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Turtle Beach Reports Third Quarter 2017 Results

SAN DIEGO, Nov. 2, 2017 /PRNewswire/ -- Turtle Beach Corporation (NASDAQ: HEAR), a leading gaming headset and audio accessory company, reported financial results for the third quarter ended September 30, 2017.

Third Quarter Summary vs. Year-Ago Quarter:

  • Net revenue of $36.0 million versus $38.4 million, down slightly due to holiday shipment timing.
  • Gross margin improved significantly to 34.9% compared to 10.2% last year (excluding a $7.1 million HyperSound-related charge, gross margin in the year-ago quarter was 28.7%).
  • Operating expenses were reduced to $10.7 million compared to $46.7 million (excluding $33.1 million in HyperSound-related charges, operating expenses in the year-ago quarter were $13.6 million).
  • Net loss improved significantly to $0.5 million, or $(0.01) per share, compared to a net loss of $44.8 million, or $(0.91) per share (excluding HyperSound-related charges, net loss in the year-ago quarter was $4.7 million, or $(0.10) per share).
  • Adjusted EBITDA improved significantly to $3.3 million compared to $0.5 million.

"Our third quarter performance was highlighted by significant gross margin expansion and prudent expense management, which drove strong growth in adjusted EBITDA that exceeded our outlook," said Juergen Stark, CEO, Turtle Beach Corporation. "We believe these results are beginning to underscore the underlying profit potential of our business as the leading console gaming headset brand now that we are largely unencumbered by HyperSound costs.

"Third quarter sales were slightly impacted by orders from some large customers that shifted from September into October. Due to the high velocity of holiday shipments that happen in late September, this shift was identified as a possibility in our third quarter outlook. While this timing difference had no impact on our full-year outlook, other factors including reduction in run-rate inventory levels by some retailers and a slightly reduced industry outlook for headsets have led us to modestly lower our full year revenue forecast. However, we continue to expect a strong holiday quarter with increased revenues and significant EBITDA expansion for both the holiday quarter and full year."

"We expect this expansion to be driven by a strong holiday product lineup," continued Stark. "This includes four new, category-redefining wireless headsets, including the world's first Xbox One headsets that connect directly to the console. We also recently launched our Elite Pro – PC Edition and OpTic Limited Edition headsets, two products that are highly visible in the esports market, as well as our new Recon Camo, which is just in time for the upcoming release of Call of Duty®: WWII."

Third Quarter 2017 Financial Results

Net revenue in the third quarter was $36.0 million compared to $38.4 million in the year-ago quarter. The decline was largely due to the shift in orders from some large customers into the fourth quarter, an event the company cited last quarter as a possible scenario given large levels of product shipments estimated to occur in late September.

Gross margin in the third quarter improved significantly to 34.9% compared to 10.2% in the third quarter of 2016. Excluding a $7.1 million HyperSound-related charge, gross margin in the year-ago quarter was 28.7%. The increase was due to a mix-shift toward higher margin headsets, as well as on-going supply chain and logistics-driven product cost improvements.

Operating expenses in the third quarter were reduced to $10.7 million compared to $46.7 million in the third quarter of 2016, which included HyperSound-related charges totaling $33.1 million. Excluding these charges, year-over-year operating expenses declined 21% due to a continued focus on cost management across the business.

Net loss improved significantly to $0.5 million, or $(0.01) per share, compared to a net loss of $44.8 million, or $(0.91) per share, in the third quarter of 2016. Excluding $0.81 per share in HyperSound-related charges, net loss in the third quarter of 2016 was $4.7 million, or $(0.10) per share. The improvement was primarily driven by the higher gross margin and lower operating expenses.

Adjusted EBITDA (as defined below in "Non-GAAP Financial Measures") improved significantly to $3.3 million compared to $0.5 million in the year-ago quarter.

Balance Sheet Highlights

At September 30, 2017, the Company had approximately $0.5 million of cash, compared to $3.3 million one year ago. As a result of its $60 million revolving credit facility, Turtle Beach generally does not hold a large cash balance.

Total outstanding debt principal at September 30, 2017 was $59.0 million compared to $59.9 million at September 30, 2016. The debt consisted of $24.8 million of revolving debt, $12.9 million in term loans and $21.2 million in subordinated debt.

