Turtle Beach (HEAR) FY Conference Summary Company Overview - **Company**: Turtle Beach - **Industry**: Gaming Accessories Key Points and Arguments Business Performance and Strategy - The CEO highlighted significant changes in Turtle Beach's business model over the past two years, focusing on improving performance and adapting to market dynamics [3][4] - The company has rationalized its SKUs, emphasizing higher productivity and margin products, and optimized its distribution channels [3][4] - The acquisition of PDP, a leader in the controller space, has diversified Turtle Beach's offerings beyond headsets, which historically accounted for 95% of the business [4][5] Market Trends and Growth Opportunities - The current gaming cycle, including the launch of Nintendo's Switch 2 and the anticipated release of GTA 6, is expected to drive accessory purchases [5][6][8] - The company is well-positioned to capitalize on upcoming hardware releases from Microsoft and Sony, which could further stimulate growth [7][8] - Despite a challenging first half of the year, the company anticipates a recovery in the second half, with a projected decline of about 10% in key categories in the U.S. [12][13] Supply Chain Management - Turtle Beach has proactively developed manufacturing capabilities in Vietnam to mitigate the impact of tariffs on production costs, with an expected 85% of production to be based in Vietnam post-Q2 2025 [9][10] - The company bulked up on inventory to counteract tariff impacts, which has helped maintain competitiveness [11] Financial Outlook - The company reiterated its revenue guidance for 2025, despite experiencing a 15-17% decline in key categories year-to-date [12][13][21] - Gross margins improved to 32.2% in Q2, with expectations to reach mid to high thirties in the latter half of the year due to better product mix and cost management [24][25] Competitive Landscape - The competitive environment is intensifying, but Turtle Beach maintains a leadership position in audio and controller markets due to its R&D investments [19][20][33] - The company is focused on leveraging new technologies and product refreshes to stay ahead in the premium headset category [33][36] R&D and Marketing Balance - Turtle Beach invests approximately 5% of its revenue back into R&D, which has led to successful product launches and technological advancements [38][39] - The marketing team has undergone significant changes, including brand refreshes and integration of acquired products, to enhance consumer engagement [40] Capital Allocation Strategy - The company has successfully refinanced its debt, reducing costs and improving cash flow generation, with a focus on three pillars: organic investment, M&A, and share repurchases [42][45] - The acquisition of PDP has been transformative, and the company remains open to further M&A opportunities across all product categories [47][48] Future Outlook - The CEO expressed optimism about the gaming industry's growth potential, particularly with the upcoming hardware cycles and the need for gamers to upgrade their accessories [49][50] - The company anticipates a multi-year growth cycle driven by high gamer engagement and the replacement of pandemic-era purchases [50][51] Additional Important Insights - The company is adapting its product designs and marketing strategies to align with macro trends in gaming, focusing on large franchise games and community engagement [41][42] - The competitive landscape for headsets is evolving, with consolidation in the market, but Turtle Beach is well-positioned to leverage its expertise and technology [33][36]

Market Position and Brand Strength - Turtle Beach is the best-selling gaming headset brand for the past 15 years[6] - The company is a top 5 gaming accessory leader in the $11 billion global gaming accessories market[6] - Turtle Beach has over 400 patents and is a leading innovator in gaming accessories[8] - The brand has the highest headset brand loyalty among active PC and/or console headset owners in the U S[9] Financial Performance and Growth - Q4 2024 revenue reached a record of $146 1 million, a 47% increase year-over-year[61] - 2024 revenue reached a record of $372 8 million, a 44% increase year-over-year[63] - Adjusted EBITDA for 2024 grew nearly $50 million to $56 4 million[64] - The company repurchased $27 8 million in common shares during 2024[65] Market and Product Strategy - The total addressable market for gaming headsets is roughly $2 9 billion[37] - The total addressable market for PC gaming peripherals is roughly $3 9 billion[50] - The market for PC/console flight sim hardware adds over $414 million in global market opportunity, and racing sim adds another $753 million[54]

Financial Data and Key Metrics Changes - First quarter revenue increased by 14% year over year to $63.9 million, driven by the full quarter contribution from the PDP acquisition [4][14] - Adjusted EBITDA rose to $4.1 million, up 180% from $1.4 million a year ago, indicating strong operating leverage [4][16] - Gross margins improved by 470 basis points year over year to 36.6% [5][14] - Operating expenses were $21.8 million, representing 34% of revenue compared to 42% in the prior year [15] Business Line Data and Key Metrics Changes - The U.S. gaming accessories market experienced a 16% year over year decline in Q1, impacting overall market performance [5][27] - Despite the market decline, the company achieved revenue growth due to the PDP acquisition and improved product offerings [4][5] Market Data and Key Metrics Changes - The broader gaming accessories market is projected to decline by 10% to 12% for the full year 2025, influenced by factors such as the delayed release of Grand Theft Auto VI and tariff impacts [28][41] - The company anticipates a gradual improvement in market conditions throughout 2025, particularly with the upcoming launch of the Nintendo Switch 2 [11][19] Company Strategy and Development Direction - The company is focusing on expanding its gaming accessories portfolio and capitalizing on industry growth drivers, including new product launches [12][22] - A new share repurchase program of up to $75 million over the next two years has been authorized, reflecting confidence in the company's future [13][18] - The company is actively managing supply chain diversification to mitigate tariff impacts, with less than 10% of U.S. supply produced in China after Q1 [9][60] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by tariffs and the evolving economic landscape but expressed confidence in navigating these issues with minimal long-term effects [8][22] - The company remains optimistic about returning to robust growth in 2026 and beyond, driven by a growing gamer base and new game releases [11][19] Other Important Information - The company generated over $40 million in cash flow from operations during Q1, marking one of the highest cash flow-generating quarters in its history [17] - The company is implementing pricing adjustments to mitigate tariff impacts, which have already been factored into the revised guidance [54][56] Q&A Session Summary Question: Impact of GTA VI delay on revenue reduction - Management indicated that the revenue reduction is a combination of factors, including the GTA VI delay and broader market challenges, with the accessories market down 16% in Q1 [25][26] Question: Expectations for gross margins in upcoming quarters - Gross margins are expected to be in the low 30s for Q2, with potential recovery in Q3 and Q4 as the company adjusts to market conditions [31][33] Question: Further cost controls in light of revised guidance - The company is actively pursuing cost synergies from the PDP acquisition and is identifying additional opportunities for cost reductions [34][35] Question: Flexibility to rebound if market conditions improve - Management stated that they are well-prepared to respond to any positive changes in market conditions, with a strong inventory position [41][42] Question: Tariff assumptions for Vietnam in projections - Current guidance reflects existing tariff conditions, and the company is ready to adjust its plans based on any changes in the tariff landscape [46][48] Question: Pricing adjustments due to tariffs - Pricing adjustments have been communicated to partners and are included in the revised guidance, with some products absorbing the tariff impact entirely [54][56] Question: Transition to Vietnam and competitive advantage - The company has been diversifying its supply chain for years and was able to quickly shift production to mitigate tariff impacts, which may provide a competitive advantage [58][60]