Corsair Gaming, Inc. (CRSR) FY 2024 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, particularly streamers, 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, 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, sim racing products, and gaming furniture, among others.
•
Gaming Components and Systems. Includes our high-performance 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 acquisitions. In recent years, we have entered into several new markets, for example the camera market for content creators and the sim racing market for gamers. We continue to expand our product portfolio and in 2024, we launched 78 new products.
On September 19, 2024, we completed the acquisition of the Fanatec Business for a purchase consideration of $43.7 million. Refer to Note 4, “Business Combinations-Fanatec Acquisition” for more information on this transaction. The Fanatec sim racing product line, which fully complements our gaming PCs, gaming and streaming peripherals, and monitors, is expected to expand our business in these markets. Based on the external analysts’ and management's estimates, the total addressable market for sim racing in 2024 is approximately $1 billion. Fanatec’s results of operations are included in our consolidated statements of operations with effect from September 19, 2024.
Summary of Financial Results
Our net revenue was $1,316.4 million, $1,459.9 million, and $1,375.1 million for the years ended December 31, 2024, 2023, and 2022, respectively. Our gross margin was 24.9%, 24.7%, and 21.6% for the years ended December 31, 2024, 2023, and 2022, respectively. We had net losses of $85.2 million, $2.6 million, and $54.4 million for the years ended December 31, 2024, 2023, and 2022, respectively.
As of December 31, 2024 and 2023, we had cash and restricted cash, in the aggregate, of $109.6 million and $178.6 million, respectively. Net cash provided by operating activities was $35.9 million, $89.2 million, and $66.4 million for the years ended December 31, 2024, 2023, and 2022, 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 continue to face global macroeconomic challenges including the ongoing conflicts in Ukraine and the Middle East, the tensions in the Red Sea, and any potential conflicts between China and Taiwan, supply chain constraints, uncertainty in key financial markets and the risk of a recession, inflationary trends, volatility in exchange rates, evolving dynamics in the global trade environment and changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports or exports from or to countries where we manufacture or sell our products. We also experience seasonality in the sale of our products, which may be affected by general economic conditions. The extent of the impact of macroeconomic conditions and geopolitical tensions 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.
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.
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. More members of the younger generation are gamers and spend more time on gaming related activities than older generations. We believe these trends will over time bring more gamers and creators to purchase dedicated hardware and help grow the market for peripheral products. The growth of these markets will not be linear, as these markets are impacted by macroeconomic and consumer confidence conditions, amongst other conditions. Our Gaming Components and Systems segment makes components used for self-built PCs and full gaming systems. The self-built PC market is heavily influenced by the timing of release of new game titles and next-gen CPUs and GPUs, as discussed in the bullet below. As for the peripherals market, our Gamer and Creator Peripherals segment benefited from an improvement in the peripherals market compared to last year. We were also able to increase our sales in this segment through expanding our product offerings by adding new products such as our teleprompter offerings, new PC controllers and mobile controllers, and several new keyboards. We expect this trend in peripheral market improvement and expansion to continue in 2025.
•
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, 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 in late 2022 of new and reasonably priced GPUs and CPUs as well as the release of new game titles. In 2024, we are mid-cycle for new GPU platforms and as a result, we did not experience a similar increase in demand driven by the new GPU platforms and some highly anticipated game title releases until the next substantial GPU launch in early 2025. The slowdown in the self-built PC market activity in the first nine months of 2024 led to an overall net decrease in demand for our products in the Gaming Components and Systems segment in 2024 compared to 2023.
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 portion of our net revenue, with e-retailer Amazon accounting for 30.9%, 30.7%, and 26.0% of our net revenue for 2024, 2023, and 2022, respectively, and sales to our ten largest customers accounting for approximately 53.1%, 55.4%, and 52.3% 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
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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 ground or ocean freight, 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 in 2024 was favorably impacted by the release of 78 new products in 2024. 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 may be further impacted in the future, by macroeconomic factors, increasing supply constraints, GPU shortages, and shifts in customer behavior. For example, our revenue seasonality for the third quarter of 2024 was negatively impacted due to a lower demand for our products in the Gaming Components and Systems segment which was primarily attributable to the delayed launches of new, reasonably priced GPUs and CPUs, as well as the postponed releases of new game titles to early 2025.
