Turtle Beach Reports First Quarter 2017 Results Exceeding Revenue, EPS And Adjusted EBITDA Outlook

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Turtle Beach Reports First Quarter 2017 Results Exceeding Revenue, EPS And Adjusted EBITDA Outlook
Turtle Beach Reports First Quarter 2017 Results Exceeding Revenue, EPS And Adjusted EBITDA Outlook

Turtle Beach Reports First Quarter 2017 Results Exceeding Revenue, EPS And Adjusted EBITDA Outlook

Turtle Beach Corporation (NASDAQ:  HEAR), a leading gaming headset and audio accessory company, reported financial results for the first quarter ended March 31, 2017.

First Quarter Summary vs. Year-Ago Quarter:

  • Net revenue of $14.4 million versus $24.0 million, reflecting the expected impact from higher holiday channel inventory.
  • Gross margin improved 140 basis points to 15.4% compared to 14.0%, with headset gross margin of 19.5% versus 19.9%.
  • Operating expenses were reduced by 22% to $10.3 million.
  • Net loss improved to $9.9 million, or $(0.20) per share, compared to a net loss of $12.0 million, or $(0.26)per share.
  • Adjusted EBITDA improved to $(6.2) million compared to $(6.3) million.

“Our first quarter results exceeded our expectations,” said Juergen Stark, CEO, Turtle Beach Corporation. “Despite facing the dual headwinds of relatively soft industry sales and higher inventory levels at retail after the holidays, our revenue declined less than anticipated, and we kept Adjusted EBITDA flat with last year while improving our net earnings. This was driven primarily by our decision late last year to transition HyperSound to a licensing model, as well as consistently disciplined control of our headset business operating costs.

“Looking further into 2017, we remain confident in our outlook for the full year and continue to expect sales to be skewed more toward the second half of the year compared to 2016. This is due to a continuation of the aforementioned headwinds, as well as a slate of exciting new product launches planned for the third and fourth quarters, and a solid lineup of expected new game launches in the second half of 2017. We believe this will impact second quarter sales as we pull back on other product sales in preparation for the launch. Additionally, our focus on expense discipline should also allow our second half sales strength to be leveraged into significant profit growth.”

First Quarter 2017 Financial Results

Net revenue in the first quarter was $14.4 million compared to $24.0 million in the year-ago quarter. The decline was due largely to lower sales of marquee games during the 2016 holiday season, leading to higher-than-normal channel inventory entering 2017, as well as mid-cycle console releases and upcoming new technology introductions disrupting consumer purchasing behavior. The first quarter of 2017 also included minimal old-gen headset sales compared to $2.5 million in the year-ago quarter.

Gross margin in the first quarter improved 140 basis points to 15.4% compared to 14.0% in the year-ago quarter. The increase was due to costs in the year-ago quarter associated with the launch of HyperSound Clear™ 500P that did not reoccur, as well as supply chain and logistics improvements. Gross margin in the headset segment was 19.5% compared to 19.9% in the year-ago quarter. Supply chain cost improvement initiatives and a more favorable year-over-year new-gen product mix (92% versus 86% in the year-ago quarter) was more than offset by approximately 250 basis points of fixed costs that were not absorbed due to the lower sales volumes.

Operating expenses in the first quarter were reduced by 22% to $10.3 million compared to $13.1 million in the first quarter of 2016. The decline was due to a continued focus on cost management across the business.

Net loss in the first quarter improved to $9.9 million, or $(0.20) per diluted share, compared to a net loss of $12.0 million, or $(0.26) per diluted share, in the year-ago quarter. The improvement was primarily driven by lower HyperSound investments related to the transition to a license model and cost management initiatives.

Adjusted EBITDA (as defined below in “Non-GAAP Financial Measures”) improved slightly to $(6.2) million compared to $(6.3) million in the year-ago quarter.

Balance Sheet Highlights

At March 31, 2017, the Company had approximately $3.6 million of cash and cash equivalents compared to $3.2 million at March 31, 2016. As a result of the Company’s $60 million revolving credit facility, Turtle Beach generally does not hold a large cash balance.

As of March 31, 2017, total outstanding debt principal was $34.4 million compared to $35.5 at March 31, 2016. The debt consisted of $14.4 million in term loans and $20.0 million in subordinated debt. Turtle Beach fully paid down its revolving credit facility in the first quarter.

2017 Outlook

For the second quarter of 2017, Turtle Beach expects net revenue to range between $17.0-$18.0 million compared to $29.4 million in the second quarter of 2016. This reflects the lingering impact of the soft 2016 holiday retail gaming sales environment and related headwinds discussed above, as well as the impact of several new product launches slated for the third quarter that are expected to negatively impact Q2 sales as the company prepares for the launch of the replacement models. Adjusted EBITDA is expected to improve to approximately $(5.5) million compared to $(6.3) million in the second quarter of 2016. Net loss for the second quarter is expected to improve and range between $(0.17)-$(0.19) per diluted share, compared to a net loss of $(0.86) per diluted share in the second quarter of 2016, which included a $(0.63) per share non-cash goodwill impairment charge. Excluding this charge, net loss was $(0.23) per diluted share.

For the full year 2017, Turtle Beach is maintaining its financial outlook outlined in March. Net revenue is expected to range between $155.0-$160.0 million compared to $174.0 million in 2016. This reflects the higher channel inventory impact on first half revenues and an approximate $6.0-$7.0 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 $10.0-$12.0 million in consolidated adjusted EBITDA in 2017 compared to $4.0 million in 2016. This includes an approximately $1.0 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 second 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.

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