Turtle Beach Corporation | NASDAQ: HEAR
Southwest IDEAS Conference | November 19, 2014
Safe Harbor Statement
This presentation includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, for example, statements regarding benefits of the recently completed merger, integration plans, expected synergies, market opportunities, future products and anticipated future financial and operating performance and results, including estimates for growth. There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein. A discussion of some of these risks and uncertainties that could cause Turtle Beach Corporation’s results to differ materially from those described in the forward- looking statements can be found in the prospectus supplement filed with the SEC by Turtle Beach Corporation on April 24, 2014 and in Turtle Beach’s most recent Annual Report on Form 10-K in the section entitled “Risk Factors,” filed with the SEC and available on the SEC’s website, www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Turtle Beach Corporation undertakes no obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this presentation. This presentation also contains trademarks and trade names that are property of their respective owners.
1 Company Overview
Company formed in January 2014 through the merger of Turtle Beach and Parametric Sound
Turtle Beach is the leading gaming headset brand with ~ 50% market share in the United States and United Kingdom
Turtle Beach Corporation’s patented HyperSound technology, which delivers immersive, directional audio, is in the early stages of commercialization
IP portfolio creates strong foundation for expansion into larger audio technology categories
Seasoned executive team and board of directors with deep industry experience
2 Brand and Product Portfolio Overview
Console Gaming PC Gaming Mobile Headsets Commercial Healthcare Consumer Licensing Headsets Headsets HIGHLIGHTS HIGHLIGHTS • Premium gaming audio brand recognized • Breakthrough audio technology with potential to globally with a large, loyal fan base disrupt many large, addressable markets • At the front end of a console gaming cycle • Robust and expanding IP portfolio with over expected to fuel industry growth 30 U.S. patents issued and 82 pending • ~50% dollar share in the U.S. and U.K. , with • Significant revenue opportunities in the medical, double-digit percentage growth internationally consumer and commercial industries
BACKGROUND BACKGROUND • Formerly a private company • Spun out of LRAD in 2010 maintaining all • 39-year track record of audio technology IP related to commercial directed ultrasound innovation audio • Formerly a microcap company traded under ticker symbol PAMT
3 Management Team
Juergen Stark John Hanson Chief Executive Officer Chief Financial Officer • COO of Motorola Mobility’s • EVP and CFO at Dialogic, Inc. mobile business • CFO at One Communications • 10 years as Principal at Corp. McKinsey & Company, Inc.
Bob Picunko Richard Kuvalik Jim Adams Chief Marketing Officer Chief Technology Officer SVP of Global Sales • 20+ years of entertainment • More than 15 years in • 20+ years of experience in industry experience consumer audio the video game industry • MTV Networks and • Led peripheral products for • Senior sales roles at Hasbro The Walt Disney Company PlayStation at Sony Interactive, Zeemote, Inc.
Megan Wynne Rob Andris Rodney Schutt Woody Norris VP Legal & Licensing SVP, Global Supply Chain & Ops. SVP, GM of HyperSound Chief Scientist • 5 years with I-Flow, LLC a • 20 years in supply chain • 20+ years of experience in the • Noted life-long inventor Kimberley-Clark Health management hearing health and medical and entrepreneur Care Company • VP, Global Supply Chain device industries • Lemelson-MIT Prize for the • 13 years with Morris Polich Operations with Hewlett • Former CEO of leading hearing invention of HyperSound & Purdy LLP law firm Packard aid companies Unitron
Hearing, Luminetx and Widex 4 Board of Directors
Ron Doornink • Former Chairman and CEO of Activision Publishing (NASDAQ: ATVI) Chairman • Operating partner of Stripes Group, LLC • Founder and principal of Erasmus Equity Investments
Juergen Stark • COO of Motorola Mobility’s mobile business CEO and Director • 10 years as Principal at McKinsey & Company, Inc. • MBA, Harvard Business School; B.S Aerospace, University of Michigan
Ken Fox • Managing partner of Stripes Group, LLC Director • Former Managing Director and co-founder of Internet Capital Group (NASDAQ: ICGE) • Co-founder of A-10 Capital and Sentinel Fund William Keitel • Former CFO of Qualcomm Incorporated (NASDAQ: QCOM) Director • During his time at the company grew revenues from approximately $800 Million to approximately $25 Billion • Held senior financial roles at Nortel (OTC: NRTLQ) and Pepsico (NYSE: PEP) Laureen DeBuono • Partner at leading CFO consulting services firm FLG Partners, LLC Director • Former President and CEO of Coapt Systems, Inc. • Former COO and CFO of hearing aid manufacturer ReSound Corp.
