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Turtle Beach (HEAR 5.29%)
Q1 2023 Earnings Call
May 04, 2023, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Turtle Beach first quarter 2023 conference call. My name is Lateef, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[Operator instructions] Delivering today's prepared remarks are our nonexecutive chairman of the board, Terry Jimenez; chief executive officer, Juergen Stark; and chief financial officer, John Hanson. Following their prepared remarks, the management team will open the call up for any questions. As a reminder, the conference is being recorded. I will now turn the call over to Alex Thompson from investor relations.

Alex, you may begin.

Alex Thompson -- Investor Relations

Thank you, operator. On today's call, we will be referring to the press release filed this afternoon that details the company's first quarter 2023 results, which can be downloaded from the Investor Relations page at 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 also may cause actual results or events to differ materially from those described in our forward-looking statements.

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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, we 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. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation.

The company, its directors, and certain of its executive officers are participants in the solicitation of proxies from the company's shareholders in connection with its 2023 annual meeting. The company intends to file a definitive proxy statement and a white proxy card with the SEC in connection with any such solicitation of proxies. Shareholders are strongly encouraged to read the proxy statement, accompanying proxy card, and all the other documents filed with the SEC carefully and in their entirety when they become available as they will contain important information, including information regarding the identity of the participants in the solicitation and their direct and indirect interests by security holdings or otherwise. Next, we'll get a statement from Terry Jimenez, the company's nonexecutive chairman of the board of directors.

Terry Jimenez -- Nonexecutive Chairman

Thanks, Alex, and good afternoon, everyone. I'm pleased to make a statement on the call this afternoon to briefly cover our CEO transition plan and governance actions, all of which was announced in a press release earlier this week on Monday, May 1st. The board has taken a series of actions consistent with its commitment to acting in the best interest of its shareholders and ensuring best-in-class governance practices. From this, the board has implemented a CEO succession plan with a transition date of June 30th, 2023.

We separated the chairman and CEO roles going forward. I was elected as the new independent chairman, accepted the decision by two long-tenure directors, Juergen Stark and William Keitel, to not stand for reelection at the 2023 Annual Stockholder Meeting. The board intends to appoint a shareholder representative in Mr. Keitel's place to be nominated for election at the 2023 annual meeting.

The board reorganized the composition of the board committees, including new committee chairs, notably all of whom are women. And importantly, the board continues to be focused on value-enhancing or strategic actions that would be in the interest of all shareholders. Further details of our announcement can be found in our separate release referenced earlier. On behalf of the board of directors, I want to thank Juergen for his leadership over the past 10 years.

He has overseen the company's transformation into a leading accessory maker poised for growth across valuable gaming categories. I also want to thank Bill Keitel for his many years of service and contributions as a director. Finally, I am honored to take on the role of board chair and to continue working closely with my fellow board members and management to engage with and enhance value for all Turtle Beach shareholders. I believe there is significant value and upside for the company and its shareholders, and I look forward to working with the team and the board to unlock that upside value.

With that, I will pass it over to Juergen to cover the first quarter's results.

Juergen Stark -- Chief Executive Officer

Good afternoon, everyone, and thank you for joining us. I'm pleased to discuss our first quarter 2023 results, which came in above expectations, and provide the context for our increased 2023 outlook. During the first quarter, we delivered net revenues of 51.4 million and an adjusted EBITDA loss of 2.3 million. Year-over-year revenues are up 10%, consistent with the growth prospects, strong strategic positioning, and progressive recovery of the gaming market that I articulated in March.

Adjusted EBITDA is improved, consistent with our expectation to return to positive adjusted EBITDA after last year's marketwide challenges. After all, this business generated 190 million in adjusted EBITDA in the five years from 2017 through 2021. I'll start with some observations on the state of the market in our business through the first three months of the year. Both the gaming market and operating environment have improved compared to last year when the industry and economy faced significant macroeconomic challenges.

