Manager, Joint Managers: Stifel Nicolaus Weisel; RBC Capital Markets.
CRSR makes gaming components for personal computers and generally has seasonally low March and June quarters.
March quarter revenue was up 23% in 2012 to $132 million from $107 million in the March 2011 quarter. Net income dropped to $3 million from $5 million.
March 2012 gross margins were 15% of revenue and net profit was 2% of revenue.
At 16 times earnings for the 12 months ended March 2012, it looks like the CRSR IPO could happen, perhaps at a lower price.
IPOdesktop generally doesn't like technology companies with a low 15% gross margin, particularly where commodity DRAM prices have an undue influence at bottom line profit.
CRSR is a designer and supplier of high-performance components to the personal computer gaming hardware market. CRSR products are sold to end-users in more than 60 countries. CRSR customers are primarily retailers and distributors.
CRSR products are purchased primarily by PC gaming enthusiasts who build their own high-performance desktop computer systems or buy pre-assembled customized systems in order to achieve the processing speeds and graphics capabilities necessary to fully experience leading edge computer games.
Over the last five years CRSR has introduced new, higher value added PC gaming components, both leveraging and reinforcing the brand image within the target market.
CRSR believes that its Corsair and Vengeance brands are leading brands among PC gaming enthusiasts. Over the last five years CRSR introduced new gaming components and brands to strengthen a leadership position, reinforce overall brand image within the target market and broaden CRSR's reach to the mainstream PC gaming audience.
CRSR believes that it is a leader in the worldwide PC gaming hardware market for DRAM modules with its Dominator and Vengeance brands.
CRSR's Dominator product line includes some of the world's fastest DRAM modules. Since 2006, CRSR expanded its sales into the highly fragmented gaming components and peripherals market by adding seven additional product families, which comprised 48.3% and 51.3% of net revenues and 55.8% and 53.1% of gross profit for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively.
CRSR established a strong brand that the company believes is widely recognized and respected in the PC gaming hardware market.
During 2011, CRSR received over 300 product awards from magazines and websites in 19 countries, of which more than 90 were Gold, Editor's Choice, or similar awards, including a "10 out of 10" review and Gold award for CRSR's White 600T computer case and the Editor's Choice award for CRSR's Force 3 solid-state drive from Hardware Heaven and The SSD Review, respectively, both computer enthusiast websites.
Over the last few years, CRSR products have also consistently won numerous awards from leading PC enthusiast publications, such as Custom PC, a widely distributed computer enthusiast magazine in the United Kingdom, and Maximum PC, a leading PC enthusiast magazine in the United States. Maximum PC has included our components in their "Dream Machine" gaming PC every year since 2007.
CRSE has experienced and expects to continue to experience seasonal fluctuations in sales due to the spending patterns of customers.
Total unit shipments have generally been lowest in the first and second calendar quarters due to lower sales following the fourth quarter holiday season.
Also the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, graphics cards and other computer hardware products, which usually takes place in the second calendar quarter and which tends to drive sales in the following two quarters.
As a consequence of seasonality, total unit shipments for the second calendar quarter are generally the lowest of the year, followed by total unit shipments for the first calendar quarter, although the effect of these lower quarterly unit volumes on consolidated net revenues may be masked by changes in average selling prices of our products.
MARCH 2012 QUARTER
CRSR's gross margins may vary significantly by product line. For example, due to price competition in the market for DRAM modules and solid-state drives and, to a lesser extent, USB flash drives, these products generally have lower gross margins than power supply units, cooling systems, computer cases and gaming peripherals.
Should the mix of products sold shift from higher margin products to lower margin products, overall gross margins may be adversely affected.
For example, gross margins were lower in the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, in part due to strong growth in sales of solid-state drives, which generally have lower gross margins than other products in CRSR's gaming components and peripherals segment.
The ongoing financial uncertainty in Europe and fluctuations in U.S. dollar exchange rates have adversely affected operating results.
For 2009, 2010, 2011 and the three months ended March 31, 2012, CRSR generated 52.2%, 50.9%, 51.5% and 48.7%, respectively, of total net revenues from sales in Europe.
STOCK COMPENSATION EXPENSES
CRSR experienced net losses (computed in accordance with GAAP) of $8.7 million and $10.2 million in 2009 and 2010, respectively.
Those losses were due to a variety of factors, particularly significant stock-based compensation expense resulting in large part from increases in the estimated fair value of CRSR's common stock.
Stock-based compensation expense was $28.0 million and $8.3 million in 2009 and 2010, respectively. In addition, CRSR recorded a valuation allowance of $13.6 million in 2010 against deferred tax assets that CRSR previously recorded as a result of stock-based compensation expense.
