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Parametric Sound Corporation (NASDAQ:HEAR)

Q1 2014 Earnings Conference Call

May 12, 2014 4:30 PM ET


Anne Rakunas – IR

Juergen Stark – President and CEO

John Hanson – CFO


Sean McGowan – Needham & Company

Rob Stone – Cowen and Company


Good day ladies and gentlemen and welcome to the Parametric Sound Corporation First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Ms. Anne Rakunas with ICR. Ms. Rakunas, you may begin.

Anne Rakunas

Thank you. Good afternoon everyone and welcome to Parametric Sounds Corporation’s first quarter fiscal 2014 earnings call to discuss our financial results. Before we get started, we will be referring to the press release filed today with details of the results which can be downloaded from the Investor Relations page of our website at Shortly after we end this call, a recording of the call will be available as a replay in the Investor Relations section of the Company’s website.

Please be aware that some of the comments made during our call may include forward-looking statements that involve risks and uncertainties regarding our operation and future results that could cause Parametric Sound’s results to differ materially from management’s current expectations.

We encourage you to review the Safe Harbor statement contained in today’s press release and other filings with the Securities and Exchange Commission including without limitations our annual report on Form 10-K and other periodic reports as well as proxy statement on schedule 14-A filed in connection with our merger with Turtle Beach which identifies specific risk factors that may affect actual results or events to differ materially from those described in forward-looking statements.

We also note that this call contains non-GAAP financial information. We’re providing that information as a supplement the information prepared in accordance with accounting principles generally accepted in the United States or GAAP, and you can find a reconciliation of these metrics to our reported GAAP results in the reconciliation table provided in today’s earnings release.

And now, I’ll turn the call over to Juergen Stark, the Company’s Chief Executive Officer.

Juergen Stark

Thank you and thanks for joining us on the call today. With me is John Hanson, our Chief Financial Officer. Good afternoon. We’re delighted to be here with you today to discuss the progress we’ve made in the first quarter to advance the growth of our Company.

I will cover the business highlights, John will cover the financial performance and outlook and then we’ll open up the call to take your questions. Well, it’s certainly been a very busy and productive first quarter for Parametric Sound operationally, strategically and financially and a formative period during which we laid the ground work for what I believe will be a bright future for our Company and our shareholders.

In less than 90 days, we completed the merger and strengthened our financial position by signing a new asset-based credit facility, paying down long-term debt and raising capital through a common stock offering. In that same 90 day period, we successfully capitalized on the initial opportunities created by the gaming console transition through a well-executed and market leading launch of our first Xbox One headsets. We also moved quickly to get the organizations integrated and the right pieces in place to drive the commercialization of our HyperSound technology. We are confident that our recent actions have put the Company in a stronger position to capitalize in the many global opportunities that lie ahead.

Operationally, we began to see the benefits of the gaming console transition. During the first quarter, we continued to see increased demand for our PlayStation 4 compatible headsets and we successfully launched the first ever Xbox One compatible headsets with the three models released on March 6th. The response to our newest headsets including a licensed tighten model has been very positive and the strong sales contributed to a net revenue of $$38.3 million, which represents growth of more than 30% over the first quarter of 2013.

This was ahead of our initial outlook of 10% growth as roughly $4 million of product shipped late in the quarter that was originally budgeted for April. Margin also improved year-over-year with a gross margin of just over 32%, a 290 basis point increase from the first quarter of 2013. This resulted in an adjusted EBITDA for the headset business of $4.8 million more than doubled from $1.7 million from the first quarter for last year.

For those of you that are new to the Turtle Beach story. The Company has a 39 year history of audio technology innovation and has played a leading role in the development of the gaming headset category. It’s important to note that, gaming headsets are very different from stereo headphones in two key ways.

First, their design for by directional communication, enabling gamers to talk to each other in online multi-player games we call that chat audio. Second, gaming headsets allow for significant technology differentiation with unique features for controlling and enhancing gaming and chat audio. In fact our higher end headsets have very sophisticated technology that allows for wireless communication, programmable audio presets and complex surround sound and chat audio processing.

