All right. Well, I think we're right on time, so it's, it's my interest in getting started here on day two of the conference. Thanks everyone for joining us, and it's my pleasure to have Andy Paul, CEO of Corsair Gaming, here with us today to kick off the conference. Andy, great to see you.
Yeah, thanks for having me.
So, Andy, I think one of the things that's a good way to start these activities is maybe just level set with the companies involved in a fair bit of number of business lines and exposure to the broader array of computing and gaming out there. Maybe talk a little bit about your segments, the company as it currently sits today, and we can use that as a jumping off point for this conversation.
Yeah, sure. Well, we have a company that's 27 years old now, and we divide it into two basic segments. One of those is primarily components that gamers use to build PCs. That's the biggest segment we've got now, and that's where we started the company making, as some people know, making memory, a very high-speed memory, and then we've expanded to make almost every component that goes into a PC. The other segment is peripherals, and that's a combination of gaming peripherals. We're talking keyboards, mice, headsets, and also streaming gear. So one of the companies we bought in 2017 was a company called Elgato, that makes cameras, microphones, capture cards, all the things that you need to stream live gameplay. So those are the basic setups.
Now, we've got about 29 different product lines.
Yeah.
At the moment, we've done 7 acquisitions, 2 before we went public and 5 after, I think is the numbers. But so that's part of the growth strategy is continuing to add companies. We think that there's a fairly reasonable amount of consolidation that's gonna go on in the next few years.
So-
Yeah.
Yeah, if we take one more step back, if you think about those end markets you're gaining exposure to, talk a little bit about how you position the company to capitalize on the rise in gaming, the rise in streaming media, the rise of sort of changes in media consumption, and, and what do you think that means for growth for the company longer term?
Yeah. Well, I think interactive entertainment has been growing steadily for years. And a lot of that's to do with you know, the basic technology of graphics processing. And so now we have, you know, games where the characters are almost lifelike, and that's just drawn over the decades, more and more people into it. So I think we have now, the last estimate I saw, we have about 1.6 billion people playing games at some level on PCs. And about roughly 30 billion of those that we would call enthusiasts, that are buying... They're spending extensive amounts of money-
Yeah
... either building PCs or buying peripherals. So those 30 million are primarily what we've been targeting over the last 20 years or so. Somebody who builds a PC to play games, we would class as an enthusiast. So that's where most of the focus has been historically. Now, we've also seen streaming emerge probably over the last 7 or 8 years. Once Twitch got started, and people could start to stream their own gameplay and really start to share their content. Now, everyone calls it, you know, content creation, but it's really just about sharing. And we've seen content being shared, you know, way, way back. I mean, Facebook's a great example of that, right? So I think those are the trends in the market are, firstly, interactive entertainment is now huge.
I always joke that asking somebody now in a survey whether they play games, you know, somebody under 30 would be like asking somebody in the 1970s whether they listen to music.
Yeah.
It's everybody plays games. So that's a generational thing. Obviously, you know, my parents, people of that age aren't playing a lot of video games, but it's steadily growing, and there's still quite a lot of space to grow. What we find is, you know, teenagers learn to play games. They don't have a lot of money, so maybe they're playing on a console. When people get into their thirties, and they're still really actively playing games, now they're prepared to spend some money on it. And like any other sport, whether, you know, skiing or mountain bikes, once someone's locked into a particular thing they like to do, then they're prepared to spend several thousand dollars. And that's what it takes these days to build a decent gaming PC.
I'd say most of the PCs that our customers are building are probably in the sort of $2,000-$4,000 range by the time they put them together. And so that just gives you a sense of how big this TAM is. It's very, very different than the conventional PC industry, where you only got price points of $500-$1,000 for a basic PC. And what I think we realize now, just looking at the makeup of the market, is that there's no reason to have a PC unless it's for gaming or doing, you know, like a workstation, because everything else you do on your phone. All the things that I used to do 20 years ago on a PC, you do on your phone now.
