Corsair Gaming, Inc. (CRSR) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section Item 1A, “Risk Factors” and below in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”.
Overview
We are a leading global provider and innovator of high-performance products for gamers and digital creators, such as streamers, Vloggers and broadcasters, many of which build their own PCs using our components. Our industry-leading gaming products help digital athletes, from casual gamers to committed professionals, perform at their peak across PC or console platforms, and our streaming products enable creators to produce studio-quality content to share with friends or to broadcast to millions of fans. Our PC components products offer our customers multiple options to build their customized gaming and workstation desktop PCs. Our solution is the most complete suite of products that address the most critical components for both game performance and streaming. Our product offering is enhanced by our two proprietary software platforms: iCUE for gamers and the Elgato streaming suite for content creators, including our Stream Deck control software, which provide unified, intuitive performance, and aesthetic control and customization across their respective product families. We also offer digital services to enhance the customer experience by integrating esports, coaching, Elgato's marketplace, customer care and extended warranty into our product offerings.
We group our products into two categories (operating segments):
•
Gamer and Creator Peripherals. Includes our high-performance gaming keyboards, mice, headsets, controllers, and streaming products, which includes capture cards, Stream Decks, microphones and audio interfaces, our Facecam streaming cameras, studio accessories, and gaming furniture, among others.
•
Gaming Components and Systems. Includes our high-performance power supply units, or PSUs, cooling solutions, computer cases, and DRAM modules, as well as high-end prebuilt and custom-built gaming PCs and laptops, and gaming monitors, among others.
We are committed to continuing to grow in our current markets as well as new markets through the development of innovative technologies and by entering into new categories through organic growth or acquisition. In recent years, we have entered into several new markets, for example the cameras market for content creators and the gaming monitors market for both gamers and content creators. We continue to expand our product portfolio and in 2023, we launched 108 new products.
In July 2023, we completed the acquisition of Drop for a cash purchase consideration of approximately $13.2 million, net of $0.6 million of cash acquired. Drop, a community-based e-commerce company headquartered in San Francisco, California, specializes in customized DIY keyboards and keycaps. We expect this acquisition to give us a leading presence in the personalized keyboards market which is one of the fastest growing trends in the gaming peripheral space as well as allow us to offer specialized Corsair and Elgato products to Drop's enthusiast community. Drop's operating results are included in our Gamer and Creator Peripherals segment with effect from July 14, 2023.
Summary of Financial Results
Our net revenue was $1,459.9 million, $1,375.1 million, and $1,904.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. Our gross margin was 24.7%, 21.6%, and 27.0% for the years ended December 31, 2023, 2022, and 2021, respectively. We had net income (loss) of $(2.6) million, $(54.4) million, and $101.0 million for the years ended December 31, 2023, 2022, and 2021, respectively.
As of December 31, 2023 and 2022, we had cash and restricted cash, in the aggregate, of $178.6 million and $147.8 million, respectively. Net cash provided by operating activities was $89.2 million, $66.4 million, and $20.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Further information on our industry, our market opportunity and competitive strengths is presented in Part I, Item 1, “Business” of this Annual Report on Form 10-K.
Key Factors Affecting Our Business
Our results of operations and financial condition are affected by numerous factors, including those discussed in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and those described below.
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Impact of Macroeconomic Conditions. Our business and financial performance depend significantly on worldwide economic conditions. We face global macroeconomic challenges including ongoing effects of geopolitical conflicts, such as the ongoing war between Russia and Ukraine, the ongoing conflict in Gaza, including the heightened tensions in the Red Sea, and any potential conflicts between China and Taiwan, supply chain constraints, uncertainty in global financial markets and the risk of a recession, inflationary trends, volatility in exchange rates, lingering impacts from the COVID-19 pandemic and evolving dynamics in the global trade environment. We also experience seasonality in the sale of our products which may be affected by general economic conditions. During 2023, we observed continued market uncertainty and inflationary pressures, however, in the second half of 2023, we have observed some recovery in the markets. In 2022, we experienced elevated industry wide inventory in our distribution channels stemming from overall demand weakness at that time, which led to us recognizing higher inventory impairment related charges in 2022 in order to rationalize our inventory levels to align with the reduced revenue in the period, however, towards the end of 2022 our inventory level began to stabilize and we exited 2023 with normalized inventory levels. These market dynamics, which we expect will continue in the short-term, have created new and different demand dynamics in our markets and have had significant impacts on our financial results.
