Shares of Turtle Beach Corporation (NASDAQ:HEAR) have seen a convincing move higher in response to the release of its 2023 results, but moreover on the back of a substantial acquisition and tender offer for the shares, as the overall news flow sent shares 25% higher.
Before diving into the implications of the latest news flow on the investment thesis, let’s first take a look at the business and its turbulent past, after which we will review the latest chapter to its rich corporate history.
On Turtle Beach
Turtle Beach is a manufacturing of gaming accessories with a history which goes back to the 1970s. The long history means that it has developed a wide range of music, sound cards, headsets, and, over time, focused more on gaming equipment.
The sequential launches of these products and varying degrees of popularity has created multiple boom-bust cycles in the shares. A single-digit stock in 2010 peaked around the $80 mark in 2013, as shares were back to trade in the single-digit territory in 2016 again, in fact down to just a dollar in 2018. Shares subsequently spiked to the $30s, but were back to single digit territory pre-Covid-19.
With the passage of time, the company has focused on providing game (hardware) accessories. This includes specific game equipment, (mobile game) controllers, headsets, accessories and pc peripherals, marketed under its namesake brand and as well as the ROCCAT brand.
The pandemic, and resulting gaming mania, sent shares back to the $30s in 2021, before falling back to levels around the $10 mark recently. All these wild share price moves are pretty much well explained by greater volatility, seen in the actual results as well.
A $160 million business in 2015 was posting losses at the time, revenues peaked around $360 million post-pandemic (accompanied by solid profits), but saw revenues plunge to $240 million in 2022, accompanied by some real losses.
2023 – Stabilization
After a very tough 2022, a year in which revenues were down a third amidst an inventory glut following an unexpected demand retreat, revenues recovered in a modest fashion in 2023. Turtle Beach reported a 7% increase in full year sales to $258 million, and even as gross margins improved in a rather dramatic fashion, the company kept on posting losses.
Operating losses narrowed from $51 million and change to just $16 million. Net losses of $17 million and change came in at a dollar per share, based on a share count of about 17 million shares. Fortunately, the balance sheet remained in a solid state, revealing an $18 million net cash position.
Needless to say is that, with shares trading at just around $10 per share, the resulting $150 million operating asset valuation was modest, at 0.6 times sales. Given the lack of profits (in fact, losses) it was easy to understand why investors are cautious here, even as a very adjusted EBITDA number of $6.5 million was reported for the year.
The big news was the outlook, and a key driver in this. For 2024, the company sees sales between $370 and $380 million, which is spectacular, but includes the contribution of the acquisition of PDP (on which I will elaborate below). Excluding the acquisition, the company expects to outperform gaming markets, with pro forma adjusted EBITDA seen between $51 and $54 million, driven by a 9-month contribution from PDP, as well as solid expected performance of the own business. Such EBITDA margins are in line with the long term expected margins seen in the low-to mid-teens.
A Big Deal
Alongside the release of the 2023 results, Turtle Beach announced a $118 million deal for gaming accessories company Performance Designed Products, a competitor with particular strength in game controllers.
The company sees pro forma sales at $400 million. The deal presentation revealed a $115-$120 million revenue contribution from the deal. Post-deal EBITDA of DPD is seen at a midpoint of $25 million, yet that is after an expected $11 million in cost synergies, as that excludes revenue synergies and benefits of sharing of best practices over time.
The deal is structured as a $79.9 million cash deal, with 3.45 million shares to be issued to the previous owners of DPD. Based on the headline deal tag of $118 million, the company is valued at around 1.0 times sales, but certainly the estimated synergies look quite compelling here and is part of the reason why investors clearly are upbeat. A $30 million tender offer for shares between $13.75 and $15.00 per share adds to the fuel as well.
What Now?
Pro forma, I peg the Turtle Beach Corporation share count at around 22 million shares (ahead of the tender offer) as the $80 million cash component of the deal means that net debt is seen in the low sixty million dollars (again ahead of the tender offer), a number which corresponds with pro forma EBITDA and hence should not cause massive leverage concerns.
Based on a $6 million EBITDA profit, the business posted operating losses of around $17 million last year. With the core business set to post EBITDA standalone in the mid-thirties in 2024, the roughly $30 million sequential improvement could drive modest operating profits of $10-15 million, but really it is that the addition of DPD (and synergies) which pave the road for a $30 million operating profit here.
If that happens, operating profits might come in around $1.25 per share (still counting conservative here based on the guidance), although that this is ahead of interest and taxes. Nonetheless, the massive improvements and profits provide real support for the shares, with more earnings power potentially seen over time.
Hence, this deal looks really great. The guidance is comforting, yet I have to recognize the many disappointments seen in the past as well. Given all this, I am taking a wait-and-see approach with Turtle Beach Corporation here, anxiously looking for evidence and progress on the expected improvements.
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