Turtle Beach Corp 10-K

Item 1 - Business Overview Turtle Beach Corporation’s mission is to deliver the ultimate experience to gamers by providing high-quality, high-performance accessories, including headsets, keyboards, mice, microphones and more. For over 45 years, Turtle Beach has been a pioneer and key innovator in audio technology and is one of the most recognized names in console gaming in North America and Europe. In 2019, Turtle Beach acquired ROCCAT, a provider of gaming keyboards, mice and other accessories focused in the personal computer (“PC”) peripherals market. In early 2021, Turtle Beach further expanded its portfolio with the acquisition of Neat Microphones (“Neat”), which creates, manufactures, and sells high-quality digital USB and analog microphones that embrace cutting-edge technology and design. Turtle Beach, headquartered in White Plains, New York, was incorporated in the state of Nevada in 2010 and the Company’s stock is traded on the Nasdaq Global Market under the symbol HEAR. Turtle Beach Corporation is the market share leader in headsets for console gaming with cutting-edge, award-winning gaming headsets for Xbox, PlayStation ® , and Nintendo consoles and also produces innovative products for PC, Mac ® , and mobile/tablet devices. With the addition of award winning PC gaming accessories from ROCCAT and deep expertise in microphones through the Neat acquisition, Turtle Beach can deliver high quality accessories across a broad range of product categories. Gaming Accessories Business Turtle Beach launched its first gaming headset and the first ever console gaming headset – the X51 - in 2005 and has become the leading brand in gaming headsets. The Company designs and markets a large assortment of gaming headsets and audio accessories for Xbox, PlayStation®, and Nintendo consoles, as well as for PC, Mac®, and mobile/tablet devices. The Company’s 2019 acquisition of the ROCCAT brand expands Turtle Beach’s reach into the global market for PC gaming headsets, keyboards, mice and other accessories, and the 2021 acquisition of Neat Microphones furthers Turtle Beach’s reach into the global microphone market. These products are distributed internationally in North America, South America, Europe, the Middle East, Africa, Australia, and Asia. Turtle Beach products are sold at thousands of storefronts, including major retailers such as Amazon, Argos, Best Buy, GAME, GameStop, EB Games, Media Markt, Saturn, Target and Walmart. Turtle Beach offers gamers a wide assortment of gaming headsets spanning multiple price points ranging from $20 to $250, with many headsets compatible across all major gaming platforms. We believe the price tiers correspond to customer profiles, beginning with entry-level gamers and progressing through casual, enthusiast, core, and professional esports gamers. Each successive price tier incorporates higher level features, comfort, and finish. For example, premium headset models typically include features like large 50mm speakers, metal headbands, memory foam, powerful amplified surround sound, active noise-cancellation, and Bluetooth ® connectivity. Additional features include audio presets like Bass Boost and Turtle Beach’s exclusive Superhuman Hearing ® sound setting, removable or flip-to-mute microphones, Turtle Beach’s proprietary ProSpecs™ glasses-friendly design, and rechargeable long-lasting batteries. As gaming consoles have evolved from dedicated video game platforms to home entertainment hubs, and as mobile and tablet devices have become popular entertainment platforms, Turtle Beach has continued to evolve its product lineup to reflect how content is consumed. While each Turtle Beach headset is designed for a primary platform, such as a specific console or PC, nearly all can be used with multiple platforms, and most are compatible with mobile/tablet devices through a standard 3.5mm jack or Bluetooth ® connectivity. This primary platform designation, paired with readily identifiable platform-specific packaging designs, often results in Turtle Beach products being displayed in multiple in-store sections by retailers, including in kiosks that allow shoppers to try the headsets and experience each headset’s specific fit, feel and overall audio quality, increasing the prominence of the Turtle Beach brand and its products in physical retail locations and online. In 2020, Turtle Beach was the leading console gaming headset manufacturer in North America with an over 45% dollar share of the market, as noted in The NPD Group’s retail tracking service, holding eight of the top 10 selling Xbox and PlayStation ® models by revenue. Turtle Beach’s console market share in the U.K. was over 40% in 2020 as reported by GfK Global. We believe the Company has achieved these global market shares by delivering high-quality products that often include first-to-market innovations and robust features, in addition to superior sound and unmatched comfort - key factors that consumers look for when shopping for a gaming headset. Similar to console headsets, our PC gaming headsets, keyboards, and mice span price points from low to high for entry level to professional gamers with each successive price tier adding features and build quality. We seek to infuse differentiation and innovations in our PC products including our own design for keyboard and mouse click switches, innovative lighting and extensive ergonomic design testing and modeling. In 2020, Turtle Beach’s PC brand – ROCCAT, introduced multiple new products to grow the range of offering and augment the already successful ROCCAT line-up. These new products include the first jointly developed wireless and wired headsets (the ELO Series) that combined ROCCAT’s award-winning design with Turtle Beach’s audio expertise. Additionally, ROCCAT released new, pioneering technology and formats for their award-winning Vulcan keyboard series. ROCCAT also introduced a new line of light-weight and ultra-responsive mice with its new Burst series. Industry Overview Gaming Headset Market 3 Gaming headsets are part of a global software and accessories gaming market which has grown to $1 83 billion by the end of 2020, a roughly 20 % year-over-year increase . The global gaming audience now exceeds global cinema and music markets with over 2. 