Item 1. Business
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, gamepad controllers, simulation products, 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 gaming in North America and Europe. 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.
The Turtle Beach brand has been the market share leader in console gaming headsets for over a decade with a vast portfolio of headsets for Xbox, PlayStation®, and Nintendo consoles, as well as for PC, Mac®, and mobile/tablet devices. And as a result of recent acquisitions; ROCCAT, a provider of gaming keyboards, mice and other accessories focused on the personal computer (“PC”) peripherals market and Neat Microphones (“Neat”), and entry into the gaming controllers and flight simulation accessories, Turtle Beach Corporation delivers 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 gone on to 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 acquisition of ROCCAT in 2019 expanded Turtle Beach Corporation’s reach into the global market for PC gaming headsets, keyboards, mice and other accessories, and the acquisition of Neat Microphones in 2021 extended Turtle Beach’s reach into the global microphone market. Also, 2021 saw the further expansion of the Turtle Beach brand with the introduction of its first controller and flight simulation accessories. These products are distributed globally. 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 tiers ranging from $20 to $250, with many headsets compatible across multiple 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
4
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 2021, Turtle Beach was the leading console gaming headset manufacturer in the U.S. and other major console markets. We believe the Company has achieved these global market shares by delivering high-quality products that often include first-to-market innovations, robust features, superior sound, unmatched comfort, and top customer support – all 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 tiers ranging from low to high for entry-level to professional gamers with each successive price tier adding features and build quality. In 2021, we have entered two large new markets: gaming controllers with the Xbox Recon Controller, and flight simulation hardware with the VelocityOne Flight™ simulation control system. We seek to infuse differentiation and innovation into our PC products, including our own design for keyboard and mouse switches, innovative RGB lighting, and extensive ergonomic design testing and modeling. Turtle Beach’s PC-focused accessory brand, ROCCAT®, has continued expanding its portfolio of PC accessories with multiple new products, including the Syn ™ Pro Air wireless gaming headset and Kone™ Pro mice – the latest entries in the brand’s PC gaming mice. Finally, ROCCAT introduced the all-new Torch™ desktop microphone, plus additional entry-level keyboard options with the Magma® and Pyro keyboards.
Industry Overview
We participate in a $184 billion global software and accessories gaming market. The global gaming audience now exceeds global cinema and music markets with over 3 billion active gamers worldwide. Gaming peripherals, such as headsets, keyboards, mice, microphones, controllers, and simulation are estimated to be a $8.8 billion business globally with over 80% of that market in the Americas and Europe where the Company’s business is focused.
Competitive esports is a global phenomenon where professional gamers train and compete to win prize money, partner with major brands, and attract dedicated fans – similar to traditional professional sports. There were approximately 475 million esports viewers in 2021, and that is expected to increase to roughly 575 million viewers by 2024, according to a report from Newzoo. Of those 575 million projected viewers, more than half are expected to identify as “occasional viewers” and with approximately 285 million considered “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.
Console Headset Market
The global market for console headsets in 2021 was approximately $1.7 billion. 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 latest next generation consoles, Xbox and PlayStation®5 platforms just ahead of holiday 2020. Demand for the new consoles has continued to be very strong and exceeded supply which is a good indicator of the enthusiasm for the latest consoles. The demand for gaming consoles is forecasted to continue to be strong in 2022 and the supply of PS5 and Xbox Series is expected to improve, helping the overall console market to single digit percentage growth in 2022.
In 2021, the Nintendo Switch™ completed its fourth year in the market with more than 70 million units sold through the end of December 2021. Nintendo continues adding and expanding their library of games with an increased number of multiplayer chat-enabled games. Nintendo launched the Nintendo Switch™ Lite, a follow-on product which offers gamers the hand-held only version of their popular gaming console.
While gaming on mobile/tablet devices represents about 52% 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
The market for PC gaming headsets, mice, and keyboards is estimated to have grown in 2021 to $3.8 billion. The same gaming, work-from-home, and school-learn-from-home factors associated with COVID-19 that benefitted the accessories market also resulted increased consumer demand for headsets, keyboards, mice, and other accessories developed for PC gaming. In 2022, the demand for such PC gaming accessories is expected to continue.
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, popular teams and players, content creators and influencers and cross-platform play. While most games are available on multiple platforms, gaming on PC offers advantages including improved graphics, increased speed and precision of mouse/keyboard controls, and the ability for deeper customization. Gaming mice and keyboards are engineered to provide
5
gamers with high-end performance and a superior gaming experience through features such as 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 consistent PC gaming appearance. Similarly, PC gaming keyboards often deliver a competitive advantage by registering keystrokes faster than others and offer options for mechanical and optical key switches that feel and sound different and offer customizable lighting.
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 that encourage communication and tend to drive increased gaming headset usage. Many of these established franchises launch new titles annually leading into the holidays and as a result can cause an additional boost to the normally strong holiday sales for gaming accessories.