Over the past decades, Turtle Beach has demonstrated the ability to identify, innovate and build audio technology driven business with high quality differentiated products and outstanding global relationships. Between 2010 and 2012, we doubled the size of Turtle Beach’s revenues to just over $200 million, through new product introductions that fueled consumer demand and increased sale through at our strong network of retail partners including Best Buy, GameStop, Wal-Mart and Amazon to name a few. As a result, the Company has a strong share for the gaming headset market, reporting approximately 50% dollar share in U.S. and UK gaming headsets market in 2013.

As expected following several years of rapid growth, our revenue falls slightly in 2013 following the announcements in the first half of last year that Sony and Microsoft would launch new consoles in November ahead of the holiday season. Historically, these console transition as we call it have produced market drop leading up to the transition followed by several years of robust growth that certainly appears to be the case as the next gen console transition is off to a record start with Sony recently announcing over 7 million units sold through worldwide for the PlayStation 4 and Microsoft announcing 5 million units sold in worldwide for the Xbox One. Both of these milestones were achieved too faster than during the last industry transition to the PlayStation 4 and the Xbox 360, the old gen consoles as we call them.

While we are still very early in what we expect would be a multi-year market transition to the new consoles, the recent console sales data is an important indicator for both our console gaming headset business and for the long-term health of the gaming industry. With approximately 50% dollar share of the U.S. and UK gaming headsets markets, a positive growth trajectory in international markets and licensing agreements in place with both Microsoft and Sony, we believe that we have positioned ourselves well to benefit from the industry’s growth in coming years.

On our 2013 earnings call in March, I discussed three important factors that will impact our performance over the life span of the current console transition. I think it’s worth to quickly revisit. First, I noted during the last console cycle, we experienced attachment rates for gaming headsets of 8% to 10% .This is actually the attach rate within the first few days after consumer purchased a gaming console. Those attachment rates increased to 20% to 22% over the life span of the console based on 2013 research.

We anticipate higher long-term attachment rates for the new generation consoles due to the increased in multi-player console gaming and the growing importance of surround sound and chat functionality in newer games. However, we are still at the very front-end of the transition and it is too early to get a solid understanding of both initial and a long-term attachment rates for the new consoles.

Second, consumer purchasing for the both the previous and next gen gaming ecosystems continues to be somewhat unpredictable. In many households, disposable income for gaming is being invested in the purchase of new consoles which have higher retail price than previous generations of consoles. At the same time, supply of new consoles is still at some times constrained.

Until we get into more normalized market conditions for the gaming industry, which we project, will occur over the next 9 to 12 months, we believe it will remain difficult to accurately predict near-term market demand. Also note that, roughly 50% of our gaming headset revenues have historically occurred in the Q4 holiday period, similar to others in our category. Given these factors, we believe it’s prudent to remain cautious with our expectations until attachment rates become clear and we get closer to the fourth quarter.

Third, while we have a broadest portfolio in the industry for the new consoles, the nature of new platform launches means that the portfolio starts narrow and fills out overtime. For example, we have 12 models for Xbox 360, which span retail price points of $29 to $299. In contrast, we have three models for Xbox one, which span retail price points of $99 to $159. As we fill out this portfolio heading into this holiday and throughout 2015, we expect a positive impact on revenues and a few points of benefit to gross margins.

To sum up the highlights on our Turtle Beach headset business, in the first quarter, we’re very pleased with the exceptional operational execution and the strong performance of our products. We are clearly off to a very good start early into this new cycle as demonstrated by the strong year-over-year revenue and margin growth.

Also on the operational front, I’m pleased to share a progress we have made with our HyperSound, our disruptive audio technology. In the first quarter, we added people and made advancements with the technology as we built towards the broader rollout of our commercial business and continue to prepare for launch into the healthcare market. As we have stated, 2014 will be a year of investment for the HyperSound business as we move forward on existing opportunities and continue to explore and evaluate new opportunities for commercializing this unique technology in the years to come.