8 billion active gamers worldwide. Gaming peripherals, such as headsets, keyboards, and mice are e stimated to be a $ 5 .1 billion business globally with over 7 5 % of that market in the Americas and Europe where the Company’s business is focused. Gaming headsets represent more than a $ 3.2 billion global market, or more than 6 0% of the total gaming peripherals market. Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract/gain dedicated fans – similar to traditional professional sports. There were approximately 443 million esports viewers in 2019, and that was expected to surge to roughly 495 million viewers by 2020 (11.7% YOY), according to a report from Newzoo. Of those 495 million projected viewers, 272 million will identify as “occasional viewers” and 223 million will consider themselves “esports enthusiasts”. Many gamers play online where a gaming headset (which typically includes a microphone allowing players to communicate in real-time) provides a more immersive experience and a competitive advantage in the industry’s most popular games and franchises. PlayStation ® and Xbox consoles continue to be dominant gaming platforms in North America and Europe for games that drive headset usage. Consistent with a historical pattern of major new console launches every 7-8 years, Microsoft and Sony released their next generation consoles, Xbox and PlayStation®5 platforms just ahead of holiday 2020. Demand for the new consoles has been very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles. Further, industry guidance suggests that with the launch of the new systems, and continued sales of the current consoles, combined console hardware sales will set records in 2021 and 2022. In 2020, the Nintendo Switch™ completed its third full year in the market with more than 70 million units sold through the end of December 2020, during which there has been an expanding library of games and an increased number of multiplayer chat-enabled games. In addition, Nintendo launched a follow-on product, the Nintendo Switch™ Lite, which is the handheld-only version of their popular gaming console. While gaming on mobile/tablet devices represents about 50% of the global gaming market and headsets can be used for mobile gaming, console and PC gaming are by-far the largest drivers of gaming headset use. PC Accessories Market PC gaming in the U.S. has seen a resurgence in popularity the past few years and continues to be a main gaming platform internationally, driven by big AAA game launches, PC-specific esports leagues, teams and players, content creators and influencers, cross-platform play, and more. While most games are available on multiple platforms, gaming on PC offers advantages that include improved graphics, increased speed and precision of mouse/keyboard controls, and ability for customization. Gaming mice and keyboards are engineered to provide gamers with higher-end performance and a superior gaming experience through benefits including faster response times, improved materials and build quality, programmable buttons and keys, and software suites to customize and control devices and settings. PC gaming mice come in a variety of different ergonomic shapes and sizes, are available in both wired and wireless models, offer options for different sensors (optical and laser) and responsiveness, and often feature integrated RGB lighting and software to unify with the lighting on other devices for a visually pleasing PC gaming appearance. Similarly, PC gaming keyboards deliver a competitive advantage by registering keystrokes faster than others, offer options for mechanical key switches that feel and sound different, and utilize customizable lighting. The $2.5 billion market for PC gaming headsets, mice and keyboards grew at 6.2% in 2019 and was forecasted to grow by another 35% in 2020 to almost $3.4 billion. The same gaming, work-from-home, and school/learn-from-home factors benefitted the accessories market where headsets, keyboards, mice and other accessories developed for PC gaming have seen an increase in consumer demand. PC and console gaming markets are also driven by major game launches and franchises that encourage players to buy equipment and accessories. On Xbox, PlayStation ® , and PC flagship games like Call of Duty ® , Destiny, Star Wars: Battlefront, Battlefield, Grand Theft Auto , and battle royale games like Fortnite, Call of Duty Warzone, Apex Legends and PlayerUnknown’s Battlegrounds , are examples of major franchises that prominently feature online multiplayer modes which encourage communication and tend to drive increased gaming headset sales. Many of these established franchises launch new titles annually leading into the holidays and as a result which can cause an additional boost to the normally strong holiday sales of gaming accessories. Microphone Market The microphone market is estimated to be $2.3 billion in size with roughly $700 million of that estimated to be for digital USB microphones. The market for high-quality microphones, specifically digital microphones is experiencing significant growth as consumers on YouTube, Twitch and other popular platforms are gravitating toward using high-quality professional equipment for their workstations. Additionally, with the increasing trend to remote work furthered by stay-at-home orders, the need for a great sounding desktop microphone has become an important tool when it comes to working from home, as well as learning from home and staying connected with family and friends. 