Some headwinds still remain such as higher-than-normal promotional activity and discretionary spending caution among consumers given the economic issues at hand, including inflation, rising interest rates, and the continued threat of recession. However, we are encouraged by the latest industry data as gaming accessory sales benefited from a strong tailwind in console sales. In fact, Sony reported that PlayStation 5 shipments in Q1 were the highest of any console in gaming history, up over 4 million units compared to the year-ago period. U.S.

Circana, formerly known as NPD, reported U.S. console headset sell-through increased over 7%. Additionally, U.S. channel inventory improved in Q1.

Our inventory levels are at the lowest since the pandemic surge. The PC gaming market recovery is trailing console with heavy discounting levels, but we expect this to subside as we progress through the year. We're encouraged by the improvements we are seeing in the gaming market. Looking at our performance across respective gaming accessory categories, we continue to lead the console headset category by far as Turtle Beach console headset brand outperformed the broader headset market's growth based on U.S.

Circana data. Our highly acclaimed wireless Stealth 600 headset continued to be the best-selling headset series by revenue in the quarter and the Recon 50X and 50P headsets were the best-selling models by units. I mentioned our exciting product plans on our call in March, and we've recently launched our ultra-premium Stealth Pro multiplatform gaming headset, which brings gamers the absolute pinnacle of gaming audio in quality and comfort. At 329.99 MSRP, the Stealth Pro continues to collect praise from gaming review outlets.

GamesRadar gave it a five of five rating along with their Editor's Choice award and called it "a masterpiece of an all-in-one multipurpose gaming headset." Importantly, this headset line is multiplatform, working perfectly across Xbox and PlayStation consoles, as well as PC and for mobile gamers. While still very early in the launch, we are extremely pleased with the response from consumers and resulting early sales, which were coming in above our expectations. Looking at our PC accessories category, the market recovery is lagging console headsets with U.S. Circana reporting PC gaming headset, keyboard, and mice sales down approximately 13% year over year for Q1.

Despite this, our ROCCAT brand products have posted year-over-year sales growth in all three categories. We continue to launch compelling new PC gaming products. We released the Magma Mini 60% gaming keyboard, which has a smaller footprint that is perfect for PC gamers with large mouse movements and is fully illuminated with five programable zones, showcasing ROCCAT's stunning AIMO RGB lighting. We have exciting plans for our PC category ahead and look forward to continuing our progress.

Our flight simulation and gamepad controller products performed well during the quarter, and we are proud to have our first flight simulation product, VelocityOne Flight, launched late 2021, continue to post the No. 1 sales position in the U.S. for flight simulation products. The U.S.

gamepad controller market was down roughly 13% year over year in Q1, but sales of our products grew over 25%. We have more exciting product launches in these categories as well. Our long-term strategy of becoming a top provider of gaming accessories across multiple categories and on all platforms is tracking well, as shown by the above highlights and our outperformance of the market this quarter. Our strong brand, innovative, high-quality products and operational execution allows us to capitalize on the additional opportunities created during a market improvement.

This is reflected not only in our first-quarter results but also in our increased outlook of 10% to 12% revenue growth, as I'll discuss shortly. I'll now pass it over to John to cover the financials, after which I'll provide additional comments on the quarter and outlook. John?

John Hanson -- Chief Financial Officer

Hey, thanks, Juergen, and good afternoon to everyone. For the first quarter, we reported revenue of 51.4 million, a 10% year-over-year growth compared to 46.7 million a year ago, reflecting a stronger U.S. console gaming headset market, increased consumer demand, and strong product performance. The double-digit year-over-year increase is a good start toward the 2023 revenue growth guidance of 10% annual growth we provided in March.