We are exposed to fluctuations in foreign currency exchange rates. As a result of our foreign sales and operations, we have revenue, payroll and other operating expenses denominated in foreign currencies, in particular the Chinese Yuan, Euro and British Pound. Unfavorable movement in the exchange rate between the U.S. dollar and the currencies we conduct sales or operate in may negatively impact our financial results. For example, our net revenue for the year ended December 31, 2022 was in part negatively impacted by the strengthening of the U.S. dollar against the Euro and the British Pound. Conversely, the weakening of the U.S. dollar against the Euro and the British Pound in 2023 contributed partially to the increase in our net revenue for the year ended December 31, 2023 and we saw our sales to the EMEA region increased by approximately 26% in 2023 compared to 2022.
The extent of the impact of macroeconomic conditions, geopolitical tensions and the lingering effects from the COVID-19 pandemic on our business, sales, results of operations, cash flows and financial condition will depend on future developments, which are not within our control and are highly uncertain and cannot be predicted. We will continue to evaluate these risks and uncertainties and further our mitigation plans.
Impact of Industry Trends. Our results of operations and financial condition are impacted by industry trends in the gaming market, including:
•
Increasing gaming engagement. We believe that gaming’s increasing time share of global entertainment consumption will drive continued growth in spending on both games and gaming products. Gaming continues to become increasingly social, as streaming viewership becomes more widely adopted along with increasing numbers of content creators. This trend, which has accelerated in the past few years experienced a setback in 2022 primarily due to challenging macroeconomic conditions and the ongoing war between Russia and Ukraine. While the gaming peripherals market showed signs of recovery in 2023 in North America and Europe, the streaming market has yet to recover to pre-2022 levels. As and when it does, we believe that we are well positioned to serve this market with best-in-class tools for content creation. We expect the overall gaming market to enter a new growth phase in 2024 as we enter a refresh cycle from the surge of consumer spending that occurred during the COVID-19 pandemic. Specifically, the video gaming industry is experiencing a significant shift and we believe is poised for continued growth and innovation. The convergence of quality content, console availability, favorable regulatory developments, and the expanded implementation of AI are driving such growth and innovation.
•
Introduction of new high-performance computing hardware and sophisticated games. We believe that the introduction of more powerful CPUs and GPUs that place increased demands on other system components, such as memory, power supply or cooling, has a significant effect on increasing the demand for our products. In addition, we believe that the introduction and success of games with sophisticated graphics that place increasing demands on system processing speed and capacity and therefore require more powerful CPUs or GPUs, which in turn drives demand for our high-performance gaming components and systems, such as PSUs and cooling solutions, and our gaming PC memory. As a result, our operating results may be materially affected by the timing of, and the rate at which computer hardware companies introduce, new and enhanced CPUs and GPUs, the timing of, and rate at which computer game companies and developers introduce, sophisticated new and improved games that require increasingly high levels of system and graphics processing power, and whether these new products and games are widely accepted by gamers. During 2023, we experienced overall demand increase for our gaming components and systems products primarily driven by the self-built PC market expansion from the increase in availability of new and reasonably priced GPUs and CPUs as well as the release of new game titles. In 2024, we will be mid-cycle for new GPU platforms and do not expect a similar increase in demand driven by these new GPU platforms until the next substantial GPU launch which is likely to impact 2025.
Impact of Customer Concentration. We operate a global sales network that consists primarily of retailers (including e-retailers), as well as distributors we use to access certain retailers. Further, a limited number of retailers and distributors represent a significant
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portion of our net revenue, with e-retailer Amazon accounting for 30.7%, 26.0%, and 26.7% of our net revenue for 2023, 2022, and 2021, respectively, and sales to our ten largest customers accounting for approximately 55.4%, 52.3%, and 51.7% of our net revenue for the same periods, respectively. Our customers, including Amazon, typically do not enter into long-term agreements to purchase our products but instead enter into purchase orders with us. As a result of this concentration and the lack of long-term agreements with our customers, a primary driver of our net revenue and operating performance is maintaining good relationships with these retailers and distributors. To help maintain good relationships, we implement initiatives such as our updated packaging design which helps e-retailers such as Amazon process our packages more efficiently. Further, given our global operations, a significant percentage of our expenses relate to shipping costs. Our ability to effectively optimize these shipping costs, for example utilizing expensive shipping options such as air freight for smaller packages and more urgent deliveries and more cost-efficient options, such as train or boat, for other shipments, has an impact on our expenses and results of operations.
