CORSAIR GAMING, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
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 gear for gamers, streamers and content creators, many of which build their own PCs using our components. Our industry-leading gaming gear helps digital athletes, from casual gamers to committed professionals, perform at their peak across PC or console platforms, and streaming gear that enables streamers and content 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 gear that addresses 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. In 2020, we also added a digital services layer to our offerings to enhance the customer experience by integrating esports, coaching, stream deck marketplace, customer care and extended warranty into our offerings.
We group our products into two categories (segments):
• Gamer and creator peripherals. Includes our high performance game
keyboards, mice, headsets, controllers and streaming equipment, which includes
capture cards, Stream Decks, USB microphones, our Facecam streaming
camera, studio accessories and EpocCam software, as well as coaching and
training services and content design services, among others.
• Game components and systems. Includes our high performance power supply
units, or power supplies, cooling solutions, computer cases, DRAM modules, as well
as pre-built and custom high-end gaming PCs, among others.
Further information about our industry, market opportunities and competitive strengths is set forth in Part I, Item 1, “Business” of this Annual Report on Form 10-K.
Our net revenue was$1,904.1 million ,$1,702.4 million , and$1,097.2 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively. We had net income (loss) of$101.0 million ,$103.2 million and$(8.4) million , respectively. Net cash provided by operating activities was$20.2 million ,$169.0 million , and$37.1 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively. We continue to experience a shift in net revenue towards a more significant mix of our higher margin gamer and creator peripherals segment, which represented 34.0%, 31.7% and 26.8% of total net revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively. As our product portfolio continues to expand, our go-to-market model has also been evolving with an increased mix of direct-to-consumer sales representing 10.7%, 8.6% and 2.7% of total net revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Our net revenue increased 55.2% in 2020, as compared to 2019, primarily due to a larger number of consumers gaming and working from home as a result of the COVID-19 pandemic. Going into 2021, while the lockdowns and shelter-in-place restrictions were gradually lifted, our net revenue continued to grow by 11.8%, despite the negative impact from the global supply chain and logistics challenges as well as the shortages of reasonably priced GPUs, which led to a decrease in demand for self-built gaming PCs and systems and its related components. We also experienced higher cost of goods sold in 2021 primarily related to expenses on freight and logistics due to supply chain and logistics issues. The full extent of the impact of COVID-19 pandemic remains uncertain, which has and may continue to negatively impact our net revenue and gross margin. While we experienced the aforementioned challenges in 2021 caused by the COIVD-19 pandemic, our 2021 revenue and gross profits represented strong growth from 2019, pre-pandemic, by 73.5% and 129.1%, respectively. In the last 18 months, we have entered into three large new markets: microphones and cameras for content creators and gaming monitors for both gamers and content creators. In addition, we have launched 141 new products in 2021. Over the longer term, we believe we will be able to continue to grow in new markets as well as the markets that we participate in through innovation and leading technologies and entry into new categories via organic growth or acquisition. Since 2018, we have completed eight acquisitions, including our acquisition of a 51% of the share capital of iDisplay Technology, or "iDisplay", a leader in electronic development and design specializing in display technology, inJanuary 2022 . 44
————————————————– ——————————
Contents
Key Factors Affecting Our Business
Our results of operations and financial condition are affected by many 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. below.
Impact of industry trends. Our operating results and financial condition are influenced by industry trends in the gaming market, including:
• Increase game engagement. We believe that the game takes more and more time
share of global entertainment consumption will drive continued growth in
spend on both games and gaming equipment. Gaming continues to become
increasingly social and streaming viewing is more widely adopted along
with a growing number of content creators. We believe that this trend, which
has accelerated in the current context, will continue and we are well
positioned to serve the streaming market with best-in-class tools for
content creation.
• Introduction of new high performance and sophisticated computer hardware
Games. We believe that the introduction of more powerful CPUs and GPUs
that put more strain on other system components, such as memory,
power supply or cooling, has a significant effect on increasing demand
for our material. In addition, we believe that the success of our business depends on
part on the introduction and success of games with sophisticated graphics
which place increasing demands on the speed and processing capacity of the system and
therefore require more powerful CPUs or GPUs, which in turn drives demand
for our high-performance gaming components and systems, such as power supplies and
cooling solutions and our gaming PC memory. As a result, our operation
results may be materially affected by the timing and rate at which
hardware companies are introducing new and improved processors and GPUs, the
the timing and rate at which computer game companies and developers
introduce sophisticated new and improved games that require more and more
high levels of system and graphics processing power, and if these new
products and games are widely accepted by players.
