. Thanks a lot. This concludes the question and answer session. I would like to turn the conference back over to Andy Paul for any closing remarks. Yes, thanks. So look, as we've stated before, we're at the forefront of a massively growing market centered around gaming, esports and streaming. I actually went back recently and looked at our pre IPO forecast, what we were thinking then. And I realized that our current and projected business levels is where we expected to be in 2023 or 2024. So clearly, the market has accelerated to a new spending level. We remain focused and committed to giving gamers and streamers the tools they need to play the best game, produce the best content and have fun doing it. Thanks for your interest in Corsair, and thanks for joining us on the call today. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.