DRAM MARKET ECONOMICS
A significant portion of CRSR's net revenues is generated by sales of DRAM modules. Any significant decrease in the average selling prices of DRAM modules would have a material adverse effect on CRSR's business, results of operations and financial condition.
A significant, declining, percentage of net revenues is generated by sales of DRAM modules. In particular, net revenues of high-performance memory components segment, most of which are generated by sales of DRAM modules, accounted for a total of 74.7%, 66.6%, 51.7% and 48.7% of consolidated net revenues in 2009, 2010, 2011 and the three months ended March 31, 2012, respectively.
As a result, any significant decrease in average selling prices of our DRAM modules, whether as a result of declining market prices of DRAM ICs or for any other reason, would have a material adverse effect on CRSR's business, results of operations and financial condition.
Selling prices for DRAM modules tend to increase or decrease with increases or decreases, respectively, in market prices of DRAM ICs.
Average selling prices of DRAM ICs declined substantially in 2008 and again from the second half of 2010 through the fourth quarter of 2011. This decrease had an adverse effect on operating results for those periods.
Furthermore, declines in average selling prices of USB flash drives and solid-state drives, whether as a result of declining prices of NAND flash memory ICs or for other reasons, may adversely affect CSRS's business, results of operations and financial condition.
Similarly, declines in average selling prices of DRAM ICs and USB flash drives and solid-state drives could affect the valuation of CRSR's inventory and may lead to inventory write-downs.
Declines in average selling prices of DRAM ICs could also allow original equipment manufacturers to pre-install higher capacity DRAM modules into new computers at existing price points, which could reduce the demand for CSRS's DRAM modules in the retail market.
As of March 31, 2012, CSRS's patent portfolio consisted of two utility patents issued in the United States and 14 utility patent applications pending (consisting of nine utility patent applications in the United States, four under the Patent Cooperation Treaty and one in Taiwan), and one registered design patent in the European Union and three pending design patent applications in the United States.
In addition, CSRS has one jointly-owned design patent in the United States. Patents expire in 2014 and on various dates from 2025 through 2027.
Competitors in the DRAM module, USB flash drive and solid-state drive markets.
Primary competitors in the markets for DRAM modules and USB flash drives include Adata, GSkill, Kingston Technology, Micron Technology through its Crucial division, Patriot and SanDisk.
Primary competitors in the market for solid-state drives include Intel (INTL), Micron Technology (MU) through its Crucial division, OCZ Technology (OCZ)and Samsung. In addition, CRSR faces the risk that established semiconductor companies, such as Intel, Micron Technology, Samsung and SanDisk (SNDK), which each manufacture DRAM or NAND flash memory ICs and incorporate them into the DRAM modules, USB flash drives or solid-state drives they sell, or established disk drive companies, such as Seagate (STX) or Western Digital (WDC), that sell solid-state drives, will use their lower cost structures, widely recognized brands and other resources to price their products substantially below CRSR's and capture market share from CRSR.
Primary competitors in the markets for power supply units, cooling systems and computer cases include Antec, Coolermaster and Thermaltake.
CSRS launched its first audio product in the third quarter of 2010 with the introduction of a gaming headset and first gaming speakers in January 2011. CSRS has developed other audio products since that time. Primary competitors in the market for audio products include Creative Labs, Klipsch, Logitech (LOGI) and Razer.
CSRS launched its first gaming keyboards and mice in the third quarter of 2011. Primary competitors in the markets for gaming keyboards and mice, include Logitech, Microsoft (MSFT), Razer and SteelSeries.
CSRS introduced computer case fans, internal computer cables and Corsair Link cooling and lighting control kits in the first quarter of 2012. Primary competitors in the markets for case fans include Coolermaster, Rosewill, and Zalman. Primary competitors in the markets for internal computer cables include Nippon Labs and Rosewill. Primary competitors in the markets for computer case fan controllers include NZXT and Rosewill.
VIDEO GAME CONSOLES
CSRS products are not designed for use in video game consoles.
PC-based games may be subject to significant competition from dedicated video game consoles, such as Microsoft's Xbox, Nintendo's Wii and Sony's (SNE) PlayStation, to the extent that the processing and graphics power of those consoles increase substantially.
As a result, net revenues and other operating results may suffer to the extent that consumer spending on video game consoles and related games increases, whether as a result of the introduction of new games or improved gaming consoles or for other reasons.
USE OF PROCEEDS
CRSR expects to net $42.5 million from its IPO. Proceeds are allocated to repay debt of about $28 million, with the balance for working capital and general corporate purposes.
CRSR expects to sell 4.1 million shares. Shareholders expect to sell 1.9 million shares.
Disclaimer: This CRSR IPO report is based on a reading and analysis of CRSR's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.