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 Customer Concentration. We operate a global sales network that
consists primarily of retailers (including eRetailers), 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 eRetailer
Amazon accounting for 26.7%, 24.6% and 25.1% of our net revenue for 2021, 2020,
and 2019, respectively, and sales to our ten largest customers accounting for
approximately 51.7%, 52.7%, and 51.6% of our net revenue for the same periods,
respectively. Our customers typically do not enter into long-term agreements to
purchase our gear 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 eRetailers 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
expenses, 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. In 2021, we had several product introductions that had a
favorable impact on our net revenue and operating results, such as the
introduction of our new K65 mini RGB keyboard, Elgato's new accessories
including our new Facecam, Corsair DDR5 memory and new high-performance gaming
controllers including SCUF Reflex, Reflex Pro and Reflex FPS, among others.
However, 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 gear over those of our competitors.
Impact of Seasonal Sales Trends. Since 2020, our revenue seasonality has been
impacted positively and negatively, and thus has not followed historic patterns,
by external events, such as shelter-in-place restrictions, global supply chain
and logistics issues and availability of affordable GPUs, primarily caused by
the COVID-19 pandemic. Historically, prior to 2020, 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 lowest 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
45
————————————————– ——————————
Contents
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 quarter due to seasonal sales such as "Black Friday," "Cyber Monday" and "Singles Day" inChina , as retailers tend to make purchases in advance of these sales, and 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, and may be further impacted in the future, by increasing supply constraints, GPU shortages, shifts in customer behavior and the evolving impacts of the COVID-19 pandemic. Impact of Fluctuations in Currency Exchange Rates. We are subject to inherent risks attributed to operating in a global economy. Some of our international sales are denominated in foreign currencies and any unfavorable movement in the exchange rate betweenU.S. dollars and the currencies in which we conduct sales in foreign countries, in particular the Euro and the British Pound could have an adverse impact on our net revenue. In addition, we generally pay our employees located outsidethe United States in the local currency, with a significant portion of those payments being made inTaiwan dollars and Euros. As a result of our foreign sales and operations, we have other expenses, assets and liabilities that are denominated in foreign currencies, in particular the Chinese Yuan, Euro and British Pound. Impact of COVID-19. Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. Since early 2020, we have experienced some business disruptions due to COVID-19, including the stoppage in our factories in early 2020, disruption in our supply chain and increased distribution costs in 2021, which led to increases in operating costs such as the significantly elevated ocean freight costs we incurred in the second half of 2021 as compared to the same period of 2020. These negative financial impacts have been offset by revenue growth in 2020 and 2021, partly due to an increase in demand for our gear as more people are under shelter-in-place restrictions, which we believe have limited people's access to alternative forms of entertainment and social interaction, and thus have increased the demand for home entertainment and connecting with others through content creation. In contrast, as the COVID-19 pandemic subsides, it has, and could continue to, result in shelter-in-place and other similar restrictions being eased. Such easing of restrictions likely has, and will continue to, result in consumers returning to other alternative forms of entertainment and interaction. This in turn has, and could continue to, result in a decline in demand for our products. The full extent of the impact of the COVID-19 pandemic on our business, results of operations, cash flows and financial position will depend on future developments, which are highly uncertain and cannot be fully predicted. We continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business and we have implemented various measures to attempt to mitigate the disruptive logistics impact to our business, specifically around managing inventory stocking level at our distribution hubs and determining the mode of shipment used to deploy our gear to the customers, and we are also ready to implement adjustments to our expenses and cash flow in the event of declines in revenues. 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 online 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
Revenue cost includes product costs, including contract manufacturer costs, inbound freight costs from manufacturers to our distribution centers as well as inter-center shipments, cost of materials and overhead, duties and rates, warranty replacement cost to process and rework the returned items. , depreciation of tooling equipment, storage costs, depreciation of excess and obsolete inventory,
46
————————————————– ——————————
Contents
and certain allocated costs related to facilities and information technology, or IT, as well as personnel and other operating expenses related to supply chain logistics.