So it's really become a specialized thing, and I think we realized when we started talking to investors, you know, about you know, before the IPO, a lot of people were trying to understand what's the difference between a Gaming PC and a PC? Of course, now everyone's realized it's a completely different animal, and it's built to do a completely different task. So there's a generational thing that's driving gaming. More and more people are playing games, and more and more people are spending more hours playing games. I think, you know, Starfield obviously just launched last night, officially, although a lot of people were playing over the weekend. I think I read that's a 200-hour game if you want to complete it now.
Yeah.
So a lot of hours involved, and people want to play with the right gear. Now, the other thing that's sort of helped with this growth is that it's become a bit of a lifestyle thing. And what I mean by that is that instead of, you know, an old PC that was just gray or beige, that's not what gaming PCs are about. So gaming PCs, when you're building them yourself, you can have a lot of, you know, customization going on. So a lot of these PCs are glass sides, glass tops, so you can see inside them. And that means there's a whole thing about making them look cool, adding LEDs. We've got one of the best software packages for driving and controlling those LEDs.
A lot of the elements inside, you know, are very carefully finished. So it's not like sort of taking apart a, an electronic box, and it's all kind of dusty and everything in there. This is really like looking in, you know, under the hood of a Ferrari or something. So gaming PCs, you know, people are building them to look cool, and obviously to operate properly. I think the other side of the business, you know, streaming and peripherals, is a similar thing where people have now realized that a keyboard that you use for gaming or a mouse that you use for gaming has got nothing to do with the keyboard or mouse that you might have used in the office. So all these things are starting to be specially designed.
I can't imagine any gamer that's spent $2,000 on a PC is gonna play with a regular, you know, office mouse or keyboard. So every aspect of those devices, down to the keys, the technology, under the keys, because when you're playing a game, either using the mouse buttons or, or the keys on the keyboard, you want a very, very precise point where the action happens. And obviously, for first-person shooter games, that's critically important, to know exactly how, you know, when, when the, when the firing is happening. So, so I think all of these things, headsets are the same thing.
You know, headsets for gaming have been designed, you know, because you're playing with other people, a lot, so you want to be able to hear what's going on, you want to be able to talk to your, teammates. So basically, this whole industry around gaming hardware has kind of developed into a very, very different, type of hardware from, you know, conventional PCs. So we still call it PC gaming-
Yep.
but it's, it's not really a PC anymore. So-
When you take a step back-
Yeah.
How do you think about the competitive landscape, who you're competing with in your different segments, on the peripheral side, on the equipment for streaming side, as well as the PC computer side?
Yeah. Well, in some ways, if you step way back, what we found is that the product lines we've been in longest, we have the highest market share. And so it's just a question of sort of over time, you can just grind away at your competitors. The two product lines that we have that we started the company with, I mean, memory, and then after that, power supplies, which power supply seems a bit boring, but actually it's one of the most important things in a gaming PC because you're powering the graphics cards and the CPU and everything. Those things we have, I think, NPD, which is the reporting giant that collects all the data from retailers. In the U.S., we have sort of 73% market share in memory now, which means total ownership.
I think the next guy is, you know, 15% or 10%. So, we kind of own that market. Power supplies, we have about a 50% market share. And then pretty much it sort of goes down, you know, with all the product lines. We've got some, like with Elgato, this company we bought, they started life making capture cards, and had like an 80% market share. They were kind of the guy if you wanted to pull video out of a console and put it into a PC to then stream, they own that market. And then we've also got a product from Elgato called Stream Deck, which again, is like 90% market share. It's kind of a one-of-a-kind thing.
So I think in terms of competitors, we have very different sort of guys. We've got in the PC component area, most of our competitors are from Asia. And a lot of these companies are companies that at one time were in the PC supply chain, and they've just tried to make their products more sort of gamey or, you know, suitable for gaming PCs. But historically, those companies were supplying people like Dell or HP or the next tier down. We don't find that those companies have got very sophisticated marketing people or organizations. And so that's why in the component area, we've managed to dominate pretty much in every category. Now, when you move to the peripheral space, we have...
