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Turtle Beach Reports Record First Quarter 2018 Results And Significantly Increases 2018 Outlook

- Net Revenue Increases 185% to $40.9 Million, Driving Record Net Income and Adjusted EBITDA - (May 09, 2018)

SAN DIEGO, May 9, 2018 /PRNewswire/ -- Turtle Beach Corporation (NASDAQ: HEAR), the leading gaming headset and audio accessory brand, reported financial results for the first quarter ended March 31, 2018. Per share information reflects the Company's 1-for-4 reverse split effective April 6, 2018.

First Quarter Highlights vs. Year-Ago Quarter:

  • Net revenue increased 185% to $40.9 million;
  • Gross margin more than doubled to 36.8% versus 15.4%;
  • Net income up significantly to $2.0 million, or $0.16 per share, compared to a net loss of $9.9 million, or $(0.81) per share;
  • Adjusted EBITDA increased $11.4 million to $5.3 million versus $(6.2) million; and
  • Net revenue, gross margin, net income and adjusted EBITDA were the highest levels for any first quarter since becoming public in 2014.

"As indicated in our pre-announcement, we delivered substantial growth in our first quarter, both relative to last year and our prior outlook," said Juergen Stark, CEO, Turtle Beach. "This growth was due to market share gains on top of a very strong overall market, propelled by the successes of Fortnite and PlayerUnknown's Battlegrounds, as these games have driven new gamers into the market and much higher headset attach rates than we have historically experienced.



"The strong market, and our significant outperformance, can be seen in NPD's latest North American console headset update. Year-to-date through March 2018, we grew our revenue share 720 basis points to 45.9% from 38.7% in the same period in 2017. In addition, while the market was up 77.6% on a sell-through basis during the same time, Turtle Beach was up 110.3%. In fact, this 110% revenue growth was nearly double the 57% growth experienced by the rest of the market as our strong brand and quality products had us well positioned to leverage the opportunity.

"We expect the momentum from this strong market to continue and have raised our 2018 financial outlook accordingly. In addition, we were pleased to have facilitated a set of transactions in late April to retire the Series B Preferred Stock at a discount of more than 50% relative to its redemption value. This was a nearly $20 million liability growing at 8% per year. On top of the March amendments to our term loan, revolver, and subordinated notes, this represents another substantial balance sheet improvement and is expected to result in a material reduction in non-cash interest expense going forward. Given these positive developments, we believe 2018 is off to a very strong start and better positions us to make selective growth investments and further reduce our debt over time."

First Quarter 2018 Financial Results

Net revenue in the first quarter of 2018 increased 185% to a record $40.9 million compared to $14.4 million in the year-ago quarter. This was due to the Company's increase in market share on top of higher volumes driven by high-performing game releases fueling stronger consumer demand.

Gross margin in the first quarter of 2018 more than doubled to a record 36.8% compared to 15.4% in the first quarter of 2017. The increase was primarily due to a less promotional environment as compared to the prior-year period and higher volumes driving fixed-cost leverage.

Operating expenses in the first quarter of 2018 increased 9% to $11.2 million compared to $10.3 million in the 2017 period due primarily to an increase in revenue-related sales costs and an increase in marketing costs relative to last year.

Net income in the first quarter of 2018 increased significantly to a record $2.0 million, or $0.16 per diluted share, compared to a net loss of $9.9 million, or $(0.81) per diluted share, in the year-ago quarter. The improvement was driven by the significant revenue and gross margin growth.

Adjusted EBITDA (as defined below in "Non-GAAP Financial Measures") in the first quarter of 2018 increased $11.4 million to a record $5.3 million compared to $(6.2) million in the year-ago quarter.

Balance Sheet Highlights

At March 31, 2018, the Company had $4.3 million of cash and cash equivalents, compared to $3.6 million one year ago. As a result of its borrowings under a $60 million revolving credit facility, Turtle Beach generally does not maintain a large cash balance.

