Market Overview

Turtle Beach Reports Record Fourth Quarter And Full Year 2018 Results

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SAN DIEGO, March 14, 2019 /PRNewswire/ -- Turtle Beach Corporation (NASDAQ:HEAR), the leading gaming headset and audio accessory brand, reported financial results for the fourth quarter and full year ended December 31, 2018.

www.turtlebeach.com) is a leading gaming accessory brand offering a wide selection of cutting-edge, award-winning gaming headsets. Whether you're a professional esports athlete, hardcore gamer, casual player, or just starting out, Turtle Beach has the gaming headset to help you truly master your skills. Innovative and advanced technology, amazing high-quality gaming audio, crystal-clear communication, lightweight and comfortable designs, and ease-of-use are just a few features that make Turtle Beach a fan-favorite brand for gamers the world over. Designed for Xbox, PlayStation®, and Nintendo consoles as well as for PC, Mac®, and mobile/tablet devices, owning a Turtle Beach gaming headset gives you the competitive advantage. Hear Everything. Defeat Everyone.™ The Company's shares are traded on the Nasdaq Exchange under the symbol: HEAR. (PRNewsfoto/Turtle Beach Corporation)" alt="Turtle Beach (www.turtlebeach.com) is a leading gaming accessory brand offering a wide selection of cutting-edge, award-winning gaming headsets. Whether you're a professional esports athlete, hardcore gamer, casual player, or just starting out, Turtle Beach has the gaming headset to help you truly master your skills. Innovative and advanced technology, amazing high-quality gaming audio, crystal-clear communication, lightweight and comfortable designs, and ease-of-use are just a few features that make Turtle Beach a fan-favorite brand for gamers the world over. Designed for Xbox, PlayStation®, and Nintendo consoles as well as for PC, Mac®, and mobile/tablet devices, owning a Turtle Beach gaming headset gives you the competitive advantage. Hear Everything. Defeat Everyone.™ The Company's shares are traded on the Nasdaq Exchange under the symbol: HEAR. (PRNewsfoto/Turtle Beach Corporation)">

Fourth Quarter Highlights vs. Year-Ago Quarter:

  • Net revenue increased 40% to $111.3 million from $79.7 million;
  • Gross margin increased approximately 90 basis points to 38.5% from 37.6%;
  • Net income up 73% to $24.6 million, or $1.33 per diluted share, compared to $14.2 million, or $1.15 per diluted share;
  • Adjusted net income was up 51% to $21.5 million, or $1.33 per diluted share, compared to $14.2 million, or $1.15 per diluted share;
  • Adjusted EBITDA increased 45% to $25.0 million from $17.2 million; and
  • Net revenue, gross margin, net income and adjusted EBITDA were all at the highest fourth quarter levels since becoming public in 2014.

2018 Highlights vs. 2017:

  • Net revenue increased 93% to $287.4 million from $149.1 million;
  • Gross margin increased approximately 360 basis points to 37.8% from 34.2%;
  • Net income up significantly to $39.2 million, or $2.74 per diluted share, compared to a net loss of $3.2 million, or $(0.26) per share;
  • Adjusted net income increased to $44.5 million, or $3.05 per diluted share, compared to a net loss of $3.2 million, or $(0.26) per diluted share;
  • Adjusted EBITDA increased 399% to $57.7 million from $11.6 million; and
  • Net revenue, gross margin, net income and adjusted EBITDA were the highest full year levels since becoming public in 2014.

"We had a terrific fourth quarter, which capped off a truly transformational year for Turtle Beach," said Juergen Stark, CEO, Turtle Beach Corporation. "We achieved record sales and profits, eliminated our long-term debt and maintained disciplined spending, all of which culminated in a dramatic increase in shareholder value.

"In a year of strong market growth, we outperformed the market. According to NPD, our North America market share ended 2018 at 46.1% versus 42.4% in 2017, which positions us as the clear leader in the console gaming headset market. During 2018, the gaming headset market, measured by revenue, was up 69% while Turtle Beach was up 84%.

"We have much to look forward to as we move further into 2019. We expect continued growth in the battle royale genre, as evidenced by the success of EA's recently launched Apex Legends, to keep gaming headset users upgrading and replacing headsets and to drive growth over time in the headset market. Looking beyond the console headset market, we expect to significantly expand our presence in the PC accessories market, combining our recently launched line of PC gaming headsets with our acquisition of the PC accessories business of ROCCAT GmbH, which, as we announced today, we expect to close in the second quarter of 2019.