Impact of New Product Introductions. Gamers demand new technology and product features, and we expect our ability to accurately anticipate and meet these demands will be one of the main drivers for any future sales growth and market share expansion. We believe our net revenue was favorably impacted by the release of 108 new products in 2023. While we intend to continue to develop and release new products, there can be no assurance that our new product introductions will have a favorable impact on our operating results or that customers will choose our new products over those of our competitors.
Impact of Seasonal Sales Trends. We have experienced and expect to continue to experience seasonal fluctuations in sales due to the buying patterns of our customers and spending patterns of gamers. Our net revenue has generally been lower in the first and second calendar quarters due to lower consumer demand following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, GPUs, and other computer hardware products, which usually take place in the second calendar quarter, and which tend to drive sales in the following two quarters. Further, our net revenue tends to be higher in the third and fourth calendar quarters due to seasonal sales such as “Black Friday” and “Cyber Monday” as well as “Singles Day” in China, as retailers tend to make purchases in advance of these sales. Our sales also tend to be higher in the fourth quarter due to the introduction of new consoles and high-profile games in connection with the holiday season. As a consequence of seasonality, our net revenue for the second calendar quarter is generally the lowest of the year followed by the first calendar quarter. Historical seasonal patterns may not continue in the future and have been impacted, for example, in 2020 and 2021, and may be further impacted in the future, by macroeconomic factors, increasing supply constraints, GPU shortages, shifts in customer behavior and the continuing impacts of the COVID-19 pandemic.
Impact of Product Mix. Our Gamer and Creator Peripherals segment has a higher gross margin than our Gaming Components and Systems segment. As a result, our overall gross margin is affected by changes in product mix. External factors can have an impact on our product mix, such as popular game releases that can increase sales of peripherals and availability of new CPUs and GPUs that can impact component sales. In addition, within our Gamer and Creator Peripherals and Gaming Components and Systems segments, gross margin varies between products, and significant shifts in product mix within either segment may also significantly impact our overall gross margin.
Impact of Fluctuations in Integrated Circuits Pricing. Integrated circuits, or ICs, account for most of the cost of producing our high-performance memory products. IC prices are subject to pricing fluctuations which can affect the average sales prices of memory modules, and thus impact our net revenue, and can have an effect on gross margins. The impact on net revenues can be significant as our high-performance memory products, included within our Gaming Components and Systems segment, represent a significant portion of our net revenue.
Components of our Operating Results
Net Revenue
We generate materially all of our net revenue from the sale of gamer and creator peripherals and gaming components and systems to retailers, including e-retailers, gamers and distributors worldwide. Our revenue is recognized net of allowances for returns, discounts, sales incentives and any taxes collected from customers.
Cost of Revenue
Cost of revenue consists of product costs, including costs of contract manufacturers, inbound freight costs from manufacturers to our distribution hubs as well as inter-hub shipments, cost of materials and overhead, duties and tariffs, warranty replacement cost to process and rework returned items, depreciation of tooling equipment, warehousing costs, excess and obsolete inventory write-downs,
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and certain allocated costs related to facilities and information technology, or IT, and personnel-related expenses and other operating expenses related to supply chain logistics.
Operating Expenses
Operating expenses consist of sales, general and administrative expenses and product development expenses.
Sales, general and administrative. Sales, general and administrative, or SG&A, expenses represent the largest component of our operating expenses and consist of distribution costs, sales, marketing and other general and administrative costs. Distribution costs include outbound freight and the costs to operate our distribution hubs. Sales and marketing costs relate to the costs to operate our global sales force that works in conjunction with our channel partners, gaming team and event sponsorships, advertising and marketing promotions of our products and services, costs of maintaining our web store and credit card processing fees related to sales on our webstore, personnel-related cost and allocated overhead costs. General and administrative costs consist primarily of personnel-related expenses for our finance, legal, human resources, IT and administrative personnel, as well as the costs of professional services related to these functions and allocated overhead costs.
Product development. Product development costs are generally expensed as incurred. Product development costs consist primarily of the costs associated with the design and testing of new products and improvements to existing products. These costs relate primarily to compensation of personnel and consultants involved with product design, definition, compatibility testing and qualification, as well as depreciation costs of equipment used, prototype material costs and allocated overhead costs.
Interest Expense
Interest expense consists of interest associated with our debt financing arrangements, including our revolving line of credit, amortization of debt issuance costs and debt discounts, and loss from debt extinguishment, consisting of the write-off of unamortized debt discount and fees associated with the 2021 refinancing of our term loan.