Functionnary costs
Operating expenses include selling, 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. We expect our total sales, general and administrative expenses to increase in absolute dollars as we continue to actively promote and distribute a higher volume of our products and also due to the anticipated growth of our business and related infrastructure, including increase in legal, accounting, insurance, compliance, investor relations and other consulting 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.
We expect our product development spending to increase in absolute dollars as we continue to make significant investments in developing new products and improving existing products.
Interest charges
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, loss from debt extinguishment, consisting of the write-off of unamortized debt discount and fees associated with the prepayment of our term loans, and the change in fair value of our interest rate cap contracts.
Other (expenses) 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. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Income tax benefit (expense)
We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those inthe United States . Accordingly, our effective tax rates will vary depending on the relative proportion of foreign toUnited 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. 47
————————————————– ——————————
Table of Contents
Results of Operations
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.
Year Ended December 31,
2021 2020 2019
(in thousands)
Net revenue $ 1,904,060 $ 1,702,367 $ 1,097,174
Cost of revenue 1,390,206 1,236,938 872,887
Gross profit 513,854 465,429 224,287
Operating expenses:
Sales, general and administrative 315,672 257,004 163,033
Product development 60,288 50,064 37,547
Total operating expenses 375,960 307,068 200,580
Operating income 137,894 158,361 23,707
Other (expense) income:
Interest expense (17,673 ) (35,137 ) (35,548 )
Other expense, net (5,661 ) (1,182 ) (1,558 )
Total other expense, net (23,334 ) (36,319 ) (37,106 )
Income (loss) before income taxes 114,560 122,042 (13,399 )
Income tax (expense) benefit (13,600 ) (18,825 ) 5,005
Net income (loss) $ 100,960 $ 103,217 $ (8,394 )
Year Ended December 31,
2021 2020 2019
Net revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 73.0 72.7 79.6
Gross profit 27.0 27.3 20.4
Operating expenses:
Sales, general and administrative 16.6 15.1 14.9
Product development 3.2 2.9 3.4
Total operating expenses 19.7 18.0 18.3
Operating income 7.2 9.3 2.2
Other (expense) income:
Interest expense (0.9 ) (2.1 ) (3.2 )
Other expense, net (0.3 ) (0.1 ) (0.1 )
Total other expense, net (1.2 ) (2.1 ) (3.4 )
Income (loss) before income taxes 6.0 7.2 (1.2 )
Income tax (expense) benefit (0.7 ) (1.1 ) 0.5
Net income (loss) 5.3 % 6.1 % (0.8 )%
Components of operating results
Net Revenue
Year Ended December 31,
2021 2020 2019
(in thousands)
Net revenue $ 1,904,060 $ 1,702,367 $ 1,097,174
Net revenue increased $201.7 million , or 11.8%, in 2021 as compared to 2020.
This was due to a 20.0% increase in sales for our gamer and creator peripherals
segment and an 8.1% increase in sales for our gaming components and systems
segment. This increase in sales was largely due to increased demand for our
products in 2020 and the first half of 2021 driven by the COVID-19 pandemic,
with such growth beginning to slow down in the second half of 2021, partly due
to the easing of the COVID-19 shelter-in-place restrictions resulting in the
reopening of most outside entertainment. In addition, our second half 2021
revenue was negatively
48
————————————————– ——————————
Contents
impacted by global supply and logistics constraints caused by the COVID-19 pandemic, as well as the shortage of reasonably priced GPUs.
Net revenue increased$605.2 million , or 55.2%, in 2020 as compared to 2019. This increase was due to strong revenue growth in both segments. We believe the increased demand of our products was generally due to a larger number of consumers gaming and working from home due to the COVID-19 pandemic in 2020, in addition to existing customers upgrading their systems and gear for a better gaming and/or streaming experience, and to a lesser extent, the inclusion of post-acquisition revenues from our acquisitions of SCUF and Origin.
Gross profit and gross margin
Year Ended December 31,
2021 2020 2019
(in thousands)
Gross profit $ 513,854 $ 465,429 $ 224,287
Gross margin 27.0 % 27.3 % 20.4 %
Gross margin decreased to 27.0% in 2021 from 27.3% in 2020. The decrease was
driven primarily by an increase in logistics costs which were largely driven by
global shipping and logistics challenges caused by the COVID-19 pandemic, and
increased promotional activity. These negative impacts were partially offset by
an increase in gross margin from an improved product mix with more sales from
the higher margin gamer and creator peripherals segment.
