Welcome to the Turtle Beach third quarter 2023 conference call. My name is Michelle, and I'll be your operator for today's call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star one one on your touchtone telephone. Delivering today's prepared remarks are Chairman of the Board, Terry Jimenez, Interim Chief Executive Officer and Senior Vice President of Global Sales, Cris Keirn, and Chief Financial Officer, John Hanson. Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the conference is being recorded. I will now turn the call over to Alex Thompson from Investor Relations. Alex, you may begin.
Thank you, Michelle. On today's call, we will be referring to the press release filed this afternoon that details the company's third quarter 2023 results, which can be downloaded from the investor relations page at corp.turtlebeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the events and presentations section of the company's website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations.
While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. The company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, we'll be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP.
You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now I'll turn the call over to Terry Jimenez, the company's Chairman of the Board.
Thank you, Alex. I'm excited to be here today, and I'm very pleased with our board and the management team's recent progress, energy, and focus. As the management team will discuss shortly, we believe that today's results clearly point to a company now heading in the right direction. Our cost structure has improved dramatically in very short order. We have taken share in our core markets. We've grown share and outpaced category growth in other key markets, and our people and our products are winning. You will hear from Cris and John regarding the company's results and our improved forecast shortly, but first, a few comments regarding the previously announced permanent CEO search and the Value Enhancement Committee's ongoing review. Firstly, as previously disclosed, the board is conducting an extensive and well-organized search process for the permanent CEO position.
Cris Keirn, our longtime Global Head of Sales, has served as our interim CEO since July first. As you can see from our results, the board's confidence in Cris's ability to lead in this transition time has been well-placed. And he remains a candidate for the permanent CEO position. The board has met with several strong candidates, and we expect to conclude the CEO search ahead of our next earnings call, and we will notify the investment community at the appropriate time regarding the results of our comprehensive search. Next, I'd like to comment on the Value Enhancement Committee of the board, which continues to review any and all ways to drive value for our shareholders and stakeholders in conjunction with the full board and the management team. Significant progress has been made to date.
The committee has been working closely with the company's new financial advisors since they were hired, a number of months ago, and we continue to be encouraged with our progress. While we cannot provide any formal update at this time, the committee continues to be fully engaged and will notify the market once that process has concluded. While I'm proud of the progress to date, our work is not done, and we will continue to drive a clear path to near and long-term value creation. We look forward to sharing more developments at the appropriate time, and we appreciate your investment and support of Turtle Beach. I believe that the prospects and potential for Turtle Beach continues to get stronger every day. With that, I will hand it over to Cris Keirn, our interim Chief Executive Officer. Cris?
Thanks, Terry, and good afternoon, everyone. Thank you for joining us to discuss our third quarter 2023 results. We showcase strong operational and financial execution in the quarter, with our third quarter sales and Adjusted EBITDA results up significantly compared to a year ago. Our revenue results were in line with our expectations and track well towards our 10%-12% revenue growth guidance for 2023, supported by over 13% growth in revenue year to date. During the quarter, revenue grew 15% year over year, driven by share gains across key categories and geographies, which exceeded overall market performance. We delivered positive Adjusted EBITDA of $1 million, an improvement from the $6.9 million negative Adjusted EBITDA in the year-ago quarter.
This significant improvement was driven by higher revenue, lower freight costs, a more normal promotional environment, and margin benefits from value-creating initiatives outlined on our previous earnings call. Overall, gaming accessories markets continue to perform in a similar trend to second quarter dynamics, with slight variations depending on the category. Year-to-date, U.S. consumer spending across gaming, hardware, software, and accessories was 2% higher than a year ago and up 10% in September. The U.S. console headset market is up 2% year-to-date, including year-over-year growth in the last month of the quarter, which continues to support the expected momentum in the gaming industry as we head into the holiday season. During the month of September, our outperformance was especially apparent as the market was only up 0.8% year-over-year, while Turtle Beach was up 7.4% for the month.