2017 Outlook

For the fourth quarter of 2017, Turtle Beach expects net revenue to increase to a range between $82.6-$87.6 million compared to $82.2 million in the fourth quarter of 2016. Adjusted EBITDA is expected to improve to a range between $16.7-$18.7 million compared to $16.1 million in the fourth quarter of 2016. Net income for the fourth quarter is expected to increase and range between $0.25-$0.29 per share compared to $0.25 per share in the fourth quarter of 2016.

For the full year 2017, Turtle Beach now expects net revenue to range between $152-$157 million (down from $157-$162 million in its August outlook) compared to $174 million in 2016. This year-over-year decline reflects the higher channel inventory impact on first half revenues, ongoing efforts by some retailers to significantly reduce their run-rate inventory levels, and a slightly reduced outlook for overall industry headset sales. In addition, it reflects 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. However, the Company continues to expect $11-$13 million in consolidated adjusted EBITDA in 2017 compared to $4 million in 2016. This includes an approximate $1 million expected adjusted EBITDA loss from HyperSound in 2017. Net loss in 2017 is still expected to range between $(0.06)-$(0.10) per share based upon 49.3 million diluted shares outstanding. This is compared to a net loss of $(1.79) per share in 2016 (or a loss of $(0.33) per share in 2016 excluding the goodwill and intangible asset impairment charges, HyperSound restructuring reserves and other restructuring charges).

A table summarizing this outlook has been provided at the end of this release.

With respect to the Company's adjusted EBITDA outlook for the fourth 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.

Conference Call Details

Turtle Beach Corporation will hold a conference call today, November 2, 2017, at 2:00 p.m. Pacific time (5:00 p.m. Eastern) to discuss its third quarter 2017 results.

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

Conference Call Details:

Date: Thursday, November 2, 2017
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
Conference ID: 5789519

For the conference call, please dial-in 5-10 minutes prior to the start time and an operator will register your name and organization. If you have any difficulty with the conference call, please contact Liolios at (949) 574-3860.

The conference call will be broadcast live and available for replay here and via the investor relations section of the Company's website at http://corp.turtlebeach.com.

A replay of the conference call will be available after 8:00 p.m. ET on the same day through November 9, 2017.

Toll-Free Replay Number: (855) 859-2056
International Replay Number: (404) 537-3406
Replay ID: 5789519

Non-GAAP Financial Measures

In addition to its reported results, the Company has included in this earnings release certain financial results, including adjusted EBITDA, that the Securities and Exchange Commission defines as "non-GAAP financial measures." Management believes that such non-GAAP financial measures, when read in conjunction with the Company's reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company's results. "Adjusted EBITDA" is defined by the Company as net income (loss) before interest, taxes, depreciation and amortization, stock- based compensation (non-cash), and certain special items that we believe are not representative of core operations. See a reconciliation of GAAP results to adjusted EBITDA included below for the three and nine months ended September 30, 2017.

About Turtle Beach Corporation

Turtle Beach Corporation (http://corp.turtlebeach.com) designs innovative, market-leading audio products. Under its award-winning Turtle Beach brand (www.turtlebeach.com), the Company is the clear market share leader with its wide selection of acclaimed gaming headsets for use with Xbox One and PlayStation®4, as well as personal computers and mobile/tablet devices. Under the HyperSound brand (www.hypersound.com), the Company develops and licenses pioneering directed audio solutions with applications in digital signage and kiosks, consumer electronics and hearing healthcare. The Company's shares are traded on the NASDAQ Exchange under the symbol: HEAR.

Cautionary Note on Forward-Looking Statements

This press release includes forward-looking information and statements within the meaning of the federal securities laws. Except for historical information contained in this release, statements in this release may constitute forward-looking statements regarding assumptions, projections, expectations, targets, intentions or beliefs about future events. Statements containing the words "may", "could", "would", "should", "believe", "expect", "anticipate", "plan", "estimate", "target", "project", "intend" and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Forward-looking statements are based on management's current belief, as well as assumptions made by, and information currently available to, management.

While the Company believes that its expectations are based upon reasonable assumptions, there can be no assurances that its goals and strategy will be realized. Numerous factors, including risks and uncertainties, may affect actual results and may cause results to differ materially from those expressed in forward-looking statements made by the Company or on its behalf. Some of these factors include, but are not limited to, risks related to the Company's liquidity, the substantial uncertainties inherent in the acceptance of existing and future products, the difficulty of commercializing and protecting new technology, the impact of competitive products and pricing, general business and economic conditions, risks associated with the expansion of our business including the implementation of any businesses we acquire, our indebtedness, the outcome of our HyperSound strategic review process and other factors discussed in our public filings, including the risk factors included in the Company's most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q and the Company's other periodic reports. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission, the Company is under no obligation to publicly update or revise any forward-looking statement after the date of this release whether as a result of new information, future developments or otherwise.