For those of you who are new to our story and unfamiliar with HyperSound, let me quickly review this remarkable new sound delivery technology, which is unlike anything else in the market. Which different is the fact that audio is injected into an ultrasound beam in the sounds stays within that beam to produce very targeted area of audio. To use analogy, if normal speakers like a light ball with light closer room in all directions HyperSound is like a tight flash light beam putting sound only where you wanted. You really have to hear it to believe it.

From a business perspective, there are three key characteristics that we believe will provide significant new market opportunities. First, with HyperSound you can get audio only where you want it. This opens up possibilities to add to retail displays without blaring into the surrounding store for example and a wide array of similar audio applications in commercial segments.

On this front, we have a broad pipeline of opportunities for adding directed audio in commercial environments for informational purposes. These range from uses in retail kiosks to opportunities in restaurants, banks, casinos, airports and museums. We’re pioneering this investment in commercial directed audio, so it will take some time to mature into a meaningful business as I mentioned in the past.

Second, HyperSound delivers audio into the ear far better than regular speakers creating significant benefits for people with hearing appearances. We’re now in development of a living room audio product which will allow people with hearing impairments to enjoy TV and music using HyperSound. With over 48 million hearing impaired people in the U.S. alone, we obviously see addressing this area as major healthcare market opportunity, which is why the recent FDA clearness was such a major milestone for us. We are focused on bringing our first healthcare product to market in 2015 and we’ll be sharing more about the specifics of HyperSound for people with hearing impairments later this year.

Third, because the sound travels in beam which can target a listener’s right and left ear independently, HyperSound offers 3D surround sound, which we believe is superior to systems currently available today using regular speakers. This opens up a wide array of potential consumer audio applications, which we plan to start bringing to market in 2016. In parallel, we’ll be ramping up our efforts on licensing the technology outside the commercial, healthcare and consumer segment I just covered.

In the first quarter for HyperSound, we put in more robust commercial sales team and pipeline development processes in place. We’ve also added multiple pro audio visual integrators as partners to broaden our channel reach. While early on in the progress, we’re both learning with opportunities have the highest value and then covering new potential commercial market segments for development. We will provide more details as we fully bet these opportunities. We also made significant progress on product development including a second generation and meter technology which will be utilized in our first healthcare product and we increased the team and investment and research.

As I said before, we view this as a new and relatively undiscovered area of audio that could produce further advancements and breakthroughs. I’ve discussed our plans to invest roughly $10 million in the commercialization of HyperSound this year and we’ve invested approximately $2 million in HyperSound this past quarter.

That’s the offer on operational fronts. Even as we executed on these operational items across both headset and HyperSound business during first quarter, we were also engaged on several important strategic initiatives. But at this point, it almost seems like something in the distinct past for us, the quarter actually began with the completion of the merger of Turtle Beach and Parametric Sound. That merger created a leading audio technology Company with significant growth opportunities across a wide range of addressable markets. It is very important to note as John goes through the Q1 financial results that, we incurred approximately $4.2 million of transaction expenses associated with that merger.

We’ve recently changed our ticker symbol to HEAR, H-E-A-R. We feel this ticker is a great fit for our new company, reflecting our strategy to improve an individual’s audio experience so they can hear better when they are playing video games, listening to music or experiencing ultrasound based audio in commercial or consumer environments. On May 27th, the Company name will change to Turtle Beach Corporation and a coinciding change in our company will take effect on the opening of trading on May 28. That’s on a strategic front.