Dr. Andrew Wolfe, PhD • Founder and principal of Wolfe Consulting Director • Former Chief Technology Officer for SONICblue, Inc. • B.S.E.E. in Electrical Engineering and Computer Science, John Hopkins; Ph.D. in Computer Engineering Carnegie Mellon
5 Performance Against Established Milestones
2014 2015 2016
Launch broad portfolio of Accelerate console headset Continued growth of innovative next generation growth as new console console and PC gaming console headsets installed base expands headsets
Strengthen retail Grow newly established Accelerated growth of relationships and improve China market HyperSound commercial in-store experience and healthcare businesses Increase share of PC gaming Improve PC gaming headset headsets Roll-out HyperSound offering and introduce consumer products accessories Launch HyperSound healthcare products Strategic Acquisitions Grow market share in non- core markets Expand HyperSound
Commercial business
Achieve large scale retail deployment of HyperSound
Complete transition to a public company
6 Headsets
7 Turtle Beach Headset Business
Overview Leading Market Share
• #1 gaming headset in 2013 by dollar share 2013 U.S. Gaming Headset Dollar Market Share • 49% of U.S. market 2.6% 1.5% • 53% of U.K. market 2.9% 2.8% • Broad portfolio of headsets for Xbox and PlayStation gamers 4.9% • Headsets in 27,000 storefronts in 44 countries at year-end 2013 5.7% Turtle Beach • Brand on the rise, with awareness among 8.8% 49.1% Xbox and PlayStation console gamers increasing 40% from 2012 to 2014 • Turtle Beach accounted for 9 of the top 15 10.6% headsets sold in the U.S. during 2013 11.1%
Sources: U.S. data from The NPD Group, Inc., U.K. data from The GfK Group., brand rating from July 2014 Turtle Beach Brand Awareness and Sentiment Study by The NPD Group, Inc.
8 Differentiating Technology
Advanced Chat Digital Signal Processing (DSP) A suite of chat technology including Advanced DSP for game audio noise gate, chat boost, variable and chat presets that can microphone monitor be customized using a new mobile app
Bluetooth Active Noise Cancellation Dual-pairing Bluetooth in most The first gaming headset to use wireless headsets for wireless noise cancellation for chat, mobile gaming, audio both inbound audio and calls and music streaming outbound chat
DTS Headphone:X Versatility The first gaming headsets with DTS Out-of-the-box versatility to work 7.1 surround sound to provide with consoles, PC, Mac, incredibly accurate and immersive tablet and mobile devices directional sound
9 2H 2014 PlayStation®4 Core Product Launches Red = First and Only Innovations Oct 19 Oct 10
Elite 800 Stealth 500P Flagship Wireless Surround . Active Noise Cancellation . DTS 7.1 Headphone:X . DTS 7.1 Headphone:X . DTS Surround Modes . Charging Stand & TX . EQ Presets
Oct 3 Jul 10
Stealth 400 P12 Wireless Stereo Wired Stereo . Digital Stereo Sound . Single USB Connection . Universal PS4 Compatibility . In-Line Amplifier . EQ Presets . Mic Monitoring 10 2H 2014 Xbox One Core Product Launches Red = First and Only Innovations Oct 26 Oct 3
TB Audio Adapter
Stealth 500X XO One Wireless Surround Wired to Controller . First true wireless XB1 . Game/Mic Presets . DTS 7.1 Headphone:X . Mic Monitoring . Genre-Specific Presets Nov . Variable Bass Boost
To Be Announced
. Superhuman Hearing . Coming . Coming
11 2H 2014 PC & Licensed Product Launches
PC/Mac Licensed Model Platform Coverage
