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Turtle Beach stock slips to red due to amended net income and weak earnings outlook

Stocks of the gaming headset maker Turtle Beach Corporation (NASDAQ GM: HEAR) are down more than 10% in the extended hours of trading primarily due to weak earnings outlook provided by the firm, which disappointed investors.

The company also added that the headset demand would come down modestly in 2019, which further dented the momentum. The firm is having a dream in the bourses with the stock skyrocketing more than 700% in the last 12 months.

Amended Net Income

In a separate filing to the SEC, Turtle Beach today reported that it is going to amend the Q2 and Q3 reports due to the improper accounting of Series B warrants issued in April last year.

As a result, Q2 net income is revised downwards to a loss of $2.3 million from earlier reported $6.3 million. For the year-to-date period ended September, net income is scaled down to $14.6 million from $23 million reported earlier. The drop in stock price can be attributed to the impact in net income and weak earnings outlook provided by the firm.

Solid Q4 results

However, Turtle Beach reported solid Q4 results which surpassed analyst estimates. Thanks to solid demand for gaming headsets, particularly aided by battle royale enthusiasts, sales jumped 40% to $111.3 million compared to $110.2 million expected by the street.

The headset maker eclipsed street earnings consensus by $0.02. Earnings increased by 15.6% to $1.33 per share compared to $1.31 estimated by the analysts. Adjusted EBITDA, one of the key metrics tracked by the street, rose 45% to $25 million.

It’s worth noting that the gaming accessory maker recorded all-time high Q4 results in terms of top line, gross margins, profits, and adjusted EBITDA since the IPO in 2014.

Last month, Turtle Beach in its preliminary results for the fourth quarter stated that it expects revenue to be in the range of $109 million to $111 million, revised upwards from the prior guidance of $94 million.

On a diluted basis, EPS is expected to be between $1.27 and $1.34, compared to $1.15 in last year, and increased from the earlier guidance of $1.02. Adjusted EBITDA is forecasted between $23 million and $25 million, compared to $17.2 million last year.

Related: Gaming stocks: A look at the three major players

ROCCAT deal: expanding the horizon

Turtle Beach also announced today that it is acquiring German-based PC gaming accessory maker ROCCAT for $14.8 million. This deal would help the company dabble into the PC-based gaming headsets, mice, keyboards and other accessories which is $2.9 billion market. The ROCCAT deal would also help to expand its reach in North America and the European region and make an entry into the Asian market.

ROCCAT deal is expected to be closed in the Q2 period and sales contribution from the German brand would be $20 million to $24 million for the next fiscal and $30 million in the 2020 period. The acquisition is anticipated to be accretive to earnings and net income in fiscal 2020.

Investors would be welcoming the deal as it would help the firm to reduce its dependence on the gaming headset and diversify to PC-based gaming headsets and other accessories like mice and keyboards.

In terms of geography, foraying into the Asian market is expected to augur well in the near future as China is the world’s largest gaming market. Even though the company needs to spend more money relating to marketing and promotions of new products, in the long term it’s going to bear fruit in terms of sales and improved profitability.

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Disappointing Outlook

Turtle Beach shocked investors with its commentary that global headset demand would decrease in 2019 as users who buy a gaming headset for the first time would return to normalcy. This is a concern for the investors as the company gets the majority of its revenues by selling gaming headsets.

Q1 revenue is expected to touch $42 million, which is better than $34.8 million expected by the street. However, adjusted EPS of $0.05 is lower than $0.09 estimates, which disappointed investors. In addition, the company has also added it doesn’t include the costs relating to the ROCCAT acquisition which would be $0.6 million in the Q1 period. If one has to factor in the acquisition costs, earnings might further take a hit.

For the fiscal 2019 period, revenue is forecasted between $240 million to $248 million. Analysts are expecting $243.1 million for the same period. But analysts’ estimates would change due to the today’s announcement of ROCCAT deal.

Adjusted EPS for the next fiscal is anticipated in the range of $0.90 to $1.10 much lower than $1.64 expected by the street. Earnings impact might be due to increased marketing spending for new launches, higher discounts, and costs related to the launch of PC gaming headsets.

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