Interest Income
Interest income consists of interest earned on interest-bearing accounts.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in foreign currencies, net fair value gains and losses from our foreign currency forward contracts, and the impairment loss on available-for-sale security.
Income Tax (Expense) Benefit
We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of foreign tax credits and changes in tax laws. Deferred tax assets are reduced through the establishment of a valuation allowance, if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the tax and financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest represents the share of the net income of iDisplay attributable to the 49% ownership interest of iDisplay we did not acquire.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2023, compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 27, 2023.
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The following tables set forth the components of our consolidated statements of operations, in dollars and as a percentage of total net revenue, for each of the periods presented.
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Net revenue | $ | 1,459,875 | $ | 1,375,098 | ||||
| Cost of revenue | 1,099,612 | 1,078,466 | ||||||
| Gross profit | 360,263 | 296,632 | ||||||
| Operating expenses: | ||||||||
| Sales, general and administrative | 285,313 | 284,932 | ||||||
| Product development | 65,261 | 66,493 | ||||||
| Total operating expenses | 350,574 | 351,425 | ||||||
| Operating income (loss) | 9,689 | (54,793 | ) | |||||
| Other (expense) income: | ||||||||
| Interest expense | (17,420 | ) | (9,560 | ) | ||||
| Interest income | 6,839 | 374 | ||||||
| Other (expense) income, net | (2,587 | ) | 213 | |||||
| Total other expense, net | (13,168 | ) | (8,973 | ) | ||||
| Loss before income taxes | (3,479 | ) | (63,766 | ) | ||||
| Income tax benefit | 2,442 | 9,820 | ||||||
| Net loss | (1,037 | ) | (53,946 | ) | ||||
| Less: Net income attributable to noncontrolling interest | 1,553 | 442 | ||||||
| Net loss attributable to Corsair Gaming, Inc. | $ | (2,590 | ) | $ | (54,388 | ) |
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Net revenue | 100.0 | % | 100.0 | % | ||||
| Cost of revenue | 75.3 | 78.4 | ||||||
| Gross profit | 24.7 | 21.6 | ||||||
| Operating expenses: | ||||||||
| Sales, general and administrative | 19.5 | 20.7 | ||||||
| Product development | 4.5 | 4.8 | ||||||
| Total operating expenses | 24.0 | 25.5 | ||||||
| Operating income (loss) | 0.7 | (3.9 | ) | |||||
| Other (expense) income: | ||||||||
| Interest expense | (1.2 | ) | (0.7 | ) | ||||
| Interest income | 0.5 | 0.0 | ||||||
| Other (expense) income, net | (0.2 | ) | 0.0 | |||||
| Total other expense, net | (0.9 | ) | (0.7 | ) | ||||
| Loss before income taxes | (0.2 | ) | (4.6 | ) | ||||
| Income tax benefit | 0.2 | 0.7 | ||||||
| Net loss | 0.0 | (3.9 | ) | |||||
| Less: Net income attributable to noncontrolling interest | 0.1 | 0.0 | ||||||
| Net loss attributable to Corsair Gaming, Inc. | (0.1 | )% | (3.9 | )% |
Comparison of Years Ended December 31, 2023 and 2022
Net Revenue
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Net revenue | $ | 1,459,875 | $ | 1,375,098 |
Net revenue increased $84.8 million, or 6.2%, in 2023 as compared to 2022. The increase was due to a 13.6% increase in sales for our Gaming Components and Systems segment, which was partially offset by a 9.8% decrease in sales for our Gamer and Creator Peripherals segment.
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Overall, the demand was higher for most of our components and systems products in 2023 primarily driven by the expansion of self-built PC market due to the increase in availability of new and reasonably priced GPUs and CPUs as well as the release of new game titles. The decrease in demand for our peripherals products was primarily due to the challenging macroeconomic environment, and also due in part to the pricing pressure in 2023 as our competitors tried to clear their excess inventory in the distribution channels through heavy discounting.
Gross Profit and Gross Margin
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (in thousands, except percentages) | ||||||||
| Gross profit | $ | 360,263 | $ | 296,632 | ||||
| Gross margin | 24.7 | % | 21.6 | % |
Gross margin increased by 3.1% in 2023 as compared to 2022 primarily due to an improvement in product costs from suppliers, lower freight costs and lower inventory impairment and related charges in 2023 as compared to 2022 due to inventory levels normalizing in 2023, and the introduction of new higher margin products.
We expect our gross margin will continue to improve in 2024 primarily due to an expected improved product mix with more sales of our higher margin products in the Gamer and Creator Peripherals segment and lower planned promotional activities.