Sep 5
Z60
Wired Surround w/ Sound Card One
. DTS 7.1 Headphone:X
. Surround Sound Modes
PC Xbox 360 Xbox PS3 PS4 Mobile . 60MM Drivers Xbox Oct 31 Recon 320 Oct 3 Wired Surround 4 Models Sep 30 . Dolby Surround . PC Inline & Mobile Mic cables Add . 50mm drivers PMD Passive 1 Model Recon 100 Oct 17 Oct 31 Wired Stereo Add PMD (EU Only) Passive . 50mm drivers 1 Model . Removable Mic Nov 14 . Available swappable speaker plates Add PMD Passive Red = First and Only Innovations 1 Model 12 Strategic Relationships
Software and Consoles Entertainment Gaming and Streaming
The only gaming headset Partnerships with some Official audio partner of brand that is officially of the world’s leading the world’s largest licensed for all three entertainment brands professional gaming major consoles league and most popular game streaming site Differentiating Technology
13 Global Retail Distribution
Points of Distribution Retailers Interactive Kiosks Over 370,000 points of Strong retail relationships ~18,000 interactive kiosks distribution (POD) . Interactive retail displays . 3x increase in North U.S. and Canada allow consumers to America since 2011 sample headsets in store . 5x increase in . Kiosks drive a meaningful International since 2011 increase in sell-through . Added Chinese distribution following deployment U.K. and Europe
Points of Distribution North America 370,000 International
240,000 Asia
128,000 Latin America
EOY 2011 EOY 2012 EOY 2013
14 Console Transition
Global Console Hardware and Software Sales Console Adoption by Annual Unit Sales
Dollars in billions Units in millions $45 50 $40 45 $35 40 $30 Today 35 $25 Current 30 Current 25 $20 20 $15 Sixth-Gen Today 15 $10 Fifth-Gen 10 Sixth-Gen $5 5 $0 0 2003 2006 2009 2012 2015 2018 YEAR ONE YEAR TWO YEAR THREE Cumulative next-gen console sales projected to Unit sales of consoles are forecasted to be increase from 7M in 2013 to 163M in 2018 76% higher in the first three years than in the • In each past transition, total industry revenue same period during the last transition cycle reached new highs within three years • We anticipate headset attachment rates • Console hardware and software sales are to accelerate approximately twelve months post forecasted to increase 58% to $42 billion from launch 2013 to 2018 • At the end of 2014,~81% of the projected five-year cumulative sales still to come
Source: DFC Intelligence Forecasts: Worldwide Console Forecast, October 2014 15 Seventh Generation Consoles
Cumulative Sales Platform Turtle Beach Position (Current 2018 est.) • 21x est. five-year cumulative sales increase 7.0 million • Expanded portfolio to eight headsets from two headsets for the fourth quarter 64.0 million • Recently reduced price by $50 to $349 for holiday season
• 21x est. five-year cumulative sales increase; 13.5 million • Expanded portfolio to five headsets from two 99.1 million headsets for the fourth quarter
Cumulative Console Sales (in millions) 120 99.1 100 Xbox One PS4 80.5 80 64.0 57.7 57.1 60 ~19% of total cumulative sales 37.1 40.5 40 24.3 18.3 20 12.2 3.0 4.7 0 2013 2014 2015 2016 2017 2018
Sources: DFC Intelligence Forecasts: Worldwide Console Forecast, October 2014 and Microsoft and Sony earnings reports, October 2014 16 Accessory Hardware: Anticipated Impact of Console Transition
140 Active Installed Base of Consoles
Millions 120 Next Gen: Xbox One, PS4 100
80
60