Gross margin increased to 27.3% in 2020 from 20.4% in 2019. The increase in
gross margin was primarily driven by increased sales volume, an improved product
mix with more higher margin products being sold in 2020 as compared to 2019 and
less promotional activity. This increase was partially offset by increased air
freight costs driven primarily by tightness in inventory supply due to the
COVID-19 pandemic in 2020.
As global shipping and logistics challenges continue into 2022, we expect our 2022 gross margins to remain under pressure due to high logistics costs.
Sales, General and Administrative (SG&A)
Year Ended December 31,
2021 2020 2019
(in thousands)
Commercial, general and administrative
SG&A expenses increased$58.7 million , or 22.8%, in 2021 as compared to 2020. The increase was primarily due to a$22.4 million increase in distribution costs primarily driven by an increase in sales volume as well as higher freight costs due to the global supply chain and logistics constraints caused by the COVID-19 pandemic, a$18.3 million increase in personnel-related costs due to headcount growth and higher stock-based compensation, a$5.3 million increase in director and officer insurance policy fees, a$5.2 million increase in marketing and advertising expenses, mainly due to increase in sponsorships and digital marketing programs, and a$3.5 million increase in credit card fees due to increased sales through our webstore. SG&A expenses increased$94.0 million , or 57.6%, in 2020 as compared to 2019. The increase was primarily due to the inclusion of$29.1 million of SCUF's post-acquisition SG&A expenses, including debt refinancing costs for funding the SCUF acquisition and acquisition and integration costs related to the SCUF Acquisition, a$27.4 million increase in distribution costs including outbound freight and the costs to operate our distribution hubs due to increased sales volume, a$24.3 million increase in personnel-related costs due to headcount growth and higher bonus expense, a$6.0 million increase in marketing expenses and a$4.4 million increase in fees primarily related to increased credit card fees due to increased sales through our webstore and fees from our insurance policies. Product Development Year Ended December 31, 2021 2020 2019 (in thousands)
Product development
Product development spending increased
49
————————————————– ——————————
Contents
increase in consultant and contractor expense supporting our business development efforts and a$1.9 million increase in other product development related costs to support our continued innovation and broadening of our product portfolio. Product development expenses increased$12.5 million , or 33.3%, in 2020 as compared to 2019. The increase was primarily driven by a$5.7 million increase in personnel-related expenses due to headcount growth and higher bonus expense, the inclusion of$5.8 million of SCUF's post-acquisition product development expenses and a$5.5 million increase in other product development related expenses. These increases were partially offset by a$4.5 million decrease in amortization expense of developed technologies intangible assets.
Interest expense and other charges, net
Year Ended December 31,
2021 2020 2019
(in thousands)
Interest expense $ (17,673 ) $ (35,137 ) $ (35,548 )
Other expense, net (5,661 ) (1,182 ) (1,558 )
Interest expense decreased $17.5 million , or 49.7%, in 2021 as compared to 2020.
The decrease was primarily due to lower interest expense paid in 2021 for our
First Lien Term Loan as a result of the partial and full repayment of such loan
in 2020 and 2021, and no interest paid for our Second Lien Term Loan due to the
full repayment of such loan in 2020. Additionally, to a lesser extent, the
decrease was due to the lower interest rate on our new Term Loan (defined below)
executed in September 2021 which replaced our First Lien Term Loan (defined
below). These decreases in interest expense were offset partially by higher
losses incurred on debt extinguishment in 2021 compared to 2020 as the total
debt amount extinguished in 2021 was higher than in 2020.
Interest expense decreased $0.4 million , or 1.2%, in 2020 as compared to 2019.
The decrease was primarily due to lower interest expense paid in 2020 for our
First Lien Term Loan and Second Lien Term Loan as a result of the partial
extinguishment of our First Lien Term Loan and full extinguishment of our Second
Lien Term Loan as well as a decrease in interest from borrowings from our line
of credit. The decrease in interest expense was partially offset by an aggregate
of $4.2 million write-off of deferred debt discounts and issuance costs
associated with extinguishments of our term loans and a $0.5 million loss
recognized for the change in fair value of our interest rate cap contracts.