Sales, General and Administrative (SG&A)
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Sales, general and administrative | $ | 285,313 | $ | 284,932 |
SG&A expenses increased $0.4 million, or 0.1%, in 2023 as compared to 2022. The increase was primarily due to higher personnel-related costs and higher legal expenses, partially offset by lower outbound freight costs, and lower amortization of capitalized cloud computing arrangements implementation costs.
Product Development
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Product development | $ | 65,261 | $ | 66,493 |
Product development expenses decreased $1.2 million, or 1.9%, in 2023 as compared to 2022. The decrease was primarily due to lower contractors and outsourcing costs and lower amortization of intangible assets.
Interest Expense, Interest Income and Other (Expense) Income, Net
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Interest expense | $ | (17,420 | ) | $ | (9,560 | ) | ||
| Interest income | 6,839 | 374 | ||||||
| Other (expense) income, net | (2,587 | ) | 213 |
Interest expense increased $7.9 million, or 82.2%, in 2023 as compared to 2022 primarily due to higher interest rates on our Term Loan.
Interest income increased $6.5 million, or 1728.6%, in 2023 as compared to 2022 primarily due to a higher cash deposit balance in 2023 resulting from the proceeds from our underwritten public offering in the fourth quarter of 2022, and, to a lesser extent, due to higher interest rates in 2023.
Other (expense) income, net relates primarily to the gains and losses resulting from the impact of foreign exchange rate changes on our cash, accounts receivable and intercompany balances denominated in currencies other than the functional currencies in our subsidiaries, as well as the net fair value gain and loss related to our foreign currency forward contracts. Our foreign currency exposure is primarily driven by fluctuations in the foreign currency exchanges rates of the Euro, British Pound and the Chinese Yuan. The change in other income (expense), net in 2023 as compared to 2022 was primarily due to the impact from the depreciation of the U.S. dollar against the Euro and British Pound, which was offset partially by the impairment loss incurred in 2022 on our available-for-sale security.
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Income Tax (Expense) Benefit
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (in thousands, except percentages) | ||||||||
| Loss before income taxes | $ | (3,479 | ) | $ | (63,766 | ) | ||
| Income tax benefit | 2,442 | 9,820 | ||||||
| Effective tax rate | 70.2 | % | 15.4 | % |
We are subject to income taxes in the United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to United States income, the utilization of net operating loss and tax credit carry forwards, changes in geographic mix of income and expense, changes in management’s assessment of matters such as the ability to realize deferred tax assets, and changes in tax laws.
Our effective tax rates were tax benefit of 70.2% and 15.4% for 2023 and 2022, respectively. The increase in our effective rate was primarily due to the generation of foreign tax credits from foreign income under Subpart F regime, as well as other types of tax credits, which were partially offset by the write-off of certain deferred tax assets mainly due to the deduction limitation under Section 162(m) of the Internal Revenue Code on some of our stock-based compensation expense.
Segment Results
Segment Net Revenue
The following table sets forth our net revenue by segment expressed both in dollars (thousands) and as a percentage of net revenue:
| Years Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||||
| Gamer and Creator Peripherals Segment | $ | 394,881 | 27.0 | % | $ | 437,817 | 31.8 | % | ||||||||
| Gaming Components and Systems Segment | ||||||||||||||||
| Memory Products | 517,416 | 35.5 | 504,589 | 36.7 | ||||||||||||
| Other Component Products | 547,578 | 37.5 | 432,692 | 31.5 | ||||||||||||
| 1,064,994 | 73.0 | 937,281 | 68.2 | |||||||||||||
| Total Net Revenue | $ | 1,459,875 | 100.0 | % | $ | 1,375,098 | 100.0 | % |
Gamer and Creator Peripherals Segment
Net revenue of the Gamer and Creator Peripherals segment decreased $42.9 million, or 9.8%, in 2023 as compared to 2022 primarily due to demand softness across a majority of products in this segment driven mainly by a challenging macroeconomic environment, including the adverse impacts from the war between Russia and Ukraine and inflationary pressure on consumer spending. The decrease in revenue was also due in part to a more competitive pricing environment in 2023 as our competitors tried to clear their excess inventory in the distribution channels through heavy discounting.
Gaming Components and Systems Segment
Net revenue of the Gaming Components and Systems segment increased $127.7 million, or 13.6% in 2023 as compared to 2022 due to increases in sales in nearly all product categories, driven mainly by the strong self-built PC market activity triggered by the launch of new, reasonably priced GPUs and CPUs that were readily available and the release of new game titles.