Total outstanding debt principal at March 31, 2018, was $34.5 million compared to $34.4 million at March 31, 2017. The debt at March 31, 2018, consisted of $22.6 million in subordinated debt, $9.2 million in term loans, and $2.6 million of revolving debt. The Company's senior debt leverage ratio, defined as total term loans outstanding and average trailing twelve-month revolving debt, divided by consolidated trailing twelve month adjusted EBITDA, improved significantly to 1.0x at March 31, 2018, compared to 2.1x at December 31, 2017, and 6.8x a year ago.

Increased 2018 Outlook

For the second quarter of 2018, Turtle Beach expects net revenue to increase 151% to approximately $48 million compared to $19.1 million in the second quarter of 2017. Net loss is expected to improve to approximately $(0.05) per share compared to a net loss of $(0.57) per share in the second quarter of 2017. Adjusted EBITDA is expected to improve to approximately $2.5 million compared to $(2.8) million in the second quarter of 2017. Other than the aforementioned reduction in non-cash interest expense, the second quarter 2018 earnings per share estimate excludes any other effects of the accounting treatment for the retirement of the Series B Preferred Stock, which the Company does not expect to have an adverse effect on net income or adjusted EBITDA.

For the full year 2018, Turtle Beach now expects net revenue to increase 37% to approximately $205 million (up from $157 million in its March outlook) compared to $149.1 million in 2017. The Company is approaching its full year outlook estimating second half sell-through will be roughly in-line with last year, which the Company expects is appropriately conservative as it continues to track the year-to-date sell through increases and refines its view of the expected longer-term impact. Net income in 2018 is now expected to improve to approximately $0.95 per share (up from a net loss of $(0.12) per share in its March outlook) based upon 14.2 million estimated fully diluted shares outstanding. This is compared to a net loss of $(0.26) per share in 2017. Adjusted EBITDA in 2018 is now expected to more than double to approximately $26 million (up from $12 million in its March outlook) and includes several million dollars of expected investments intended to drive future growth. This compares to $11.6 million in adjusted EBITDA in 2017. Other than the aforementioned reduction in non-cash interest expense, the full year 2018 earnings per share estimate excludes any other effects of the accounting treatment of the retirement of the Series B Preferred Stock in the second quarter of 2018, which the Company does not expect to have an adverse effect on net income or adjusted EBITDA.

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 second quarter and full year 2018, 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, May 9, 2018, at 2:00 p.m. Pacific time (5:00 p.m. Eastern) to discuss its first quarter 2018 results.

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

Conference Call Details:
Date: Wednesday, May 9, 2018
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: 9889426

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 corp.turtlebeach.com.

A replay of the conference call will be available after 8:00 p.m. ET on the same day through May 17, 2018.

Toll-Free Replay Number: (855) 859-2056
International Replay Number: (404) 537-3406
Replay ID: 9889426

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 months ended March 31, 2018.

About Turtle Beach Corporation

Turtle Beach (www.turtlebeach.com) has been revolutionizing console multiplayer gaming since the very beginning with its wide selection of industry leading, award-winning gaming headsets. Whether you're a professional esports athlete, hardcore gamer, casual player, or just starting out, Turtle Beach has the gaming headset to help you truly master your skills. Innovative and advanced technology, amazing audio quality, clear communication, lightweight and comfortable designs, and ease-of-use are just a few features that have made Turtle Beach a fan-favorite brand for gamers the world over. Made for Xbox and PlayStation® consoles as well as for PC, Mac®, and mobile/tablet devices, having a Turtle Beach gaming headset in your arsenal gives you the competitive advantage. 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, 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.