And so just to complete the thought there, you know, almost everybody in the component space making what we make is quite small. So we're sort of 4 or 5 times bigger than any of our competitors. Now, there's obviously other giants in the component space like Intel, AMD, and NVIDIA, but we kind of treat as partners. We're not trying to be in competitive competition with them. When we go into the peripheral space, it's slightly different. We've got Logitech is probably the biggest competitor we have now, and they're doing both streaming and peripherals. Obviously, it's a slightly more conservative company, and so not so appealing necessarily to the younger set. And then we've got Razer, who's another company, private company now, they were public in Hong Kong, that is the opposite spectrum.
So Razer was a company started little after us, but was very aggressive in terms of marketing and kind of, edgy. And so, that was really appealing to sort of teenagers. And we're kind of in the middle in terms of brand perception, where it's a very, very solid brand, and most of the people that are buying our gear have probably been doing that for 10+ years. But it's a very, very well-known brand. We've got a lot of you know, a great reputation for sort of rugged and reliable products, and products that are just designed to work for the purpose. So it's... There's a lot of smaller companies that have jumped in over the years, and I think, as I was saying earlier, I think there is gonna be room for consolidation.
It's very, very difficult when you've got in the peripheral space, for example, you've got ourselves, Razer, and Logitech. When you go into someone like Best Buy, they typically only have room for kind of three brands, and so that's what you see, those three brands, you know, Corsair, Logitech, and Razer. And then there's other people sort of around the peripheral on the bottom shelf. If you're a small brand, you'd never get into Best Buy. They just don't need you anymore. And that's the same with a lot of retail. Even Amazon, you know, anybody can get onto Amazon Marketplace, but, you know, we probably do, I don't know, close to $500 million a year with Amazon.
The leverage we've got in terms of actually having a conversation and changing the way they're thinking, you know, dwarfs any of the smaller competitors. So I think a lot of, a lot of people that are sub $100 million in either peripherals or the component space, you tend to be looking around for someone to buy them.
Yeah. Understood.
And so that's why we're able to do, you know, do so many acquisitions.
Understood. Looking back as a way to look forward, you know, the pandemic obviously pulled forward a lot of penetration in gaming, a lot of Refresh Cycle around equipment in gaming. Talk a little bit about what you went through during the pandemic, and how should we be thinking about what it means for the Refresh Cycle for the broader industry, the further we put the pandemic, hopefully, in the rear view mirror?
Yeah. Yeah, that's a good question.
Yeah.
Well, I think the first thing to say is that the market size is substantially bigger now than 2019. All right? So if you think about what normally would happen with a pull forward situation in the market, you'd have, you know, revenue or people buying things in 2020 that would have bought in 2022 and 2023, but instead pulled forward. So you'd get a normal pull forward, you'd see a boost in sales followed by a trough, and we haven't seen the trough. So what we've seen is a huge increase. Now, by the way, what that means is when you actually go through and do the math, is a lot of new gamers coming into the mix.
Yeah.
So it wasn't just pull forward, there was an acceleration of sort of the market in terms of new people buying things for the first time. We saw that mostly in peripherals. So I think, you know, work from home or people staying at home was probably the biggest increase in kids having headsets because people didn't want to listen to their kids playing games when they're trying to work, right?
Yeah.
So a massive increase in that market. I mean, it was more than 100% growth from 2019. And today, that market, you know, the market for peripherals, I say headsets because headsets is roughly half the peripheral market, with keyboards and mice being about the same size, but that market is about 50% bigger than it was pre-pandemic. So I think we've now got. Now, if we didn't have inflation and interest rates rising, I think we would already be in a steady growth, you know, looking back to 2019 and steadily growing. As it is, I think, you know, inflation and rising interest rates obviously has some effect on consumer spending, even in gaming.
