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Turtle Beach (NASDAQ:HEAR)
Q4 2020 Earnings Call
Mar 04, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, ladies and gentlemen, and welcome to the Turtle Beach fourth-quarter and full-year 2020 conference call. Delivering today's prepared remarks are chairman and chief executive officer, Juergen Stark; and chief financial officer, John Hanson. Following their prepared remarks, the management team will open up the call for any questions. Before we go further, I would like to turn the call over to Sean McGowan of Gateway Investor Relations, Turtle Beach's IR advisor, as he reads the company's safe harbor that provides important cautions regarding forward-looking statements.

Sean, please go ahead.

Sean McGowan -- Investor Relations

Thank you, Joelle. On today's call, we will be referring to the press release filed this afternoon that details the company's fourth-quarter 2020 results, which can be downloaded from the Investor Relations at page@corp.turtlebeach.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the Investors section of the company's website later today. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the federal securities laws.

Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding the company's operations and future results that could cause Turtle Beach Corporation's results to differ materially from management's current expectations. While the company believes that its expectations are based upon reasonable assumptions, numerous factors may affect actual results and may cause results to differ materially. So the company encourages you to review the safe harbor statements and risk factors contained in today's press release and in its filings with the Securities and Exchange Commission, including, without limitation, its annual report on Form 10-K and other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in our forward-looking statements.

The company does not undertake to publicly update or revise any forward-looking statements after this conference call. The company also notes that on this call, it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and you can find such a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. And now, I'll turn the call over to Juergen Stark, the company's chairman and chief executive officer.

Juergen?

Juergen Stark -- Chairman and Chief Executive Officer

Good afternoon, everyone, and thank you for joining us. We are very pleased to report another record quarter in what was a record year for the company. Our fourth-quarter sales rose to $132.9 million, an increase of 31% over last year, bringing our full-year sales to over $360 million, more than 25% higher than the highest annual sales in our history. The fourth-quarter and the full-year revenues exceeded our expectations as both the market and our products continued to perform strongly.

We also delivered record EBITDA of over $60 million for the year and record operating cash flow of $51 million. As you all know by now, the market for gaming has continued to be strong in general, and this past year saw a large sudden surge as existing gamers begin gaming more and millions of new gamers entered the market as the stay-at-home orders hit in the spring. In addition, gaming headsets are great for working and schooling at home, which drove additional demand from non-gamers for our headsets. This surge in demand impacted all gaming categories and created an unprecedented opportunity, as well as an unprecedented set of challenges.

We rose to the challenge and captured the opportunity, significantly outperforming the market through great execution. First, we believe we were able to ramp up our factory capacity faster than most. Within a few weeks of seeing the first signs that the stay-at-home orders were driving a steep surge in demand, we increased our factory output by a factor of 5 times from what we had planned. This meant not only adding more production capacity but also forecasting and securing components far in advance.

It meant securing shipping and transportation capacity at a time when most flights were grounded, and logistics capacity was highly constrained. And it meant working in a retail landscape that was constantly changing and staying coordinated on a day-to-day basis with our retail partners globally. But similar to 2018, the best time to outperform the market is when the market is booming, and that's what we did again. As an example, according to NPD, the U.S.

console headset market was up in 2020 by 41% in dollars and 29% in units. Sales of Turtle Beach console headsets in the U.S. were up 53% in both dollars and units. We ended 2020 with a 46.8% dollar share of the U.S.

console headset market, up from 43% the year before. And by the way, this outperformance only got better as the year went on. In December, our dollar share rose to 51%, and our unit share rose to over 60%, a strong finish to the year. Our ability to out-execute the rest of the market not only enabled our financial success last year but helped ensure millions of consumers could get great headsets and our retail partners could capture the surging market demand.

Looking at the best-selling console headset models for the U.S. for 2020, all five of the top five best-selling models were ours as were eight of the top 10. Our strong console headset results were also helped by the launch of Gen 2 STEALTH 600 and 700s, $99 and $149 wireless headsets for Xbox and PlayStation, which quickly became top-selling models. Those new headsets had big shoes to fill as they replaced our top-selling prior models, and the Gen 2 models did it with the best headsets we've ever delivered at those price points.

In December, our Gen 2 models had six of the top 10 revenue spots in the U.S. market. The product and market share performance are a testament to the enduring strong brand we built with console gamers and their recognition of our high-quality and innovative products for all levels of gamers. In PC gaming accessories, which includes headsets, keyboards, and mice, we are still a relatively small player, but we have seen very encouraging growth in what was our first full year with an expanded product line.

