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Turtle Beach Announces Second Quarter 2014 Results

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SOURCE Turtle Beach Corporation

SAN DIEGO, Aug. 11, 2014 /PRNewswire/ -- Turtle Beach Corporation (NASDAQ: HEAR) today announced financial results for the second quarter ended June 30, 2014.

Highlights & Developments

  • Second quarter net revenue of $22.3 million, lifts net revenue to $60.6 million for the first six months of 2014, a 12% increase over revenue of $54.1 million in the first six months of 2013.
  • For the first six months of 2014, gross margin improved to 28.2%, a 50 basis point increase compared with the same period a year ago, driven by an increased penetration of higher margin headsets.
  • Reduced debt 38% to $40.8 million as of June 30, 2014 from $66.2 million as of March 31, 2014.
  • Retail tracking data confirms year-over-year Turtle Beach console gaming headset market share gains in all of the Company's major markets for the first six months of 2014.
  • Introduced four new Xbox One and five new PlayStation®4 compatible headsets at the June 2014 E3 tradeshow which will expand the next-gen headset portfolio when launched in the fourth quarter.
  • Improved PC gaming headset sell-through in the U.S. by 62% year-over-year for the first six months of 2014; introducing complementary PC keyboards and mice via licensing agreement to further drive PC headset sales and share gains.
  • Made progress toward the introduction of Turtle Beach officially-licensed Xbox One gaming headsets for China ahead of the highly-anticipated September launch of Xbox One consoles, including the execution of a marketing agreement with a Chinese partner.
  • Completed design on a new generation of HyperSound emitter that delivers improved audio performance and can be manufactured more quickly and more cost effectively, and will be incorporated into new commercial and hearing health products in 2015.
  • Announced that the Company's largest shareholders, representing approximately 72% of the shareholder base and including CEO Juergen Stark and Chairman Ron Doornink, agreed to an eight month voluntary lock-up extension that extends through April 1, 2015.

"We made solid progress during the second quarter to position our business for the holiday season and longer-term success," commented Juergen Stark, chief executive officer of Turtle Beach. "At the E3 tradeshow in June, we unveiled new feature-rich gaming headsets for Xbox One and Playstation®4 that showcase our commitment to enhancing the consumer audio experience and distinguish Turtle Beach as a category-leading innovator. While attachment rates year-to-date have tracked below our expectations due primarily to the broad availability of the Xbox One Headset Chat Adapter and the limited number of multiplayer video game launches for next-generation consoles, we believe expansion of our product portfolio, growing consumer demand for the Xbox One and PlayStation®4, and the launch of a dozen new AAA multiplayer video game titles in the third and fourth quarter will fuel accelerated growth of our headset business in the second half of the year. In addition, we have made significant advances with our HyperSound technology that improve audio clarity, reduce cost, and establish large scale manufacturability ahead of new product launches in 2015. We look forward to building on the foundation we've established to unlock the full potential of our Turtle Beach and HyperSound brands."

Second Quarter and First Six Months 2014 Review
Net revenue in the second quarter was $22.3 million, compared with $24.5 million in the same period in 2013. The decrease in revenue was driven primarily by the timing of approximately $4 million in sales of the Company's new Xbox One headsets, which customer demand moved into the first quarter as previously reported. For the first six months of 2014, revenue increased 12% to $60.6 million, compared with $54.1 million for the same period a year ago. The increase in revenue was driven by strong consumer response to the Company's Xbox One and Playstation®4 compatible headsets.

Gross profit for the second quarter was $4.8 million, compared to $6.3 million in the same period in 2013. While gross margin for the second quarter was 21.7% compared to 25.8% in the same period in 2013, for the first six months of 2014 gross margin improved 50 basis points to 28.2% compared with the same period a year ago. The second quarter decrease in gross margin was driven largely by non-recurring costs to package the Microsoft Xbox One Headset Chat Adapter with our headsets and ship them to retailers.

Operating expenses increased 16% to $14.0 million, compared to $12.1 million in the same period in 2013. The increase in operating expenses was primarily attributable to higher depreciation and amortization, investments in personnel and research and development to support future growth of HyperSound technology as well as additional general and administrative costs associated with being a public company. For the first six months of 2014, operating expenses, excluding $3.7 million in one-time business transaction costs, increased 32% to $27.0 million, compared to $20.4 million in the same period a year ago.