"With the addition of ROCCAT, we will significantly increase our total addressable market and can approach new and existing markets with a more robust suite of products that will include a great line-up of PC gaming headsets, keyboards and mice. And with ROCCAT's emerging presence in Asian markets and our leading position in North America, we believe that we have increased the opportunity to serve gamers globally.

"We believe our market opportunities have never been greater. The significant surge in new users that we saw in 2018 has elevated the market to higher levels, and while we expect the console gaming headset market in 2019 to return to a more normal level, we also expect this level to be significantly greater than it was in 2017, which, along with our new PC product expansions, should result in another year of strong sales and cash flow. 

"As we indicated in a Form 8-K we filed earlier today, we are restating both our second and third quarter reports on Form 10-Q to reflect a change in accounting for the warrants that were issued in connection with the retirement of the Series B preferred stock in April 2018. This change in accounting had no impact on our net revenue, gross margin, operating income, adjusted EBITDA or cash flows for any quarter or the full year of 2018. The warrants, which were originally accounted for as equity instruments, are now reported as financial instrument obligations that are marked to market each period, with changes in fair value reflected quarterly in earnings. While we are disappointed this change is requiring us to restate our second and third quarter filings on Form 10-Q, this non-cash effect does not diminish our optimism for our prospects."

Fourth Quarter 2018 Financial Results
Net revenue in the fourth quarter of 2018 increased 40% to $111.3 million compared to $79.7 million in the year-ago quarter. This was the result of strong market demand for console gaming headsets, driven by increased usage of gaming headsets, particularly among battle royale players, along with the Company's increase in market share compared to 2017. Net revenue in the fourth quarter of 2018 slightly exceeded the high end of the Company's preliminary results of $111 million announced on February 7, 2019.

Gross margin in the fourth quarter of 2018 increased approximately 90 basis points to 38.5% compared to 37.6% in the fourth quarter of 2017. The increase was primarily due to continued higher volumes driving fixed cost leverage.

Operating expenses in the fourth quarter of 2018 increased to $17.4 million from $14.0 million in the 2017 period due primarily to an increase in marketing spend, much of which was related to the launch of the new PC headsets, revenue-driven sales-based commissions and expenses, and other operational performance-based compensation.

Net income in the fourth quarter of 2018 increased 73% to $24.6 million, or $1.33 per diluted share, compared to $14.2 million, or $1.15 per diluted share, in the year-ago quarter. The improvement was primarily driven by the significant revenue growth and the corresponding increase in gross margin. Adjusted net income (as defined below in "Non-GAAP Financial Measures"), which excludes the mark-to-market adjustment relating to the financial instrument obligations, was up 51% to $21.5 million, or $1.33 per diluted share, compared to $14.2 million, or $1.15 per diluted share. 

Adjusted EBITDA (as defined below in "Non-GAAP Financial Measures") in the fourth quarter of 2018 increased 45% to $25.0 million compared to $17.2 million in the year-ago quarter. Adjusted EBITDA in the fourth quarter of 2018 met the high end of Company's preliminary results. 

2018 Financial Results
Net revenue in 2018 increased 93% to $287.4 million compared to $149.1 million in 2017. This was the result of the strong market demand for console gaming headsets, driven by increased usage of gaming headsets, particularly among battle royale players, along with the Company's increase in market share over 2017.

Gross margin in 2018 increased 360 basis points to 37.8% compared to 34.2% in 2017. The increase was primarily due to a favorable product and customer mix, continued higher volumes driving fixed cost leverage, and a less promotional environment. This was partially offset by incremental air freight ($4.0 million) incurred in 2018 to keep pace with increased consumer demand.

Operating expenses in 2018 increased to $54.7 million from $46.2 million in the 2017 period due mainly to higher marketing spending primarily related to new product launches, revenue-driven sales-based commissions and expenses, and other operational performance-based compensation.

Net income in 2018 increased significantly to $39.2 million, or $2.74 per diluted share, compared to a net loss of $3.2 million, or $(0.26) per share, in 2017. Adjusted net income (as defined below in "Non-GAAP Financial Measures") increased to $44.5 million, or $3.05 per diluted share. The improvement was primarily driven by the significant revenue growth and the corresponding increase in gross margin.

Adjusted EBITDA (as defined below in "Non-GAAP Financial Measures") in 2018 increased 399% to $57.7 million compared to $11.6 million in 2017.  