Ahead of the holidays, we launched our new line of three Elo PC gaming headsets, reflecting a great combination of ROCCAT team's design and branding and Turtle Beach's audio expertise that have made our console headsets best sellers for more than a decade. We launched three new models of our Vulcan PC gaming keyboards. These are line extensions to the Vulcan 121 and 122 keyboards, which are top-selling keyboards in Germany. Two of the models use our new proprietary Titan Optical Switches.

We also launched two new PC gaming mice, the Burst Core and Burst Pro. Both of these also use our new Titan Optical Switches, and the Burst Pro features a new extremely lightweight, transparent honeycomb shell with really cool organic lighting coming through the shell. As a result, we've more than doubled our ROCCAT revenues last year versus 2019 and remain on track to continue to significantly grow ROCCAT revenues this year. I'm going to take a moment right now to, again, thank our great team.

I know I say that every quarter, but last year really did present an unprecedented set of challenges for any team in the consumer electronics business. Our people were dealing with the same pandemic worries and uncertainties that everyone was facing, and they had to suddenly accommodate a business that was booming, changing by the hour, all while working from home and adjusting many facets of their lives, not to mention launching a record number of new products while working remotely and not being able to visit the factories. They stepped up in a big way, and I'm very proud of each and every one of our team members. Thank you.

Getting back to our results. As impressive as our sales growth has been over the past years, the improvement in our balance sheet is also striking. At the end of 2017, we ended the year with net debt of $84 million. And that debt was high-cost and keeping us from pursuing the opportunities we wanted to in new product areas.

Just three years later, we ended 2020 with $47 million in cash and not $0.01 of debt. That's an improvement in our net cash position of over $130 million in three years, which is more than the entire enterprise value just three years earlier. Our balance sheet has gone from something that needed fixing to a strategic tool. We have already begun to use this improved liquidity to expand our business into new categories that have added billions of dollars in addressable market that we can go after.

And as pleased as I am by our record performance last year, with revenues up more than 50%, that's more than $125 million from 2019, I'm even more pleased that we believe we have an opportunity to grow further this year. That's a result of our continued strength in console headsets, our view of tremendous opportunities to grow in PC accessories, and additional investments we made last year and will make this year to enter new categories like microphones and several others yet to be announced. With that, I will turn the call over to John to review our financial performance, after which I will come back with some additional comments about what we see for the market and our business in 2021. John?

John Hanson -- Chief Financial Officer

Thanks, Juergen, and good afternoon, everyone. We are pleased to report that the strong momentum we saw early last year continued right through the end of the year, allowing us to deliver better-than-expected results across all of our financial metrics. As Juergen said, as a company, we set new records for sales and adjusted EBITDA. Net revenue for the fourth quarter of 2020 was $132.9 million or $131.2 million on a constant-currency basis, compared to $101.8 million in the year-ago quarter.

We had not given specific revenue guidance for the fourth quarter, but the 31% increase in our fourth-quarter revenue was obviously much better than the roughly flat level of sales that was implied in our second-half revenue guidance of $245 million. It is particularly notable that this growth came despite the fact that we believe that roughly $20 million of holiday purchasing had been pulled forward into the third quarter because of retailer sales plans, which, in turn, drove our third-quarter increase. Even with this pull forward, fourth-quarter consumer demand continued to be stronger than expected, and our products continue to perform extremely well, and we were able to meet that demand. Revenue growth in the fourth quarter was the result of many of the same factors that drove our results all year, strong increases in consumer demand for headsets, the launches of new consoles from Sony and Microsoft, excellent sales performance of our console headsets, and the significant expansion of our PC accessory offerings.

Full-year net revenue was a record $360.1 million, up 53% compared to $234.7 million in 2019. The growth was driven by the same factors cited above. Gross margin in the fourth quarter was 35.8%, 70 basis points higher than the 35.1% we reported in the fourth quarter of 2019. This increase was driven by several factors moving in different directions, lower-than-normal and lower-than-expected promotional spending as a result of consumer demand dynamics, a favorable shift in our sales mix, volume-driven fixed cost leverage, partially offset by roughly $2 million in incremental air freight costs to facilitate the increase in sales.

Full-year gross margin was 37.2%, a 370-basis-point improvement over 2019, driven by the same factors that drove up our fourth-quarter margin. Operating expenses in the fourth quarter of 2020 were $27.6 million, compared to $22.3 million in the same quarter of 2019. The increase was driven by volume-related selling costs, as well as additional investments to expand our PC accessories business and drive future growth. As a percentage of net revenue, operating expenses in the fourth quarter were 20.8%, a 110-basis-point improvement over last year's fourth quarter when operating expenses were 21.9% of net revenue.