We like to say that gaming interactive entertainment is kind of recession-proof. And certainly, it appears that way. I mean, we're on track, as you know, from the guidance to increase sales from last year, where a lot of, you know, people in consumer are not that fortunate. So the market's, you know, there's an underlying growth going on. Now, the interesting thing is, if you look at all these new gamers that came into the mix in 2020 and 2021, there's gonna be another sort of an echo, if you like, of that with one refresh cycle later. Refresh cycle for most of the components and peripherals we're looking at is about 3-4 years. So 3-4 years after 2020, that's now and next year.
So, I think that's also gonna help, help with growth and help combat the fact that there's certainly some people, if they've just had their mortgage reset, so they're gonna be a little tight on spending.
Yeah. Understood. Well, maybe let's double-click on that because I think there's two-
Yeah
Debates in there that are persistent in the investment community. One is that gaming, and, and with it, all that comes with it, in the long tail, is somewhere between recession-proof and recession-resilient, but then you also have this refresh cycle.
Yeah.
Just educate us or remind us of the comments you made on the last earnings call about the current state of the consumer and what sort of variability, good and bad, you might be watching for consumer behavior towards the end of this year?
Yeah, well, we saw... I mean, during this year, we've had Prime Day, which was, which was very good. Overall sales and our performance in Prime Day was great. So that's... That was very encouraging 'cause, that was one of the things that we look for. We've got another Prime Day coming up, as you probably know, in October.
Yeah.
So two Prime Days this year. Obviously, it's too early to know what people are thinking about for the holiday season. We're pretty bullish about it, and the reason is all the great games coming out. I mean, one of the things that happened with COVID and with work from home is that collaborative work wasn't as efficient. And so now you see all the companies that need to do collaborative work pulling people back in the office. But that had an effect on games. There was a lot of games that got delayed from 2022 into 2023, and so now we're seeing all these things come out. And this year, we've had an amazing run, you know, Hogwarts. We've had Diablo IV, we've got Starfield coming out today. And then Baldur's Gate was huge.
So all these games, you know, get people more interested. It's like, you know, what happens to the ski industry when there's a lot of snow at Tahoe, you know?
Yeah.
People rush out and buy new skis. So I think that's gonna be the thing that really drives this year and offsets any negatives from the fact that people are tight on spending. The other thing I would say is that, you know, for people that are enthusiasts, you know, that are building PCs, that's the last thing that they're gonna not do. I think, you know, people would rather just maybe not take their family out to dinner so often and spend money on gaming. So, you know, I don't see a big effect. We certainly haven't seen any effect yet on interest rates affecting spending on gaming.
Got it.
But it's just difficult to try and know, you know, how much pull-forward effect there is. Or, you know, a pull forward means that people have built a Gaming PC last year or in 2021 are not gonna do it again-
Right
... till next year, or refresh till next year. But overall, you know, we're feeling pretty positive about the growth prospects. I mean, if you think about most industries that I look at at the moment, you know, people are looking at sort of negative growth from 2022 to 2023. And we've noticed that as we go through the year, we've seen it—like in peripherals, we saw about a 15% drop from peripheral sales in Q1 compared to Q1 last year. I'm talking overall market. And by the time we got to the middle of the year, around Prime Day, it's about level.
Yeah.
So, we're tracking at the moment, you know, and I would say based on that, you know, I think it's gonna be ahead of last year by the time we get into the holiday season.
Got it. Zooming out from the current-
Yeah
... state of the consumer, when you think longer term, how should we be thinking about the growth inputs in the business of peripherals versus components? Because beyond just even the growth piece, it also has a component of driving mix shift into your growth margins as well.
Yeah, that's right. Well, I think the both have got a massive amount of white space, quite honestly. I think just because of the price points, you know, how many people there are that are going to decide to suddenly spend $3,000 on building a gaming PC? We've typically pegged that market, in other words, the self-built PC market, at a 5%-10% growth, you know, per year. And I think it's reasonable to expect that in the next couple of years and furthermore out. There's plenty of market availability. It's just, you know, the amount of people that have to step up and decide to spend that sort of money.