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. 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, and certain allocated costs related to facilities and information technology (“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.
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Sales, general and administrative. Sales, general and administrative (“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, and amortization of debt issuance costs and debt discounts.
Interest Income
Interest income consists of interest earned on interest-bearing bank deposits and interest-bearing Bridge Loan, net of amortization of Bridge Loan origination costs.
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, offset by bargain purchase gain from business acquisition.
Income Tax Benefit (Expense)
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 subsidiaries in which we own less than 100% of the equity attributable to the ownership interest that we did not acquire.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2024, compared to the year ended December 31, 2023. For a discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022, 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, 2024.
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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, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Net revenue | $ | 1,316,379 | $ | 1,459,875 | ||||
| Cost of revenue | 988,782 | 1,099,612 | ||||||
| Gross profit | 327,597 | 360,263 | ||||||
| Operating expenses: | ||||||||
| Sales, general and administrative | 310,008 | 285,313 | ||||||
| Product development | 67,543 | 65,261 | ||||||
| Total operating expenses | 377,551 | 350,574 | ||||||
| Operating income (loss) | (49,954 | ) | 9,689 | |||||
| Other (expense) income: | ||||||||
| Interest expense | (13,207 | ) | (17,420 | ) | ||||
| Interest income | 3,347 | 6,839 | ||||||
| Other expense, net | (1,844 | ) | (2,587 | ) | ||||
| Total other expense, net | (11,704 | ) | (13,168 | ) | ||||
| Loss before income taxes | (61,658 | ) | (3,479 | ) | ||||
| Income tax benefit (expense) | (21,736 | ) | 2,442 | |||||
| Net loss | (83,394 | ) | (1,037 | ) | ||||
| Less: Net income attributable to noncontrolling interest | 1,787 | 1,553 | ||||||
| Net loss attributable to Corsair Gaming, Inc. | $ | (85,181 | ) | $ | (2,590 | ) |
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| Net revenue | 100.0 | % | 100.0 | % | ||||
| Cost of revenue | 75.1 | 75.3 | ||||||
| Gross profit | 24.9 | 24.7 | ||||||
| Operating expenses: | ||||||||
| Sales, general and administrative | 23.6 | 19.5 | ||||||
| Product development | 5.1 | 4.5 | ||||||
| Total operating expenses | 28.7 | 24.0 | ||||||
| Operating income (loss) | (3.8 | ) | 0.7 | |||||
| Other (expense) income: | ||||||||
| Interest expense | (1.0 | ) | (1.2 | ) | ||||
| Interest income | 0.3 | 0.5 | ||||||
| Other expense, net | (0.1 | ) | (0.2 | ) | ||||
| Total other expense, net | (0.8 | ) | (0.9 | ) | ||||
| Loss before income taxes | (4.6 | ) | (0.2 | ) | ||||
| Income tax benefit (expense) | (1.7 | ) | 0.2 | |||||
| Net loss | (6.3 | ) | (0.0 | ) | ||||
| Less: Net income attributable to noncontrolling interest | 0.1 | 0.1 | ||||||
| Net loss attributable to Corsair Gaming, Inc. | (6.4 | )% | (0.1 | )% |
Comparison of Years Ended December 31, 2024 and 2023
Net Revenue
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Net revenue | $ | 1,316,379 | $ | 1,459,875 |
Net revenue decreased $143.5 million, or 9.8%, in 2024 as compared to 2023. The decrease was due to a 20.8% decrease in sales for our Gaming Components and Systems segment, offset partially by a 19.7% increase in sales for our Gamer and Creator Peripherals segment.
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For further discussions specific to our Gaming Components and Systems and Gamer and Creator Peripherals segments, refer to “Segment Results” section below.
