Turtle Beach Reports Fourth Quarter And Full Year 2016 Results In-Line With Revenue Outlook, Exceeding EPS And Adjusted EBITDA
Turtle Beach Corporation (NASDAQ: HEAR), a leading gaming headset and audio accessory company, reported financial results for the fourth quarter and full year ended December 31, 2016.
Fourth Quarter Summary vs. Year-Ago Quarter:
- Net revenue decreased 3% (flat in constant currency) to $82.2 million with new-gen headset sales up 8%.
- Gross margin rose 760 basis points to 36.7% with headset gross margin up 630 basis points to 37.2%.
- Operating expenses, excluding a $49.8 million goodwill impairment charge in the year-ago quarter, were reduced by 19% to $14.9 million.
- Net income improved significantly to $12.2 million, or $0.25 per share, compared to a loss of $(46.5) million, or $(1.09) per share. The year-ago quarter included a $49.8 million goodwill impairment charge.
- Adjusted EBITDA improved 63% to $16.1 million.
“Our fourth quarter closed out a strong year highlighted by solid demand for our entry-level RECON series headsets, our new STEALTH 520 and STEALTH 420X+ wireless headsets and good overall performance across the rest of our line,” said Juergen Stark, CEO, Turtle Beach Corporation. “In fact, this strength continued to drive our leading market share higher. Recent NPD data confirmed that our 2016 unit share was up 90 basis points to 34.2%, while our revenue share rose slightly to 42.0% compared to 41.9% in 2015.
“These results were achieved despite the overall console gaming market slowing significantly and uncharacteristically this past holiday season. We believe lower sales of marquee games, as well as the November 2016 debut of PlayStation ®4 Pro and the yet-to-be-announced launch date of Xbox Scorpio, disrupted the consumer’s typical holiday purchasing behavior. Despite this softening, fourth quarter profitability exceeded our outlook due to a favorable mix of new-gen to old-gen sales, gross margin-enhancing supply chain and logistics improvements, as well as prudent operating expense management across the entire business.
“In the fourth quarter we converted much of our HyperSound business to a license model and wound down operating expenses to under $300,000 per month. While we are still pursuing additional revenue-generating opportunities, including licensing the technology for HyperSound Glass and other applications, we plan to continue to reduce operating expenses to a point where it becomes immaterial to our overall business.
“Our goals throughout 2017 will be focused on further improving our overall profitability, which we believe will allow us to continue to strengthen our balance sheet. We believe we have significant growth opportunities in virtual reality, livestreaming, PC gaming and expansion throughout China that we expect to continue to cultivate throughout the year, with more significant investment planned for 2018.”
Fourth Quarter 2016 Financial Results
Net revenue in the fourth quarter was $82.2 million compared to $84.6 million in the year-ago quarter, and on a constant currency basis, net revenue was essentially unchanged. New-gen headset sales in the fourth quarter were up 8%.
Gross margin in the fourth quarter was up 760 basis points to 36.7% compared to 29.1% in the year-ago quarter. Gross margin in the headset segment increased 630 basis points to 37.2% due to higher margin new-gen headsets contributing 94% of revenues in the fourth quarter, up from 86% during the same period in 2015, as well as supply chain and logistics improvements.
Operating expenses in the fourth quarter, excluding a $49.8 million goodwill impairment charge in the year-ago quarter, were reduced by 19% to $14.9 million compared to $18.3 million (excluding the charge mentioned above) in the fourth quarter of 2015. The decline was due to continued cost management across the business. Including the year-ago impairment charge, operating expenses in the fourth quarter of 2015 were $68.1 million.
Net income in the fourth quarter improved significantly to $12.2 million, or $0.25 per diluted share, compared to a net loss of $(46.5) million, or $(1.09) per diluted share, in the year-ago quarter. Excluding the aforementioned 2015 impairment charge, net income in the fourth quarter of 2015 was $3.3 million, or $0.08 per diluted share. The year-over-year increase, even when excluding the impairment charge, was due to the aforementioned gross margin improvements and continued cost management. The fourth quarter of 2016 included approximately 6.8 million incremental shares compared to the year ago quarter, primarily due to the February 2016 follow-on public offering of common stock and concurrent private placement.