Segment Gross Profit and Gross Margin
The following table sets forth our gross profit expressed in dollars (thousands) and gross margin (which we define as gross profit as a percentage of net revenue) by segment:
| Years Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||||||||
| Gamer and Creator Peripherals Segment | $ | 132,982 | 33.7 | % | $ | 125,079 | 28.6 | % | ||||||||
| Gaming Components and Systems Segment | ||||||||||||||||
| Memory Products | 77,436 | 15.0 | 75,236 | 14.9 | ||||||||||||
| Other Component Products | 149,845 | 27.4 | 96,317 | 22.3 | ||||||||||||
| 227,281 | 21.3 | 171,553 | 18.3 | |||||||||||||
| Total Gross Profit | $ | 360,263 | 24.7 | % | $ | 296,632 | 21.6 | % |
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Gamer and Creator Peripherals Segment
The gross margin of the Gamer and Creator Peripherals segment increased 5.1% in 2023 as compared to 2022 primarily due to lower product costs from suppliers, lower freight costs, and lower inventory impairment and related charges, as well as the introduction of new higher margin products, such as the Elgato Facecam Pro.
Gaming Components and Systems Segment
The gross margin of the Gaming Components and Systems segment increased 3.0% in 2023 as compared to 2022 primarily due an improved product mix with more sales from the higher margin products, lower product costs from suppliers, lower inventory impairment and related charges and lower freight costs and tariffs. These positive impacts to gross margin were partially offset by higher promotional activities in 2023.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity have been the payments received from customers purchasing our products, the borrowings under our Credit Agreement (defined below) and the net proceeds we received from our underwritten public offerings.
Our principal uses of cash generally will include purchases of inventory, payroll and other operating expenses related to the development and marketing of our products, capital expenditure, repayments of debt and related interest, income tax payments, future investments in business and technology, and selective mergers and acquisitions.
As of December 31, 2023, we had cash and restricted cash, in aggregate of $178.6 million, including $23.2 million held by our foreign subsidiaries. Amounts held outside of the United States are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the United States generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations.
We believe that the anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash balances at December 31, 2023, supplemented with the borrowings under our revolving credit facility will be sufficient to fund our principal uses of cash for at least the next twelve months. In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on the demand for our products. We may require additional funding and need or choose to raise the required funds through borrowings or public or private sales of debt or equity securities. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financial covenants that would restrict our operations. There can be no assurance that any such equity or debt financing will be available on favorable terms, or at all. Our liquidity is subject to various risks including the risks identified in the section titled “Risk Factors” in Item 1A and market risks identified in the section titled “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A, each of which is incorporated herein by reference.
Liquidity
The following table summarizes our cash flows for the periods indicated (in thousands):
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 89,153 | $ | 66,389 | ||||
| Investing activities | (26,981 | ) | (47,034 | ) | ||||
| Financing activities | (37,387 | ) | 72,609 |
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Cash Flows from Operating Activities
Net cash provided by operating activities was $89.2 million for 2023 and consisted of non-cash adjustments of $79.5 million and a net cash inflow of $10.7 million from changes in our net operating assets and liabilities, offset partially by a net loss of $1.0 million. The non-cash adjustments consisted primarily of depreciation and amortization and stock-based compensation expense, which were partially offset by changes in deferred income taxes. The net cash inflow from changes in our net operating assets and liabilities was primarily related to an increase in accounts payable mainly due to timing of payments and purchases. These cash inflows were partially offset by an increase in inventory purchases and account receivables driven by increase in revenue in 2023.
Net cash provided by operating activities was $66.4 million for 2022 and consisted of non-cash adjustments of $58.8 million and a net cash inflow of $61.5 million from changes in our net operating assets and liabilities, offset partially by a net loss of $53.9 million. The non-cash adjustments consisted primarily of depreciation and amortization and stock-based compensation expense, which were partially offset by changes in deferred income taxes. The net cash inflow from changes in our net operating assets and liabilities was primarily related to a decrease in inventory purchases and decrease in account receivables. These cash inflows were partially offset by a decrease in accounts payable mainly due to timing of payments and purchases as well as a decrease in the accrual for sales returns, customer incentives, freight costs and bonus expenses.
Cash Flows from Investing Activities
Cash used in investing activities was $27.0 million for 2023 and consisted of $14.2 million for the Drop acquisition (net of cash acquired), and $12.8 million capital expenditure, primarily for equipment and software.