Adjusted EBITDA (as defined below) for the headset business totaled approximately ($4.7) million compared to ($3.4) million in the second quarter of 2013. The Company invested approximately $2.0 million in HyperSound during the quarter. Adjusted EBITDA on a consolidated basis was ($6.7) million. For the first six months of 2014, Adjusted EBITDA for the headset business improved to approximately $0.2 million, from ($1.7) million in the same period a year ago. Adjusted EBITDA on a consolidated basis was ($3.9) million for the first six months of 2014, reflecting investments of approximately $4 million in HyperSound during the first six months of 2014.

Balance Sheet Highlights
The company ended the quarter with approximately $9.0 million in cash and cash equivalents compared to $6.5 million as of December 31, 2013. As of June 30, 2014, the Company had outstanding debt of $40.8 million compared to debt of $78.3 million as of December 31, 2013. The debt at June 30, 2014 consisted of $19.2 million drawn down from our revolver, $7.3 million of subordinated notes and $14.3 million in Series B Preferred Stock. Total inventory as of June 30, 2014 was $37.5 million, a decrease of 14% as compared to the same period in 2013. There were approximately 41.9 total shares outstanding on June 30, 2014.

Full Year 2014 Expectations
The Company is maintaining its revenue and EBITDA guidance for the full-year. As previously stated, net revenues for the Turtle Beach headset business are expected to be in the range of $210 to $230 million. Full year adjusted EBITDA for the headset business is expected to be in the range of $30 to $35 million. Total company 2014 adjusted EBITDA is expected to be in the range of $20-$25 million, reflecting the impact of a $10 million anticipated HyperSound investment.

Investor Presentation
The Company also announced it has posted an updated investor presentation on its corporate website. The new presentation can be accessed at http://corp.turtlebeach.com/investor-relations.    

Conference Call Details
Juergen Stark, CEO, and John Hanson, CFO, will host a conference call and simultaneous webcast to discuss the financial results and outlook today, August 11, 2014, at 1:30 PM Pacific Time / 4:30 PM Eastern Time. To participate in the conference call, investors should dial (877) 303-9855 (domestic) or (408) 337-0154 (international) and provide the pass code 74134380, 10 minutes prior to the scheduled start of the call.  A simultaneous audio-only webcast of the call may be accessed on the Internet at www.turtlebeachcorp.com. An archive of the webcast will be available on the Company's website for approximately one year, and a recorded replay of the call will be available for one week at (855) 859-2056 or (404) 537-3406 and entering conference ID number 74134380.

Non-GAAP Financial Measures
In addition to its reported results, the Company has included in this earnings release certain financial results that the Securities and Exchange Commission defines as "non-GAAP financial measures." Management believes that such non-GAAP financial measures, when read in conjunction with the Company's reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company's results. These non-GAAP financial measures relate to presenting Adjusted EBITDA, as defined by the Company for the periods presented. Please see a reconciliation of GAAP results to Adjusted EBITDA, which is included below for the three and six months ended 2014 and 2013.

All trademarks are the property of their respective owners.

About Turtle Beach Corporation
Turtle Beach Corporation (Turtlebeachcorp.com) designs audio products for consumer, commercial and healthcare markets. Under the brand Turtle Beach (TurtleBeach.com), the company markets premium headsets for use with video game consoles, including officially-licensed headsets for the next-generation Xbox One and PlayStation®4, personal computers and mobile devices. Under the brand HyperSound (HyperSound.com), the company markets pioneering directed audio solutions that have applications in digital signage and kiosks, consumer electronics and healthcare. The Company's shares are traded on the NASDAQ Exchange under the symbol NASDAQ:HEAR.

Forward-Looking Statements
This press release includes forward-looking information and statements within the meaning of the federal securities laws.  Except for historical information contained in this release, statements in this release may constitute forward-looking statements regarding assumptions, projections, expectations, targets, intentions or beliefs about future events. Forward looking statements are based on management's statements containing the words "may", "could", "would", "should", "believe", "expect", "anticipate", "plan", "estimate", "target", "project", "intend" and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement.  Forward-looking statements are based on management's current belief, as well as assumptions made by, and information currently available to, management.