March 31,
2018


December 31,
2017

ASSETS

(unaudited)



Current Assets:




Cash and cash equivalents

$

4,335



$

5,247


Accounts receivable, net

21,751



50,534


Inventories

15,816



27,518


Prepaid expenses and other current assets

3,536



3,467


Total Current Assets

45,438



86,766


Property and equipment, net

3,979



4,677


Intangible assets, net

1,363



1,404


Deferred income taxes

382



362


Other assets

1,144



1,042


Total Assets

$

52,306



$

94,251


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)




Current Liabilities:




Revolving credit facility

$

2,642



$

38,467


Term loans



4,173


Accounts payable

9,758



13,459


Other current liabilities

8,656



11,451


Total Current Liabilities

21,056



67,550


Term loans, long-term portion

8,434



6,789


Series B redeemable preferred stock

19,297



18,921


Subordinated notes - related party

21,630



20,836


Other liabilities

2,311



2,312


Total Liabilities

72,728



116,408


Commitments and Contingencies




Stockholders' Equity




Common stock, $0.001 par value - 25,000,000 shares authorized; 12,347,001 and 12,346,502 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

12



12


Additional paid-in capital

148,305



148,082


Accumulated deficit

(168,691)



(170,048)


Accumulated other comprehensive loss

(48)



(203)


Total Stockholders' Equity (Deficit)

(20,422)



(22,157)


Total Liabilities and Stockholders' Equity (Deficit)

$

52,306



$

94,251


 

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per-share data)

(unaudited)

Table 2.



Three Months Ended


March 31,
2018


March 31,
2017

Net Revenue

$

40,886



$

14,352


Cost of Revenue

25,857



12,136


Gross Profit

15,029



2,216


Operating expenses:




Selling and marketing

5,929



4,449


Research and development

1,329



1,390


General and administrative

3,985



4,171


Goodwill and intangible asset impairment




Restructuring charges



298


Total operating expenses

11,243



10,308


Operating income (loss)

3,786



(8,092)


Interest expense

2,005



1,840


Other non-operating expense (income), net

(245)



(51)


Income (loss) before income tax

2,026



(9,881)


Income tax expense

64



45


Net income (loss)

$

1,962



$

(9,926)






Net loss per share:




Basic

$

0.16



$

(0.81)


Diluted

$

0.16



$

(0.81)


Weighted average number of shares:




Basic

12,347



12,313


Diluted

12,369



12,313


 

Turtle Beach Corporation

GAAP to Adjusted EBITDA Reconciliation

(in thousands)

(unaudited)

Table 3.



Three Months Ended






March 31, 2018



As
Reported


Adj
Depreciation


Adj
Amortization


Adj
Stock
Compensation


Adj
EBITDA


Net revenue

$

40,886



$



$



$



$

40,886






Cost of revenue

25,857



(121)





(18)



25,718



Gross profit

15,029



121





18



15,168




















Operating expense

11,243



(827)



(79)



(205)



10,132

















Operating income (loss)

3,786



948



79



223



5,036




















Interest expense

2,005














Other non-operating income, net

(245)









(245)

















Income (loss) before income tax

2,026














Income tax expense

64














Net income (loss)

$

1,962





Adjusted EBITDA


$

5,281






Three Months Ended


March 31, 2017


As
Reported


Adj
Depreciation


Adj
Amortization


Adj
Stock
Compensation


Other (1)


Adj
EBITDA

Net revenue

$

14,352



$



$



$



$



$

14,352


Cost of revenue

12,136



(122)





85



(353)



11,746


Gross profit

2,216



122





(85)



353



2,606














Operating expense

10,308



(647)



(84)



(471)



(298)



8,808














Operating income (loss)

(8,092)



769



84



386



651



(6,202)














Interest expense

1,840












Other non-operating income, net

(51)











(51)














Income (loss) before income tax

(9,881)












Income tax expense

45












Net income (loss)

$

(9,926)







Adjusted EBITDA


$

(6,151)



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

 

Table 4.












FY 18



Q2 18

Q2 17


FY 18

Prior

FY 17


Guidance

Actual


Guidance

Guidance¹

Actual








Net Revenue

~$48M

$19.1M


~$205M

~$157M

$149.1M








EPS

~$(0.05)

$(0.57)


~$0.95

~$(0.12)

$(0.26)








Adjusted EBITDA

~$2.5M

$(2.8)M


~$26

~$12M

$11.6M









(1) Reported on March 6, 2018.

 

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SOURCE Turtle Beach Corporation

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