Gross margin in the first quarter was 27.5% compared to 30.1% in the year-ago period, reflecting higher promotional spend in light of continued competitive discounting, which was partially offset by lower freight and logistics costs. The higher competitive discounting really started in Q2 last year, and while it's improving, it was a headwind in Q1, as we expected. As mentioned previously, freight costs continue to decline, and we have already started seeing the benefit in this quarter with higher sales accelerating the inventory pace to lower rates and actual rates tracking a bit lower than expected. Operating expenses in the first quarter were 20.6 million compared to 22.3 million in the year-ago period.

First-quarter recurring operating expenses declined nearly 13% year over year, which was primarily driven by the expense management initiatives we undertook in 2022, as well as lower marketing spend to align with our product launch and sales plans. Our first-quarter adjusted EBITDA loss was 2.3 million compared to a loss of 5.7 million in the year-ago period.The year-over-year improvement is primarily driven by higher revenue, as well as the operating expense management initiatives we implemented last year. We are on plan to generate adjusted EBITDA improvements throughout the year. Non-GAAP net loss for the first quarter was $4.4 million or $0.27 per diluted share compared to non-GAAP net loss of $6.3 million or $0.39 per diluted share in the year-ago period.

We expect our effective tax rate for the full year to be approximately 20%. Turning to the balance sheet, at March 31, 2023, we had 20.6 million of cash and no outstanding borrowings on our revolving credit line. Inventory at March 31st, 2023, were 65.2 million compared to 117.4 million at March 31, 2022. Worth noting and as Juergen mentioned, our inventory levels at quarter-end are at their lowest levels since the pandemic surge.

Cash flow from operations was 28.8 million in the quarter, which was an improvement of $42 million year over year. And now, I'll turn the call back over to Juergen for additional comments. Juergen?

Juergen Stark -- Chief Executive Officer

Thanks, John. As I said, we're pleased to deliver first-quarter results above our expectations, particularly given the still challenging environment, which demonstrates our team's commitment to executing well on our strategy in an improving gaming market. On our March call, I discussed the positive underlying trends in gaming.I'll reiterate a few. According to Newzoo, the number of global gamers is expected to grow by 335 million through 2025.

Gamers are also spending more on gaming hardware with annual spend per gamer up over 20% since 2020. Even in last year's slump, consumer spending on video game hardware, content, and accessories all continued to trend well above pre-pandemic levels throughout the year. We also remain encouraged by the higher-quality slate of AAA games with several setting franchise records and the strong outlook for games this year. We continue to expect new-generation Xbox and PlayStation supply to significantly improve, with DFC forecasting a 60% increase in PlayStation 5 sales for 2023 versus 2022.

Sony, setting an all-time shipment record versus all consoles in Q1, is a great start. As we communicated on our last call, we continue to expect a progressive improvement in our financial performance in light of a healthier gaming market and strong portfolio of existing and new products. Given our performance in Q1 and positive outlook for the year, we are increasing our revenue outlook to a range of $265 million to $270 million, which would reflect growth of 10% to 12%. This is mainly driven by our expected outperformance of gaming markets in specific categories.

The share gains in the first quarter provided a good start on that, and the phenomenal launch of our ultra-premium Stealth Pro multiplatform headset, as well as the exciting launches yet to come, are expected to contribute. We are increasing our adjusted EBITDA guidance to a range of 6 million to 8 million, driven by an increase in expected revenues and continued tight cost management. As we've noted, this still includes significant headwinds, which we expect will abate as we progress through the year and, therefore, provide for a much better level of profitability in 2024. For Q2, we expect a similar level of revenues as Q1 and somewhat higher marketing spend to support the recently launched Stealth Pro line.

As I said, I'm pleased with the strong execution we displayed in the first three months of the year and the positive momentum that has created for the balance of the year. As we say every quarter, gaming is a great market to be a leader in, and we continue to position ourselves to capitalize on the additional opportunities as the market recovers. The key pillars of our strategy remain intact. First, continue to lead in the $1.4 billion console gaming headset market where we have maintained leadership, by far, for over 13 consecutive years.