As a result of the revenue growth, gross margin increase, and operating expense leverage, adjusted EBITDA in the fourth quarter of 2020 was $23.6 million, an increase of 42% compared to $16.6 million in the year-ago quarter. The year-over-year improvement includes approximately $2 million of airfreight expense, as well as our previously announced investments in growth. As Juergen will discuss later on, these improvements were also driven in part by lower-than-normal levels of promotional spending. We had expected promotional spending to return to normal levels in the fourth quarter, but the dynamics of consumer demand and product availability eliminated the need for normal levels of spending.

Our full-year 2020 adjusted EBITDA was $61.4 million, compared to $22.8 million in 2019. This is the highest level of adjusted EBITDA in our company's history, exceeding our prior record back in 2018. GAAP net income in the fourth quarter of 2020 was $16.3 million, compared to net income of $20.4 million in the year-ago quarter, reflecting the trends I just discussed. GAAP net income per share in the fourth quarter of 2020 was $0.93 on 17.6 million weighted average diluted shares outstanding compared to net income per share of $1.29 on 15.7 million weighted average diluted shares outstanding in the year-ago quarter.

The increase in the diluted share count is primarily the result of lower assumed share repurchases under the Treasury method for calculating diluted shares. Please note that on a GAAP basis, the fourth quarter of 2020 included a benefit of $1.6 million from a change in the fair value of contingent consideration, and the fourth quarter of 2019 included a $7.4 million benefit from the release of a tax valuation allowance. Excluding these and other minor adjustments, adjusted net income for the fourth quarter of 2020 was $14.8 million or $0.84 per diluted share compared to adjusted net income of $13 million or $0.83 per diluted share in the 2019 period. Cash flow from operations was $18.4 million in the fourth quarter of 2020, up 52% from $12.1 million in the fourth quarter of 2019.

For the full year, cash flow from operations totaled $51 million, an increase of 29% compared to $39.4 million in 2019. This was, by far, the highest level of cash flow from operations we've ever had and was 21% higher than our prior record, which was $42.2 million in 2018. This is the third consecutive year we have delivered cash flow from operations of at least $39 million. Our effective tax rate for the fourth quarter was 26.3%, and for the full year, it was 26.1%, slightly lower than the 27% rate we had said we expected following the third quarter.

Now, turning to the balance sheet. At December 31, 2020, we had $46.7 million of cash and cash equivalents with zero debt, including no borrowings on our revolving credit line. That's a $54 million net improvement from the end of 2019. Inventories at December 31, 2020, were $71.3 million, compared to $45.7 million at December 31, 2019.

The increase in inventory was driven by expected continued strong demand in early 2021 and a higher revenue run rate for the business. Now, I'll turn the call back over to Juergen for some additional comments. Juergen?

Juergen Stark -- Chairman and Chief Executive Officer

Thanks, John. I will finish with some comments on what we see for the market and for our results in 2021. As you've heard me say many times, we believe that gaming has been and continues to be one of the best, if not the best, consumer category in which to be a leader. It has become more of a focal point of consumer attention than movies, TV, sports, and other activities.

As entertainment, it continues to grow in a share of people's leisure time and has also become one of the most popular ways for people to get together. And this was all going on and getting more pronounced even before people were forced to spend time indoors and before the launches of the new consoles. Over the last 12 months, gaming has become even more important as a form of entertainment, competition, and socializing. We believe that even when things return to so-called normal, gaming is going to be bigger than it was and continue to be a booming market.

And we are one of the top few hardware companies in the $5 billion market for gaming headsets, keyboards, and mice. In fact, in 2020, we were the top seller of those products in the U.S., combining console and PC gaming. That's despite us really just getting started in the PC segment. We continue to believe that the future for the gaming market and for us looks very bright.

We have several elements to our growth strategy. First, continue to lead in console headsets. This has been and will continue to be about delivering high-quality headsets for every level of gamer and finding ways to innovate and give gamers features that nobody else has. This is how we've held a lead that dwarfs the nearest competitor for more than a decade.

And we have some more industry-first innovations coming this year. Second, we will continue to expand our PC gaming portfolio of headsets, keyboards, and mice. The additional ROCCAT PC products we launched in the fall last year will be followed by another wave of really exciting new PC gaming products this year. As I've mentioned, our near-term goal is to create an incremental $100 million business in PC accessories and our longer-term goal is to lead those PC gaming categories.

We will make investments this year to continue our progress toward both those goals. Third, continue to identify and move into additional categories for expansion. Despite being very busy executing on a complex set of retail and supply chain dynamics last spring, we launched additional efforts to grow our addressable markets over time. I think it's safe to say that if you can think of a gaming accessory category, we have spent time evaluating the potential for us to enter that category.