Adjusted EBITDA (as defined below in “Non-GAAP Financial Measures”) on a consolidated basis increased 63% to $16.1 million compared to $9.9 million in the year-ago quarter. The improvement was primarily driven by strong new-gen headset sales and successful cost management initiatives and supply chain and logistics improvements. Adjusted EBITDA for the headset business was up 23% to $17.2 million in the fourth quarter compared to $14.0 million in the year-ago quarter.
Full Year 2016 Financial Results
Net revenue in 2016 increased 7% (up 9% in constant currency) to $174.0 million compared to $162.7 million in 2015. The increase was due to the success of the new-gen headset portfolio.
Gross margin in 2016 was 24.5% compared to 25.0% in 2015. The decline was due to non-cash intangible asset amortization costs associated with the HyperSound Clear™ 500P launch, as well as a $7.1 million inventory reserve associated with the HyperSound restructuring. Gross margin in the headset segment increased 540 basis points to 31.9% from 26.5% due to higher margin new-gen headsets contributing 92% of revenues in 2016, up from 77% in 2015, as well as the supply chain and logistics improvements.
Operating expenses in 2016 were comprised of headset-related expenses of $46.6 million, HyperSound impairment of $63.2 million and HyperSound-related expenses of $10.5 million. Compared to 2015, headset operating expenses declined 10% and HyperSound expenses excluding the impairment decreased 24% due to continued cost management across the business.
Net loss in 2016 was $(87.2) million, or $(1.79) per diluted share, compared to a net loss of $(82.9) million, or $(1.96) per diluted share in 2015. Excluding the goodwill and intangible asset impairment charges, HyperSound restructuring reserves and approximately $0.6 million for other restructuring charges, net loss in 2016 was $(16.2) million, or $(0.33) per diluted share. This compares to a loss of $(24.2) million, or $(0.57) per diluted share in 2015, which excludes the goodwill impairment charge, as well as a $8.5 million non-cash valuation allowance and $0.4 million for other restructuring charges. This improvement was driven by the success of the new-gen headsets and prudent cost management.
Adjusted EBITDA (as defined below in “Non-GAAP Financial Measures”) was up significantly to $4.0 million, including investments of approximately $10.4 million in the HyperSound business, compared to adjusted EBITDA of $(11.4) million in 2015, which included $13.8 million in HyperSound investments. Adjusted EBITDA for the headset business increased over 500% to $14.4 million in 2016 compared to $2.4 million in 2015.
Balance Sheet Highlights
At December 31, 2016, the Company had approximately $6.2 million of cash and cash equivalents compared to $7.1 million at December 31, 2015. As a result of the Company’s $60 million revolving credit facility, Turtle Beach generally does not hold a large cash balance.
As of December 31, 2016, total outstanding debt principal was $69.7 million, which includes $35.9 million of revolving debt, $14.4 million in term loans and $19.4 million in subordinated notes, compared to $68.1 million in total outstanding principal debt at December 31, 2015.
2017 Outlook
For the first quarter of 2017, Turtle Beach expects net revenue to range between $12-$13 million compared to $24.0 million in the first quarter of 2016. This reflects the impact of higher-than-normal channel inventory due to the soft 2016 holiday retail gaming sales environment. Adjusted EBITDA is expected to be approximately $(8.5) million compared to $(6.3) million in the first quarter of 2016. Net loss for the first quarter is expected to range between $(0.24)-$(0.26) per diluted share, compared to a net loss of $(0.26) per diluted share in the first quarter of 2016.
For the full year 2017, Turtle Beach expects net revenue to range between $155-$160 million compared to $174.0 million in 2016. This reflects the higher channel inventory impact on first quarter revenue and an approximate $6-$7 million year-over-year decline in old-gen headset sales, bringing this business to a close in 2017. This also assumes no material revenue from HyperSound. The Company expects to generate $10-$12 million in consolidated adjusted EBITDA in 2017 compared to $4.0 million in 2016. This includes an approximately $1 million expected adjusted EBITDA loss from HyperSound in 2017. Net loss in 2017 is expected to range between $(0.08)-$(0.12) per diluted share based upon 49.3 million diluted shares outstanding, compared to a net loss of $(1.79) per diluted share in 2016 (or a loss of $(0.33) per diluted share in 2016 excluding the goodwill and intangible asset impairment charges, HyperSound restructuring reserves and other restructuring charges).
With respect to the Company’s adjusted EBITDA outlook for the first quarter and full year 2017, a reconciliation to its net 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 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 loss outlook for such periods is not available without unreasonable effort. These reconciling items could be material to the Company’s actual results for such periods.