In addition to the recent Stealth Pro launch, we have a very strong portfolio plan through 2024 to expand our market leadership position. Second, continue to expand our PC gaming portfolio of headsets, keyboards, and mice and grow our share in the $3.2 billion PC accessories market. As multiplatform gaming trends continue to rise, we feel we're in a good position to offer gamers the portfolio of accessories for all platform experiences. While the PC accessories market was very challenged for all participants this past year, we were encouraged by our share gains this year and have exciting plans for this category well into 2024.

Third, drive continued expansion and growth in our gamepad controller and simulation products that we successfully entered in 2021. These adjacent gaming accessory categories allow us to leverage the core competencies of Turtle Beach and expand the markets we can generate revenues from. And fourth, continue to identify and selectively evaluate other growth opportunities to increase our addressable markets, including new product categories and expansion in target geographies, as we have with Korea and Japan. As I said on our call in March, this strategy has and will continue to enable us to take full advantage of the compelling long-term trends in the global gaming market and fulfill our objective to drive profitable growth.

Our goal is to continue to create shareholder value by executing on our strategy and delivering on our long-term targets of 10%-plus annual growth at 10%-plus adjusted EBITDA margins. Given that I will be stepping down on June 30th, this will be my last Turtle Beach earnings call. I'd like to first thank Bill Keitel for his valuable contributions over the past nine years. I still recall being told, we'd "never be able to get him onto our board given his stature as one of the most highly regarded CFOs in the country." Thank you, Bill.

Thank you as well to an amazing team here at Turtle Beach. It's been an honor to lead the company for over 10 years. With the excellent team in place here, this is a good time for me and a good time for the company to make a transition. In the past 10 years, we've worked ourselves out of a debt-laden balance sheet and managed through multiple years with challenging market conditions, including 2022.

We've executed well through, as the OpCo analyst put it, "violent demand supply swings," including significant outperforming the market in the 2018 Fortnite and 2020 pandemic-driven surges. This team has led our continued dominance in console headsets while diversifying into adjacent gaming categories to enable our long-term growth. Our current business and portfolio plans through 2024 are the most exciting we've ever had. I'm confident the business is well-positioned for success and in good hands to drive value creation going forward for all of our stakeholders.

While I'm excited to have time to spend on other activities, I will really miss the team and the company. With that, let's turn to our Q&A.

Questions & Answers:


Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from the line of Mark Argento of Lake Street. Your question please, Mark.

Mark Argento -- Lake Street Capital Markets -- Analyst

OK. Thank you. Juergen, congrats on new chapter. It's been fun working with the company over the last 10 years.

But looking forward to the next chapter, and hopefully, to experience a little bit more of that great country we got and getting to -- point and do a little bit more flying. So, exciting times for you. But hats off. Just wanted to drill in a little bit on a couple of things that stuck out to me in the quarter.

In particular, the inventory levels, I think you guys worked inventories down fairly nicely. I guess the question is, in terms of refill cycles, do you feel like you got enough inventory here as, hopefully, things pick back up going throughout the year?

Juergen Stark -- Chief Executive Officer

Yeah. Thanks, Mark, and appreciate your comments. You are one of the folks I'm also going to miss frankly, after more than nine years of working together. And I certainly appreciate your great coverage of the company.

On the inventory, so our inventory, lowest level since the pandemic surge starting in April 2020. So, we are in a good position. We still plan to end the year with lower inventory, but it will come up depending on holiday load in the next couple of quarters.

John Hanson -- Chief Financial Officer

Functions phasing.

Juergen Stark -- Chief Executive Officer

Yeah. Just phasing of the revenues and the load-in.

Mark Argento -- Lake Street Capital Markets -- Analyst

Great. And then in terms of the overall buying patterns, obviously some pretty good console sales here in the front half of the year. What's the typical attach rate in terms of when you see a console get sold through and you could actually attach a headset there? So, should we see more of a pickup Q3, Q4? Is that more of a 2024 event?