40 Last Gen: Xbox360, PS3 20 Crossover point: Next Gen active installed base exceeds Last Gen active installed base - Source: DFC October 2014 2013 2014 2015 2016 2017 2018
2013: 2015: • Last Gen headset sales begin to slow • Next Gen ramp begins to offset Last Gen decline • Last Gen headset portfolio is reduced (fewer models) • Next Gen headset portfolio largely complete • Next Gen console specs become available • Specs timing limits Next Gen headset portfolio 2016-2017: • Next Gen headset sales exceed Last Gen sales 2014: • 2nd round of Next Gen Headsets launched, adding sales • Last Gen headset sales continue to decline • Sales of first models of Next Gen headsets ramp 2018: • Last Gen product portfolio further narrowed • Next Gen installed base peaks after rapid growth • Next Gen headset portfolio increases (more models) • Normal industry growth trend expected after 2018 17
2014 Major Next Gen Software Releases
• Major 2014 multiplayer titles at the end of the year will drive gaming headset attach rates • The limited number of AAA video games Major multiplayer titles to launch with major online multiplayer features between October and December releases in the first half of 2014 has 9 contributed to the slow growth in attach rates
Major multiplayer titles launched 3 from January to September
Major console multiplayer titles to 4 launch in 1H15 (delayed from 4Q14)
18 PC and Mobile Opportunity
PC Gaming Headsets Mobile Headsets
$29 - $299 $199 - $299 (Price Points) (Price Points)
Growing market opportunity – especially Growth driven by increased availability of internationally smartphones and mobile music players • 2014 global PC gaming market forecast raised • Multi-billion dollar market opportunity in music from $22B to $25B in February 20141 and media headphones • Successful introduction of a new line of • Broadening distribution in Q4 2014 with select PC products in 2013 – receiving positive reviews new retailers • Introduced six new PC gaming headsets in the • Plans to expand mobile product offering in 2015 last nine months • 75% year-over-year dollar share increase in the U.S. for the first nine months of 20142 • Introducing PC gaming companion products, including mice, keyboards and mousepads
1. Source: DFC Intelligence Forecasts: Worldwide Console Forecast, February 2014 2. Source: The NPD Group, Inc. 19 International Growth
More sales of next-generation consoles are Turtle Beach has more than doubled the number occurring outside the United States than of countries with retail distribution since 2011, during previous generation of consoles. increasing from 22 to 49 over four years.
First Three-Year Console Sales Markets with Distribution (Units in millions) (Number of Countries) 49 50 45 Xbox 360 34% 40 37
Xbox One 52% 30 22 20 0 5 10 15 20 25 North America International 10
0 PS3 58% 2011 2012 2013 2014
PS4 64%
0 5 10 15 20 25
North America International 20 International Growth: Spotlight on China PC Gaming Software 2.5x more PC game software is sold in China than in the U.S. United States. China
PC Game Players There are 227 million gamers in China of which 65 million are hard core gamers. Our officially licensed XO FOUR and XO SEVEN headsets for the Xbox One PC Gaming Headsets were in market ahead of the September The PC Gaming headset market in China is console launch. estimated to reach $55 million in 2014 and
$200 million by 2016.
