Turtle Beach (HEAR -0.83%)Q4 2024 Earnings CallMar 13, 2025, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Turtle Beach fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Chuck [Inaudible] with ICR. Please go ahead.

Unknown Speaker -- -- Analyst

Thank you, operator. On today's call, we'll be referring to the press release filed this afternoon that details the company's fourth quarter and year-end 2024 results. The release is available on the press releases page of the company's investor relations website, corp.turtlebeach.com. There you'll also find the latest earnings presentation that supplements the information discussed on today's call.

And finally, a recording of the call will be available on the events and presentations section of the company's investor relations website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations.

While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially so the company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in our forward-looking statements. Company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP.

You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings press release and presentation. Hosting the call today are Cris Keirn, chief executive officer; and Mark Weinswig, chief financial officer. With that, I'll turn the call over to Cris.

Cris Keirn -- Chief Executive Officer

Thanks, Chuck. Good afternoon, everyone, and welcome to our fourth quarter and year-end 2024 earnings call. I'm thrilled to report that we ended a record-breaking 2024 with a record- breaking quarter. We achieved our highest ever quarterly results in both revenue and adjusted EBITDA, underscoring the strength and resilience of our strategy, execution, and business model.

This strong performance was driven by several key factors. Our acquisition of PDP has been a game changer, significantly expanding our product portfolio and market reach and infusing the company with more amazing talent and expertise. PDP delivered an immediate positive impact on our performance at the time of the acquisition. And the completion of our integration, activities in Q4 continued to drive results for the fourth quarter.

Revenue was 146.1 million, up 46.8% compared to the same quarter last year, driven primarily by incremental sales and retail distribution for PDP, as well as low single-digit percentage growth for Turtle Beach-branded products. We were able to reduce our promotional spend as a percentage of revenue for the fourth quarter and full year on the strength of our next-generation product launches in 2024. And we're pleased to see ASP increases as a result. This promotional approach also contributed to improved profitability that was achieved for the quarter and full year.

Adjusted EBITDA for the fourth quarter was 35.7 million, a significant increase from 14 million in the same period last year. The substantial improvement with our adjusted EBITDA growing at a faster pace than our revenue reflects our ongoing focus to enhance efficiency and streamline our processes. As one example, we expect to realize more than 13 million in annual cost synergies from the PDP acquisition, surpassing our initial expectations of 10 to 12 million. These results underscore our commitment to driving profitability and operational excellence as we continue to optimize our expanded portfolio and organization.

To that point, our relentless focus on operational excellence has yielded substantial improvements across the company. From supply chain optimization to cost management, our efforts have enhanced efficiency and profitability while positioning us for sustained growth. These efforts include preparations and mitigations for the impact of any new tariffs. 2024 was truly a transformational year for Turtle Beach.

We have built a solid foundation for future expansion, and I'm confident that we are well-positioned to capitalize on the opportunities ahead. With that, let's dive into a few takeaways from 2024 and the fourth quarter. We're pleased to see that as we expected, the full year 2024 growth of 6% for us gaming accessories outpaced the overall gaming market, which was slightly down per Circana data. Turtle Beach-branded gaming headsets revenue share in the U.S.

increased 270 basis points in the fourth quarter compared to the previous quarter, supported by the launch of our new Stealth 700 Gen 3 premium wireless headset built on our next-generation platform design. For the controllers and gamepads category, Circana data shows that our revenue growth in the U.S. significantly outpaced the market, with a 25% increase in retail sales for 2024, while the market grew about 2.5%. Notably, our premium Victrix Pro BFG and Turtle Beach Stealth Ultra controllers ranked as the second and third best-selling third party gamepads during the year.

Additionally, our Riffmaster wireless guitar controllers, perfect for Fortnite Festival, continued dominating the music controller category with a No. 1 share in the U.S. Over the course of the year, our strong cash generation enabled us to continue to return value to our shareholders. For the full year, we executed nearly $28 million in share buybacks at an average price of $15.39 per share.

These repurchases were the largest in our history and underscore our confidence in Turtle Beach's long-term growth prospects and our dedication to enhancing shareholder value. As we move forward, we will maintain a sharp focus on capital allocation, ensuring that our financial strategies aligned with our goal of delivering sustained, value, and growth. Before turning the call over, I'd like to take a moment to acknowledge some important updates in our leadership team. First, I'm delighted to welcome Mark Weinswig as our new chief financial officer.

Mark brings a wealth of experience and a proven track record of financial leadership. We're confident that he will be instrumental in driving our financial strategy and supporting our growth initiatives. Welcome aboard, Mark. At the same time, I'd like to extend our gratitude to John Hanson as he embarks on retirement after 11 years of dedicated service to Turtle Beach.