Cash used in investing activities was $47.0 million for 2022 and consisted of $26.3 million capital expenditure including renovation and furnishing of our headquarters in Milpitas, California, as well as purchases of equipment and software, $19.5 million for the iDisplay acquisition (net of cash acquired), and $1.0 million for the investment in an available-for-sale convertible note.
Cash Flows from Financing Activities
Net cash used in financing activities was $37.4 million for 2023 and consisted primarily of $41.0 million repayment of debt, $1.4 million payment of taxes related to net share settlement of equity awards, and $1.0 million payment of dividends to noncontrolling interest. These cash outflows were partially offset by proceeds received from the issuance of shares through the employee equity incentive plans of $7.4 million. We did not borrow from our revolving credit facility in 2023.
Net cash provided by financing activities was $72.6 million for 2022 and consisted primarily of $81.7 million net proceeds from the issuance of common stock in connection with our underwritten public offering in the fourth quarter of 2022 pursuant to the 2022 Shelf Registration Statement, and $7.0 million proceeds received from the issuance of shares through our employee equity incentive plans. These cash inflows were partially offset by $9.5 million repayment of debt and debt issuance costs, $4.3 million payment of dividends to noncontrolling interest, and $1.5 million payment of taxes related to net share settlement of equity awards. During 2022, we also borrowed $701.5 million from our revolving credit facility to fund our operations, and the full amount was repaid in 2022.
Capital Resources
Credit Agreement (Term Loan and Revolving Credit Facility)
On September 3, 2021, we refinanced the First Lien Credit and Guaranty Agreement with a new Credit Agreement. The new Credit Agreement provides for a total commitment of $350.0 million, consisting of a $100.0 million revolving credit facility and a $250.0 million term loan facility.
The Credit Agreement is available for a period of five years, maturing September 2026, and provides for additional incremental facilities up to a maximum aggregate principal amount of $250.0 million, subject to the satisfaction of certain conditions. We may prepay the Term Loan and the Revolving Facility at any time without premium or penalty. We prepaid $34.1 million and $3.8 million of the Term Loan principal in the years ended December 31, 2023 and 2022, respectively.
The Term Loan and Revolving Facility under the Credit Agreement will each bear interest at our election, either (a) LIBOR plus a percentage spread (ranging from 1.25% to 2.0%) based on our total net leverage ratio, or (b) the base rate (described in the Credit Agreement as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month LIBOR plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.0%) based on our total net leverage ratio. The Credit Agreement also requires the payment of a commitment fee on the daily unused portion of the Revolving Facility, which initially ranged from 0.2% to 0.35% based on our total net leverage ratio.
Our obligations under the Credit Agreement are guaranteed by substantially all of our U.S. subsidiaries and secured by a security interest in substantially all assets of the Company and the guarantor subsidiaries, subject to certain exceptions detailed in the Credit Agreement and related ancillary documentation.
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On June 30, 2022, we entered into a First Amendment of the Credit Agreement (“First Amendment”) which, among other changes, resulted in the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) being utilized as a replacement rate for LIBOR. Consequently, following the First Amendment, the Term Loan and Revolving Facility will each bear interest at our election at either (a) BSBY plus a percentage spread (ranging from 1.25% to 2.25%) based on our total net leverage ratio, or (b) the base rate (as described in the Credit Agreement as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month BSBY plus 1.0%) plus a percentage spread (ranging from 0.25% to 1.25%) based on our total net leverage ratio. In addition, pursuant to the First Amendment, the maximum permitted Consolidated Total Net Leverage Ratio was also amended to increase to 3.50 to 1.00 between the quarters ending September 30, 2022 through and including March 31, 2023, and such ratio will revert to 3.00 to 1.00 from the quarter ended June 30, 2023 and each quarter thereafter; provided, that upon the occurrence of a Qualified Acquisition (as defined in the Credit Agreement), such ratio can be increased to 3.50 to 1.00 temporarily provided all the requirements set forth in the Credit Agreement are met. Additionally, the commitment fee on the unused portion of the Revolving Facility was amended to range from 0.2% to 0.4% based on our total net leverage ratio.
