Turtle Beach Corporation Q1 FY2025 earnings call

• Acquired PDP in March 2024, with a full quarter of contribution this year compared to just two weeks in the prior year.
• Lowered promotional spend as a percentage of revenue due to strong next-generation product introductions.
• Proactively increased inventory levels in anticipation of tariffs, with less than 10% of U.S. supply from China after Q1, primarily from Vietnam.
• GTA 6 delay to spring 2026, but market comps expected to improve with Nintendo Switch 2 launch and new games.
• Announced new products for spring, including licensed Nintendo Switch headsets/controllers and Xbox accessories.
• Largest share repurchase program in history, repurchased nearly $30M, and authorized a new $75M share repurchase program over the next two years.

First quarter revenue grew by 14% year-over-year to $63.9 million. Adjusted EBITDA increased to $4.1 million, up from $1.4 million a year ago. Gross margins improved substantially by nearly 470 basis points year-on-year to 36.6%. The full quarter contribution from the March 2024 acquisition of PDP was a key factor. Revenue contribution from PDP, along with strong next-generation headset product introductions, drove growth despite a 16% year-over-year decline in the U.S. gaming accessories market in Q1.

• Revised full year 2025 revenue to be in the range of $340 million to $360 million.
• Expected full year 2025 adjusted EBITDA to be in the range of $47 million to $53 million.
• Second quarter expected to account for approximately 16% to 17% of full year revenues, with 2/3 of full year revenue in the second half due to Nintendo Switch 2 launch and consumer environment.

• Broader economic environment and tariffs posing challenges to the business.
• GTA 6 delay impacting demand for accessories in 2025.
• Dynamic macroeconomic and tariff landscape creating uncertainty in financial projections.

Q: Good afternoon, guys. A couple of questions. So maybe if you could help shed a little bit more light on the $50 million reduction in revenues. How much of that is kind of slated from the GTA 6 pushout versus tariffs and macro? And then, Mark, maybe you can comment on expectations for gross margins, maybe the June quarters and the remainder of the year.

A: Hey, Tony. Thanks for the question and great to have you here. The revised guidance is really a function of our adjusted views on what the accessories markets are going to do for the full year. And there are several factors in there. GTA 6 is part of them, but it's really a combination of factors. Let me talk you through those a little bit. When we issued our initial guidance, we believed Q1 would be down kind of mid-single digits year-over-year from a market perspective in the U.S. And what we've seen is the broader accessories market is down 16% for Q1. And headsets and third-party controllers are actually down more than 20% through Q1. When we think about starting from that basis on Q1 going forward, remember, we guided prior to the tariffs hitting, prior to a lot of the consumer sentiment data that's come out and we think that, that -- those challenges have to be considered as we look at the full year. So that being said, we do think the market is going to improve as we go through the year from a comp perspective. And if you look at how the model is built, we think that Q2 comps will improve to being down sort of in the mid-teens year-over-year on accessories, and that's going to be driven by Nintendo Switch 2 launching in June. And then when you look at the back half of the year, Q3, Q4, we've got that modeled now of being down mid-single digits on a percentage basis versus up mid-single digits on a percentage basis year-over-year. So when you put all those quarters together, it puts the year down about 10% to 12% for the gaming accessories markets that we play in here in the U.S. And that's about a 15% difference from what we had planned of being up kind of mid -- low to mid-single digits from a market perspective in '25. So that's the driver in that $50 million, the set of drivers that are combining to make that. That being said, we feel great about 26%. And when you look ahead to what is happening in the gaming market, you're going to have the full effect of Switch 2. It will be rolling at that point. You're going to have games like Battlefield and GTA 6 coming in, in the spring of next year. So this isn't any kind of a long term, this is more of a delay in what that demand lift is going to look like, but it does impact '25, and that's why you see the adjustment in the numbers. And now I'll turn it over to Mark here for comments on the gross margin.