Let me now turn finally to the significant progress we’ve made on the financial front. As I’ve mentioned earlier, we’ve recently completed two significant actions to support our growth objectives. First, we signed a new $60 million global asset-based credit facility with Bank of America that provides more borrowing capacity at a lower interest rate. It was a lengthy process to get more attractive financing in place with better support occurring at future needs of the business, particularly overseas where we have tremendous runway ahead of us. John and his team did a great job managing this process to a successful conclusion and we are really delighted to be working with Bank of America. I mentioned on the March, call that we’re placing our former credit facility was a top priority and we accomplished that.

Second, we closed the common stock offering that resulted in $35.6 million of proceeds net of commissions and fees, which was led by Needham and included Cowen, Wedbush and Lake Street. There were several factors that played into our decision to raise additional capital and raise it when we did. First and foremost, it provided us the ability to further reduce the Company’s outstanding debt and in particular to pay off $10 million of what was essentially a bridge loan on which the interest rate was said to increase from 10% to 20% in August. Equally important, it allows us to inject the business with roughly $25 million of working capital, replace the funds that had been utilized over the past 18 months to pay down our existing term loan. Recall that, in order to replace the working capital line, we needed to pay down $42 million of long-term debt, which was essentially entangled with the working capital line.

Longer term we also had the objective to increase the tradable float, which was about 6 million shares in order to make the market for our stock more attractive to a broader investor base. The equity raise increased the public float by over 60% to approximately $10 million shares. Working closely with our financial advisors, our Board and management team decided that it will be best for long-term interest of the company to proceed with this capital raised in late April given the view that, the equity markets particularly for our sector could become more challenging as the year progressed.

We did not want to risk the possibility that the markets would essentially close for new capital and we could not address the items I just covered sometime in the coming three to six months. This drove the decision to do the capital raise sooner rather than later. The Board now recognized that it’s been a challenging few weeks of trading post the offering. However, with the new ABL financing in the common stock offering, we accomplished multiple critical objectives that we believe will put us in a much better position to pursue our near and long-term growth objectives.

That covers our operational, strategic and financial progress in Q1. Before I turn the call over to John for a full review of the quarterly financials and an update on guidance, I would like to thank Ken Potashner for his many contributions to Parametric Sound and to the development of our HyperSound business. As we announced today Ken is stepping down from our Board. He has been a valuable asset as we have crafted our strategy to leverage and commercialize this innovative HyperSound technology and we wish him all the best in his future endeavor.

With that, I will turn it over to John for the financials.

John Hanson

Thank you Juergen. Good afternoon everyone. Thanks for joining us today. In my presentation, I will be discussing our first quarter 2014 results for the combined Turtle Beach and Parametric entity as we now file our results for the combined business. It is important to note that, results for the year ago period represents Turtle Beach on a standalone basis.

On a GAAP basis net revenue totaled $38.3 million, compared with 29.5 million in the first quarter of 2013, representing a 30% year-over-year increase. Gross profit on a GAAP basis totaled 12.3 million in the first quarter of 2014 compared with 8.6 million a year ago. Gross margin as a percentage of revenue was 32.1%, a 290 basis points increase compared to 29.2% in the first quarter of 2013. The increase in gross margin as a percentage of revenue was primarily due to the favorable product and customer mix related to the Xbox one headset launch.

As Juergen mentioned, it’s important to note that the Company incurred $4.2 million of expenses associated with the merger in the quarter. These are one-time business transaction expenses that are not run rate of operating expenses going forward. Operating expenses on a GAAP basis including the $4.2 million of merger expenses totaled $16.8 million. Operating expenses excluding merger expenses totaled 12.6 million, which compares with $9 million in the first quarter of 2014. The increase in operating expenses was primarily attributable to approximately $2 million of HyperSound investment, $0.9 million in higher depreciation associated with kiosk implementations and $0.3 million in higher stock compensation expense.

On a non-GAAP adjusted EBITDA basis, the Company delivered approximately $4.8 million for the headset business in the first quarter of 2014, as compared to $1.7 million in the first quarter last year. The year-over-year increase in adjusted EBITDA was driven primarily by higher net revenue as previously discussed and improved gross profit. When adjusted for approximately $2 million of investment in HyperSound, adjusted EBITDA on a consolidated basis was $2.8 million.