2014 $55M
2016 $200M
$0 $25 $50 $75 $100 $125 $150 $175 $200
Source: DFC Intelligence Forecasts 21 22 HyperSound Technology
New Sound Delivery Mechanism Innovations • Fundamentally new approach to audio Patent-protected innovations provide a • Thin panels generate an ultrasound beam competitive advantage over other solutions in the marketplace. • Audio is injected into the beam • Sound is contained to the air within the • Digital signal processing has significantly ultrasound beam improved audio quality and frequency response
HyperSound • Electronics advancements have enabled the use of low voltage cables and lower overall power consumption • Innovations in emitter panel design have improved the ratio of audio volume to panel size, allowing for the production of smaller, louder emitter panels Standard Speaker • Advances in emitter manufacturing process now allow for cost effective mass production
23 Commercial Opportunity BENEFIT • HyperSound’s ability to place sound in a specific location makes it ideal for many commercial uses
STATUS • In November 2014 achieved first wide-scale deployment of HyperSound® virtual reality audio zones in Activision Call of Duty®: Advanced Warfare retail displays in approximately 1,000 Best Buy locations in North America • Pursuing multiple showcase installations at brand-name retailers
MARKET OPPORTUNITY • Pre-defined sound zones for in-store promotional, informational and way-finding messages • Audio for interactive kiosks and displays ̶ 20M digital signs currently in use in North America1 ̶ 34M ATMs, vending machines and self-service kiosks in North America by 20152 ̶ 2.5M self-service kiosks by 20152 3 ̶ 120,000 fast food restaurants in the U.S. 1. BUNN Research, January 2014. 2. Self-Service Markets: ATMs, Kiosks, Vending ̶ 900 casinos and 850,000 electronic gaming Machines, BCC Research, March 2011. machines in the U.S.4 3. QSR, August 2013. 4. 2013 Survey of Casino Entertainment, American Gaming Association, October 2013. 24 Healthcare Opportunity
BENEFIT HyperSound provides significant improvement in listening experience for people who are hard of hearing
STATUS • Received FDA clearance for HyperSound Audio System in February 2014 • Hired hearing aid industry veteran Rodney Schutt as SVP and General Manager of HyperSound in 2014 • Products in development and will ship in 2015
MARKET OPPORTUNITY • Targeting living room TV/audio solution to enable improved listening experience • Large, addressable markets ̶ 360M worldwide and 48M in the U.S. are hard of hearing1 ̶ 35% to 40% of population over 65 suffer from hearing loss1 ̶ $4B U.S. hearing-aid market, with ~11M units sold annually1
25 1. Johns Hopkins School of Medicine, November 2011. Consumer Opportunity
BENEFIT HyperSound allows for immersive 3D audio in a wide variety of consumer electronics applications
MARKET OPPORTUNITY • Home theater systems • Entertainment and gaming soundbars • Computer speakers
STATUS • Pursuing consumer product development in 2016 and beyond
26 Licensing Opportunity
BENEFIT HyperSound can be integrated into a wide variety of commercial and consumer products
MARKET OPPORTUNITY • Automotive and other transportation markets • Displays and televisions • Mobile devices • Smart home technology • And more …
STATUS • Actively engaged in licensing discussions to incorporate HyperSound in consumer products
27 HyperSound Timeline
Application Strategy 2014 2015 2016 2017
Become the market leader in directed Commercial audio systems in kiosk and sound zone 2014 + applications
Hearing Create an entirely new market of ultrasonic audio products that benefit 2015 + Health people with hearing loss
Apply the unique benefits of Consumer HyperSound to a broad array of 2016 + consumer products
Leverage broad applications of Licensing HyperSound into external, licensed 2014 + products
Continued R&D to advance the Research technology and identify new 2014 + capabilities and applications
28 Strong and Rapidly Growing Portfolio of Patents
119 Headset innovations on: • Audio processing • Gaming specific features
HyperSound innovations on: 46 • Emitter construction • Ultrasound and emitter electronics • Digital signal processing techniques • Market uses of ultrasound EOY 2012 November 2014 audio Pending 20 86
Issued 26 33
29 Financial Summary
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2014 Financial Summary: Revenue
$100 $96M* $92M $94M 2013 2014 $88M
$80 (in millions) (in
$60
$38M $38M $40 $33M $30M $25M $22M $20
$0 Q1 Q2 Q3 YTD thru Q3 Q4 • Revenue up ~2% for first nine months driven by strong consumer response to our Xbox One and Playstation®4 compatible headsets, partially offset by timing differences in new product launches and international distributor shipments • Q1 revenue growth driven by successful launch of first Xbox One compatible headsets including ~$4 million in shipments that shifted out of Q2. Q3 revenue down due to timing differences in new product launches and international distributor shipments compared with last year which shifted sales into Q4 *represents midpoint of guidance range 31 2014 Financial Summary: Gross Margin
40% 2013 2014
32.1% 31.0% ~31%E 30% 29.2% 25.8% 25.5% 26.5% 23.3% 21.7% 22.4% 20%
10%
0% Q1 Q2 Q3 YTD thru Q3 Q4
• Gross margin improved 100 basis point for first nine months. Excluding the non-recurring Microsoft adapter expenses of ~$2.8 million, gross margin improved 390 basis points • Q1 gross margin improved 290 basis points driven by successful launch of first Xbox One compatible while Q2 was impacted by non-recurring Microsoft adapter expenses. Q3 gross margin up 90 basis points driven by sales of higher margin headsets
32 2014 Guidance: Headset Business
Q4 Guidance YTD Sept 2014 Midpoint Midpoint Headset $94 $96 $190 Business Adjusted ($2) $21 $19 EBITDA*
* Total Company adjusted EBITDA projected to be $9 million which includes ~$10 million investment in HyperSound.