4 The 2021 acquisition of Neat Microphones expands Turtle Beach’s reach into the global microphone market, including, in particular, the market for digital/USB microphones which are often used by gamers, streamers, and influencers who also use other PC accessories. COVID-19 Impact and Outlook During 2020, as the pandemic created stay-at-home guidance, the gaming accessory market experienced a significant surge in demand as existing gamers began gaming more and new gamers entered the market. In addition, the work-from-home and school/learn-from-home increase created additional demand for accessories, particularly gaming headsets which work well for video and audio calls. As a result, the Company’s 2020 revenues have exceeded historical levels as the overall gaming and headset markets have experienced an unprecedented surge in demand. Going forward, the effects of the global pandemic and the measures being taken in response are uncertain and difficult to predict. While there were likely certain one-time benefits to demand caused by the stay-at-home orders, we believe millions of new gamers have joined the market which should create an ongoing, larger installed base of players. Business Strategy We intend to further build upon Turtle Beach’s brand awareness, superior audio technology and high-quality products, as well as further promote and expand the ROCCAT and Neat Microphones brands in certain geographic regions to increase sales and profitability. The Company's strategy focuses on the following: • Continue to Advance Our Turtle Beach Brand. We believe that Turtle Beach’s reputation among consumers is a competitive advantage, and that our success is attributable to our emphasis on delivering the highest quality, most innovative headsets. • Expand Our Product Lines. We continue to invest in the resources necessary to maintain and expand our technical capability to manufacture multiple product lines that incorporate the latest technologies. PC gaming headsets, keyboards and mice represent a market that is two times the size of the console gaming headset market with projected double-digit market growth. As shown by the initial success of the recently released Elo series of PC gaming headsets, we continue to believe the PC gaming accessory market can be a great source of growth in the coming years. • Grow Revenue in New Markets. We intend to increase our available markets by continuing to develop internally, or through partnerships or acquisitions, products in new gaming accessory or audio categories that we offer to our customers. The latest example, on January 12, 2021, we announced the acquisition of Neat Microphones (“Neat”) that creates, manufactures and sells high-quality digital USB and analog microphones and enables our entry into the $2.3 billion global microphone market, which is experiencing rapid growth in the digital/USB accessories segment. To maintain our competitive position in our markets we are focused on the following: • continuing to deliver innovative, high quality gaming headsets that incorporate advanced audio and wireless technology, while providing a superior game and chat audio experience and unmatched comfort; • continuing to deliver innovations in speed, precision, lighting and form factor in gaming keyboards, mice, and other gaming categories that can leverage those capabilities • maintaining our position at key retailers with products available in more locations throughout retailers; • continuing investments in our ecommerce platforms to drive profitable growth by expanding customer reach, reducing cost-to-serve, and creating differentiated customer experiences; • maintaining our strategic relationships, and continuing investment in sponsorships, which we believe provide our brand a larger presence with consumers and creates opportunities for retailers to carry our products; and • leveraging high-quality technical support and customer service to exceed consumer expectations and develop brand loyalty. Intellectual Property We operate in an industry where innovation, investment in new ideas, and protection of resulting intellectual property rights are critical to success. With over 250 patents, we have a substantial base of intellectual property assets to protect our current and future product development, such as key innovations in gaming headsets, and intend to vigorously enforce such rights. As a third-party gaming accessory company, certain technology used in the new generation of consoles requires a license to enable products to connect to that platform. While Playstation ® does not require any license to produce headsets that can connect, certain connections on the Xbox platforms require the purchase of proprietary chips to integrate into the locked chat audio. The Company currently has the necessary licenses, or can obtain the necessary licenses, to produce compatible products. 