Please note that, we have provided a reconciliation of GAAP reported results to adjusted EBITDA in the accompanying tables at the end of the press release we issued today. Now we are pleased with the revenue and profitability results for Q1 as they come in ahead of our expectations, some of which is due to Q1, Q2 timing of revenue, but the results put us nicely on track for the year.

Now turning to the balance sheet, as of March 31, 2014, cash and cash equivalence totaled $5.5 million compared with $6.5 million as of December 31, 2013. The Company had $66.2 million in bank debt, subordinated notes and Series B preferred as of March 31, 2014 compared with $78.3 million as of December 31, 2013, reflecting a decline of 12.1 million. On a net debt basis, the Company has 60.7 million in net debt at March 31, 2014.

As Juergen mentioned earlier, we successfully closed a new $60 million five year asset-backed loan agreement or ABL credit facility with Bank of America. The new credit facility replaces our previous credit facility and provides more borrowing capacity, better terms and a lower rate of interest than our prior facility. It is also a global facility. This significantly improves and expands funding for both our U.S. and European operations. We are very pleased to be working with Bank of America and believe this reflects our strong financial fundamentals and the confidence they have in our Company.

We also completed an equity offering that generated $35.6 million of proceeds net of all commissions and fees, which we used to retire $10 million in subordinated debt while putting approximately $25 million of cash back on the balance sheet. These actions significantly improved the strength and flexibility of our balance sheet and we believe we have sufficient resources to execute our objectives as we capitalize on the growth opportunities we see before us. Following the equity raise, net debt outstanding was approximately $24.8 million, which represents a $35.6 million reduction since March 31, 2014.

Moving on, accounts receivable decreased $19.6 million to 28.9 million at March 31, 2014 due to lower sequential revenue and strong cash collections in the quarter consistent with historical trends. Total inventory decreased $8.1 million to $41.6 million at March 31, 2014 through the Xbox One product sales and proactive inventory management initiatives. As we have previously stated, reducing inventory is a priority for the Company and we are pleased with our performance against this objective in the quarter. The Company used a proportion of the cash flow generated from accounts receivable and inventory reductions to pay down accounts payable by $15.3 million from year-end and to further reduce debt. Working capital management is a priority for the leadership team.

Now turning to our current thoughts and our outlook for the full year 2014 for the combined Parametric and Turtle Beach business, we are reiterating our previous guidance. As Juergen discussed, despite our strong performance in Q1 given the early nature of the console transition cycle and the fact that roughly 50% of our gaming headsets business has historically come in the Q4 holiday period. We feel it is prudent to hold our prior guidance. To review we expect headset revenues to be in the range of $210 million to $230 million, representing growth of approximately 24% over 2013 levels at the midpoint of the range.

The strong anticipated revenue growth is primarily driven by the expected rebound in the core console gaming headset market, which we expect to be a multi-year trend. Revenues from hyper HyperSound are expected to be in a range of $1 million to $4 million and consisted with our expectations for the early stages of commercializing that technology. We believe we will see more significant revenue impact from HyperSound in 2015 and beyond.

Gross profit is expected to be approximately 30%, a 180 basis point increase over 2013 with further improvement expected through 2015 as a gaming headset product portfolio for new consoles expands and HyperSound becomes a more material part of the revenue. Full year adjusted EBITDA for headsets is expected to be in a range of $30 million to $35 million, representing growth of 135% from 2013 with adjusted EBITDA margin of approximately 15% at the midpoint of the range, a $730 basis point increase over 2013 at the midpoint of the range.

As previously discussed the Company plans to invest approximately $10 million at HyperSound in 2014 in order to capitalize on the broad array of expected future opportunities for this technology. Total Company adjusted EBITDA for 2014 therefore is expected to be in a range of $20 million to $25 million.