While the Company believes that its expectations are based upon reasonable assumptions, there can be no assurances that its goals and strategy will be realized. Numerous factors, including risks and uncertainties, may affect actual results and may cause results to differ materially from those expressed in forward-looking statements made by the Company or on its behalf. Some of these factors include, but are not limited to, the substantial uncertainties inherent in acceptance of existing and future products, the difficulty of commercializing and protecting new technology, the impact of competitive products and pricing, general business and economic conditions, risks associated with the expansion of our business including the implementation of any businesses we acquire, our indebtedness, and other factors discussed in our public filings, including the risk factors included in the Company's Annual Report on Form 10-K and other periodic reports filed with the SEC, the Company's Proxy Statement on Schedule 14A filed in connection with our merger with Turtle Beach and the Company's Prospectus Supplement filed with the SEC on April 24, 2014.  Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission, the Company any is under no obligation to publicly update or revise any forward-looking statement after the date of this release whether as a result of new information, future developments or otherwise.

 

 

Turtle Beach Corporation

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)


Table 1.









June 30,
2014


December 31,
2013

ASSETS

(unaudited)




Current Assets:






Cash and cash equivalents

$

8,958



$

6,509


Accounts receivable, net

15,164



48,542


Inventories, net

37,497



49,643


Deferred income taxes

10,536



2,214


Prepaid income taxes

1,329



2,925


Prepaid expenses and other current assets

5,168



3,561


Total Current Assets

78,652



113,394


Property and equipment, net

5,132



7,369


Goodwill

80,974



-


Intangible assets, net

40,385



3,972


Deferred income taxes

6,101



827


Other assets

520



1,745


Total Assets

$

211,764



$

127,307


LIABILITIES, CONVERTIBLE PREFERRED STOCK AND

    STOCKHOLDERS' EQUITY (DEFICIT)






Current Liabilities:






Revolving credit facilities

$

19,256



$

39,736


Term loan

-



14,500


Subordinated notes - related parties

7,322



-


Accounts payable

10,528



44,136


Due to shareholders

3,125



3,125


Other current liabilities

8,796



9,712


Total Current Liabilities

49,027



111,209


Series B redeemable preferred stock

14,253



13,713


Deferred income taxes

14,325



850


Subordinated notes

-



10,342


Other liabilities

2,051



1,986


Total Liabilities

79,656



138,100


Commitments and Contingencies






Series A convertible stock, $0.01 par value - 50,000,000 shares authorized;
    
48,689,555 shares issued and outstanding as of December 31, 2013

-



24,345


Stockholders' Equity (Deficit)






Common stock, $0.001 par value - 50,000,000 shares authorized; 41,906,120 and
     12,700,460 shares issued and outstanding as of June 30, 2014 and December 31, 2013,
     respectively

42



13


Additional paid-in capital

124,758



(54,031)


Retained earnings

6,567



18,775


Accumulated other comprehensive income

741



105


Total Stockholders' Equity (Deficit)

132,108



(35,138)


Total Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)

$

211,764



$

127,307


 

 

Turtle Beach Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per-share data)

(unaudited)


Table 2.









Three Months Ended


Six Months Ended


June 30, 2014


June 30, 2013


June 30, 2014


June 30, 2013

Net Revenue

$

22,296



$

24,520



$

60,584



$

54,053


Cost of Revenue

17,465



18,198



43,477



39,106


Gross Profit

4,831



6,322



17,107



14,947


Operating expenses:












Selling and marketing

7,698



8,412



14,698



14,118


Research and development

2,071



1,325



4,069



2,212


General and administrative

4,698



1,660



8,271



4,030


Business transaction costs

(484)



680



3,744



680


Total operating expenses

13,983



12,077



30,782



21,040


Operating loss

(9,152)



(5,755)



(13,675)



(6,093)


Interest expense

1,055



1,249



5,295



2,563


Other non-operating expense (income), net

(70)



84



(95)



473


Loss before income tax benefit

(10,137)



(7,088)



(18,875)



(9,129)


Income tax benefit

(835)



(3,750)



(6,667)



(3,487)


Net loss

$

(9,302)



$

(3,338)



$

(12,208)



$

(5,642)














Net loss per share:












Basic

$

(0.23)



$

(0.26)



$

(0.33)



$

(0.44)


Diluted

$

(0.23)



$

(0.26)



$

(0.33)



$

(0.44)


Weighted average number of shares:












Basic

40,827



12,700



37,296



12,700


Diluted

40,827



12,700



37,296



12,700


 

 

TURTLE BEACH CORPORATION

GAAP to Adjusted EBITDA Reconciliation
















GAAP

Adj

Adj

Adj 

Adj

Adjusted 

Q2 2014

Reported

Depr

Stock Comp

Amort

Tran Exp

EBITDA








Revenue, net

$                  22,296

$                     -

$                     -

$                   -

$                -

$                  22,296

Cost of Revenue

$                  17,465

$                 (53)