John's contributions have been invaluable in steering the company through many significant milestones and challenges. We want to thank John for his commitment and leadership and wish him all the best in his well-deserved retirement. Mark will now take us through the financials in more detail and 2025 guidance. Mark?

Mark Weinswig -- Chief Financial Officer

Good afternoon, everyone, and thank you, Cris, for the warm welcome. I am truly honored to join Turtle Beach as the new chief financial officer. I am excited to work alongside such a talented and dedicated team and look forward to contributing to its continued success. I would also like to extend my gratitude to John for his guidance and direction during this transition period.

As Cris mentioned, our fourth quarter 2024 revenue was at an all-time record of $146 million, reflecting incremental revenue from the PDP business, our next generation products and solid execution. In addition to the strong revenue performance, our gross margin for the fourth quarter improved to 37%, a 500 basis-point improvement compared to 32% from the year-ago period. Included in the cost of sales for the most recent quarter is a $3.4 million charge related to a loss of inventory in transit. Operating expenses of 30.6 million were 21% of revenue compared to 24% in the prior year, reflecting the improved leverage of the business from the higher revenue base.

We continue to invest in new products and product line extensions to expand our product portfolio and grow our addressable market. Most importantly, our fourth quarter adjusted EBITDA improved to an all-time quarterly record of 35.7 million compared to 14 million in the year-ago period. For the full year, adjusted EBITDA was 56.4 million compared to 6.5 million in the prior year. The significant increase in adjusted EBITDA was driven by higher revenues combined with the cost containment actions taken providing strong operating leverage.

Now, turning to the balance sheet, at year-end net debt was 85 million comprised of 98 million of outstanding debt and 13 million of cash. The debt balance is comprised of 49 million outstanding under our revolving credit line and 49 million on the term loan. One important item to note is that just this week, we nearly paid off the entire revolving line balance due to strong cash receipts. During the fourth quarter, we repurchased approximately 162,000 shares at an average price of $15 per share, returning 2.4 million to shareholders through our share repurchase program.

For the full year, we repurchased a total of 27.8 million. Our current share repurchase program expires in April. In line with our continued commitment to return capital to shareholders, we are opportunistically assessing various potential share repurchase strategies. Turning to guidance.

We are expecting full year 2025 revenue to be in the range of 395 million to 405 million. This represents 7% growth at the midpoint compared to 2024. We expect our full year 2025 adjusted EBITDA to be in the range of 68 million to 72 million. The midpoint for 2025 represents a greater than 200 basis point improvement in adjusted EBITDA margin and 24% growth compared to 56 million of EBITDA in 2024.

Both of these would be record levels for the company. As we navigate recent volatility in the retail market, we can -- we want to provide additional context on expected seasonality. First, it's important to note that we typically see the majority of our revenues in the second half of the year, driven by the holiday season. We believe the second half of this year will see an even larger portion of revenues than usual due to the anticipated launch of new games and console platforms.

As such, we expect the first quarter will account for approximately 15 to 16% of full year revenues. Finally, as Cris noted, we are actively monitoring the changing tariff environment. We expect this to be a dynamic situation for the time being. Our full year 2025 guidance includes the expected net impact of the tariffs currently in place.

We expect to provide further clarity in future calls. Now, I'll turn the call back over to Cris for additional comments.

Cris Keirn -- Chief Executive Officer

Thanks, Mark. We have never been more excited about the future of Turtle Beach, considering the record quarter we delivered in Q4 and the new baseline of performance for the company in 2025 and beyond. We've discussed how our strategic efforts could put us in a position to exceed previous highs last seen for the company during the Battle Royale surge in 2018 and the pandemic era in 2020 and 2021. Q4 demonstrated that our new run rates and scale have already surpassed those previous milestones, and we're energized to expand on that success with a record 2025.

Our steadfast dedication to innovation, exceptional execution, and growth continues to distinguish Turtle Beach as a front runner in the gaming accessories market. We remain committed to driving expansion and complementary product categories and executing on accretive M&A to drive additional scale in our business. As always, our amazing team at Turtle Beach is the driving force behind our results, and I want to thank them for the contributions and the transformative and record year. We remain confident in our strategy and focused on delivering value for our shareholders and gaming customers.

And with that, let's turn to Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Sean McGowan with ROTH Capital Partners. Please proceed with your question.

Sean McGowan -- Analyst

Hi, guys. Thank you. Cris, could you possibly put any kind of a number around what you expect the impact to be from tariffs? You know, is it simply a reduction in sales? Is it an increase in costs, or is it both?