Now before I turn the call back over to Juergen, I would like to thank the entire finance team for their hard work during these past months closing the merger, replacing the working capital line and supporting the capital rates. And now, I would like to pass the call back over to Juergen for some closing remarks.

Juergen Stark

Thanks John. As you can see, it’s been a very good start to the year and I am pleased with how well our teams have executed given all the different business and corporate initiatives we’ve recently undertaken. We truly have a fantastic group of employees who are passionate about delivering great products. Over the past quarter they demonstrated variability to accomplish a very complex set of operational challenges alongside completing multiple corporate and financial objectives. To our great team, I say thank you.

We expect the momentum across our Turtle Beach Gaming business to remain positive as household penetration of Xbox One and PlayStation 4 gaming consoles continues to build in the U.S. and then our international markets. Our strong leadership position in the console gaming headset market provide a solid platform to fuel and drive our HyperSound technology commercialization, as we continue to innovate and deliver audio products that provide better technology, quality and user experience across multiple market segments.

As I outlined on our March call, we have a clear set of priorities for 2014. Let me quickly summarize these again here. Number one, capitalize on the introduction of the new gaming consoles with first-to-market compatible products. Two, introduce an expanded offering of Xbox One and PlayStation 4 compatible products with differentiated features.

Three, expanded internationally and in the new segments including PC gaming and video headsets. Four, maintain and enhance the outstanding relationships that we have with our global retailers and the unique partnerships we have with leaders in the gaming category. And finally fifth, invest in research and product development and sales of HyperSound products.

As a company and team, we’re focused on executing well with a long-term view on what is best for the business and therefore for you our investors. During the first quarter, we took appropriate steps to strengthen our balance sheet and provide the funding and flexibility to support our efforts, which we believe will deliver greater value for our shareholders over the long-term. We also demonstrated our strong ability to execute on the various operational aspects of the business with the successful launch of three more market-leading products and we continue with passion to provide differentiated high quality audio products.

With that we will now take your questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question is from Sean McGowan from Needham & Company. Your line is open. Please proceed with your question.

Sean McGowan – Needham & Company

Thank you. Hi Juergen. Hi John. I have a couple of questions if I may. John, on the income statement, a $4.2 million interest cost, how much of that if any is not really interest cost but costs associated with the change in the banking line?

John Hanson

It’s approximately $2 million for the quarter.

Sean McGowan – Needham & Company

Was it cost and fees?

John Hanson

Obviously, as you know we distinguish the formal credit facility and have to right off those fees to P&L.

Sean McGowan – Needham & Company

Right. Okay. And those are probably actual cash cost, right?

John Hanson

Not in the current period, the cost associated with those amendments would have been incurred in prior period and so at the non-cash item.

Sean McGowan – Needham & Company

Right. Very helpful. Thank you. Second, maybe this is going to be in the Q, but can you tell us what your plan to talk about regarding revenue and EBITDA on a segment-by-segment basis? Is that something that you would be breaking out?

John Hanson

Sean, I think as we said before, we’re going to continue to provide a breakout on revenues once HyperSound become meaningful and we will continue to provide visibility on what the investments are in HyperSound.

So for Q1, it was about $2 million investments into the HyperSound business and then for the full year, it’s about $10 million and we’re expecting about $1 million to $4 million in revenues this year for HyperSound. And we get asked repeatedly about breaking out the segment, right now, we’re not going to do the full segment accounting, it’s too complicated and cost a lot of money. But as HyperSound becomes more meaningful part of the business, we will start to break it out.

Sean McGowan – Needham & Company

Okay. But is it fair to say that, HyperSound really wasn’t any meaningful revenue in the first quarter?

John Hanson

Yes. That’s fair to assume. And on the EBITDA very important that, we laid out the headset EBITDA was $4.8 million just that there is true appeals-to-appeals with $1.7 prior quarter. The consolidated the EBITDA with the $2 million investment in HyperSound is about $2.8 million.