5 Supply Chain and Operations We have a global network of suppliers that manufacture products to meet our quality standards and cost objectives sought by our customers. We have worked closely with component, manufacturing and global logistic partners to build a supply chain that we consider predictable, scalable and efficient to provide high-quality, reliable products and leading cost management practices. The use of outsourced manufacturing facilities is designed to take advantage of specific expertise and allow for flexibility and scalability to respond to both seasonality and changing demands for our products. In 2020, due to current economic conditions, and pandemic-related government restrictions, that have slowed down supply chains, we have extended our purchase order lead times and increased our purchasing forecast period to allow for sufficient delivery time. We believe we have strong, long-term relationships with our suppliers and that, subject to the discussion in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” we will continue to have a sufficient supply of quality products on satisfactory terms. Retail Distribution Our products are sold in over 40 countries by retailers such as Amazon, Argos, Best Buy, GAME, GameStop, EB Games, Media Markt, Saturn, Target and Walmart. We often have a broader assortment and more shelf space than competitors at video game and electronics retailers such as Best Buy and GameStop, which we believe reinforces the brand’s authenticity with gaming enthusiasts, and our presence in mass channel retailers such as Walmart and Target enables the brand to reach a wider audience of casual gamers. Our established presence on Amazon and other online retail sites, and positive consumer product ratings on those sites, increases the search visibility of our products and helps to influence both online and in-store sales. TB Europe, located in the U.K., serves as a primary sales office for the European market and has strengthened our international operations with support for sales, marketing, customer service and distribution. Our websites, TurtleBeach.com, ROCCAT.org, and Neatmic.com, are important focal points for our marketing efforts, serving as a destination for consumers to learn about the brands, the product offering and as a place to maintain ongoing customer connection. The company saw tremendous growth in online direct sales in 2020 as more consumers opted to shop from home and expect to see this growth continue. Customers Our business customer base is comprised primarily of large retailers and distributors, both domestic and international. In 2020, net sales to our major market channels consisted of $213.0 million to North American retail customers, $85.8 million to European customers, $27.7 million to North American distributors and $33.6 million to other customers. Our five largest individual customers accounted for approximately 61% of our gross sales in 2020, 62% of our gross sales in 2019, and 64% of our gross sales in 2018. During 2020, our three largest customers - Walmart, Target and Amazon - each accounted for between 11% to 23% of our consolidated net sales. Seasonality Our business is seasonal with a significant portion of sales and profits typically occurring around the holiday period. Historically, more than 45% of headset business revenues are generated during the period from September through December as new headsets are introduced and consumers engage in holiday shopping. In addition, launches of major new online multiplayer games, and specific retailer purchasing behavior, can drive significant revenue shifts between months and quarters in a given year. Human Capital As of December 31, 2020, Turtle Beach had roughly 300 employees, of which 253 were full-time salaried employees. None of our employees are represented by a labor union. We believe that our relationship with our employees is good. In order to build and maintain a strong and productive workforce, we consistently assess the current business environment and labor market to refine our compensation and benefits programs and other resources available to our employees. We are committed to an inclusive and high-performance culture at all levels of the organization. The Company has a diverse global workforce with larger offices located in four countries. 6 We are further committed to developing our employees professionally by leveraging our Intellectual Capital (IC) process. The IC process includes constructive reviews and various talent and leadership development initiatives conducted by the management team and provided throughout an employee’s career . In response to the COVID-19 pandemic in 2020, we implemented and continue to maintain additional health and safety protocols and new procedures across all of our locations to help ensure the safety and well-being of our employees. These protocols included the option to work from home, proper hygiene, social distancing, mask use and temperature screenings and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. Available Information We make available free of charge on or through our website, http://corp.turtlebeach.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and all amendments to those filings as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information contained on our website is not incorporated by reference unless specifically stated therein. In addition, the SEC maintains a website that contains reports, proxy statements, and other information about issuers, such as Turtle Beach, who file electronically within the SEC. The address of the website is www.sec.gov. 7