Corsair Gaming, Inc. quarterly report, Q1 FY2021

Corsair Gaming, Inc. — Q1 2021 Form 10-Q Summary

Business context and reporting period

Corsair is a global provider of gaming, streaming and content-creation gear, operating through Gamer and Creator Peripherals and Gaming Components and Systems segments. The unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.

Financial performance and liquidity

Metric	Q1 2021	Q1 2020	Change
Net revenue	$529.4 million	$308.5 million	+71.6%
Gross profit	$160.3 million	$78.6 million	+104.0%
Gross margin	30.3%	25.5%	+4.8 percentage points
Operating income	$67.3 million	$13.3 million	+404.6%
Net income	$46.7 million	$1.2 million	Material increase
Diluted EPS	$0.47	$0.01	Material increase
Cash flow from operations	$27.8 million	$2.0 million	Material increase

Peripherals revenue increased 131.9% to $175.9 million; Gaming Components and Systems revenue increased 51.9% to $353.5 million.
Peripherals gross margin was 39.1%, compared with 29.2%; Gaming Components and Systems gross margin was 25.9%, compared with 24.3%.
SG&A increased 44.9% to $77.9 million, primarily from higher distribution costs, headcount and bonus expense. Product development increased 31.4% to $15.2 million.
Interest expense declined 47.2% to $4.9 million after repayment of the Second Lien Term Loan and partial repayment of the First Lien Term Loan. Other expense was $2.4 million, primarily reflecting foreign exchange losses.
Effective tax rate was 22.0%, compared with 68.8% in the prior-year quarter, primarily because prior-year U.S. losses and credits were subject to a valuation allowance.
Cash and restricted cash totaled $125.6 million at March 31, 2021. Total debt, net of discount and issuance costs, was $294.3 million, consisting of the First Lien Term Loan; $298.9 million of principal is due at maturity in August 2024.
The company reported $48.1 million of available revolving-credit capacity and stated that existing cash and operating cash flow should fund principal uses for at least the next 12 months.
Inventory was $234.6 million and accounts receivable were $304.2 million at March 31, 2021. Operating cash flow was partly offset by increases in receivables and inventory and a decrease in accounts payable.

Material changes versus the prior comparable period

Revenue growth was attributed to increased gaming, streaming and work-from-home demand, system and gear upgrades, and strong Elgato streaming-product sales.
Gross margin expanded due to favorable product mix, higher-margin streaming products, higher volume and less promotional activity, partially offset by increased freight costs and supply limitations.
Debt declined by $28.0 million during the quarter through voluntary repayment. The company remained in compliance with its debt covenants.
In February 2021, Corsair acquired Visual by Impulse for approximately $1.7 million. The acquisition provides creative design services for streamers.
Origin deferred and contingent consideration of approximately $4.4 million was paid during the quarter.
Cash and restricted cash decreased $8.0 million during the quarter after $27.8 million of operating cash flow, $8.1 million of investing outflows and $27.8 million of financing outflows.

Guidance, outlook, commentary and risks

The filing does not provide a specific numerical revenue, earnings or margin forecast.
Management expects continued investment in product development, sales, marketing and infrastructure, which may increase operating expenses in absolute dollars.
Management expects seasonal sales patterns to continue, with the second quarter generally the lowest-revenue quarter and the third and fourth quarters stronger.
COVID-19 increased demand for home gaming and content creation but also caused factory closures, supply-chain disruption, higher freight costs and inventory constraints. If restrictions ease, consumers may return to alternative entertainment, reducing demand.
Key risks include customer concentration, dependence on Amazon and other retailers, third-party manufacturing and single-source suppliers, DRAM and integrated-circuit pricing, freight and tariff costs, foreign exchange exposure, product obsolescence, competition and reliance on new GPUs, CPUs and games.
Amazon represented 24.6% of revenue in each comparative quarter, and the ten largest customers represented 49.3% of Q1 2021 revenue. One customer represented at least 10% of revenue.
Approximately 19.6% of Q1 2021 revenue was denominated in foreign currencies. A hypothetical 10% currency movement would have affected foreign-exchange gains or losses by approximately $3.8 million.
The company disclosed a recent cybersecurity incident involving SCUF servers that may have exposed customer payment-card information handled by a third-party ecommerce provider.
The filing identifies historical material weaknesses in internal control over financial reporting and ongoing remediation efforts. Separately, management concluded that disclosure controls and procedures were effective at March 31, 2021.
After quarter-end, Corsair entered into a 10.5-year lease for a new Milpitas headquarters, with approximately $45.6 million of undiscounted fixed payments; the existing Fremont lease expires in March 2022.

Important facts for investors to verify

Whether COVID-19-related demand persists after restrictions ease and whether supply-chain and freight pressures improve.
Inventory levels, receivable concentration and customer ordering trends, particularly involving Amazon and the largest retailers.
Gross-margin sustainability as product mix, DRAM prices, promotions and freight costs change.
Progress on internal-control remediation and any future impact of the disclosed cybersecurity incident.
Ability to repay or refinance the approximately $298.9 million First Lien principal due in August 2024 while funding growth, acquisitions and the new headquarters lease.
Exposure to foreign exchange, variable interest rates, tariffs, Taiwan/China supply-chain concentration and LIBOR replacement.