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. Our foreign currency exposure is
primarily driven by fluctuations in the foreign currency exchanges rates of the
Euro, British Pound and the Chinese Yuan.
Income Tax (Expense) Benefit
Year Ended December 31,
2021 2020 2019
(in thousands, except percentages)
Income (Loss) Before Income Taxes $ 114,560 $ 122,042 $ (13,399 )
Income Tax (Expense) Benefit (13,600 ) (18,825 ) 5,005
Effective Tax Rate 11.9 % 15.4 % 37.4 %
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, and 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 expense of 11.9% and 15.4% for 2021 and 2020,
respectively. The change in effective tax rate for 2021 as compared to 2020 was
primarily due to excess tax benefits from stock-based compensation as well as
the recognition of a $3.1 million tax benefit resulting from the change in
management's assessment of the realizability of our California deferred tax
assets as a result of the increased U.S. profitability.
Our effective tax rates were tax expense of 15.4% and tax benefit of 37.4% for
2020 and 2019, respectively. The change in effective tax rate for 2020 as
compared to 2019 was primarily due to an increase in income before income tax
compared to 2019, the change in the mix of income and losses in the various tax
jurisdictions in which we operate, the recognition of a $4.6 million tax benefit
resulting from the change in management's assessment of the realizability of
certain deferred tax assets as a result of the reorganization of our
organizational structure in connection with our IPO, and a $0.6 million one-time
benefit from the change in tax law resulting from the enactment of the
Coronavirus Aid, relief and Economic Security Act ("CARES Act") in the first
quarter 2020.
50
————————————————– ——————————
Table of Contents Segment Results Segment Net Revenue
The following table shows our net revenues by segment expressed in dollars (thousands) and as a percentage of net revenues:
Year Ended December 31,
2021 2020 2019
Segment of peripherals for gamers and creators
Memory Products 612,964 32.2
609,053 35.8 463,406 42.2
Other Component Products 643,894 33.8 553,948 32.5 339,627 31.0
1,256,858 66.0 1,163,001 68.3 803,033 73.2
Total Net Revenue $ 1,904,060 100.0 % $ 1,702,367 100.0 % $ 1,097,174 100.0 %
Segment of peripherals for gamers and creators
Net revenue of the gamer and creator peripherals segment increased$107.8 million , or 20.0%, in 2021 as compared to 2020 due to revenue growth across almost all product categories. In particular, the Elgato branded content creator products was our fastest growing category in this segment and accounted for approximately one-third of the segment's revenue. We believe revenue growth in this segment was driven in part by the COVID-19 shelter-in-place orders that prompted consumers to spend more time working and gaming at home and gamers seeking to improve their performance by upgrading their gear. The volume of the products shipped in this segment was lower in the second half of 2021 than the first half of 2021 primarily due to global supply and logistics constraints caused by the COVID-19 pandemic. Net revenue of the gamer and creator peripherals segment increased$245.2 million , or 83.4%, in 2020 as compared to 2019 primarily due to strong sales growth in sales of Elgato branded streaming products, we believe driven in part by the COVID-19 shelter-in-place orders as consumers spend more time working and gaming at home, and the inclusion of SCUF post-acquisition revenue.
Gaming Components and Systems Segment
Net revenue of the gaming components and systems segment increased$93.9 million or 8.1%, in 2021 as compared to 2020. We believe the revenue growth was driven in part by the COVID-19 shelter-in-place orders, particularly, for our PSUs and pre-built systems. The revenue growth in this segment was partially offset in the second half of 2021 due to the shortage of reasonably priced GPUs which curtailed the demand for new PC builds and related components, as well as global supply and logistics constraints caused by the COVID-19 pandemic. Net revenue of the gaming components and systems segment increased$360.0 million , or 44.8%, in 2020 as compared to 2019 primarily as a result of strong sales growth across all products due to continued strong market demand, we believe driven in part by the COVID-19 shelter-in-place orders, and to a lesser extent, the inclusion of Origin post-acquisition revenue.