Juergen Stark -- Chief Executive Officer

Yeah, that's a good question. There's a percent of consumers who will buy a console and accessorize it. Mainly the new -- some of the new entrants. That's not a huge effect, but it does have an effect.

And I think the much better supply situation for PlayStation for sure setting a quarter record, which was quite a surprise, as well as Xbox, contributed to the over 7% growth that we saw in the U.S. on console headsets. And we do expect that the console supply will continue to improve. I think frankly, they are out of the phase of the console constraints, and that certainly will have a positive effect on the market this year.

Mark Argento -- Lake Street Capital Markets -- Analyst

All right. And just one last one in terms of gross margins, nice improvement at least relative to kind of where we were or where our model was. What's kind of the new normal would you think in terms of kind of run rate gross margins in, I call it, not a highly promotional but more of kind of a normalized environment?

Juergen Stark -- Chief Executive Officer

Yeah. Good question. I'm glad you are asking. We are maintaining our long-term target of mid-30s gross margins, right? This year, we expect -- still expect 28% to 30% gross margins, and that's really driven by continued freight costs that are higher than normal, but rapidly coming down.

So, that's a very reliable improvement that I think will be well past going into 2024, and higher competitive discounting, which still remains some in counsel and more severe, I would say in PC, that we also expect to improve over time. But those two things are going to have an effect still about $10 million on the gross margin line and $10 million on the EBITDA line that I'm hopeful going into 2024 will be kind of completely out of our system.

Mark Argento -- Lake Street Capital Markets -- Analyst

Great. Appreciate it, and again, good luck. Thank you, Juergen.

Juergen Stark -- Chief Executive Officer

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Martin Yang from OpCo. Your line is open, Martin.

Martin Yang -- Oppenheimer and Company -- Analyst

Hi. Thank you for taking my question. Juergen, it's been phone coming covering and we'll definitely miss you on future calls. I first want to ask about the Stealth Pro products.

It's been a while since you take position in the ultra-high premium segment. So, two questions on that. First, why does it take so long for you to address this segment again? And then the second question is how meaningful is this segment to you or to Turtle Beach?

Juergen Stark -- Chief Executive Officer

Yeah. Thanks, Martin. You know, a long time ago, we dominated the highest-price tier as well, and we have and continue to really lead by far the mid and the upper mid-tier. But you're right, we haven't been in that highest tier.

And I will tell you, we have had plans for more than a year and a half, two years to reenter that market. The reason we haven't done it is because the pandemic created such a headache with semiconductors that we had to divert engineering to replatform wireless headsets and essentially protect that very large revenue stream for the business, which we did successfully. But call it an emergency redirection of R&D that really started late in 2020 and continued through 2021, frankly, that forced us to divert resources from the Stealth Pro. And so, we just as a matter of priorities had to make that move.

And frankly, we're very excited that at long last we can take over what we think will be the king of wireless in the premium tier. And certainly, the reviewers are some of them are even saying that's a fair claim that they're making King of wireless. So, very excited. The top tier is about, I believe, about 12% of the revenues for the overall market.

So, it's meaningful and given that we've had no share above 200, that 12%, all of the share gains will be accretive to the overall economics of the business and our overall market share.

Martin Yang -- Oppenheimer and Company -- Analyst

Got it. Thank you for the details. My second question is about potential new products and your view on new emerging product categories. I'm referring to the handheld gaming trends where Steam Deck plus other PC like game-held and cloud handheld hardware or emerging on market seems to have certain positive initial feedback from the players.

Do you have a view on that? And then, if so, be sure to play a role in that segment. What are the angles?

Juergen Stark -- Chief Executive Officer

Yeah, appreciate the question. So, we are not focused right now on developing our own console, handheld or otherwise. Our simple view is the more places people can game and the easier it is for them to game the more opportunity we have to sell all of our accessories, particularly headsets, which are just as useful on those platforms or cloud gaming if you want to play multiplayer. You and I would also note that we've released some mobile gaming products that work very well with mobile, but don't have any immediate plans to enter the very complex hardware console category itself at this time, I will say.