Gross Profit and Gross Margin
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Gross profit | $ | 327,597 | $ | 360,263 | ||||
| Gross margin | 24.9 | % | 24.7 | % |
Gross margin increased by 20 bps in 2024 as compared to 2023. An improved product mix with more sales in the Gamer and Creator Peripherals segment accounted for 160 bps of the increase in gross margin, which was partially offset by a decrease of 110 bps in gross margin from higher spending on promotional activities as a proportion of net revenue.
Sales, General and Administrative (SG&A)
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Sales, general and administrative | $ | 310,008 | $ | 285,313 |
SG&A expenses increased $24.7 million, or 8.7%, in 2024 as compared to 2023. The increase was primarily due to a $9.3 million increase in distribution costs, which was largely attributable to rationalization costs for distribution hubs and increased freight costs, a $8.9 million increase in legal and other professional service expenses, which were mainly attributable to one-time settlement costs and professional services associated with the Fanatec Acquisition, a $2.2 million increase in marketing and advertising costs, a $1.3 million increase in severance and a $1.1 million increase from amortization of capitalized cloud computing arrangements implementation costs.
Product Development
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Product development | $ | 67,543 | $ | 65,261 |
Product development expenses increased $2.3 million, or 3.5%, in 2024 as compared to 2023. The increase was primarily due to higher personnel-related costs resulting from increase in headcount as well as merit adjustments.
Interest Expense, Interest Income and Other Expense, Net
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Interest expense | $ | (13,207 | ) | $ | (17,420 | ) | ||
| Interest income | 3,347 | 6,839 | ||||||
| Other expense, net | (1,844 | ) | (2,587 | ) |
Interest expense decreased $4.2 million, or 24.2%, in 2024 as compared to 2023. The decrease was primarily due to a lower principal balance on our Term Loan combined with lower interest rates on our Term Loan in 2024.
Interest income decreased $3.5 million, or 51.1%, in 2024 as compared to 2023 primarily due to a lower cash balance in our interest-bearing account.
Other expense, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currencies of our subsidiaries. Our foreign currency exposure is primarily driven by fluctuations in the foreign currency exchanges rates of the Euro, the British Pound and the Chinese Yuan. The foreign exchange loss in the year ended December 31, 2024 was partially offset by a $2.6 million bargain purchase gain from the Fanatec Acquisition.
Income Tax Benefit (Expense)
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Loss before income taxes | $ | (61,658 | ) | $ | (3,479 | ) | ||
| Income tax benefit (expense) | (21,736 | ) | 2,442 | |||||
| Effective tax rate | (35.3 | )% | 70.2 | % |
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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 a tax expense of 35.3% and a tax benefit of 70.2% for 2024 and 2023, respectively. The change in our effective rate was primarily due to a change in the mix of income and losses in the various tax jurisdictions in which we operate, as well as the valuation allowance recorded against our U.S. federal and state deferred tax assets, which were partially offset by a tax benefit recognized for the transfer of customer relationship intangible asset from Hong Kong to the U.K. as a result of our global tax restructuring initiative completed on July 1, 2024.
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, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||||
| Gamer and Creator Peripherals Segment | $ | 472,729 | 35.9 | % | $ | 394,881 | 27.0 | % | ||||||||
| Gaming Components and Systems Segment | ||||||||||||||||
| Memory Products | 429,916 | 32.7 | 517,416 | 35.5 | ||||||||||||
| Other Component Products | 413,734 | 31.4 | 547,578 | 37.5 | ||||||||||||
| 843,650 | 64.1 | 1,064,994 | 73.0 | |||||||||||||
| Total Net Revenue | $ | 1,316,379 | 100.0 | % | $ | 1,459,875 | 100.0 | % |
Gamer and Creator Peripherals Segment
Net revenue of the Gamer and Creator Peripherals segment increased $77.8 million, or 19.7%, in 2024 as compared to 2023. The increase was primarily driven by the success of recent new product launches, increased demand for most of the products in this segment and the inclusion of post-acquisition revenues from our Drop Acquisition in July 2023, and from our Fanatec Acquisition in September 2024.
