Corsair Gaming, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Corsair is a global provider of high-performance gear for gamers, streamers and content creators. Its reportable segments are Gamer and Creator Peripherals and Gaming Components and Systems. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the prior-year periods.
The company completed its corporate reorganization on September 15, 2020 and its initial public offering on September 25, 2020. Corsair sold 7.5 million shares at $17.00 per share and received $118.6 million of proceeds after underwriting discounts and commissions, before offering costs.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net revenue | $457.1 million | $284.4 million | $1.146 billion | $770.6 million |
| Gross profit | $127.9 million | $60.2 million | $311.6 million | $153.8 million |
| Gross margin | 28.0% | 21.2% | 27.2% | 20.0% |
| Operating income | $49.7 million | $11.0 million | $99.5 million | $9.5 million |
| Net income (loss) | $36.4 million | $1.5 million | $60.2 million | $(14.4) million |
| Diluted EPS | $0.40 | $0.02 | $0.69 | $(0.19) |
| Cash flow from operations | Not separately provided | Not separately provided | $100.3 million | $1.1 million |
- Q3 revenue increased 60.7% year over year; nine-month revenue increased 48.7%.
- Q3 operating margin was approximately 10.9%, compared with 3.9% in the prior-year quarter. Nine-month operating margin was approximately 8.7%, compared with 1.2%.
- Revenue growth was broad-based. Q3 Gamer and Creator Peripherals revenue increased 128.8% to $161.6 million, while Gaming Components and Systems revenue increased 38.3% to $295.5 million.
- Q3 segment gross margins were 37.1% for Gamer and Creator Peripherals and 23.0% for Gaming Components and Systems.
- At September 30, 2020, cash was $116.2 million and total cash and restricted cash was $120.1 million. Accounts receivable was $259.5 million and inventory was $210.2 million.
- Net cash provided by operating activities was $100.3 million for the first nine months, while investing activities used $5.9 million and financing activities used $26.4 million.
Debt, Liquidity and Capital Resources
- Debt, net of discounts and issuance costs, was $370.1 million at September 30, 2020, consisting of the First Lien Term Loan. Principal outstanding was $376.9 million, with maturity in 2024.
- The $50.0 million Second Lien Term Loan was fully repaid during the second and third quarters of 2020. Corsair also repaid $86.6 million of First Lien principal in September using IPO proceeds, including a $55.8 million mandatory repayment and a $30.8 million voluntary repayment.
- The revolving credit facility had $48.0 million of available capacity at September 30, 2020. The First Lien facility is secured by substantially all U.S. personal property assets, including intellectual property.
- Management stated that cash balances and operating cash flow should be sufficient to fund principal uses for at least the next 12 months.
- Contractual obligations totaled $580.1 million, including $448.1 million of debt principal and interest, $103.1 million of purchase obligations and $28.9 million of operating lease payments.
Material Changes Versus the Prior Comparable Period
- Revenue, gross profit and profitability increased substantially, with net income replacing the prior-year nine-month net loss.
- Gross margin expanded by 6.8 percentage points in Q3 and 7.2 percentage points for the nine-month period, primarily due to greater volume, improved product mix and lower promotional activity. Higher air freight costs partially offset the improvement.
- SG&A increased 64.1% in Q3 and 51.6% for nine months, driven by higher distribution costs, personnel and bonus expense, marketing, public-company preparation costs and the inclusion of SCUF-related expenses.
- Inventory increased 39.1% from December 31, 2019, while accounts receivable increased 28.3%. These increases contributed to working-capital investment despite strong operating cash flow.
- Stockholders’ equity increased to $388.6 million from $216.8 million at year-end, reflecting IPO proceeds and year-to-date net income.
- The company adopted the new lease standard on January 1, 2020, recognizing $17.9 million of lease liabilities and $17.7 million of right-of-use assets.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal numerical revenue or earnings guidance. Management expected demand for its gear to continue through the remainder of 2020 as COVID-19-related work-from-home and shelter-in-place trends continued, but warned that an economic slowdown could reduce demand.
- COVID-19 caused factory closures, supply-chain disruption and higher distribution and air freight costs. The associated cost pressures were offset by strong demand in the reported periods, but future effects remained uncertain.
- Amazon represented 22.4% of Q3 revenue and 25.1% of nine-month revenue. The ten largest customers represented approximately 49.0% and 51.2%, respectively. Customer purchase orders generally are not long-term commitments.
- Foreign-currency exposure, variable-rate debt, LIBOR transition risk, DRAM pricing volatility, dependence on third-party manufacturers and concentration of manufacturing in Asia could affect future margins, liquidity and revenue.
- Interest expense included approximately $2.9 million of Q3 debt-extinguishment costs and $3.3 million for the nine-month period. The company also recognized a $0.6 million CARES Act tax benefit during the year.
- The filing’s risk factors state that Corsair has identified material weaknesses in internal control over financial reporting and is continuing remediation. Management nevertheless concluded that disclosure controls and procedures were effective at September 30, 2020.
- Goodwill and intangible assets totaled approximately $311.6 million and $265.4 million, respectively, creating potential impairment exposure. The company also reported $103.1 million of non-cancelable purchase commitments.
- The company reported no material adverse effect expected from ordinary-course legal proceedings and no off-balance-sheet arrangements.
Investor Verification Items
- Verify whether COVID-19-driven demand remained durable after 2020 and distinguish structural growth from pandemic-related pull-forward.
- Monitor gross margin for the effects of product mix, promotional activity, DRAM pricing, tariffs and expedited freight.
- Assess customer concentration, particularly Amazon and the ten largest customers, and the absence of long-term purchase commitments.
- Review debt repayment capacity, variable-rate exposure, covenant compliance and the transition away from LIBOR.
- Track inventory, accounts receivable and purchase commitments for signs of working-capital strain or excess inventory.
- Evaluate remediation of the disclosed material weaknesses and the company’s ability to maintain effective financial reporting controls as a newly public company.
- Consider EagleTree’s approximately 78% ownership, controlled-company governance exemptions and potential future share sales after lock-up expiration.