Microphone Market
The microphone market is estimated to be $2.3 billion in size of which roughly an estimated $700 million is for digital USB microphones. The market for high-quality microphones, specifically digital microphones, has experienced 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 sustained trend to remote work, the need for a well-performing desktop microphone has become an important tool when it comes to working and learning from home, as well as staying connected with family and friends. Turtle Beach Corporation’s acquisition of Neat Microphones in 2021 expanded the Company’s reach into the global microphone market, including, in particular, the market for digital/USB microphones that are often used by gamers, streamers, and influencers with other PC accessories.
Other Gaming Accessories Market
During 2021, the Company expanded into the gaming simulation and gaming controller markets with the launch of the VelocityOne Flight™ simulation control system and the Xbox Recon Controller, respectively. These markets will increase our total addressable market by $1 billion, with third-party game controllers at roughly $600 million and PC/console flight simulation hardware at roughly $400 million in global market.
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 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. We have continued to expand our ROCCAT PC portfolio, launching new products such as the Torch USB microphone, as well as a variety of new Sense mouse pads and we continue to believe the PC gaming accessory market will be an opportunity for growth in the coming years. We are not only continuing to move our best-selling gaming audio business forward with new headsets like the Recon 200 Gen 2 but have entered two large new markets: gaming controllers with the Xbox Recon Controller, and flight simulation hardware with the VelocityOne Flight™ simulation control system.
•
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. In 2021, we completed the acquisition Neat Microphones, a business 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. As a result, for the first time, almost 20% of our revenues are derived from categories outside the console gaming headset category, a market in which we have been a leader for over ten years.
6
To maintain and/ or improve 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 300 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 believes it currently has the necessary licenses, or can obtain the necessary licenses, to produce compatible products.
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 dependable, scalable, and efficient to provide high-quality, reliable products employing 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 2021, the ongoing global economic recovery from the COVID-19 pandemic as well as surging imports and strong demand for electronics created significant challenges for global supply chains resulting in inflationary cost pressures and component shortages. We also experienced logistical challenges related to transportation delay, incremental costs for commodities and components used in our products and component shortages, all of which negatively impacted our sales and results of operations. We expect these challenges will continue to have an
7
impact on our business. As a result, we continue to take proactive steps to limit the impact of these challenges and, are working closely with our suppliers to manage availability of product and implement other cost savings initiatives.
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 expect to continue to be able to obtain 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 enable 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.com , 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. Information contained on our websites is not incorporated by reference herein unless specifically stated therein.
Customers
Our business customer base is comprised primarily of large retailers and distributors, both domestic and international. In 2021, net sales to our major market channels consisted of $209.0 million to North American retail customers, $102.9 million to European customers, $20.2 million to North American distributors and $34.3 million to other customers.
Our five largest individual customers accounted for approximately 66% of our gross sales in 2021, 67% of our gross sales in 2020, and 66% of our gross sales in 2019. During 2021, our three largest customers - Walmart, Target, and Amazon - each accounted for between 10% 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. In the past few years, normal seasonal patterns have been significantly changed due to pandemic-driven shifts in consumer demand.
Human Capital
As of December 31, 2021, Turtle Beach had 304 employees, of which 272 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.
Corporate Culture
We are focused on creating a corporate culture of integrity and respect, with the goal of working together to drive our business to be creative, innovative, and competitive. To achieve these objectives, we have adopted and regularly communicate to our employees the following core values:
• Leadership: We take initiative and lead in our respective roles. We lead by example.
• Teamwork: We work as a team and value diversity. We win together and lose together.
• Excellence: We take pride in our work and seek excellence in everything we do.
• Integrity: We are honest, direct, and transparent in all interactions.
• Innovation: We innovate to deliver better products and constantly improve every aspect of our company.
• Execution: We do what we say we will do and take personal accountability for our commitments.
We operate a performance-based environment where results matter and financial discipline is enforced. We seek to create a highly collaborative culture in which employees feel a sense of pride that their input is sought after and valued. We believe that our culture is a long-term competitive advantage for us, fuels our ability to execute and is a critical underpinning of our employee talent strategy.
8
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.
Diversity and Inclusion
We believe diversity in the workplace creates an environment where different perspectives lead to improved creativity, productivity, team member engagement, and overall employee happiness. To embrace diversity in 2021, we:
• Continued bias training for the entire company;
• Implemented and tracked diversity metrics through our recruiting process;
• Included diversity statements in all job postings, our TB Careers website and social media channels; and
• Began working with diversity-focused, specialized job sites to increase the diversity of our candidate pool.
Compensation and Benefits
We operate in a highly competitive and technologically challenging environment. We provide competitive compensation and benefits programs for our employees. In addition to salaries, these programs (which vary by employee level and by the country where the employees are located) include, among other items, bonuses, equity-based compensation awards, retirement plans, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, advocacy resources, flexible work schedules and employee assistance programs.
Health, Safety and Wellness
In response to the COVID-19 pandemic, 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 .
9