Corsair Gaming, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Corsair is a global provider of gaming, streaming and content-creation products, organized into Gamer and Creator Peripherals and Gaming Components and Systems. This unaudited report covers the three and six months ended June 30, 2021, compared with the same periods in 2020. The company completed the $1.7 million acquisition of Visual by Impulse in February 2021.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $472.9 million | $380.4 million | $1.002 billion | $688.9 million |
| Gross profit | $130.4 million | $105.1 million | $290.7 million | $183.7 million |
| Gross margin | 27.6% | 27.6% | 29.0% | 26.7% |
| Operating income | $34.7 million | $36.4 million | $102.0 million | $49.7 million |
| Net income | $27.7 million | $22.6 million | $74.5 million | $23.8 million |
| Diluted EPS | $0.28 | $0.26 | $0.74 | $0.28 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $59.4 million | $75.6 million |
Q2 revenue increased 24.3% year over year, while six-month revenue increased 45.5%. Six-month Gamer and Creator Peripherals revenue increased 78.0% to $331.1 million; Gaming Components and Systems revenue increased 33.5% to $671.2 million. Q2 segment growth was 40.9% and 17.6%, respectively.
Q2 operating income declined despite revenue growth because SG&A increased 41.1% to $80.2 million and product development increased 30.8% to $15.5 million. Six-month SG&A was $158.0 million and product development was $30.7 million. The six-month effective tax rate declined to 17.2% from 22.5%; Q2 declined to 7.6% from 15.8%, primarily because of stock-based compensation tax benefits and changes in geographic income mix.
Liquidity, debt and balance sheet
- Cash and restricted cash totaled $138.6 million at June 30, 2021, compared with $133.6 million at December 31, 2020.
- Cash provided by operations was $59.4 million for the first six months, down from $75.6 million, primarily reflecting increased inventories, prepaid assets and lower accounts payable.
- Inventory increased to $273.4 million from $226.0 million, while accounts receivable declined to $258.8 million from $293.6 million.
- Debt, net of discount and issuance costs, was $270.0 million, down from $321.4 million. The company made $53.0 million of debt repayments during the first six months, including $28.0 million in March and $25.0 million in June.
- The remaining $273.9 million principal balance is due in August 2024. The company reported $48.6 million of available revolving-credit capacity and compliance with debt covenants.
- Management believes cash balances and operating cash flow will fund principal uses for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven by increased gaming, streaming and work-from-home demand, as well as stronger Elgato and SCUF sales, PSU demand and prebuilt systems.
- Six-month gross margin expanded 230 basis points to 29.0%, primarily from favorable product mix, higher-margin Elgato products and volume. Q2 gross margin was unchanged because higher-margin mix was offset by freight, logistics and port-shutdown costs.
- Operating expenses grew faster than Q2 revenue, causing operating income to decline 4.7% to $34.7 million. Six-month operating income more than doubled because of revenue growth and gross-margin expansion.
- Interest expense fell 52.9% in Q2 and 50.1% for the six months after repayment of the Second Lien and reductions in First Lien debt.
- Shares outstanding increased to 93.8 million at June 30, 2021 from 91.9 million at December 31, 2020, primarily through employee equity plans. Stock-based compensation expense was $7.9 million for the six months, compared with $2.7 million.
Guidance, outlook, risks and unusual items
The filing does not provide clear quantitative revenue or earnings guidance. Management expects seasonal sales to be stronger in the third and fourth quarters and expects continued growth in direct-to-consumer sales, product development spending and absolute SG&A. Management also expects freight and logistics pressures related to COVID-19 and supply constraints to continue.
- COVID-19 may reduce demand as restrictions ease and consumers return to other entertainment, while continued factory, port, labor and transportation disruptions may constrain supply and increase costs.
- Customer concentration is significant: Amazon represented 24.6% of six-month revenue, and the ten largest customers represented approximately 50.0%. Customers generally purchase through cancellable purchase orders rather than long-term commitments.
- Manufacturing and component sourcing are concentrated among third parties in China, Taiwan and Southeast Asia. Risks include shortages, tariffs, geopolitical tensions, freight-cost volatility and quality issues.
- DRAM modules represented 27.3% of six-month revenue, exposing results to DRAM integrated-circuit pricing and inventory volatility.
- Foreign-currency risk remains material: 18.9% of six-month revenue was denominated in foreign currencies, and foreign-exchange expense was $2.6 million. The company maintains forward contracts with a $48.3 million notional amount.
- The company reported a $1.4 million one-time tax expense from remeasurement of U.K. deferred tax liabilities. It also recorded $4.3 million of deferred and contingent consideration payments related to the Origin acquisition.
- The filing identifies risks involving competition, product cycles, cybersecurity and privacy, intellectual property, customer and supplier concentration, variable-rate debt and the phase-out of LIBOR.
- The risk-factor section states that the company has identified material weaknesses in internal controls over financial reporting, while Item 4 states that disclosure controls and procedures were effective and that there were no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether demand remains elevated after COVID-19 restrictions ease and whether the company can sustain recent growth rates.
- Inventory levels, sell-through, product returns and potential write-downs as supply conditions and demand normalize.
- The effect of freight, logistics, component and tariff costs on gross margin, particularly in the Gaming Components and Systems segment.
- Progress in remediating the disclosed internal-control material weaknesses and reconciliation with the Item 4 effectiveness conclusion.
- Debt repayment capacity and exposure to variable interest rates and LIBOR replacement.
- Dependence on Amazon, other major customers, third-party manufacturers and key DRAM suppliers.
- Potential liabilities from cybersecurity incidents, intellectual-property claims, product warranties, tax audits and other contingencies.