Turtle Beach (HEAR 18.44, +1.24, +7.23%) shares are trading nicely higher today, though
off of their opening +14.8% leap, after
the company guided sharply above market expectations for Q3 revenue and EPS.
Turtle Beach is a gaming headset and audio accessories company. It offers a wide variety of gaming headsets at various price points suited to different performance needs, offering models that should prove attractive to a wide variety of customers, from professional esports athletes and hardcore gamers to recreational players and those who are just starting out.
HEAR’s products combine innovative and advanced technology with lightweight and comfortable designs, modeled with both crystal-clear communication and ease of use as priorities, to deliver high-quality gaming audio. Designed for compatibility with Xbox, PlayStation, and Nintendo consoles as well as for PC, Mac, and mobile/tablet devices, Turtle Beach’s gaming headsets, says HEAR, provide their owners with a competitive advantage. The company’s motto is "Hear Everything. Defeat Everyone."
Turning to the Q3 guidance, HEAR expects EPS of $0.74-0.78, which is up sharply from prior guidance of approximately $0.44/share. Revenue guidance was increased to $73-74 mln from prior guidance of $65 mln. Adjusted EBITDA guidance was increased to $17 mln from $11 mln. That's up more than 5x from $3.3 mln reported in 3Q17.
What is driving this upside? HEAR says that the momentum it built in 1H18 continued through 3Q18. The strong increase in demand for gaming headsets that occurred with the rise of the “battle royale” genre has continued. Catalyzing industry sales, the popularity of the genre has attracted new gamers into the market, encouraged veteran gamers to upgrade their gear to strengthen their competitive edge, and increased the overall usage rate and installed base of gaming headsets.
Furthermore, anticipated game launches such as Activision’s (ATVI) Call of Duty: Black Ops 4, which includes a battle royale mode, and Take-Two’s (TTWO) Red Dead Redemption 2, both due for release this month, should continue to spur high headset usage and demand.
HEAR's surveys show that on average, gamers replace their headsets every 20-24 months; HEAR believes replacement was driving the majority of the core headset market prior to the battle royale phenomenon. With battle royale popularity in play and gaming interest expanding, HEAR expects that an increase in the number of gaming headset users will be reflected in the market size going forward.
HEAR also expects that it has once-again outpaced the overall market based on increased year/year share in Q3, further adding to revenue and profit. HEAR says its portfolio of great headsets for every level of gamer continues to perform well across the board. According to NPD, year-to-date through August, Turtle Beach sold more console video gaming headsets than any other competitor in any other calendar year since 2006. HEAR expects that its strong results will enable it to further reduce debt over time and fuel various long-term growth investments.
In sum, this was some impressive upward guidance for Turtle Beach. It's clear that their gaming headsets are big sellers in the marketplace. The quick replacement cycle of 20-24 months coupled with the rise of the “battle royale” genre are really driving results. After rising sharply from $5 in early May to a high of $34.50 in early August, the stock had been trending lower in recent months. However, this Q3 guidance may get the stock back on the uptrend.
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