Sean McGowan – Needham & Company

Right, thanks. Couple of others, can you talk about your plan in China and when do you expect that to become anything meaningful?

Juergen Stark

I get that question pretty frequently here. Yeah, as probably everybody knows, Xbox One is launching later in this year in China. China has typically been a larger PC gaming market. We announced last year in June I believe we have a partnership with Acton. They are very well regarded distributor in the audio space there and actually at the moment our sales in China working on our plans through this year with Acton.

So right now, the kind of attack approach for us in China is really in the PC category because that’s the market that exists and is larger there. But as the console start to rollout later this year and in 2015, obviously we will bring our console headset business there through our partnership with Acton.

Sean McGowan – Needham & Company

Is there partnership such that you would be selling the product to Acton and then it’s their inventory or is it your inventory all the way through?

Juergen Stark

No. It’s a typical consumer electronics distribution arrangement. So, they buy and they distribute for us in China. They then provide the marketing and the channel development expenses all of that.

Sean McGowan – Needham & Company

Okay. So you book the sale upon shipping to Acton and then it’s their goods and they sale?

Juergen Stark

Yeah. That’s correct.

Sean McGowan – Needham & Company

Okay. And then last question, there has been a lot of the news lately about media headset. So, do you think this move assuming that happens does that change anything for you guys?

Juergen Stark

No. I mean, we knew it is a pretty positive thing for us and the industry. Obviously, we are a market leader in high tech headsets. The media piece is a very small for us today, right, but it is a key area that we are looking to invest in. And so, the extent to that raises visibility to the value of all the headset business, that’s a very good thing and so we view it as a net positive.

Sean McGowan – Needham & Company

But right now your media headset are in the Apple store, you expect that to change at all?

Juergen Stark

We will see. Well, I would hesitate to comment on Apple strategy. They are very smart guys and my guess is the acquisition has less to do with the actual headsets initially and more to do with the fact that music is such a big part of what they have laid in and what they’ve build.

So my guess is they’ll continue to have like they do today, dozens of competitive headsets to beats in their Apple stores and mere interest might be more reflective of the music streaming business that beats good, the good brand that they have, the excellent talent that they have there. So, we will see where that goes here.

Sean McGowan – Needham & Company

Fair enough. Thank you very much.

Juergen Stark

Sure, Sean. Thanks.

John Hanson

Thank you.


Thank you. And our next question is from Rob Stone with Cowen and Company. Your line is open.

Rob Stone – Cowen and Company

Hi guys. I wonder if I can just try for a little more color on revenue. I know you’re not giving detailed exact number. But first of all on HyperSound, was there some revenue? I know you have some commercial applications you have been working on.

John Hanson

Sure, Rob. No problem. So, HyperSound it’s under $100,000 in revenue and there were some adjustments as well that are reflected in the revenue numbers based on some prior activity. So, we’re calling it not material at this point and as I stated before, essentially we rebuilt the commercial sales team there and are taking really starting at the 15th of January a fresh look at how to get that commercial business build in the right way.

So to do that, we have terminated some agreements that we are in place before and are moving forward in the areas that we feel have the ability to most meaningful longer-term commercially. So, that team is on track and we feel good about the guidance range that we gave for the year and are not viewing kind of Q1 results as representative of the good progress really being made there.

Rob Stone – Cowen and Company

Clearly the transition quarter. Then on the gaming headset business, can you say roughly what the breakdown was between Gen 7 related products, PS 4 and Xbox One versus everything else?

Juergen Stark

We are not going to breakout segments, but obviously a large portion of the revenues from the past quarter indeed a lot of the upside that we realized was Xbox One headset shipments for which we have view there being some paint demand for Q4 as we talked about in the past, and then the further breakout we probably just for competitive reasons won’t provide at this point.

Rob Stone – Cowen and Company

Okay. So on the notion of a pull-in from Q2 and your four years numbers unchanged, we should not expect that the offset is in your traditional seasonally low period in the June quarter?