Cris Keirn -- Chief Executive Officer

Yeah. Hi, Sean. It's a great question and it's something we've spent quite a bit of time on, you know, preparing for tariffs looking at our mitigations and looking at what the future may look like for tariffs. as far as putting a number on it, you know, it would be in the range of several million of of EBITDA if we were able to -- if they came off, you know, tomorrow and they and tariffs didn't return, it would be a benefit of several million for us.

If there are additional tariffs, you know it's something that we -- it's a very dynamic environment. And trying to estimate what might come down, you know, in that respect is something that we're tracking. And I feel very good about what the team has done from a mitigation standpoint and our preparedness for any new tariffs that may come down, but clearly not knowing what those might be -- you know, could have an impact on the -- on our results.

Sean McGowan -- Analyst

OK, thank you. Maybe, Mark, for you a question on the margin. If we add back that inventory charge, I assume that's all in COGS. So, does that imply that gross margin in the quarter would have been 39%? And maybe more importantly, is that a level we should expect at this kind of level of revenue going forward?

Mark Weinswig -- Chief Financial Officer

Yeah, Sean. Thanks for the question. so we actually put in the -- in today's release, we added in the financial outlook section, a part that actually talks about our go-forward expectations for gross margins, we noted in there that we're now focusing on mid to high 30s in terms of gross margin percentage for the full year. Obviously, our gross margin is very much reflective of revenues, so, you know, we'll be very much back-end loaded in terms of the margin percentage.

But, you know, we feel very good about this expansion and our potential margin opportunity.

Sean McGowan -- Analyst

OK. Let me finish with a question about buybacks. So, you know, if you look back, you've contemplated things like a Dutch or, you know, you've done some buybacks. I think the upper range, if I remember correctly, on the Dutch was around 15.

So, you know, should we view this current price as an attractive one? And would you consider doing something kind of big event like that?

Cris Keirn -- Chief Executive Officer

Yeah, this is something that, you know, we're constantly assessing. You know, we are committed to look at how we can return capital to shareholders, and we're going to be opportunistic about opportunities in that range. You know, clearly, we believe that there's a lot of value here that that is not being recognized in the current price. So, we do feel that the stock is extremely attractive at the pricing that it is.

So, that factors into our decisions clearly.

Sean McGowan -- Analyst

Very helpful. Thank you.

Cris Keirn -- Chief Executive Officer

Thanks, Sean.

Operator

Our next question is from Jack Vander Aarde with Maxim Group.

Jack Vander Aarde -- Maxim Group -- Analyst

Hey, guys. Great. Welcome to Mark, and congrats to John again. Thanks for taking my questions.

So, Cris, maybe for you, can you just touch on your revenue outlook in terms of where you see, I guess, by product category and then, also, where you have the greatest visibility or maybe the greatest -- the least visibility in terms of geographical regions? Thanks.

Cris Keirn -- Chief Executive Officer

Sure. Hey, Jack. Thanks for the question. You know, when you look at the outlook, you know, we're, I believe, taking a pretty conservative approach here based on what we're seeing so far in 2025.

You know, we anticipated that we'd seen a bit of a stronger market at this point when we were, you know, going into the holiday. We did see a bit of a decline in the markets in December year over year. And that's -- you know, we always talk about how Q4 sort of leads into Q1 performance. And we are seeing that in Q1 as we noted, as you probably saw there in the release.

You know, the markets in the U.S. for accessories, for gaming were down, you know, pretty significantly in January. And so, what we believe is going to happen for '25 is that we think it will continue to be a bit softer here in the first half of the year, but we're very excited about what's happening in the back half of the year. The two main drivers there, you know, Nintendo has confirmed that at some point in 2025, Nintendo Switch 2 will launch.

And that will be an extremely positive, you know, factor for, for everyone in gaming. And then, secondly, as you know, GTA 6 is planned to be launched this fall. Those two factors are going to have a tremendous effect on the gaming accessories markets in the back half of the year. And so, you know, our overall revenue for the year reflects that dynamic.

I think the second part of your question was around geographies and categories. So, when you look at what Turtle Beach has been able to do over the last couple of years, we've been driving additional revenue in categories that are adjacent to gaming headsets. And, you know, we've made a ton of progress there, particularly with the PDP acquisition to where -- you know, we believe 2025, more than a third of our revenues are going to be coming from non headset categories. So, and that continues to increase for us.

And I do think, over time, you're going to see that approaching, you know, 40%, 50% of our revenues being outside of headsets. From a geographical standpoint, you know, we have about, you know, rough and tough, maybe you know, 70% of the revenue domestically, about 25% in U.K. and Europe, and then you, know, Asia is a single-digit contributor to our revenue.

Jack Vander Aarde -- Maxim Group -- Analyst

OK, great. I appreciate that. And then, maybe just a follow up in terms of the adjusted EBITDA guidance. So, the 2025 EBITDA guidance appears very strong, you know, considering the revenue outlook.