Q: Sean McGowan: Hi, guys. Thanks. Yeah. I want to focus on a couple of things, too, on the guidance reduction. So some of these things that are affecting your outlook, I'm sure are not only out of your control, but like there's no way they're reversing. GTA 6 isn't coming back into this year. But the impact of tariffs and the related impact on consumer sentiment that could be fluid. So the question is, to what extent are you able to kind of recover with production and shipments, if there is a positive switch to some of those factors? Or at some point, you can't make it any more, but what kind of flexibility do you have to rebound if there's change?

A: Hi, Sean. Great question. And we are ready to go should that happen. We mentioned that we stocked up on some inventory. So we're in a very strong inventory position right now. If anything happens short term because at any day, there could be a tariff announcement that provides some relief. So we wanted to give you the color on our assumptions on the market being down 10% to 12% for accessories for the full year in the categories that we play. Because if it does improve, clearly, we'll be recovering some of that adjustment in the guidance. But at this point, without that visibility, we felt that we wanted to give you the assumptions behind the change. And then as we go through the year and we see those adjustments, we'd be ready to go. But as far as the supply demand increase coming in from markets improving, we would be completely ready to go for that should that occur.

Q: Martin Yang: All right. Thank you for taking my question. Some of my questions regarding tariffs have been answered, so I ask about pricing. So does the current revised guidance imply any potential pricing adjustments throughout the year?

A: Hi, Martin. Thanks for the question. It does include the pricing adjustments that we've already gone out and communicated with our partners. So we took quick action on that, and there will be some pricing adjustments going into place to mitigate the tariffs that are currently in place. And that's why you don't see really from a margin standpoint and from an EBITDA perspective, it's pretty much in line with the revenue drop taking into consideration our fixed cost leverage. So there's no real changes from what we announced in our initial guidance to the impact of the tariffs for us. And that's a combination of the cost reduction activities that the team is taking in addition to these pricing adjustments. But those pricing adjustments are already in the guidance. If there is changes to the current tariff situation, we'll be taking additional actions on price to address those.

Q: Jack Codera: Hi. This is Jack Codera calling in for Jack Vander. Thanks for taking my questions. Can you guys provide any additional color on what you're expecting in terms of the scope of the onetime costs. And then I think you mentioned you guys have already transitioned. So if the number is correct, less than 10% of products are going to be produced in China. Can you give any color on that existing chunk? Is that chunk going to have any lasting impact on gross margin? Thank you.

A: Sure. Yeah. The one-time costs, there's some transition costs in there. We do have some tariff impact. As we mentioned in the call in Q1 or Q4 call is that there's several million dollars of tariff impact that we're continuing to carry. It's 150 basis points or so kind of hit there that you'll see in the numbers. So those are really the extent of those charges. And can you repeat the second part of your question, Jack?

Q: Sean McGowan: Hey, back. Yeah. so I wanted to talk a little bit about your comments regarding, I think you said taking some product in, kind of in anticipation of the tariffs or just the general comment you made about being ready to move quickly if there is a change in the outlook. How do I square that with the fact that your inventory is really not up that much year-over-year. And that's one of the ways we're able to generate so much cash, but is there inventory sitting with suppliers that's not on your books? Like, how can you have that flexibility if you don't have the inventory?

A: No. A key factor, Sean, it's a great point is that a lot of the inventory we had last year was directly after the PDP acquisition A lot of that inventory was a product that we're no longer selling. So it's -- there was some slow moving goods. Any time you do an acquisition like that, you end up clearing through a good portion of inventory that's not really a replenishment good, and we've done a lot of that work over the last year. So how we would characterize it is the inventory we have now is, by and large, highly replenishment-based inventory, and we don't have a lot of that slow moving really left with us. We've cleared a lot of that in the past year. So the quality of inventory we have at this point and the categories that we leaned into knowing what the situation might look like if we needed to move, that's where we've leaned into from an inventory purchases standpoint. So I would say that the product mix of that inventory is much more favorable for us at this point.