And we pulled the trigger and began executing on a few last year. Our recent expansion of Neat Microphones -- acquisition of Neat Microphones is a great example of the first announced additional expansion category. As we said when we announced the acquisition, Neat is a pretty small company right now, and the portfolio we acquired the company for is yet to be announced and launched. But it has tremendous potential, particularly given that the Neat team, now part of Turtle Beach, built Blue Microphones, including the digital microphones that are the current industry-leading products.

The overall microphone market is over $2 billion in size globally, and the digital USB portion is roughly $700 million and the fastest-growing part of that market. These microphones are not related exclusively to gaming, but we see a lot of overlap between gamers, streamers, and influencers who also often use other gaming accessories. Just like with our ROCCAT acquisition, we've added a specific set of skills that can enable us to not only take a meaningful position in a category but have an opportunity to lead that category over time. We will continue to look for logical adjacencies where we can either buy or build our way in and leverage our core competencies in brand, product development, distribution, and execution.

And as I've hinted, we have several new categories coming this year. A fourth engine for growth is geographic expansion. We're No. 1 in console headsets in North America, the U.K., and other countries by a significant margin.

But we believe we have opportunities to grow our share in other geographies and in other product segments. We're not going to go into specifics for competitive reasons, but we will be putting resources behind expanding in the new geographic markets where we see opportunities across all of our product segments. Let's turn now to our outlook for 2021 and beyond. Those of you who've been following our story for a long time know that when the console headset market surged in 2018, we knew this was likely to have two implications for the years after 2018.

First, the influx of millions of new gamers would create some level of one-time bump that year as they bought their first headsets. Second, many of those new gamers would join the market, upgrading and replacing their gear over time, leading to a step function increase in the size of the market. That's exactly what happened. We see something similar happening after 2020.

If we look at the three drivers of growth last year, existing gamers gaming more, millions of new gamers join the market, and for headset, some level of non-gamer buying for working and learning from home, we think there are some very encouraging implications for the longer term. For console headsets, we expect that 2020 had some level of one-time impact of new gamers buying their first headsets. After all, the second quarter was nearly double normal sell-through, and third quarter was up nearly 50%, and that is unlikely to repeat. But the millions of new gamers that entered the market also has the long-term benefit of a similar step-function increase in the size of the market that we saw from 2017 to 2019.

However, 2021 is also starting strong from a sell-through standpoint and has the added benefit of the new console launches, which typically provide an additional tailwind. Demand for the new Xbox and PlayStation consoles continues to exceed supply, and we continue to be big believers in the market potential of those platforms with their "hard to tell it's not real" level of graphics and audio. Given that, it's a tough call whether the market for console gaming headsets will be up or down in 2021 relative to 2020. But our working assumption is that it will be down roughly mid-single digits from the record 2020, particularly in Q2 and Q3, and then continue to show good growth in future years.

PC accessories market saw a similar significant increase in demand in 2020 from the stay-at-home orders, as well as the upgraded CPUs and GPUs that launched last year. Like the console market, we expect that market to be significantly larger than 2019 but down somewhat from 2020 this year and then continue to show growth in the coming years. That's the market. For Turtle Beach, even if the underlying console and PC markets are down a bit from record 2020 levels, we believe we can offset this by continuing to substantially grow our PC accessories business by driving additional growth in several new gaming categories entering the mic market with our upcoming Neat portfolio and growing in a few selected geographies where we see strong opportunities.

We have targeted our financial metrics to reflect investments to support that strategy accordingly this year. Given this, we have two simple goals for 2021. Number one, drive growth in 2021 and beyond despite record 2020 revenues. And two, to do so in a way that still delivers category-leading EBITDA margins.

We are targeting revenues of approximately $370 million this year, reflecting the market dynamics and our specific growth vehicles I just discussed. We set a target level of EBITDA at 12% of revenue, which we believe compares favorably to others in our category despite our somewhat smaller size. Therefore, we anticipate that our adjusted EBITDA in 2021 will be approximately $45 million. This approximate $45 million in expected EBITDA reflects a few other dynamics we expect this year.

First, gross margins in 2020 were benefited by significantly lower-than-normal promotional levels as stock was constrained for the whole industry much of the year. This benefit is large and flows directly to EBITDA. We anticipate promotional levels to return to more normal levels this year. Second, gross margins were negatively impacted by the roughly $9 million in airfreight we spent in 2020 to expedite supply and capture the surge in market demand.

We expect air freight to be a more normal couple of million dollars this year. That said, constraints on particular components and/or logistics capacity could increase costs, which would have an impact on gross margins. But our financial plans assume we're able to resolve constraints by spending a bit more rather than having the constraints impact revenues. Third, we will be increasing our opex, particularly in the sales and marketing categories, to support the targeted growth this year, as well as to set us up for continued growth in 2022 and beyond.