On November 28, 2022, we entered into a Third Amendment (“Third Amendment”) to the Credit Agreement which provides for, among other things: (i) a decrease in the required minimum Consolidated Interest Coverage Ratio to 2.50 to 1.00 for the quarters ending on and after March 31, 2023 through and including December 31, 2023; (ii) an increase in the maximum permitted Consolidated Total Net Leverage Ratio to 3.75 to 1.00 for the quarters ending December 31, 2022 and March 31, 2023, stepping down to 3.50 to 1.00 for the quarter ending June 30, 2023, and 3.25 to 1.00 for the quarters ending September 30, 2023 and December 31, 2023; and (iii) a modified pricing grid providing for an increased margin (ranging from 1.50% per annum to 3.25% per annum for loans bearing interest at the BSBY rate, and 0.50% per annum to 2.25% per annum for loans bearing interest at the base rate, in each case depending on our total net leverage ratio) for the period of December 31, 2022 through December 31, 2023. Additionally, the commitment fee on the unused portion of the Revolving Facility was amended to range from 0.25% to 0.5% based on our total net leverage ratio, for the period of December 31, 2022 through December 31, 2023. According to the provision in the Third Amendment, with effect from January 1, 2024, the aforementioned amended terms will revert back to the terms as amended by the First Amendment, including the required minimum Consolidated Interest Coverage Ratio, the required maximum permitted Consolidated Total Net Leverage Ratio, the interest rate margin and the commitment fee on the unused portion of the Revolving Facility.
As of December 31, 2023, we were not in default under the Credit Agreement. As of December 31, 2023, the total principal outstanding of the Term Loan was $199.0 million and the available and uncommitted capacity under the Revolving Credit Facility was $100 million.
Contractual Cash and Other Obligations
The following table summarizes our contractual cash and other obligations as of December 31, 2023 (in thousands):
| Payments Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
| Debt principal and interest payments (1) | $ | 226,470 | $ | 25,092 | $ | 201,378 | $ | — | $ | — | |||||||||
| Inventory-related purchase obligations (2) | 117,682 | 117,682 | — | — | — | ||||||||||||||
| Operating lease obligations (3) | 56,460 | 10,201 | 15,621 | 12,425 | 18,213 | ||||||||||||||
| Other purchase obligations (4) | 9,495 | 9,142 | 353 | — | — | ||||||||||||||
| Total | $ | 410,107 | $ | 162,117 | $ | 217,352 | $ | 12,425 | $ | 18,213 |
(1)
Amounts represent the principal cash payments as of December 31, 2023, of our Term Loan based on the repayment schedule according to the Credit Agreement and the expected interest payments associated with the Term Loan. See Note 8 “Debt” to our consolidated financial statements for more information.
(2)
Amounts represent an estimate of purchase obligations related to inventory.
(3)
Amounts represent contractual obligations from our operating leases for offices and warehouse spaces.
(4)
Amounts represent non-cancelable obligations related to capital expenditures, software licenses, marketing and other activities.
As of December 31, 2023, we had $2.6 million in non-current income tax payable, including interest and penalties, related to our income tax liability for uncertain tax positions. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the contractual cash obligation table above.
Critical Accounting Polices and Estimates
A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), which requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, as well as the
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reported amounts of revenue and expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results may differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition.
We believe the accounting policies below are critical in the portrayal of our financial condition and results of operations, and involve management’s most difficult, subjective, or complex judgments.
Revenue Recognition and Accruals for Product Returns and Customer Incentive Programs
We offer product return rights and customer incentive programs. Customer incentive programs include special pricing arrangements, promotions, rebates and volume-based incentives.
Rights of return vary by customer and range from the right to return products to limited stock rotation rights allowing the exchange of a percentage of the customer’s quarterly purchases. Estimates of expected future product returns qualify as variable consideration and are recorded as a reduction of the transaction price of the contract at the time of sale based on historical return rates. Return rates are influenced by product life cycle status, new product introductions, market acceptance of products, sales levels, the type of customer, seasonality, product quality issues, competitive pressures, operational policies and procedures, and other factors. Return rates can fluctuate over time but are sufficiently predictable to allow us to estimate expected future product returns.
Customer incentive programs are considered variable consideration, which we estimate and record as a reduction to revenue at the time of sale. Significant management judgments and estimates must be used to determine the cost of these programs to be included in the transaction price in any accounting period including a reduction for the estimate of amounts that ultimately will not be claimed for certain customer incentive programs. We use the expected value method to arrive at the amount of variable consideration. The Company constrains variable consideration until the likelihood of a significant revenue reversal is not probable. The accrual estimates are based on actual sales data, historical experience, forecasted incentives, anticipated volume of future purchases, and inventory levels in the channel.
Recent Accounting Pronouncements
Refer to Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K for recent accounting pronouncements adopted and to be adopted.