• Sat. Sep 19th, 2020

Dimancherouge

Technology

IPO Update: Corsair Gaming Proposes IPO Terms (Pending:CRSR)

Quick Take

Corsair Gaming (CRSR) has filed to raise $238 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides gaming products and software to gaming and esports enthusiasts worldwide.

CRSR has achieved a strong growth rate, a recent swing to net profits, large free cash flow, and reasonable IPO valuation, so is worth serious consideration.

Company & Technology

Fremont, California-based Corsair was founded to develop a line of high performance PC and console platform hardware peripherals, components and systems worldwide.

Management is headed by co-founder, president and Chief Executive Officer Mr. Andrew Paul, who was previously president of the Multichip Division at Cypress Semiconductor (CY).

Below is a brief overview video of Corsair’s Command Center software:

Source: Corsair

The company’s primary offerings include:

Corsair has received at least $328 million from investors including Corsair Group (Cayman) and private equity firm EagleTree Capital.

Customer Acquisition

The company sells its products via its website through ‘approximately 50 retailers and over 160 distributors and, through distributors, supply our products to thousands of smaller online and brick-and-mortar retailers.’

The firm also sells through Amazon.com, which for the six months ended June 30, 2020, accounted for 26.8% of its total revenue.

Sales, G&A expenses as a percentage of total revenue have been rising as revenues have increased, as the figures below indicate:

Sales, G&A

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

16.0%

2019

14.9%

2018

14.8%

Source: Company registration statement

The Sales, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales, G&A spend, rose to 1.8x in the most recent reporting period, as shown in the table below:

Sales, G&A

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

1.8

2019

1.0

Source: Company registration statement

Market & Competition

According to a 2020 market research report by Jon Peddie Research, the global market for PC gaming hardware is expected to reach $37 billion by 2022.

This represents a forecast CAGR of 1.05% from 2018 to 2022.

The main drag on growth is expected to be the Do-It-Yourself market while prebuilt and custom pre-built PCs may be a positive growth factor.

Jon Peddie commented on the market:

The DIY market is still being affected by the protracted extinction of Entry-Level desktop discrete Graphic Processing Units (GPUs). Gamers generally don’t build DIY rigs using an integrated graphics solution and off the shelf systems in this class offer a lot of bang for the buck. With some additional weakness in the Mid-Range we see the DIY market falling over the next three years then stabilizing. The good news is that DIY activity in the High-End is quite healthy in that time frame. When gamers look at the price of boutique brand gaming PC’s which can cost upwards of $5k, many justify home builds for a few thousand less sporting similar performance.

Major competitive or other industry participants include:

  • Logitech (LOGI)

  • Razer (RAZR)

  • Kingston (OTC:KSYT)

  • Microsoft (MSFT)

  • Cooler Master

  • NZXT

  • EVGA

  • Seasonic

  • Thermaltake

  • Dell Alienware

  • HP Omen (HP)

  • Asus

  • iBuypower

  • Cyberpower

Financial Performance

Corsair’s recent financial results can be summarized as follows:

  • Growing topline revenue, at an accelerating rate

  • Increasing gross profit and gross margin

  • Higher operating margin and operating profit

  • Sharply increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 688,925,000

41.7%

2019

$ 1,097,174,000

17.0%

2018

$ 937,553,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 183,686,000

96.2%

2019

$ 224,287,000

16.4%

2018

$ 192,695,000

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

26.66%

2019

20.44%

2018

20.55%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ 49,747,000

7.2%

2019

$ 23,707,000

2.2%

2018

$ 21,790,000

2.3%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ 23,817,000

2019

$ (8,394,000)

2018

$ (13,720,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ 75,608,000

2019

$ 37,103,000

2018

$ 422,000

(Glossary Of Terms)

Source: Company registration statement

As of June 30, 2020, Corsair had $107.4 million in cash and $886.4 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $109.0 million.

IPO Details

CRSR intends to sell 7.5 million shares and selling shareholders will sell 6.5 million shares of common stock at a midpoint price of $17.00 per share for gross proceeds of approximately $238 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.9 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 15.24%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use our net proceeds from this offering to repay approximately $86.6 million of outstanding indebtedness under our first lien term loan and the remaining proceeds for working capital and general corporate purposes.

As of June 30, 2020, $463.5 million was outstanding under the first lien term loan and the interest rate for borrowings under the first lien term loan was either, at our election, a base rate plus a margin range from 2.75% to 3.25% or an adjusted Eurodollar rate plus a margin range from 3.75% to 4.25%.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, Barclays, Credit Suisse, Macquarie Capital, Baird, Cowen, Stifel, Wedbush Securities, and Academy Securities.

Commentary

Corsair seeks public investment to pay down debt and provide liquidity for certain of its investors.

The company’s financials show strong topline revenue growth, a swing to net income and positive cash flow from operations and free cash flow.

Sales, G&A expenses as a percentage of total revenue have risen slightly while its Sales, G&A efficiency rate has increased markedly, indicating increased efficiency during the Covid-19 pandemic era.

The market opportunity for selling premium products to gamers and esports players is large but expected to grow at a slow rate.

However, sales of premium products in the DIY market is expected to grow substantially as players seek to customize their rigs at lower price points.

As a comparable-based valuation to a basket of publicly held Computer/Peripherals companies in January 2020 with an EV/Revenue of 3.23x, CRSR’s proposed EV/Revenue of 1.5x appears quite reasonable.

When directly compared to peripheral maker Logitech (LOGI) which has a current EV/Revenue multiple of 3.56x while growing revenue at only 10.6% versus Corsair’s 41.7%, CRSR’s IPO valuation also appears more than reasonable.

Given the firm’s strong growth rate, swing to net profits, large free cash flow, and reasonable IPO valuation, so is worth serious consideration.

Expected IPO Pricing Date: September 22, 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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