Segment gross profit and gross margin
The following table sets forth our gross profit expressed in dollars (thousands)
and gross margin (which we define as gross profit as a percentage of net
revenue) by segment:
Year Ended December 31,
2021 2020 2019
Segment of peripherals for gamers and creators
35.2 %$ 81,363 27.7 % Gaming Components and Systems Segment Memory Products 108,901 17.8 125,026 20.5 74,781 16.1 Other Component Products 180,033 28.0 150,661 27.2 68,143 20.1 288,934 23.0 275,687 23.7 142,924 17.8 Total Gross Profit$ 513,854 27.0 %$ 465,429 27.3 %$ 224,287 20.4 % 51
————————————————– ——————————
Contents
Segment of peripherals for gamers and creators
The gross profit of the gamer and creator peripherals segment increased in 2021 by$35.2 million , or 18.5%, as compared to 2020, largely due to the revenue growth of 20.0% in the same period. Gross margin decreased by 40 basis points primarily due to increased logistics costs caused by the COVID-19 pandemic disruptions and increased promotional activity. These negative impacts to the gross margin were partially offset by the strong growth in the sales of our higher margin Elgato branded content creator products and better leverage on our fixed cost from higher sales volume year-over-year. The gross profit of the gamer and creator peripherals segment increased in 2020 by$108.4 million , or 133.2%, as compared to 2019, largely due to the strong revenue growth of 83.4% in the same period. The 7.5% increase in gross margin was primarily driven by the addition of higher margin SCUF products and the strong growth in sales of higher margin Elgato branded content creator products, coupled with less promotional activities.
Gaming Components and Systems Segment
The gross profit of the gaming components and systems segment increased in 2021 by$13.2 million , or 4.8%, compared to 2020, primarily due to the revenue growth of 8.1% in the same period. The 70 basis points decrease in gross margin was primarily attributable to our memory products due to lower selling prices as a result of competitive pricing pressure in addition to increased freight and logistics costs across this segment caused by the COVID-19 pandemic disruptions.
The gross margin of the gaming components and systems segment increased in 2020 by
Risks and uncertainties related to the COVID-19 pandemic remain and until the supply chain and logistics constraints ease and GPUs become more available, our revenue and gross margin for both segments may continue to be negatively impacted.
Cash 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 IPO completed inSeptember 2020 . 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 and future investments in business and technology. As ofDecember 31, 2021 , we had cash and restricted cash, in aggregate of$65.4 million , including$22.8 million held by our foreign subsidiaries. Amounts held outside ofthe United States are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outsidethe United States generally will not be taxable from aU.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 ofthe 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 atDecember 31, 2021 , 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. 52
————————————————– ——————————
Table of Contents Liquidity
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2021 2020 2019
Net cash provided by (used in):
Operating activities $ 20,192 $ 168,953 $ 37,103
Investing activities (20,541 ) (10,280 ) (145,427 )
Financing activities (65,404 ) (79,131 ) 132,314
Cash flow from operating activities
Net cash provided by operating activities for 2021 was$20.2 million and consisted of net income of$101.0 million and non-cash adjustments of$60.0 million and offset partially by a net use of cash of$140.8 million from changes in our net operating assets and liabilities. The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense, loss on debt extinguishment and amortization of debt issuance costs, which were partially offset by changes in deferred income taxes. The net cash outflow from changes in our net operating assets and liabilities was primarily related to increases in inventory purchases and income tax prepayment for ourHong Kong subsidiary, as well as a decrease in accounts payable mainly due to timing of payments and purchases. These cash outflows were partially offset by increases in the accrual for sales returns and customer incentives, income tax payable and bonus accrual. Net cash provided by operating activities for 2020 was$169.0 million and consisted of net income of$103.2 million , non-cash adjustments of$50.8 million and$14.9 million from changes in our net operating assets and liabilities. The non-cash adjustments consisted primarily of amortization of intangibles and depreciation, stock-based compensation expense, loss on debt extinguishment and amortization of debt issuance costs, 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 increase in accounts payable, other liabilities and accrued expenses. The increase in accounts payable was mainly due to timing of payments and purchases with longer payment terms, and the increase in other liabilities and accrued expenses was mainly from an increase in the bonus accrual and a higher accrual for sales returns and customer incentives. The cash inflow was partially offset by an increase in inventory, accounts receivable and prepaid expenses and other assets.