Balance Sheet Highlights
On December 17, 2018, Turtle Beach amended its revolving credit agreement with Bank of America and paid off the remaining balances on both its term loan and subordinated debt, materially de-levering the Company. This culminated a year in which the Company repaid $11.7 million of its term loans and $23.9 million of its subordinated notes from operating cash flows and retired its Series B preferred stock obligation with a redemption value of $19.4 million.  The only remaining debt outstanding at December 31, 2018, was amounts borrowed under the revolving credit facility. In addition, as a result of the aforementioned change in accounting treatment for the warrants, the Company reflected $7.8 million of financial instrument obligations at December 31, 2018.

At December 31, 2018, the Company had $7.1 million of cash and cash equivalents with $37.4 million outstanding under its revolving credit facility, which the Company fully repaid in the first quarter of 2019 from operating cash flows. This compares to $5.2 million of cash and cash equivalents, $38.5 million outstanding under its revolving credit facility, and outstanding debt principal on its term loans and subordinated debt of $33.6 million at December 31, 2017.  In addition, at December 31, 2017, the Company had $18.9 million outstanding for its Series B preferred stock obligation.

2019 Outlook
The Company expects that industry demand for headsets will remain strong and that the Company will remain the market share leader. Factors that will influence net revenue in 2019 include the frequency of headset replacement and upgrades, the Company's market share, the success of the Company's efforts to grow the PC accessories business (including ROCCAT), and the pace of geographic expansion. The Company expects the overall headset market to contract moderately in 2019 as the number of new gaming headset users returns to a more normal rate.

Full year revenue in 2019 is expected to be in a range of $240 million to $248 million, which includes approximately eight months' worth of revenue from ROCCAT, which we estimate will be $20 million to $24 million. Gross margin in 2019 is expected to be in the range of 33% to 34% due to reduced operating leverage associated with the decline in revenue, as well as anticipated increases in promotional allowances and one-time charges associated with the ROCCAT acquisition.

The Company expects 2019 operating expenses related to the console headset business to be roughly flat with 2018. Spending related to growth initiatives, which include marketing costs for Turtle Beach PC headsets as well as operating expenses for ROCCAT is estimated to be $10-$12 million. In addition, the Company expects one-time transaction and integration costs associated with the ROCCAT acquisition totaling approximately $3 million over the course of 2019. As a result of these investments in growth initiatives, the Company is targeting a total company net revenue growth rate of over 10% per year on average in the coming years. The 2019 guidance assumes an effective tax rate of 10% for the year.

Net revenue in the first quarter of 2019 is expected to be roughly flat with the first quarter of 2018. Adjusted EBITDA in 2019 is expected to be somewhat lower than 2018 due to higher promotional allowances mostly related to new product introductions, increased marketing spending and additional spending in support of the launch of PC gaming headsets.


Q1 '19

FY '19


Guidance

Guidance




Net Revenue

~$42M

$240M-$248M




GAAP EPS1

~$0.02

$0.70-$0.90




Adjusted EPS1

~$0.05

$0.90-$1.10




Fully Diluted Shares

~16.5M

16.6M




Adjusted EBITDA

~$3.0M

$27M-$31M


1 The Company's financial instrument obligation will be marked-to-market each quarter using a Black-Scholes model. GAAP EPS and Adjusted EPS for 2019 as shown in the Company's outlook exclude the impact of such mark-to-market adjustments as it is impractical to predict. In addition, Adjusted EPS excludes transaction and integration costs related to the acquisition of ROCCAT, which are currently estimated to be $0.6 million and approximately $3 million in Q1-19 and the full year 2019, respectively.

With respect to the Company's adjusted EBITDA outlook for the first quarter and full year 2019, a reconciliation to its net income (loss) outlook for the same periods has not been provided because of the variability, complexity, and lack of visibility with respect to certain reconciling items between adjusted EBITDA and net income (loss), including other income (expense), provision for income taxes and stock-based compensation. These items cannot be reasonably and accurately predicted without the investment of undue time, cost and other resources and, accordingly, a reconciliation of the Company's adjusted EBITDA outlook to its net income (loss) outlook for such periods is not provided. These reconciling items could be material to the Company's actual results for such periods.

Conference Call Details
Turtle Beach Corporation will hold a conference call today, March 14, 2019, at 2:00 p.m. Pacific time (5:00 p.m. Eastern) to discuss its fourth quarter and full year 2018 results.

CEO Juergen Stark and CFO John Hanson will host the call, followed by a question and answer session.

Conference Call Details:
Date: Thursday, March 14, 2019
Time: 5:00 p.m. ET / 2:00 p.m. PT
Toll-Free Dial-in Number:
 (877) 303-9855
International Dial-in Number: (408) 337-0154
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