As a result, we expect adjusted net income per diluted share to be approximately $1.35 for 2021, using an average share count of roughly 17.5 million and a tax rate assumption of 28%. Now, a few words about the expected revenue phasing this year and our expectations for Q1. Just as we saw last year, an unusual quarterly phasing of revenue, so will 2021 we expect, but in a different way. The first quarter of 2020 was soft for the console headset market ahead of new console launches, following a similar pattern to prior console transition years.

That happened exactly as we expected with Q1 U.S. sell-through for the market down over 25% through February. Then in late March and through all of Q2, the console headset market experienced nearly 100% increases in sell-through as stay-at-home orders hit and millions of new gamers and accessory buyers entered the market. Q3 continued with sell-through nearly 50% higher than 2019.

Q3 also saw some revenue shift from Q4 because of earlier retail holiday purchases. In Q4, things started to normalize, but also included the new console launches, albeit with constrained supply. All of this worked to create an unusual quarterly sales pattern in 2020. Moving to 2021, strong sell-through has continued as many people are still staying at home for work or school, plus the new console launches are contributing even while they remain supply constrained.

This, combined with the strong finish to last year, is driving retailers to replenish and build their stock levels. As a result, for the first quarter of 2021, we are expecting revenues to be approximately $88 million, up from $35 million in the first quarter of 2020. This 150% increase expected growth reflects both weaker-than-normal first quarter last year, combined with higher-than-normal level of revenues for the first quarter of 2021. The year-over-year quarterly comparisons this year could be pretty confusing because they will jump up and down considerably given the unusual patterns both last year and expected this year.

So we'd encourage investors to stay focused on full-year guidance and our progress toward those annual results. We're expecting first-quarter adjusted EBITDA to be approximately $14 million, up from negative $2.7 million in the first quarter of 2020. This reflects the factors we already discussed above, including more normal promotional spending and investments in new products. For the first quarter of 2021, therefore, we expect adjusted net income per share to be approximately $0.45.

In conclusion, three takeaways we have about our outlook. Number one, we believe we can grow total revenues this year because of growth in business outside of console headsets, even as we continue to do very well in that market segment. Number two, we're using our financial strength to invest in future growth, which we believe will give us the ability to grow in 2022 and beyond. Number three, we're targeting an adjusted EBITDA margin of around 12% this year, which compares well to our peers and enables us to invest to drive future growth.

We had another great year in 2020, and we're very excited about 2021 and the coming years, both for the gaming market and for us as a company. We are in an enviable position of leadership in one of the best consumer electronics segments to be in. We have grown our leadership at console headsets, have a very strong growing beachhead in PC gaming accessories and we're entering new adjacent categories that can leverage our strengths. We've, again, demonstrated the ability to execute extremely well across our entire business.

Our balance sheet has never been stronger, and we intend to ramp up investments to produce revenue growth and superior cash flow returns for years to come. Let me reiterate in closing my appreciation for the global Turtle Beach team members who have done an incredible job under challenging circumstances. You are all truly what makes this company succeed, and I'm very proud to be a part of this great team with you. Operator, we're now ready to take questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] Our first question will come from Thomas Forte with D.A. Davidson. Please proceed.

Thomas Forte -- D.A. Davidson -- Analyst

Great. Thanks. Juergen and John, outstanding year, excellent performance. So I have one question on the next 12 months, and then I have one question on the next couple of years.

So first, we'll start with the next 12 months. So Juergen, if Microsoft and PlayStation are able to get supply to catch up with demand for their next-generation consoles, how would that make your life better or not have an impact when I think about your outlook for '21?

Juergen Stark -- Chairman and Chief Executive Officer

Sure. So I think they will ultimately catch up with demand here. But I don't think it's going to have a big impact on us other than potentially just shifting the timing around of the market a bit. I would view it as a net positive for us that the new console sales, essentially, some of which probably would have happened last year, slipped into this year because of supply constraints.

And that demand is likely to be more spread through the course of this year than front-loaded. So I think, for us, it's a net positive in just kind of balancing out the demand through more of the year.

Thomas Forte -- D.A. Davidson -- Analyst

Excellent. And then my second question is, you did an amazing job discussing product opportunities, ways to expand your current portfolio, but I want to know long-term how you thought about services, which is something that CORSAIR has talked about. So basically, non-hardware revenue, what do you see as the opportunity? And is that something you're also considering when you're looking at opportunities to extend your efforts beyond today?

Juergen Stark -- Chairman and Chief Executive Officer

That's a great question, Tom. And the short answer is, absolutely, we're looking at that. We look at, obviously, our strength in gaming hardware as a key set of assets that we can bring to bear on new categories. So hardware will continue to be of strong interest to us, and be able to leverage distribution, supply chain execution, all the things we've demonstrated we can do extremely well.

