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Turtle Beach recovery on track following better-than-expected Q1 2018

Headset vendor up from $10m loss in 2017 to $2m income, thanks to success of Fortnite and PUBG

Turtle Beach is on the road to recovery following high losses and near delisting in 2017 as the Battle Royale bandwagon has triggered a surge in headset sales.

The accessories firm declared its financial results for the first quarter of 2018, noting it to be the best Q1 since the company went public in 2014. Most notably, net income was reported as $2 million for the three months ended March 31st - a dramatic improvement on the $9.9 million loss in the same period last year.

Net revenue was also up significantly at $40.9 million, almost triple the $14.4 million seen in 2017. Gross margin more than doubled to 36.8% from 15.4% in the previous year.

The company has also retained its position as the market leader for gaming headsets in North America, taking 45.9% of the revenue spent in this category during Q1 (up from 38.7% last year).

It's welcome news for Turtle Beach given how close the firm has been to being delisted from NASDAQ over the past year.

The company previously received a written warning from the stock exchange's Listing Qualifications Department in May 2017 because their common stock had closed at less than $1 per share for 30 consecutive business days. Turtle Beach secured a 180-day extension, but then requested an additional extension in November 2017.

In January 2018, the firm received another written warning because the market value of its publicly held shares came in at less than $15 million for 30 consecutive business days. However, last month Turtle Beach announced it had regained compliance with NASDAQ listing requirements.

During an investor call, transcribed by Seeking Alpha, CFO John Hanson also elaborated on a set of transactions the company is undertaking to retire its Series B Preferred Stock. Once this is complete, more than 50% of Turtle Beach's shares will be held by public stockholders, meaning that (under NASDAQ listing rules) the headset vendor is no longer a controlled company.

In the official earnings release, CEO Juergen Stark attributed the company's reversal of fortunes to "market share gains on top of a very strong overall market", driven by Fortnite and PUBG.

The two Battle Royale titles have brought new customers to the industry, and Turtle Beach by extension, with Stark noting "much higher headset attach rates than we have historically experienced". In the investor call, he elaborated that Battle Royale is driving growth in three ways.

"The first one is people who have existing Xbox and PlayStations are playing first-person shooters, a lot of them are using headsets maybe more over time," he said. "But we suspect that the attach rate on Fortnite and Battle Royale games is even higher than it is on first-person shooters.

"Because it's a survival game, the audio cues are really important, even if you're not playing on a team, and then there is a lot of play like there is in first-person shooters. So that's kind of if you look at that like the core gamers, a lot of them are using headsets, but the attach rate might even be somewhat higher from Battle Royale."

The second spike he observed was the number of console gamers who usually play titles like FIFA and 2K's sports titles, but will invest in a headset as they shift towards Fortnite and the like. Finally, he said new gamers are buying PlayStation 4 and Xbox One specifically for Battle Royale titles and "getting headsets at reasonably good attach rates."

Elsewhere, Stark also highlighted the benefits of Turtle Beach products appearing on Twitch streams, and reaffirmed the company is working with a number of broadcasters such as Dr DisRespect.

However, while Turtle Beach may have secured its position on NASDAQ again, it's not out of hot water financially. The firm still faces an outstanding debt principal of $34.5 million, as of March 31st 2018 - actually $100,000 more than the $34.4 million reported last year.

The firm reports it amended its various lending agreements on March 5th, including a reduction in various interest rates and extending final payment dates to 2023.

"The net effect of the changes is expected to be interest savings of at least $3.5 million over the next five years," said CFO Hanson during the call. "In addition, we recently paid down just over $3.2 million of the sub-debt and increase the term debt by the same amount to reduce our interest expenses subsequent to the end of the quarter."

Given the promising first quarter, Turtle Beach has increased its financial forecasts for the year ahead. In Q2, it now expects net revenue of $48 million, which would be a 151% increase ovewr the $19.1m seen in Q2 2017.

For the full-year, it expects revents to increase by 37% year-on-year, from $149.1 million to $205 million. This is significantly higher than the $157 million predicted in its March outlook.

Stark expects the success of Battle Royale and the headset market's momentum to continue, adding: "We believe 2018 is off to a very strong start and better positions us to make selective growth investments and further reduce our debt over time."

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