Now, the easier market, which is peripherals, because most peripherals, you're talking about a $100 ASP, and in fact, entry level, $50. So very easy to get into. I think that's got a much high capability. Historically, that was running at about 15% a year, and then, as I said, during the pandemic, 100% growth. I would expect that to return to a 15% growth. And streaming is a slightly difficult one to say because, there's a lot of, there's a lot of people that bought streaming gear for teleconferencing, you know-
Yeah
... just Zoom and Teams and stuff in the last couple of years. And we don't really know, you know, when someone buys a camera, exactly what they're gonna do with it.
Okay.
But we do think that's a continuing growing trend. A lot of it depends on, you know, what platforms are available and how easy it is to make money. I mean, obviously, everybody. 3 years ago, we talked to teenagers, everyone wanted to be a YouTube star, and I think now people have realized, you know, that a lot of them are not going to make any money, so. But it's still a great fun thing to do, to share, you know, share video content with friends. So I think the peripheral in general, peripheral market, you know, across that area, I think 15% is the historical numbers, and I wouldn't see any reason why it wouldn't change long term.
Yeah.
As I said, there's, you know, when you think about it, 1.6 billion gamers, and we think about 150 million people are actually buying peripherals now, there's a huge, huge white space, and obviously, a lot of that in Asia, where you've got, you know, you've got low ASPs. But, but what we've seen in the last few years, the biggest growth has actually come from the U.S. and from and from Europe. And even there, there's massive white space.
Yeah.
So I noticed, I think in 2020, I saw an incremental 6 million headsets sold compared to the previous year. And that's out of the estimates, I mean, 200 million gamers in the U.S., something like that. So you can see there's lots of white space available.
Okay. Speaking of the streaming side, you have the Stream Deck. You've announced the Stream Deck Marketplace. Maybe talk about how you think that could evolve in terms of an opportunity for you at the company.
Yeah. Well, I think it's super exciting, right? Because we've now enabled. And the marketplace, just so everybody understands, is we've created very much like a like an Apple marketplace, where we're allowing developers to put Stream Deck plugins onto the marketplace. And very soon we'll be switching it on so that they can actually sell. At the moment, it's all free, but we'll have people sell products, and then we obviously take a cut of that revenue. So that gives us a whole new stream of revenue at obviously very high margins. The applications of Stream Deck are still very much untapped. I mean, when Stream Deck was launched, and the reason it was called Stream Deck, it was designed as an extra programmable keyboard.
And for those of you that haven't seen a Stream Deck, it's a device that's got a number of keys. Under each key is an LCD display, and you can program that to have any icon you want. So, for example, you may have one button that says Live on Twitch, and the little Twitch logo. You just press that, and off you go. Another one could be lights on, off, another one could be mic mute. And so if you're streaming, you want to be able to quickly glance over. You may have one button that just says, "Thanks for the tip, mate," you know, if someone tips you in the stream. And it automatically just sends out a text. So, now, that's for screen streaming. What we found is that there's a lot of other things that people like to do.
So, for example, Teams, we just did a collaboration with Microsoft on Teams, where we now have a Teams plugin. So that has all the things you'd expect to have in conferencing. So, you know, raise your hand, share, Zoom, and you know, go live on Zoom, join a meeting. So these are all just simple tasks that, you know, it's sometimes, you know, when you're on a Zoom call and you're trying to share, everyone's scrambling around, trying to find the buttons in Windows. Much easier to press a button. So, we've had people do pretty extensive plugins for Adobe, for some of the creative suites. We've even got sort of an accounting whiz that's done Excel macros on the Stream Deck.
I think what we've realized there is, you know, we've been super successful in game streaming, and now we're trying to roll it out to both SMB and other specialist consumers that are doing some sort of creation or complex tasks.
Okay, understood. You talked a little bit earlier about how mix shift can have a flow-through into margins, but looking longer term, maybe talk about your longer-term margin targets in terms of where you want to get to.
Yep.
How much of it are elements of inside your control versus elements of mix and growth that are a little bit outside your control? How to think about the trajectory-
Yeah
... to those margin targets?