That said, software, services are also categories in gaming that can leverage the strong brand or brands that we have now, and they are definitely of interest on our radar moving forward.

Thomas Forte -- D.A. Davidson -- Analyst

Great. Thanks again.

Juergen Stark -- Chairman and Chief Executive Officer

Thanks, Tom.

Operator

Thank you. Our next question comes from Drew Crum with Stifel. Your line is now open.

Drew Crum -- Stifel Financial Corp -- Analyst

OK. Thanks, guys. Good afternoon. So, Juergen, you said you're assuming the console market is down mid-single digits in '21.

Does your guidance assume that you give back share, you maintain share, or you pick up some share? And then separately, you talked about a number of the drivers influencing gross margins. So if I have this correct, you're assuming promotion spend returns to normal, you're expecting top-line growth to maybe get a little bit of leverage and air freight is going to be down. Taking that together, how should we think about gross margin for '21? Thanks.

Juergen Stark -- Chairman and Chief Executive Officer

Sure, Drew. Appreciate the questions. So for the console market, I mentioned that our working assumption, while it's a bit tough to call this year with all the puts and takes, and certainly, the strong start to the year makes it even more difficult to kind of judge, our working assumption is that the console headset market overall will be down mid-single digits this year. And that's not down and declining, that's just not having the same kind of one-time bump that happened last year because we do expect strong growth going forward.

And in terms of our share, we finished with 46.8%. It always strikes me as a little strange to talk about our share moving up or down a few percentage points, given that the next closest competitor is in the teens. So our financial modeling assumes that our share will normalize a bit this year as we don't expect to have some of the supply chain or supply advantages that we had, particularly in some months of Q3 where we had over 50% revenue share, which is abnormally high. So we do expect potentially to give back a bit, but for our share to stay very strong, especially compared to prior years, where typically we've been in the low 40s.

So on your first question on gross margins, yes, there are a number of complicated puts and takes. The biggest kind of gross margin first impact is promotional spending. And as I mentioned, last year was abnormal for everybody in the industry. When you're supply constrained, you are not typically spending money to do additional displays at the front of retail, things like that.

Don't think about promotional spending is just sales and discounts. It's a much broader bucket than that. Much of which you don't or can't take advantage of when supply is constrained. So the entire industry showed a lower level of promotional spend last year, which has a large impact on gross margin and flows directly through to EBITDA.

Our financial guidance this year assumes that that pretty quickly returns to normal here, the promotional environment. That's the biggest impact. Then the second biggest one would be air freight. And as I mentioned, we had about $9 million of airfreight in last year that comes directly off the gross margin line.

This year, we'd expect to do a couple of million dollars in airfreight, more of a normal level of airfreight. So there's a, call it, roughly $7 million gross margin swing that way. And then the last thing that impacts gross margin is just operating leverage. And so as we have bigger -- especially in quarters that are typically lower, the gross margin can move around quite a bit because we have millions of dollars of fixed cost in supply chain team and people that are above the gross margin line.

Does that answer your question on gross margin?

Drew Crum -- Stifel Financial Corp -- Analyst

Yes. Very helpful. Thanks, guys.

Juergen Stark -- Chairman and Chief Executive Officer

Thanks, Drew.

Operator

Thank you. Our next question comes from Mark Argento with Lake Street. Your line is open.

Mark Argento -- Lake Street Capital Markets, LLC -- Analyst

Juergen and John, congrats on a good year, and thanks for the granularity and the drivers. But just kind of taking it up to 5,000 feet. When you think about kind of mix of the business, console versus, we call, other, where do you think three years, five years, where do you think console as a percentage of sales you can see that kind of at 50% or even below. When do you think you could really see that revenue mix, that diversified mix? How aggressive could you be to get there?

Juergen Stark -- Chairman and Chief Executive Officer

Sure. I think in the next year or two, we'll have more than 30%, 40% of our business outside of console. And I think in the next three to four years, we should be well over half the business outside of console. And that's not that we don't like the console business, by the way.

That's just a matter of taking advantage of opportunities to leverage our strengths in all the large adjacent multibillion-dollar gaming accessory markets.

Mark Argento -- Lake Street Capital Markets, LLC -- Analyst

Right. Do you see kind of kind of the build versus buy -- and obviously, it seems that you're making small buys with brand and technology. But do you see the opportunity to leverage the Turtle Beach brand into other markets? Or are you going to leave Turtle Beach brand really the dominant console brand and really go with that strategy of adjacent markets, different brands?