Gaming Components and Systems Segment
Net revenue of the Gaming Components and Systems segment decreased $221.3 million, or 20.8% in 2024 as compared to 2023. The demand for our products in this segment is largely driven by the activity in the self-built PC market, which is heavily influenced by the launch of new, reasonably priced GPUs and CPUs, as well as the release of new game titles. However, in 2024, we were mid-cycle for new GPU platforms, resulting in a relatively flat-to-low market trajectory for the self-built PC market since the beginning of the year. This led to a greater than anticipated decrease in demand for our products in this segment this year. Additionally, we experienced a downward adjustment in inventory levels at our channel partners in 2024 compared to an increase in channel inventory levels during the same periods last year, contributing to the lower net revenue in 2024.
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, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||||
| Gamer and Creator Peripherals Segment | $ | 182,293 | 38.6 | % | $ | 132,982 | 33.7 | % | ||||||||
| Gaming Components and Systems Segment | ||||||||||||||||
| Memory Products | 57,179 | 13.3 | 77,436 | 15.0 | ||||||||||||
| Other Component Products | 88,125 | 21.3 | 149,845 | 27.4 | ||||||||||||
| 145,304 | 17.2 | 227,281 | 21.3 | |||||||||||||
| Total Gross Profit | $ | 327,597 | 24.9 | % | $ | 360,263 | 24.7 | % |
Gamer and Creator Peripherals Segment
The gross margin of the Gamer and Creator Peripherals segment increased by 490 bps in 2024 as compared to 2023. The increase was primarily attributable to a 350 bps increase from a more favorable product mix within this segment, in part due to
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successful launches of new products with higher average margins, and lower product costs from suppliers, a 80 bps increase from lower inventory reserves, and a 110 bps increase due to lower costs to process inventory returns in the year ended December 31, 2024. These increases were partially offset by a 50 bps decrease due to higher air freight costs.
Gaming Components and Systems Segment
The gross margin of the Gaming Components and Systems segment decreased by 410 bps in 2024 as compared to 2023. The decrease was primarily attributable to a 190 bps decrease from an unfavorable product mix within this segment and pricing pressures from market competition, a 160 bps decrease from increased promotional activities as a proportion of net revenue, and a 100 bps decrease from factory underutilization and higher inventory reserves.
Liquidity and Capital Resources
Overview
We have financed our operations and acquisitions through cash from operations, and when necessary, through debt facilities and issuance of equity securities. As of December 31, 2024, our principal sources of liquidity were cash and restricted cash, in aggregate of $109.6 million, and our borrowing capacity under the Revolving Facility (as defined under ‘Capital Resources’ below) of $99.8 million.
We have a shelf-registration statement on Form S-3 on file with the SEC, which allows us to offer securities, including common stock, preferred stock and warrants, through August 1, 2025. As of December 31, 2024, $216.7 million remained available for issuance under the shelf-registration statement.
Our principal uses of cash generally 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.
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, 2024, supplemented with the borrowing capacity under our Revolving Facility, if and as needed, 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.
Liquidity
The following table summarizes our cash flows for the periods indicated (in thousands):
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 35,877 | $ | 89,153 | ||||
| Investing activities | (52,705 | ) | (26,981 | ) | ||||
| Financing activities | (50,680 | ) | (37,387 | ) |
Cash Flows from Operating Activities
Net cash provided by operating activities was $35.9 million for 2024 and consisted net loss of $83.4 million, offset by non-cash adjustments of $97.0 million and a net cash inflow of $22.3 million from changes in our net operating assets and liabilities. The non-cash adjustments consisted primarily of depreciation and amortization, stock-based compensation expense, as well as changes in deferred income taxes, partially offset by a bargain purchase gain from the Fanatec Acquisition. The net cash inflow from changes in our net operating assets and liabilities was primarily related to a decrease in account receivables from lower revenue in 2024 and a decrease in inventories from our efforts to normalize inventory levels. These cash inflows were partially offset by a decrease in accounts payable mainly due to timing of payments.
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
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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.
