Corsair Gaming, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Corsair is a global provider of high-performance gaming, streaming and content-creation products. Its two reportable segments are Gamer and Creator Peripherals and Gaming Components and Systems. The filing covers the three and nine months ended September 30, 2021, compared with the same periods in 2020; financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenue | $391.1 million | $457.1 million | $1.393 billion | $1.146 billion |
| Gross profit | $101.4 million | $127.9 million | $392.0 million | $311.6 million |
| Gross margin | 25.9% | 28.0% | 28.1% | 27.2% |
| Operating income | $10.8 million | $49.7 million | $112.8 million | $99.5 million |
| Net income | $1.8 million | $36.4 million | $76.2 million | $60.2 million |
| Diluted EPS | $0.02 | $0.40 | $0.76 | $0.69 |
| Operating cash flow | Not separately provided | Not separately provided | $25.1 million | $100.3 million |
Q3 revenue declined 14.4% year over year, while nine-month revenue increased 21.6%. Q3 operating margin was approximately 2.7%, versus 10.8% in the prior-year quarter; nine-month operating margin was approximately 8.1%, versus 8.7%. Q3 net margin was approximately 0.5%, versus 8.0%; nine-month net margin was approximately 5.5%, versus 5.3%.
- Q3 Gamer and Creator Peripherals revenue was $139.3 million, down 13.8%; Gaming Components and Systems revenue was $251.9 million, down 14.8%.
- Nine-month Gamer and Creator Peripherals revenue was $470.3 million, up 35.3%; Gaming Components and Systems revenue was $923.1 million, up 15.6%.
- At September 30, 2021, cash and restricted cash totaled $76.3 million, down from $133.6 million at December 31, 2020.
- Total debt was $248.8 million, consisting primarily of a $250.0 million term loan, net of discounts and issuance costs. The company had $100.0 million available under its revolving facility.
- Inventories increased to $331.9 million from $226.0 million at year-end 2020, while accounts payable declined to $247.5 million from $299.6 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue and profitability deteriorated substantially because of COVID-19-related supply and logistics constraints, elevated ocean freight costs, promotional activity and shortages of reasonably priced GPUs.
- Gross margin fell 210 basis points in Q3, primarily from higher logistics costs and promotional activity. For the nine-month period, gross margin improved 90 basis points because of stronger product mix and growth in higher-margin Elgato streaming products.
- SG&A increased 16.5% in Q3 and 33.1% for nine months, driven by headcount and stock-based compensation, marketing, distribution costs, director and officer insurance and public-company expenses. Product development expense increased 12.3% in Q3 and 24.4% for nine months.
- Operating cash flow declined by $75.3 million year over year, principally because of a $102.9 million inventory investment and lower accounts payable, partially offset by collections of accounts receivable.
- On September 3, 2021, Corsair replaced its prior First Lien facilities with a new $250.0 million five-year term loan and $100.0 million five-year revolving facility, both maturing in September 2026. Proceeds were used to repay the prior term loan.
- The company acquired Visual by Impulse in February 2021 for approximately $1.7 million.
Guidance, Outlook, Commentary and Risks
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that existing cash and operating cash flow are expected to fund principal uses for at least the next 12 months, but future capital needs may vary and additional financing could be required.
- Management expects continued demand from gaming, streaming, esports and content creation, but noted that easing pandemic restrictions could reduce demand as consumers return to alternative entertainment and social activities.
- Supply-chain disruption, elevated freight costs, port shutdowns, component shortages and GPU availability remain significant operating risks. Management is adjusting inventory levels and shipment modes and may adjust expenses and cash flow if revenue declines.
- The new credit agreement requires a maximum Consolidated Total Net Leverage Ratio of 3.0 to 1.0 and a minimum Consolidated Interest Coverage Ratio of 3.0 to 1.0. At September 30, 2021, reported ratios were 0.8 to 1.0 and 10.4 to 1.0, respectively, and the company was not in default.
- A hypothetical 100-basis-point increase in interest rates would increase annual interest expense by approximately $2.5 million. A hypothetical 10% currency movement would change foreign-exchange gains or losses by approximately $2.8 million for the nine months.
- Customer concentration is material: Amazon represented 26.4% of nine-month revenue, and the ten largest customers represented approximately 50.5%. Customer orders generally are not subject to long-term purchase commitments.
- Other significant risks include dependence on third-party and single-source manufacturers, DRAM pricing and availability, seasonal demand, competition, cybersecurity and privacy incidents, international operations, tariffs, currency movements, product defects and intellectual-property claims.
- The risk-factor section references previously identified material weaknesses in internal controls. Separately, management concluded that disclosure controls and procedures were effective as of September 30, 2021 and reported no material changes in internal control over financial reporting during the quarter.
- Legal proceedings are described as ordinary-course matters, and management does not believe their ultimate outcome will have a material adverse effect. The filing also reports no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether supply-chain, freight and GPU constraints continue to pressure quarterly revenue, inventory levels and gross margins.
- Whether elevated inventory of $331.9 million can be sold without material discounts, obsolescence charges or cash-flow deterioration.
- The effect of variable-rate debt and any LIBOR replacement on interest expense and covenant compliance.
- Progress in remediating the historical material weaknesses in internal controls and the company’s future auditor attestation status.
- Revenue and receivable exposure to Amazon and other concentrated customers, including the absence of long-term purchase commitments.
- Whether post-pandemic normalization reduces demand for gaming and streaming products, particularly products benefiting from work-from-home and shelter-in-place trends.
- Potential effects of foreign exchange, tariffs, geopolitical tensions in Asia, cybersecurity incidents and intellectual-property or product-warranty claims.