Juergen Stark -- Chairman and Chief Executive Officer

That's a great question. One of the things I like and has been a pretty big change for us is up until 2019, we were a one-brand company. So everything we looked at from a market segment standpoint always had the complication of can we utilize the Turtle Beach brand into that segment? Or do we essentially then potentially pollute the strong brand that Turtle Beach has in console? What's very different today is we essentially now have three brands to look at future M&A with, Turtle Beach, ROCCAT, and now Neat as well. And remember that Neat is not only doing gaming microphones, streaming microphones but also prosumer audio, and that brand over time has some potential to stretch into non-gaming segments as well as we build it.

So I would say when we look at potential M&A, we have many more options now. One option is to use any of the three brands where it's the best fit. And the other option is to add brands because the organization has now learned how to be a multi-brand company and leverage the flexibility that comes with that. One other point.

It may seem from the outside obvious that given how strong Turtle Beach's brand is and console to just use that brand for anything else we do. What that requires, though, is that you essentially dilute the strength of the brand in one segment like console gaming in order to have that same brand cover additional segments. So I'll give maybe an extreme example. Enterprise headsets.

We could do those all day long, used by working people. That said, we would have to look at whether consumers, kids, let's say, to make, again, a kind of an extreme example, would want to be using the same brand headset that dad or mom was using for work. And that's what gets taken into consideration in terms of what is the optimal brand play. And as I said, I really like the fact that we have a lot more flexibility now, particularly as we look at adding categories organically or by M&A.

Mark Argento -- Lake Street Capital Markets, LLC -- Analyst

That's helpful. And maybe one for John. When we think about the model, kind of this 12% adjusted EBITDA target. Is that kind of a good number where we should model where we'd expect plus or minus maybe 100 bps or 150 bps quarter in, quarter out, or year in, year out.

But is that kind of where you're pegging this thing and you're going to flow it all back into growth? Or maybe just talk about the longer-term kind of bogey?

John Hanson -- Chief Financial Officer

Yeah. Great question, Mark. So 12% is the mark that we set for 2021, and we would expect that to inch up over the next two to three years. Obviously, we're investing to drive growth.

We want to get that engine moving here. But we do expect to increase that over time.

Mark Argento -- Lake Street Capital Markets, LLC -- Analyst

Thanks, guys.

John Hanson -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Jack Vander Aarde with Maxim Group. Your line is open.

Jack Vander Aarde -- Maxim Group -- Analyst

Great. Congrats on the solid results, Juergen and John, solid results every quarter this year. Thank you for taking my questions as well. So I guess maybe I'll just start with -- a lot of my questions have been asked already.

So Juergen, maybe I'll start with the question from you, kind of a strategic perspective. Wondering how you view the somewhat early stage but booming eSports market opportunity and how Turtle beach can leverage the growth in audience and all the growth verticals that are within eSports in general. And I've seen you made some strategic partnerships as well in the space. So how do you view eSports in that opportunity as it relates to Turtle Beach?

Juergen Stark -- Chairman and Chief Executive Officer

Sure. So first of all, we are in eSports. We're one of the top gaming accessory providers. In fact, across the console and PC landscape, we are the top-selling keyboard, headset, mouse provider in the United States.

So we are in eSports. We've been partnering with teams for years selectively. And so we're in it. We're in it today.

We don't position the business as some others do as this is just all eSports because, in reality, gaming is not just eSports. Gaming is entertainment. It's competition, eSports, right, bigger audiences than any other sport now other than the NFL. And it is socializing.

And we, in our view, all three of those trends are what drive the gaming market, not just the eSports piece.

Jack Vander Aarde -- Maxim Group -- Analyst

Got it. Fantastic. No, that makes a lot of sense. And absolutely.

Well aware you're already in eSports, just wondering how much growth can be fueled or how much additional or incremental activity you could be involved with, but it sounds like it's a part of the puzzle and you're already established there. So that's helpful to know. And then maybe just a follow-up question. In terms of the revenue guidance, I know a lot of analysts have already touched on this, but just given your outlook implies positive growth on the top line despite console headsets being down slightly year over year or mid-single digits.

So I guess that leaves growth from PC accessories and maybe the new microphone product lineup. Anything you could share or maybe like a rough contribution, directional growth? Anything you can provide color on as to what is driving that overall growth in revenue for this year as it relates to those two businesses?

Juergen Stark -- Chairman and Chief Executive Officer

Sure. So with our financial model for this upcoming year with revenue growth, again, our underlying assumption is based on the console gaming headset being down roughly mid-single digits. That's not a small -- at half of the market share nearly, that's not a small number for us, by the way, right? So that's $10 million to $20 million of revenue, and we're adding $10 million more this year on top of last year. So that's, call it, we need to produce $20 million to $40 million of growth outside of the impact of console headsets.

And that's what I'm super pleased that we put ourselves in a position to be able to do. That will come from PC accessory growth. We more than doubled the business last year already, and we're on track with another new wave of products coming this year, the products that launched last fall doing well, to add a good amount of revenue from the PC accessories market. That market is booming.