Cash flow from investing activities
Cash used in investing activities was$20.5 million for 2021 and consisted of$11.0 million for the purchase of capital equipment and software,$4.7 million for the payment of deferred and contingent consideration primarily related to the Origin business acquisition, and$4.8 million for acquisitions of immaterial businesses. Cash used in investing activities was$10.3 million for 2020 and consisted of$9.0 million for the purchase of capital equipment and software and$1.3 million for acquisitions of immaterial businesses.
Cash flow from financing activities
Net cash used in financing activities was$65.4 million for 2021 and consisted primarily of$328.2 million repayments of debt and$0.4 million payment of taxes related to net share settlement of equity awards. These cash outflows were partially offset by$248.5 million net proceeds from our new Term Loan executed inSeptember 2021 and$14.9 million proceeds received from the issuance of shares through our employee equity incentive plans. During 2021, we also borrowed$63.5 million from our revolving credit facility to fund our operations and the full amount was repaid in 2021. Cash used in financing activities was$79.1 million for 2020 and consisted of$190.4 million repayments of debt and$8.5 payment of offering costs. These cash outflows were partially offset by$118.6 million proceeds received from the issuance of common stock in connection with our IPO, after deducting underwriting discounts and commissions, and$1.3 million proceeds received from the issuance of shares through our employee equity incentive plans.
Capital resources
Credit agreement (term loan and revolving credit facility)
OnSeptember 3, 2021 , we refinanced the FirstLien Credit and Guaranty Agreement with a new Credit Agreement ("Credit Agreement"). The new Credit Agreement provides for a total commitment of$350.0 million , consisting of a$100.0 million revolving credit facility ("Revolving Credit Facility") and a$250.0 million term loan facility ("Term Loan"). The net proceeds from borrowings 53
————————————————– ——————————
Contents
under the Term Loan of$248.5 million (net of$1.5 million of debt discount) were used to repay all amounts outstanding under the First Lien Term Loan onSeptember 3, 2021 . The Credit Agreement is available for a period of five years, maturingSeptember 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. The Term Loan and Revolving Credit 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. Our obligations under the Credit Agreement are guaranteed by substantially all of ourU.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. 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 of 3.0 to 1.0 and a minimum Consolidated Interest Coverage Ratio of 3.0 to 1.0 (as defined in our credit facilities). The Credit Agreement also includes events of default customary for facilities of this nature and upon the occurrence of such events of default, among other things, all outstanding amounts under the Credit Agreement may be accelerated and/or the lenders' commitments terminated. In addition, upon the occurrence of certain events of default, the interest on the Term loan and Revolving Credit Facility can increase by 2.0%. As ofDecember 31, 2021 , we were not in default under the Credit Agreement. As ofDecember 31, 2021 , total principal outstanding of the Term Loan was$248.8 million and the available and uncommitted capacity under the Revolving Credit Facility was$99.5 million .
Contract cash and other obligations
The following table summarizes our contractual cash and other obligations as of
Payments Due by Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
Debt principal and interest $ 278,168 $ 9,899 $ 32,984 $ 235,285 $ -
payments (1)
Inventory-related purchase 141,599 141,599 - - -
obligations (2)
Operating lease obligations (3) 72,868 10,164 21,225 12,066 29,413
Other purchase obligations (4) 24,346 19,815 4,223 308 -
Contingent consideration in
connection with a 1,250 1,250 - - -
business acquisition
Total $ 518,231 $ 182,727 $ 58,432 $ 247,659 $ 29,413
(1) The amounts represent the main disbursements as at
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) The amounts represent an estimate of the purchase obligations related to inventories,
of which
of which we acquired a majority financial stake of 51% as of January
1st 2022 and therefore these obligations no longer exist as of
Date of purchase.
(3) The amounts represent the contractual obligations of our operating leases for
offices and storage spaces.
(4) Amounts represent non-cancellable obligations related to capital expenditures,
software licensing, marketing and other activities.
As ofDecember 31, 2021 , we had$2.1 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 withU.S. Generally Accepted 54
————————————————– ——————————
Contents
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 accrued liabilities for product returns and customer incentive programs
We offer product return rights and customer incentive programs. Customer incentive programs include special pricing agreements, promotions, discounts 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, published return policy, and other unforeseen global 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
See 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.
© Edgar Online, source
Comments are closed.