Martin Yang -- Oppenheimer and Company -- Analyst

Thank you. I appreciate the answer.

Juergen Stark -- Chief Executive Officer

Thanks, Martin.

Operator

Thank you. Our next question comes from the line of Sean McGowan of ROTH MKM. Your question please, Sean.

Sean McGowan -- ROTH Capital Partners -- Analyst

Thank you. Hi, guys. Yeah. Let me start off, too, Juergen, by saying it's going to be weird to cover this company without you at the helm.

I met you before you were even there, before the Parametric stuff, and then worked with you side by side writing a lot of these press releases. So, it's going to be unusual. Wish you the best. Yeah.

So, let me jump in first with a clarification question on the market being up. I think, did you say 7.7% and is that console only or is that console and PC from Circana, whatever they call themselves?

Juergen Stark -- Chief Executive Officer

Yes, Circana or NPD. Thanks for the kind remarks, Sean. I remember our very first interactions quite well actually, and I'll miss working with you as well. So, the console headset is up 7.7%.

That's U.S. console gaming headsets the PC category, headsets, keyboards, and mice kind of varied some down more, some down less but came in the U.S. at about 13% down versus up for console. And those are U.S.

numbers in general. Europe is faring worse than the U.S. and the market down there. And not in every case in every country in Europe, but generally, I think Europe is recovering more slowly from a gaming and macroeconomic standpoint.

Sean McGowan -- ROTH Capital Partners -- Analyst

Thank you. And following up on Mark's question before on the gross margin, so I mean, you're pretty clear on what your expectations are. Do you think you could be at that kind of mid-30s rate for the fourth quarter as you exit the year? I know there's a lot of operating leverage within that gross margin line.

John Hanson -- Chief Financial Officer

I think we -- certainly, the Q4 should have better -- always has better margins or typically has better margins because of the operating leverage we gain on fixed opex costs. And again, I think that a lot of the headwinds on gross margin should hopefully be out of our system by the time we're entering 2024. I would definitely expect gross margins in Q4 to be into the 30s for sure, but maybe not at quite at the mid-30s level depending on what happens with discounting and mainly discounting, because I think the freight rates will be largely passed by that time.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK, great. That's helpful. Because that -- and frankly, because what I'm -- the reason I'm pushing on that is I'm having a little bit of trouble getting to 8 million, the upper end of your guidance range on EBITDA, without that, particularly since I think we're assuming a lot of reduction in G&A, putting aside what might happen going forward. But I'd be willing to cut it that much.

So, it sounds like maybe gross margin is going to be better. But do you think that the level that we saw of G&A in the first quarter, is that indicative of what we should expect each quarter going forward, or could it be lower?

Juergen Stark -- Chief Executive Officer

G&A, the marketing costs will go up a bit in Q2. And then we will be roughly stable, a little bit higher in terms of marketing for Q3. And then Q4 will go up, you know, low single-digit millions just because that's a much heavier marketing period.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. All right. That's helpful. Thanks a lot.

Good luck, Juergen. See you soon.

Operator

Thank you. Our next question comes from the line of Drew Crum of Stifel. Please go ahead, Drew.

Drew Crum -- Stifel Financial Corp. -- Analyst

OK, thanks. Good afternoon. And Juergen, best of luck. It was a pleasure.

Maybe just a follow-up on a question that Mark asked earlier. I'm not sure I got the right answer here. But what is your sense, Juergen around retailers' willingness to take on more product following a period of de-stocking? Do you have good visibility on the second half of conviction that retailers are going to come back and restock shelves? And then I have a follow-up.