It grew a lot last year as well. So that's number one. Number two, launching the Neat microphone portfolio. That will be smaller this year because those products will launch during the year.

But that's going to be a bigger contributor in 2022. And then while we haven't named them specifically, we have a few additional categories where we will be launching that are large, where we will be launching new products this year in gaming that will be announced as we go during the year. And those are efforts that really started last spring and are now going to come to fruition this year. So with that combination, that's how we expect to be able to offset some potential decline, although, again, it's hard to judge in the underlying console gaming headset market.

Jack Vander Aarde -- Maxim Group -- Analyst

Fantastic. That was a very helpful granular breakdown, short and concise and to the point there, and I appreciate that. I'm excited to see what these new categories are. Congrats on the quarter, again, and all of this year.

I'll jump back in queue.

Operator

Thank you. [Operator instructions] Our next question comes from Martin Yang with Oppenheimer & Company. Your line is now open.

Martin Yang -- Oppenheimer & Co. -- Analyst

Hi, John. Good afternoon. My first question is on, now that you have a much more expanded installed base, as well as more product categories, how do you think about gaining better insight on your consumer behavior on the way they upgrade or the way they use their devices?

Juergen Stark -- Chairman and Chief Executive Officer

Interesting question. So we do, as you probably know, extensive modeling of the markets and supplement it with consumer research. This is one of the ways that we, I believe, have done quite a good job forecasting what the underlying market in our core console segment is going to do. I know we're looked at as the bellwether in terms of just forecasting what's going to happen with the market.

Last year, we did a lot of consumer research to try to understand what drove the incremental demand, which was very useful in our ability to forecast the back half of the year. Well, that combination of underlying modeling of the markets, the economics of those markets, gross margins, price tiers, where the largest price tiers are, how the price tiers are moving in terms of whether consumers are moving up or down, which ones are growing, that modeling and assessment happens very rigorously here and on a regular basis. And then we supplement it with external consumer research when we have specific trends or questions that we want to have answered to add to our modeling or our assessment of a category that we are launching products in. So all of that continues, and it's just expanded the net now to include PC accessories, throwing in microphones as well now.

And as we move into some new categories, those categories will get the same level of analytical rigor.

Martin Yang -- Oppenheimer & Co. -- Analyst

Got it. And my next question is your expansion for ROCCAT, as well as any other PC or non-console product categories. Do you think there are any useful lessons you learned on ROCCAT's growth with which you could apply to Neat? Or is there a different category that requires a different growth tactic for you in the future years?

Juergen Stark -- Chairman and Chief Executive Officer

That's a great question. The Neat acquisition has gone quite well and largely to plan. So it would be hard for me to say that we learned some lessons in terms of especially things going wrong. We did make decisions early in the ROCCAT acquisition to stop some products that were generating revenues because they just weren't up to our quality standards or sell-through standards.

And those were tough decisions to make at that time, so I would say one lesson we learned is we're glad we did that because we essentially allowed ourselves an opportunity to reset the portfolio a bit and really move forward with a view not just to what the portfolio would accomplish in the year that we were launching the products or the year we acquired ROCCAT, but the potential for that portfolio to be expanded and take a leadership position in the segment, not just gain us market share. That same philosophy is what we're applying to Neat. And frankly, it's the same philosophy that the Neat team brought to us with the acquisition. They weren't looking to launch a few microphones.

They were looking to once again revolutionize, as this team has done before, the microphone industry, especially the digital and USB market. So that was a very good alignment in terms of, again, kind of wanting -- not just to focus on taking some share and growing some revenues but putting ourselves in a position to actually be a leader in the category or lead the category, period, over time.

Martin Yang -- Oppenheimer & Co. -- Analyst

Got it. Thank you.

Operator

Thank you. Currently, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Stark for closing remarks.

Juergen Stark -- Chairman and Chief Executive Officer

Thank you very much. I appreciate everybody joining us today. Just a quick note that we have a quarterly investor presentation and a new version of the company presentation that's up on the site. Would encourage everybody to check those out.

And with that, we wish everybody safety and good health as we inch back toward normal here, and we look forward to speaking with our investors and analysts when we report our first-quarter results in May. Thank you very much.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Sean McGowan -- Investor Relations

Juergen Stark -- Chairman and Chief Executive Officer

John Hanson -- Chief Financial Officer

Thomas Forte -- D.A. Davidson -- Analyst

Drew Crum -- Stifel Financial Corp -- Analyst

Mark Argento -- Lake Street Capital Markets, LLC -- Analyst

Jack Vander Aarde -- Maxim Group -- Analyst

Martin Yang -- Oppenheimer & Co. -- Analyst

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