We expect to continue leading the headset category with new and exciting console gaming headsets that gamers love, as demonstrated by the nearly $1 billion in U.S. retail sales that the three of our top sellers, Stealth 600, Stealth 700, and Recon 70, have collectively delivered since their respective launches. In key non-console headset categories, we continue to take share and demonstrate growth. For Circana, the U.S. flight simulation category is down 11% year-to-date, but our year-over-year growth and value share both exceed 20% in the category. Like last quarter, U.S. PC gaming accessories markets continue to be challenged and are still down roughly 12% year-to-date. However, we are well-positioned to benefit when PC categories return to growth with launches like Vulcan II Mini and Vulcan II mechanical keyboards in the third quarter.
IGN recently named our full-size Vulcan II as their choice for best mechanical gaming keyboard, while PCWorld gave our Vulcan II Mini Air, the publication's coveted Editors' Choice designation. We also announced the availability of the mobile Atom Controller for iPhones in Q3, which comes on the heels of the previously announced Atom Controller for Android. As we continue to launch exciting new products across these categories in the coming months, we believe there are further opportunities to extend our growth runway in PC gaming, simulation, and controllers. Before I turn it over to John to walk through our financials in more detail, I'd like to cover the progress we've made against the profit improvement initiatives we outlined during our second quarter conference call, and how this positively impacts our 2023 Adjusted EBITDA guidance.
These initiatives include SKU rationalization, portfolio optimization, platform product development for a range of cost improvements, and more. Due to the strong progress that we've made on these profitability initiatives during the quarter, we are raising our full year 2023 Adjusted EBITDA guidance to the range of $8 million-$10 million. Additionally, we now expect to exit 2023 with a run rate EBITDA of approximately $28 million-$33 million, up from the previously communicated range of $25 million-$30 million. We are thrilled to report this continued progress. While formal earnings guidance for 2024 will be provided next year, as is consistent with our past practice, and after we receive complete visibility on an important Q4, we felt it appropriate to highlight the work completed to date that has gone into developing opportunities ahead in 2024.
I'll now pass it over to John to cover the financials. John?
Hey, thanks, Cris, and good afternoon, everyone. For the third quarter, we reported revenue of $59.2 million, a 15% year-over-year increase compared to $51.3 million a year ago. The increase was primarily driven by strong performance in console headset and simulation products year-over-year. Additionally, channel inventories increased during the third quarter due to holiday load-ins, which we believe is a positive sign from retailers for the fourth quarter. Gross margin in the third quarter improved to 29.9%, the highest level in the past six quarters, compared to 14.1% in the year ago period. This increase was primarily driven by lower freight costs and promotional spend. Just to remind everyone, last year, we recorded a $5.3 million incremental inventory provision related to the pandemic-driven supply chain challenges.
Excluding the provision, adjusted gross margin was 24.5% a year ago, a 540 basis point margin improvement year-over-year. Operating expenses in the third quarter were $20.2 million, compared to $21 million in the year ago quarter. The third quarter recurring operating expenses have declined 7% year-over-year, which was primarily driven by continued proactive expense management. Our third quarter adjusted EBITDA improved to a + $1 million, compared to a - $6.9 million in the year ago period. The year-over-year improvement is primarily driven by higher revenue, improved margins, and lower expenses resulting from proactive expense control. We are on track to deliver positive adjusted EBITDA for 2023. On an LTM basis, adjusted EBITDA has improved approximately $18 million this year and is slightly below breakeven. Turning to the balance sheet.
At September 30, 2023, we had $12.3 million of cash and $13.3 million outstanding on our revolving credit line. Inventories at September 30, 2023, were $76 million, compared to $118.4 million at September 30, 2022. Cash flow from operations was $7.9 million, which was a $77.5 million improvement year-over-year on a year-to-date basis... as the global supply chain continues to normalize, we expect inventories to decline further. Now I'll turn the call back over to Cris for additional comments. Cris?