All trademarks are the property of their respective owners.


Turtle Beach Corporation

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)


Table 1.



September 30,
2017


December 31,
2016


(unaudited)



ASSETS




Current Assets:




Cash and cash equivalents

$

473



$

6,183


Accounts receivable, net

24,588



54,633


Inventories

45,869



21,698


Prepaid expenses and other current assets

4,956



4,121


Total Current Assets

75,886



86,635


Property and equipment, net

4,427



4,311


Intangible assets, net

1,484



1,618


Deferred income taxes

126



543


Other assets

1,146



1,693


Total Assets

$

83,069



$

94,800


LIABILITIES AND STOCKHOLDERS' EQUITY




Current Liabilities:




Revolving credit facilities

$

24,793



$

35,905


Term loan

4,814



2,647


Accounts payable

29,996



11,927


Other current liabilities

12,110



16,414


Total Current Liabilities

71,713



66,893


Term loan, long-term portion

7,238



10,442


Series B redeemable preferred stock

18,547



17,480


Subordinated notes - related party

20,051



17,881


Other liabilities

2,239



2,800


Total Liabilities

119,788



115,496


Commitments and Contingencies




Stockholders' Equity




Common stock, $0.001 par value - 100,000,000 shares authorized; 49,386,006 and 49,251,336 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

49



49


Additional paid-in capital

147,802



146,615


Accumulated deficit

(184,279)



(166,800)


Accumulated other comprehensive loss

(291)



(560)


Total Stockholders' Equity

(36,719)



(20,696)


Total Liabilities and Stockholders' Equity

$

83,069



$

94,800


Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per-share data)

(unaudited)


Table 2.



Three Months Ended


Nine Months Ended


September 30,

2017


September 30,

2016


September 30,

2017


September 30,

2016

Net Revenue

$

35,975



$

38,384



$

69,439



$

91,774


Cost of Revenue

23,437



34,457



48,384



79,372


Gross Profit

12,538



3,927



21,055



12,402


Operating expenses:








Selling and marketing

5,586



7,016



15,564



19,737


Research and development

1,336



2,637



4,423



6,701


General and administrative

3,499



4,591



11,740



15,161


Goodwill and intangible asset impairment



32,084





63,236


Restructuring charges

241



339



509



564


Total operating expenses

10,662



46,667



32,236



105,399


Operating income (loss)

1,876



(42,740)



(11,181)



(92,997)


Interest expense

2,042



1,866



5,717



5,331


Other non-operating expense (income), net

(252)



326



(517)



1,395


Earnings (loss) before income tax

86



(44,932)



(16,381)



(99,723)


Income tax expense (benefit)

578



(133)



1,098



(340)


Net loss

$

(492)



$

(44,799)



$

(17,479)



$

(99,383)










Net loss per share:








Basic

$

(0.01)



$

(0.91)



$

(0.35)



$

(2.05)


Diluted

$

(0.01)



$

(0.91)



$

(0.35)



$

(2.05)


Weighted average number of shares:








Basic

49,386



49,230



49,328



48,371


Diluted

49,386



49,230



49,328



48,371


Turtle Beach Corporation

Reconciliation of GAAP and Non-GAAP Measures

(in thousands, except per-share data)

(unaudited)


Table 3.



Three Months Ended


Nine Months Ended


September 30,

2017


September 30,

2016


September 30,

2017


September 30,

2016

Net Income (Loss)


GAAP Net Income (Loss)

$

(492)



$

(44,799)



$

(17,479)



$

(99,383)










Goodwill and intangible asset impairment



32,084





63,236


Business transition charges

(71)



8,049



550



8,049


Non-GAAP Earnings

(563)



(4,666)



(16,929)



(28,098)










Diluted Earnings Per Share








GAAP - Diluted

$

(0.01)



$

(0.91)



$

(0.35)



$

(2.05)










Goodwill and intangible asset impairment

$



$

0.65



$



$

1.31


Business transition charges

$



$

0.16



$

0.01



$

0.17


Non-GAAP - Diluted

$

(0.01)



$

(0.10)



$

(0.34)



$

(0.57)










Turtle Beach Corporation

GAAP to Adjusted EBITDA Reconciliation

(in thousands)

(unaudited)


Table 4.