I appreciate the commentary around the gross margins which are much stronger than previous years for sure, and it sounds like it considers the tariff impact. So, what about the operating expense line? Are we -- maybe if you could just provide some sense of how that compares maybe seasonality wise to the prior year. And just -- are costs coming down? Is there more noncash add-backs? Any color there would be helpful.

Cris Keirn -- Chief Executive Officer

Sure. Yeah, we expect to continue to get leverage on our operating expenses. This has one -- been one big benefit for us, obviously, with the acquisition and the synergies that we've realized there. We've seen a dramatic improvement, you know, in our leverage for opex.

And I think, this year, what you'll see is it will continue to improve as we go through the year because those synergies are -- essentially, we're going to realize all of those for the full year of 2025, that 13 million. That we mentioned earlier. And we think there's continued opportunities there as we continue to drive, you know, sort of streamline our processes and look for opportunities to leverage that. So, I think from a seasonality standpoint, it'll be similar to a run rate year, but on a much lower run rate level than what we've seen in the past.

Jack Vander Aarde -- Maxim Group -- Analyst

OK, great. I appreciate the color there. I'll hop back in the queue. Thanks, guys.

Cris Keirn -- Chief Executive Officer

Thanks, Jack.

Operator

[Operator instructions] Our next question is from Martin Yang with Oppenheimer.

Martin Yang -- Analyst

Hi. Thank you for taking my question. So, first, can you remind us your sensitivity to the currency changes and what happens if, you know, the U.S. dollar continues to weaken, or whether a currency movement was factored into your annual guidance? Thank you.

Mark Weinswig -- Chief Financial Officer

Yeah, thank you for the question. you know the -- right now, we are seeing some benefits in terms of just the strengthening -- you know the strengthening market for us on the FX side. You know we have taken into account, you know, potential changes. We do not do any hedging or any type of transactions like that.

But, you know, we have in a sense a natural hedge in terms of the amount of revenues that we have in different currencies. So, at this point, you know, we would say that, you know, it's something that we are looking at closely, but we feel very confident with our outlook for 2025 based on the results so far in the first three months of the year.

Martin Yang -- Analyst

Got it. The second question is on your view toward a second half weighted revenue outlook. Is there any restaurant reference points in history that led you to the outlook? Or, you know, is there any particular year that it will give us a good comparison? Or is that based on, you know, conversation with retail customers? You know, any sorts of context that led you to the second year -- second half outlook be helpful. Thank you.

Cris Keirn -- Chief Executive Officer

Sure. Yeah, that's a great question, Martin. And it is such an important factor in how we're thinking about the year. You know, when you look at similar years, I would say it would be very similar to 2019, which is sort of our, you know, pre-pandemic, sort of normal seasonality with the exception that Q1 would be, you know, lower based on what we're seeing, you know, out there in the market right now.

And that we would expect that that loading would then come back in kind of Q3, Q4 time frame. So, from a -- as far as the factors that are leading us to that, you know, it is feedback from our retail partners. And a lot of the gaming industry folks that are taking a look at what's going on in the markets right now, there's a lot of excitement around what the back half will look like based on those -- those two, you know, huge factors mentioned earlier between, you know, the expected launch here for Switch 2 at some point, and what's going to happen with GTA 6. That's a -- the anticipation around that game, you know, and we know what normal, large, you know, releases will do for us from an accessory sales standpoint, we expect that effect to be even greater when GTA 6 comes out.

So, those are really the main factors there. But I would look to 2019 with the adjustments to Q1 as sort of a bit more of a representative of the year.

Martin Yang -- Analyst

Got it. Thank you, Cris. That's it for me.

Cris Keirn -- Chief Executive Officer

Thanks, Martin.

Operator

Thank you. Our next question is from Sean McGowan with ROTH Capital Partners.

Sean McGowan -- Analyst

Hi, I just wanted to circle back on your comment again about -- following up on that seasonality comment. Could you just remind us -- did you say 15% to 16% based on the midpoint of that range?

Mark Weinswig -- Chief Financial Officer

Yeah. Yep, that's true.

Sean McGowan -- Analyst

OK, just wanted to clarify that. Thank you.

Cris Keirn -- Chief Executive Officer

Thanks, Sean.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Cris Keirn for any closing comments.

Cris Keirn -- Chief Executive Officer

Thank you, all, for joining our call today and your interest in the company, and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. [Operator signoff]

Duration: 0 minutes

Call participants:

Unknown Speaker -- -- Analyst

Cris Keirn -- Chief Executive Officer

Mark Weinswig -- Chief Financial Officer

Sean McGowan -- Analyst

Jack Vander Aarde -- Maxim Group -- Analyst

Martin Yang -- Analyst

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