Juergen Stark -- Chief Executive Officer

Sure. So, we are seeing, I would say, a little less conservatism from retailers, and some in particular are realizing that there in stock levels suffer when their inventory levels are too low and are making some moves. But in general, I think the retailers are still cautious. So, the Q1 results came in based on sell-through and in a bit of less conservatism on the retail inventory side, particularly with a few.

We do expect that they will remain somewhat conservative on inventory until they really see multiple quarters of rebound. They are not at such a low level that they are out of stock or things like that. But our guidance does not forecast some heavy restocking by the channel during the year. It's really largely driven by the assumption that the market will be roughly flat, maybe up a bit, depending on the category.

But the product launches we have made and those coming will allow us to drive share gains and outperform the market and deliver 10% to 12% revenue growth.

Drew Crum -- Stifel Financial Corp. -- Analyst

Got it. OK. And then you mentioned the promotional activity in the PC category. Do you have excessive inventory there or are you lean on inventory? You are just using promotion to maintain or gain share.

And John, I think you mentioned that the promotional spend, that really spiked in 2Q last year. Once you anniversary that, should we assume that this will be gross margin neutral to positive by the second half? Thanks.

Juergen Stark -- Chief Executive Officer

Yeah, good question. So, PC is obviously a much, much smaller part of our business, but we are still working to reduce our inventory levels in PC. As I believe many others in the category are, as evidenced by many of the large market share players driving still very heavy promotions. And as a smaller player, promotional activities by the large player really has -- makes our life more difficult in terms of moving our inventory levels down and driving sell-through.

It was very encouraging, as I mentioned, to see that the PC markets in the US were down significantly, but we actually generated growth in all three categories despite the heavy -- continued heavy competitive discounting. We do believe that that will subside as we go through the year. Hard to tell if that will happen by Q4. Q4 is obviously a key quarter to move tonnage, so to speak.

So, it really depends on how much progress everybody's able to make between now and Q4 in terms of what they may still need to do or not need to do in Q4 in terms of discounting.

Drew Crum -- Stifel Financial Corp. -- Analyst

OK. Thanks, guys.

Juergen Stark -- Chief Executive Officer

Sure. Thanks, Drew.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Jack Codera of Maxim Group. Please go ahead, Jack.

Jack Codera -- Maxim Group -- Analyst

Hi. This is Jack Codera calling in for Jack Vander Aarde. Thanks for taking my question. I might have missed this, but last quarter you mentioned expectation for noncomp product mix.

The target was about, I think 25% overall. I was wondering if you could give any color what that was for 1Q '23 and then given the slightly improved guidance. Is that still the expectation for the full year? Thank you.

Juergen Stark -- Chief Executive Officer

Yes. So, we are not going to provide this every quarter. We'll provide the annual results because the quarterly results will move up and down a bit depending on the mix and in particular, depending on which products launch when. But our share gains across all of our categories in many of our markets, were obviously very encouraging, and we're pleased with the continued success of the diversification of the business and remain on track to have 2025 plus percent of our business outside of console headsets this year.

Jack Codera -- Maxim Group -- Analyst

OK. That's amazing. That's helpful. That's all for me.

Thank you.

Juergen Stark -- Chief Executive Officer

Thanks, Jack.OperatorThank you. We have no further questions at this time. Now, I'll turn the call back over to Juergen Stark for closing remarks. Juergen?

Thank you. It's been a pleasure hosting these calls. I'll miss the team and the analysts and doing these calls with John. And thank you again for your participation and interest in our company.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Alex Thompson -- Investor Relations

Terry Jimenez -- Nonexecutive Chairman

Juergen Stark -- Chief Executive Officer

John Hanson -- Chief Financial Officer

Mark Argento -- Lake Street Capital Markets -- Analyst

Martin Yang -- Oppenheimer and Company -- Analyst

Sean McGowan -- ROTH Capital Partners -- Analyst

Drew Crum -- Stifel Financial Corp. -- Analyst

Jack Codera -- Maxim Group -- Analyst

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