Three Months Ended


September 30, 2017


As Reported


Adj

Depreciation


Adj

Amortization


Adj

Stock

Compensation


Other (1)


Adj

EBITDA

Net Revenue

$

35,975



$



$



$



$



$

35,975


Cost of Revenue

23,437



(165)





(20)



312



23,564


Gross Profit

12,538



165





20



(312)



12,411














Operating Expense

10,662



(622)



(89)



(350)



(241)



9,360














Operating income (loss)

1,876



787



89



370



(71)



3,051














Interest expense

2,042












Other non-operating expense, net

(252)











(252)














Earnings (loss) before income tax

86












Income tax expense

578












Net loss

$

(492)







Adjusted EBITDA


$

3,303



Nine Months Ended


September 30, 2017


As Reported


Adj

Depreciation


Adj

Amortization


Adj

Stock

Compensation


Other (1)


Adj

EBITDA

Net Revenue

$

69,439



$



$



$



$



$

69,439


Cost of Revenue

48,384



(479)





66



(41)



47,930


Gross Profit

21,055



479





(66)



41



21,509














Operating Expense

32,236



(2,521)



(259)



(1,253)



(509)



27,694














Operating income (loss)

(11,181)



3,000



259



1,187



550



(6,185)














Interest expense

5,717












Other non-operating expense (income), net

(517)











(517)














Earnings (loss) before income tax

(16,381)












Income tax expense

1,098












Net loss

$

(17,479)







Adjusted EBITDA


$

(5,668)
















(1) Other includes business transition costs and restructuring charges.


Table 4. (continued)



Three Months Ended


September 30, 2016


As Reported


Adj

Depreciation


Adj

Amortization


Adj

Stock

Compensation


Other (2)


Adj

EBITDA

Net Revenue

$

38,384



$



$



$



$



$

38,384


Cost of Revenue

34,457



(83)



(1,218)



(152)



(7,079)



25,925


Gross Profit

3,927



83



1,218



152



7,079



12,459














Operating Expense

46,667



(1,632)



(114)



(865)



(32,423)



11,633














Operating income (loss)

(42,740)



1,715



1,332



1,017



39,502



826














Interest expense

1,866












Other non-operating expense (income), net

326











326














Earnings (loss) before income tax

(44,932)












Income tax benefit

(133)












Net loss

$

(44,799)







Adjusted EBITDA


$

500



Nine Months Ended


September 30, 2016


As Reported


Adj

Depreciation


Adj

Amortization


Adj

Stock

Compensation


Other (2)


Adj

EBITDA

Net Revenue

$

91,774



$



$



$



$



$

91,774


Cost of Revenue

79,372



(420)



(3,660)



(398)



(7,079)



67,815


Gross Profit

12,402



420



3,660



398



7,079



23,959














Operating Expense

105,399



(3,765)



(368)



(2,824)



(63,800)



34,642














Operating income (loss)

(92,997)



4,185



4,028



3,222



70,879



(10,683)














Interest expense

5,331












Other non-operating expense (income), net

1,395











1,395














Earnings (loss) before income tax

(99,723)












Income tax benefit

(340)












Net loss

$

(99,383)







Adjusted EBITDA


$

(12,078)
















(2) Other includes asset impairments, business transition costs and restructuring charges.


Table 5.








Fiscal 2017 Outlook






FY 17



Q4 17

Q4 16


FY 17

Prior

FY 16


Guidance

Actual


Guidance

Guidance¹

Actual








Net Revenue

$82.6-$87.6M

$82.2M


$152-$157M

$157-$162M

$174M








Adjusted EBITDA

$16.7-$18.7M

$16.1M


$11-$13M

$11-$13M

$4M








EPS

$0.25-$0.29

$0.25


$(0.06)-$(0.10)

$(0.06)-$(0.10)

$(1.79)








Normalized EPS

$0.25-$0.29

$0.25


$(0.06)-$(0.10)

$(0.06)-$(0.10)

$(0.33)²








(1) Reported on August 10, 2017.






(2) Excludes $(1.46) per share in goodwill and intangible asset impairment charges, HyperSound
restructuring reserves and other restructuring charges.

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SOURCE Turtle Beach Corporation