Cash Flows from Investing Activities
Cash used in investing activities was $52.7 million for 2024 and primarily consisted of $43.1 million cash used for the Fanatec Acquisition, net of cash acquired (refer to Note 4, “Business Combinations” for more information on the Fanatec Acquisition), $9.8 million of capital expenditure, partially offset by $1.0 million cash received from escrow for the purchase price adjustment related to the Drop Acquisition.
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 Flows from Financing Activities
Net cash used in financing activities was $50.7 million for 2024 and primarily consisted of $25.0 million repayment of debt, $19.8 million purchase of additional ownership interest in iDisplay (refer to Note 16, "Redeemable Noncontrolling Interest" for more information on the additional ownership interest purchase), $4.9 million settlement of deferred consideration related to a 2019 business acquisition, $5.8 million payment of dividends to noncontrolling interest, and $0.6 million payment of taxes related to net share settlement of equity awards, partially offset by $5.4 million proceeds received from the issuance of shares through the employee equity incentive plans. During the year ended December 31, 2024, we borrowed $25.0 million from our Revolving Facility to fund our operations and the full amount was repaid within the same period.
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.
Capital Resources
On September 3, 2021, we refinanced the First Lien Credit and Guaranty Agreement with a new Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for a total commitment of $350.0 million, consisting of a $100.0 million revolving credit facility (the “Revolving Facility”) and a $250.0 million term loan facility (the “Term Loan”). 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 $12.5 million and $34.1 million of the Term Loan principal in the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, the total principal outstanding of the Term Loan was $174.0 million and the available and uncommitted capacity under the Revolving Facility was $99.8 million.
The Credit Agreement has a variable rate structure. According to the provisions in the Third Amendment to the Credit Agreement (“Third Amendment”), beginning 2024, the Term Loan and the Revolving Facility carry interest at our election at either (a) Bloomberg Short-Term Bank Yield Index rate (“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. Additionally, the commitment fees on the unused portion of the Revolving Facility ranges from 0.2% to 0.4% based on our total net leverage ratio.
On August 19, 2024, we entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement, which provides for, among other things, (i) effectuates the transition of the underlying variable interest rate from the BSBY to a forward-looking interest rate based on the Secured Overnight Financing Rate (“SOFR”), with no change to the applicable margin percentage spread, but with the addition of a rate spread adjustment in the amount of 0.10% per annum, (ii) increases the letter of credit sublimit from $15 million to $65 million and (iii) the issuance of letters of credit denominated in Euro.
The Credit Agreement contains covenants with which we must comply during the term of the agreement, which we believe are ordinary and standard for agreements of this nature, including the maintenance of a maximum Consolidated Total Net Leverage Ratio (“CTNL Ratio”) and a minimum Consolidated Interest Coverage Ratio (“CIC Ratio”) (as defined in the Credit Agreement). According to the provisions in the Third Amendment, beginning 2024, we are required to maintain a maximum CTNL Ratio of 3.00 to 1.00 and a minimum CIC ratio of 3.00 to 1.00, with the provision that the maximum CTNL Ratio can be temporarily increased to 3.50 to 1.00 upon the occurrence of a Qualified Acquisition (as defined in, and subject to the requirements of the Credit Agreement). As of December 31, 2024, we were not in default under the Credit Agreement.
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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.
Contractual Cash and Other Obligations
The following table summarizes our contractual cash and other obligations as of December 31, 2024 (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) | $ | 189,313 | $ | 21,996 | $ | 167,317 | $ | — | $ | — | |||||||||
| Inventory-related purchase obligations (2) | 78,698 | 78,698 | — | — | — | ||||||||||||||
| Operating lease obligations (3) | 73,901 | 16,697 | 20,717 | 15,537 | 20,950 | ||||||||||||||
| Other purchase obligations (4) | 7,209 | 5,713 | 1,041 | 280 | 175 | ||||||||||||||
| Total | $ | 349,121 | $ | 123,104 | $ | 189,075 | $ | 15,817 | $ | 21,125 |
(1)
Amounts represent the principal cash payments as of December 31, 2024, 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 7 “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, 2024, we had $3.5 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 Policies 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 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.
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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.