$                 (38)

$                 (8)

$                -

$                  17,366

  Gross Profit

$                    4,831

$                   53

$                   38

$                   8

$                -

$                    4,930








Operating Expense

$                  13,983

$            (1,181)

$            (1,310)

$             (252)

$            484

$                  11,724








Operating Income (Loss)

$                  (9,152)

$              1,234

$              1,348

$               260

$          (484)

$                  (6,794)















Other Income







Interest Expense, net

$                    1,055






Other Expense, net

$                       (70)





$                       (70)








  Total Other Expense, net

$                       985













Loss Before Taxes

$                (10,137)













Tax Benefit

$                     (835)













Net Income (Loss)

$                  (9,302)



 Adjusted EBITDA 

$                  (6,724)

 

 

TURTLE BEACH CORPORATION

GAAP to Adjusted EBITDA Reconciliation
















GAAP

Adj

Adj

Adj 

Adj

Adjusted 

Q2 YTD 2014

Reported

Depr

Stock Comp

Amort

Tran Exp

EBITDA








Revenue, net

$                  60,584

$                    -

$                    -

$                  -

$                -

$                  60,584

Cost of Revenue

$                  43,477

$              (107)

$                (68)

$              (14)

$                -

$                  43,288

  Gross Profit

$                  17,107

$                107

$                  68

$                14

$                -

$                  17,296








Operating Expense

$                  30,782

$           (2,941)

$           (2,329)

$            (483)

$       (3,744)

$                  21,285








Operating Income (Loss)

$                (13,675)

$             3,048

$             2,397

$              497

$         3,744

$                  (3,989)















Other Income







Interest Expense, net

$                    5,295






Other Expense, net

$                       (95)





$                       (95)








  Total Other Expense, net

$                    5,200













Loss Before Taxes

$                (18,875)













Tax Benefit

$                  (6,667)













Net Income (Loss)

$                (12,208)



 Adjusted EBITDA 

$                  (3,894)

 

 

TURTLE BEACH CORPORATION

GAAP to Adjusted EBITDA Reconciliation
















GAAP

Adj

Adj

Adj 

Adj

Adjusted 

Q2 2013

Reported

Depr

Stock Comp

Amort

Tran Exp

EBITDA








Revenue, net

$                  24,520

$                     -

$                     -

$                  -

$                -

$                  24,520

Cost of Revenue

$                  18,198

$                 (50)

$                 (21)

$                  -

$                -

$                  18,127

  Gross Profit

$                    6,322

$                   50

$                   21

$                  -

$                -

$                    6,393








Operating Expense

$                  12,077

$               (904)

$               (534)

$            (230)

$          (680)

$                    9,729








Operating Income (Loss)

$                  (5,755)

$                 954

$                 555

$              230

$            680

$                  (3,336)















Other Income







Interest Expense, net

$                    1,249






Other Expense, net

$                         84





$                         84








  Total Other Expense, net

$                    1,333













Loss Before Taxes

$                  (7,088)













Tax Benefit

$                  (3,750)













Net Income (Loss)

$                  (3,338)



 Adjusted EBITDA 

$                  (3,420)

 

 

TURTLE BEACH CORPORATION

GAAP to Adjusted EBITDA Reconciliation
















GAAP

Adj

Adj

Adj 

Adj

Adjusted 

Q2 YTD 2013

Reported

Depr

Stock Comp

Amort

Tran Exp

EBITDA








Revenue, net

$                  54,053

$                     -

$                     -

$                  -

$                -

$                  54,053

Cost of Revenue

$                  39,106

$                 (84)

$                 (41)

$                  -

$                -

$                  38,981

  Gross Profit

$                  14,947

$                   84

$                   41

$                  -

$                -

$                  15,072








Operating Expense

$                  21,040

$            (1,806)

$            (1,222)

$            (461)

$       (1,207)

$                  16,344








Operating Income (Loss)

$                  (6,093)

$              1,890

$              1,263

$              461

$         1,207

$                  (1,272)















Other Income







Interest Expense, net

$                    2,563






Other Expense, net

$                       473





$                       473








  Total Other Expense, net

$                    3,036













Loss Before Taxes

$                  (9,129)













Tax Benefit

$                  (3,487)













Net Income (Loss)

$                  (5,642)



 Adjusted EBITDA 

$                  (1,745)

 

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