Q4 Headset Highlights vs Prior Year FY 2014 Headset Highlights vs Prior Year
• Net revenue ~12% higher due to • Net revenue ~6% higher in a market new products and retail positioning that is projected to be flat to down slightly • Gross margin flat with last year net of incremental freight costs from • Gross margin flat with 2013 net of product delays and LA Port issues incremental freight cost and Microsoft Adapter costs • Adjusted EBITDA improving to ~20% of revenue from 18% in 2013 • Adjusted EBITDA improving to ~10% or ~36% increase of revenue from 8% in 2013 33 2014 Financial Summary: Balance Sheet
As of As of Highlights: 12/31/13(1) 9/30/14 • Signed new global Liquidity $60M working capital line with Bank of America on Cash & Equivalents $6.5M $4.4M March 31, 2014 Borrowings Available $0.0M $13.7M • Raised net proceeds of $35.6 million through Debt $64.6M $36.2M common stock offering in April 2014 Revolver $39.7M $28.7M • Cash, cash equivalents Term Loan $14.5M $0.0M and available borrowings increased $11.6 million to Subordinated Notes $10.3M $7.5M $18.1 million • Outstanding debt decreased 44% or $28.4 million to $36.2 million at September 30, 2014 (1) Reflects Turtle Beach standalone balance sheet as of December 31, 2013.
34 Future Growth Drivers
2015
•Accelerate console headset growth as new console installed base expands •Grow console headsets in emerging markets including China •Increase share of PC gaming headsets •Launch HyperSound healthcare products •Expand HyperSound Commercial business
2016
•Continued growth of console and PC gaming headsets •Accelerated growth of HyperSound commercial and healthcare businesses •Roll-out HyperSound consumer products •Strategic Acquisitions
35 Investment Summary
MARKET LEADER IN GROWING CATEGORY • Established leader in gaming headsets with ~50% dollar market share in the U.S. and U.K. and license agreements for both the Xbox One and PlayStation®4 consoles • In the early stages of a multi-year growth cycle in console gaming • Double-digit growth in expanding international markets
BREAKTHROUGH AUDIO TECHNOLOGY WITH DISRUPTIVE POTENTIAL • Recently delivered first large scale HyperSound commercial product implementation in approximately 1,000 Best Buy stores • On schedule to roll out HyperSound health care product in 2015 ATTRACTIVE INVESTMENT PROFILE • The company has near, mid and long-term growth potential driven by the console transition and mid to long-term growth prospects from HyperSound • Solid EBITDA margins with opportunity for meaningful expansion
36 Contact Information
Corporate Communications Investor Relations David Lowey Anne Rakunas
Turtle Beach Corporation ICR [email protected] [email protected] +1 619-887-4327 +1 310-954-1113
100 Summit Lake Drive, Suite 100 12400 Wilshire Boulevard, Suite 1200 Valhalla, NY 10595 Los Angeles, CA 90025
COMPANY WEBSITES www.turtlebeachcorp.com www.turtlebeach.com www.hypersound.com
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