Thanks, John. We are pleased with our third quarter results and believe the positive trends in gaming will support increased accessories demand through the end of this year and into 2024. While some aggressive competitive discounting still exists, the scope of these promotions continues to decline across accessories. Demand for gaming accessories is normalizing higher than pre-pandemic levels, as expected, and the replacement cycle for pandemic accessory purchases is expected to drive ongoing demand into 2024. Console hardware supply is strong, and there are promotions already running as we head into holiday that will drive new hardware sales, and new games are performing well, with an exciting lineup to close out the year. With these points in mind, all the industry drivers for accessory sales growth are in place, and Turtle Beach is well positioned to capitalize on these positive conditions.
We remain committed to maintaining our leadership in gaming headsets and driving growth in adjacent categories, and remain confident that our value-creating initiatives, including SKU Rationalization, portfolio optimization, and platform product development, will continue to result in profitability improvements. We're energized by the trends throughout our business, and I would like to thank the entire Turtle Beach team for performing at such a high level in this dynamic environment. We remain highly focused on driving enhanced value for our gamers, retailer partners, and shareholders. And with that, let's turn to our Q&A.
Thank you. We will now begin the question -and-a nswer session. If you have a question, please press star one one on your touchtone telephone. If you wish to be removed from the queue, please press star one one again. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one one on your touchtone phone. Our first question comes from Mark Argento with Lake Street Capital Markets. Mark, your line is open.
Yep. Hey, guys, Mark Argento here at Lake Street. Just a couple quick ones. Gross margins looked ticked up nicely. And I apologize if you broke it out already, but, you know, I know freight obviously benefiting from a better freight environment. Can you guys kind of peel the onion a little bit on what you're seeing in the gross margin line?
Yeah. So, yeah, and thanks, Mark. Yeah, certainly. So the improvement is certainly driven by lower freight costs. We've seen the freight costs returning to near pre-pandemic levels, but still slightly elevated, as well as, as well as a lower promotional spend. You know, in terms of the quarter, for the quarter, we realized, you know, that lower freight year-over-year was, you know, $several million of value and benefit to the margin line. And we expect our freight cost to continue to improve over the next several quarters, and which is also a key part of the exit 2023 Adjusted EBITDA run rate that we've that we increased here this quarter on the call.
Yeah, in addition to that, Mark, thanks for the question. You know, the improvements that we've seen with some of the actions we took last quarter and have been taking on the SKU Rationalization and some of the portfolio changes, we're seeing a better mix, and so that's also helping us.
Well, that's super helpful. And then in terms of obviously really strong revenue this quarter, kept the full year guide in line. Obviously, EBITDA guide up a little bit, which is nice to see. But are we, you know, is the read through here that you, you know, maybe pulled in some orders, you know, into Q3? What kind of retail buying patterns are you seeing right now?
Yeah, great question. When you look at where retailers are coming out for holiday, we did see some orders coming in sooner in September to load in for holiday. We take that as a really good sign, how retailers are feeling going into the holiday with all the great things that are going on, you know, between the games that are out there, the console supply, the promotional environment, just a really good time for the accessories business. So I think retailers are also anticipating, you know, a good holiday, and that's why we saw those earlier orders. There is still a lot of the quarter to go, as you know.
You know, it's 40% of our year, so, you know, we feel like at this point, we wanted to hold revenue there, despite the fact that we got some of those orders in a bit sooner than expected. But we're pleased to see how that's progressing and, you know, expect to realize that $265-$270 for the year.
Great. Thanks, guys. I'll hop back in the queue.
Great. Thanks, Mark.
Thank you, Mark.
As a reminder, to ask a question, please press star one one. Our next question comes from Jack Vander Aarde with Maxim Group. Your line is open.
Okay, great. Hey, Cris. Hey, John. Strong results, great to see. Strong outlook as well. Thanks for taking my questions.
Thanks.