Well, I think that the obviously, we've had from a margin standpoint, it's been a difficult two or three years, because we've had all sorts of supply chain issues, incredibly expensive containers, just bringing things in from China. Most of that's been resolved now, so we're back to sort of a normal cadence. The expectation is that in the components area, on a gross margin basis, we should be able to run up to sort of high 20s. And in peripherals, we should be able to get into the mid plus 30s.
And so that's why, as you say, in the mix shift, as we, because peripherals is a, as a market, is a higher growth market, as we increase the amount of our business that's in peripherals compared to components, we'll just steadily see the margins go up overall. And, you know, our OpEx at the moment is, you know, we've got sales force around the world, we've got marketing people, so the OpEx does not need to go up, you know, commensurately. So we should be able to deliver, you know, a higher percentage EBITDA.
Okay.
Yeah.
You talked earlier about M&A. Maybe in the last few minutes, we have just elements of helping people understand how your M&A strategy fits in-
Yep
... to the broader goals around growth and competitive intensity industry, and then we'll dovetail into talking about wider capital allocation.
Yeah.
Maybe start with M&A and what you've learned from what you've done and how the M&A strategy continues to evolve.
Yeah. So when we look at M&A, the first thing we're doing is thinking about which markets we want to get into, and then which product lines. So if we don't have a product line, we've got two choices. One is to go from scratch, and that can take a while. You know, we've found that it takes a few years to get credibility in the market and go through all the kinks and get a really successful product out, or you can buy your way into it. And the advantage of doing that is you also, the smaller companies kind of have an acqui-hire effect, where you're hiring the product experts as well as the brands. So that's the first way we think about it.
Pretty much everything we've acquired has either been to, you know, expand the product catalog, or we also are thinking about direct consumer. So we've historically been a channel company-
Yep
... with our sales through, you know, in this country, Amazon and Best Buy. It used to be Fry's, but of course, Fry's is sadly gone. Most of the companies we're buying now are 100% direct to consumer, and a lot of that is because the size of them. If you start a new company now in hardware, then what you do is you sell direct to consumer, and you sell through Amazon Marketplace. And so, so what that does is it increases our direct consumer business a lot more. And the reason that's important is that having a direct connection with the customer is super important, obviously, for marketing purposes, and just for feedback. You don't really get a lot of direct consumer interaction through Amazon. I mean, they don't give you your mailing list and everything.
So, so that's super important for us. And we've also, you know, with the setup we have, I mean, we have expert sales and marketing people throughout the world. Usually, for a company that's that we buy, the first thing we'll do is look at their product portfolio and say, "Okay, let's figure out which product we want to put into Best Buy or Amazon," and we can do that just mechanically.
Yep.
Small companies, if you're, you know, under $50 million in sales, it's difficult to even get a meeting at Best Buy-
Yeah
... or Amazon. So that's where we can really help.
Okay. So in the last few minutes we have-
Yeah
... just bringing it all together. You know, when you look out over the next 12, 18 months, what are your key priorities in terms of either allocating capital, executing on the business, and sort of navigating through the broader environment you see in front of you?
Well, look, we're cash flow positive. We've, I mean, we're profitable pretty much every quarter. I think we've had one quarter last year where we weren't profitable, going through inventory adjustments. So cash flow is pretty straightforward. And it's quite simple. We either use cash to do M&A, or we pay down some of the historical debt we've had. And at the moment, we're doing both. We don't... What we found is it's easier to do small M&A and have them be successful, and I'm talking about sub $50 billion purchases. And so we can do that comfortably out of cash flow at the moment.
Unless I get to the point where I find more M&A opportunities than we have cash, but I think we have $150 million of cash on sitting there at the moment. So that's basically the two things we're looking at. And obviously, as we grow, we'll generate more cash and pay debt down faster, and hopefully, do M&A at the same time.
Okay. Super clear. Well, Andy, thanks so much for being part of the conference. Please join me in thanking Andy and the Corsair Gaming team for being part of the conference this year. There we go.