Juergen Stark

Yeah. Remember that, Q2 is typically for the whole industry is kind of a lowest quarter. And as I said on the prepared remarks, the upside, the late upside was really just largely a timing issue. We were shipping at high velocity late in the quarter, every retailer has different cut-off points so actually even late in the quarter somewhat difficult to know exactly what’s going count in Q1 and Q2 and we have the benefit of really what I would say is excellent execution on the supply chain side that managed to get some shipments out in Q1 that we expected in Q2.

Rob Stone – Cowen and Company

Okay. And then my final question is with respect to gross margin, some nice upside there and you mention specifically that, expanding the product range in the quarters ahead gives you the opportunity to grow gross margin. So, you still aiming at 30% for the year, what factors would bringing the margin down from the nice number you posted in March quarter?

John Hanson

Yeah, couple of things. In March quarter, the Xbox One shipments were more highly-weighted towards the domestic market and you’ll recall the description before, in North America and in the UK, we essentially sale direct and then in other parts of the world we sell through distribution. This is a very typical set up for consumer electronics companies. When we sale through the distribution, the gross margin is lower, but the distributor makes a lot of investment that are below gross margin marketing, the sales team, all of that, right.

So, at the EBITDA line, and recall that we target for the headset business in mid-teens EBITDA, at EBITDA line it’s roughly a wash but it does effective gross margin, and so in Q1 given that a higher percent of sales it was weighted to the U.S. in domestic where we make higher margin that’s what was the difference.

We’re still sticking toward 30% again in the spirit of the comments before. We’re one quarter and we’re two months into the Xbox One cycle here. So for us, to start to making adjustments to our annual number wouldn’t really make a lot of sense.

Rob Stone – Cowen and Company

Great. Thanks for the through explanation. I’ll jump back in the queue.

John Hanson

Sure. Thanks, Rob.


Thank you. And it looks like we have a follow up from Sean McGowan with Needham & Company. Mr. McGowan, your line is open.

Sean McGowan – Needham & Company

Yeah. It is actually follow-up on Rob’s question earlier. How many headsets do you expect to this year that would have exclusive to that title?

Juergen Stark

I’m not sure I understand the question Sean.

Sean McGowan – Needham & Company

I thought from previous conversation that there were some models that might be tie to particular title maybe the user would be able to hear some signals that somebody else couldn’t hear.

Juergen Stark

I think you might be referring to the licensed headsets like the Titanfall headset.

Sean McGowan – Needham & Company

Yes. I think in the past you had the Call of Duty where it was tightening closely with the title and there might be some digital singles that headset could get that maybe someone else couldn’t get.

Juergen Stark

Great. I’m glad to talk through that actually, because the license part – the relationships we have with companies like Activision and Titanfall and Marvel are very unique. We just announced also license agreement with Star Wars. So that’s really unique part of our business and some may view that as a big competitive advantage actually.

So each year like we did on Titanfall, we will be launching – our Activision partnerships continues and we plan to launch some Call of Duty headsets for their new release in the holiday period. And then we’re working couple of others which I won’t at this point provide details on but some of these will be more thoroughly discussed in detail in June which is kind of the typical timeframe that new product announcements could made for the holidays.

Sean McGowan – Needham & Company

Okay. So, we might see some of those features then?

Juergen Stark


Sean McGowan – Needham & Company

Okay. All right. Thank you.


Thank you. I’m not showing any further questions. Mr. Stark, please proceed with closing comments.

Juergen Stark

Okay. Thank you very much. Thank you again everyone for joining us today. Before we end the call, I want to let everyone know that we’re presenting in the Cowen Technology Conference in New York on May 29th and also exhibiting at E3 in Los Angeles, June 10th through June 12th. We will also be meeting with investors over the coming weeks and really look forward to introducing our unique Company to a broader set of investors as we move forward.

We look forward to seeing some of you at these events and we will speak to you again on our second quarter call in August. Thanks again for your attention and questions today.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect.

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