So, Cris, can you maybe just speak to the SKU rationalization a bit more, maybe as it relates to all of your product categories? Is there any sort of target number or a range of SKUs that you believe is optimal, or just any added color there would be helpful? Thanks.
Sure. Sure. Hey, Jack, thanks for the question. Yes, I think when you look at the categories, you know, that we operate in, we've expanded pretty quickly over the last several years. You know, we've invested into the new spaces. We've learned, you know, from our experiences there, which products are really, you know, tracking with customers, and we've seen some that aren't. And so, you know, we've taken action on those over the last couple of quarters to really right size, I would say, our portfolios in those areas, to the point where we're seeing the sales consolidate into the higher performing SKUs that we've selected to move forward with. So there's no number per se, per category that we're targeting.
We're really just looking to see from a margin mix and from a sales mix, you know, what's really resonating with those gamers out there and, consolidating our portfolio to those, to those products. There's other categories where we still continue to grow. You look at the simulation categories, and controllers, you know, we're adding SKUs there, because we've seen good success, and we've seen, you know, good performance in those categories. So it's something that we're looking at very closely. We've got a really sharp focus on that moving forward to ensure that we've got the right mix.
Okay, great. That's helpful. And then maybe, just in terms of, if we can review, I think in the past, you know, you guys have provided more of, more of a, a granular or specific update on non-console versus console revenue mix, and I know you have been doing that routinely or consistently. But just wondering if you could speak in general, as you look into 2024, given the SKU rationalization, and some of your comments about the PC market in general. Can you talk about maybe just how you expect your, your revenue mix or, you know, to evolve as we head into 2024, between console and non-console?
Sure, absolutely. Great question. The mix that we're seeing now is somewhere in that 20% range, you know, is looking like non-console. I know we've said, you know, before it was 20%-25%. We've seen some real strength in the console business this year. If you look at the markets and how they're performing, you know, the US console business is up 2%. You know, we're up more than that. You know, we've picked up some share there, but, you know, the rest of the categories are down, you know? So, flight simulation is a good example. You know, it's down pretty significantly, I think 11%. We're up, you know, 20% in that category. So, you know, and controllers as well.
You know, the third-party controller market is, you know, roughly flat to slightly down, despite the growth in controllers this year. So we're really seeing some strong results in the headset space and, you know, we're taking actions to mitigate some of those markets that are maybe not performing quite as well. And so that's why you see the mix shifting a bit more towards the console space, for this year. Looking into next year, we've got some really exciting launches in these other categories that I believe are gonna drive our share, even further, and I think you'll see that mix continue to expand from that, you know, 20-ish level, from this year.
Okay, great. And then just one more question, if I might. So looking at 2024 and just given, you know, I know you can provide formal, formal guidance, I think, next quarter. But you did - you are exiting the year at a higher Adjusted EBITDA run rate level. So maybe just, if you could just talk about how does, how does gross margin versus, improved OpEx control kind of factor into that higher Adjusted EBITDA exit run rate?
Yeah, it's a bit of both. When you look at the mix, you know, we're focused on all areas here that we can go in and drive profit improvements, and there are certainly opportunities in each. The platform product development that we've shared over the last couple of calls, that's gonna drive a lot of really great improvements in our gross margin. You know, we've got, again, some very exciting new products coming out next year on some new platforms that bring a lot of efficiencies, and they bring a lot of great features for gamers as well. So we're excited about that.
On the OpEx side, you know, we've taken a very close look, you know, on how that's shaping up for the company, where we're headed over the next two to three years, and what the structure of the business needs to be. And so we've taken actions there as well, and we'll continue to look at that. So it's coming from both fronts, really, and you know, we're excited on where we're headed there.
Okay, great. Nice work, John and Cris. I appreciate the time. Thanks.
Yeah. Thanks, Jack.
Thanks, Jack. Thank you. We have no further questions at this time. Now I'll turn the call back over to Cris Keirn for closing remarks. Cris?
Thank you, Michelle, and thank you everyone for your participation and interest in Turtle Beach. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.