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*Stock Advisor returns as of November 4, 2024

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. The company does not undertake or publicly update or revise any forward-looking statements after this conference call. The company also notes that on its 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.

You can find a reconciliation of these metrics to the company's reported GAAP results and the reconciliation tables provided in today's earnings release and presentation. Hosting the call today are: Cris Keirn, chief executive officer; and John Hanson, chief financial officer. And with that, I'll turn the call over to Cris.

Cris Keirn -- Chief Executive Officer

Thanks, Chuck. Good afternoon, everyone, and welcome to our third quarter 2024 earnings call. We're delighted to report another strong quarter, highlighted the continued popularity of the Turtle Beach brand, our sustained momentum in gaming accessories and the tremendous progress toward the integration of PDP, which is running ahead of schedule. Our strategic acquisition of PDP has significantly broadened our reach and further elevated our presence across several categories, especially in controllers, which I'll speak about more shortly.

Further, Turtle Beach's brand reach and strong reputation for quality gaming accessories continues to gain fans. And just last month was named in Times World's Best Brands of 2024 feature as a Top 5 consumer electronics brand in the gaming hardware and peripherals category. This quarter, we experienced robust revenue growth, driven by increased demand for our leading gaming accessories and the benefits of our expanded portfolio. We're in the early stages of realizing the advantages of our increased scale and diversification, which are strengthening our leadership across categories.

Our unwavering commitment to innovation, top-tier execution and continuous growth continues to set Turtle Beach apart as a leader in the gaming accessories market. For the third quarter, Turtle Beach revenue was $94.4 million, up 60% compared to the same quarter last year. Excluding PDP contributions, revenues were up 15% compared to last year. Our growth continues to be driven by the ongoing success of our portfolio and strong sales of our latest groundbreaking products like the Stealth 700 Gen 3 wireless headset, a premium multi-platform headset using our unique cross-play technology.

Games industry site Game Rant noted in their review that the Stealth 700 is definitely one of the best gaming headset in the market right now and a multi-platform gamers dream. Thanks to our recent launches, we achieved sales this quarter with lower promotional spend, significantly boosting our profitability. Additionally, our strong revenue results reflect earlier-than-anticipated retail load-ins ahead of the holidays as we saw activity during the quarter, which was designed to mitigate the potential impact from the port strike. Considering these accelerated load-ins, our full year revenue guidance remains unchanged.

Our adjusted EBITDA for the quarter was $16.3 million, a substantial improvement, compared to the $1 million in the same period last year. We are pleased to see that the year-to-date growth of 7% for U.S. gaming accessories continues to outpace the overall gaming market, which has been roughly flat. Our gaming headsets revenue share increased 108 basis points in Q3 compared to the previous quarter following the launch of our new wireless headsets.

Additional share gains are anticipated during the upcoming holidays following the mid-Q3 launch of our new Stealth 700 Gen 3 premium wireless headset. In the controllers and game pads category, Turtle Beach revenue growth continued to significantly outpace the market, with a 37.9% retail sales increase year-to-date compared to the U.S. controller markets growth of nearly 3%. Notably, our Victrix Pro BFG controller and Turtle Beach Stealth Ultra, we're the second and third best-selling third-party game pads year-to-date.

Our RIFFMASTER wireless guitar controllers, perfect for Fortnite Festival continue dominating the music controller category with 97% share in the U.S. On the expense side, we continue to enhance our operational efficiencies, resulting in substantial profitability gains. Our gross margin of 36.2% for the third quarter expanded by 630 basis points year over year as a result of our focused cost optimization initiatives and the ongoing successful integration of PDP. We've seen reduced promotional spending following our recent new product launches, which we expect to increase somewhat to normal holiday levels in Q4.

It's worth noting that gross margin for the quarter would have been 38.3%, excluding ROCCAT brand transition reserves and PDP purchase accounting charges, neither of which are expected to continue moving forward. Our integration of PDP is progressing very well, ahead of schedule and continues to drive value. We now anticipate achieving total annual synergies exceeding $13 million, surpassing our original estimate of $10 million to $12 million. The expanded market opportunities from our newly combined product portfolio are exciting, and we foresee a long-term runway for growth.

Beyond the acquisition cost synergies, we anticipate that there are long-term revenue synergies due to our enhanced product lineups and strong customer relationships. Furthermore, we continue to drive margin expansion through our previously communicated initiatives, including SKU rationalization, portfolio optimization and the launch of our platform next-generation products. The result of all of this is that we're raising our full year adjusted EBITDA guidance to a range of $55 million to $58 million, up from our prior range of $53 million to $56 million. With our strong underlying fundamentals driving increased cash generation coupled with our positive outlook and view that our share price represents great value, we continue to buy back our stock during the third quarter.

In the quarter, we repurchased a value of approximately $10.1 million of our stock, bringing our year-to-date repurchases to about $25.3 million. This underscores both our continued confidence in Turtle Beach's trajectory and our commitment to enhancing shareholder value. We believe in our vision, and we are putting our resources behind it. Looking ahead, we are excited about the many opportunities in front of us.

We'll continue to focus on innovation and operational excellence, which we are successfully leveraging to expand our market leadership. Our upcoming product launches and the ongoing integration of PDP will further strengthen our position in the broader gaming accessories market. We remain committed to delivering value to our shareholders and providing best-in-class products for gamers worldwide. John will now take us through the financials in more detail.

John?

John T. Hanson -- Chief Financial Officer

Thanks, Cris, and good afternoon, everyone. As Cris noted, our third quarter 2024 revenue was $94.4 million. That's an increase of approximately 60% compared to the year-ago period and driven by increased sales of our products and from PDP. Excluding the positive impact from the PDP products, our net revenue increased approximately 15% compared to last year, highlighting the strength of our results across the board.

Gross margin in the third quarter was 36.2%, compared to 29.9% last year, which represents a 630-basis-point improvement compared to the third quarter of 2023. The increase was driven by reduced promotional spend, lower product and freight costs, partially offset by higher royalty costs due to the mix of business. Excluding PDP, purchase accounting charges and ROCCAT brand transition reserves which are not expected to continue going forward, gross margins would have been 38.3%. Operating expenses in the third quarter were $27.7 million, compared to $20.2 million a year ago and include $3.5 million in costs related to the acquisition of PDP.

Operating expenses, excluding nonrecurring items, were 24.8% of revenue, which is an improvement from 32.2% in the prior year. This improvement is primarily driven by our strategic efforts to achieve a better balance between revenue enhancing initiatives and our expense management goals. Our third quarter adjusted EBITDA improved to $16.3 million, compared to $1 million in the year-ago period. The $15.2 million year-over-year improvement is primarily the result of higher revenues combined with greater efficiencies on both costs and expenses.

On an LTM basis, adjusted EBITDA is now $35 million, which is a significant improvement and driven by the higher revenue, improved margins and operating expense leverage. Our third quarter net income was a positive $3.4 million or $0.16 per diluted share, compared to a net loss of $3.6 million or negative $0.21 per diluted share a year ago. Turning to the balance sheet. At quarter end, we had net debt of $94.1 million comprised of $107.9 million of outstanding debt and $13.8 million of cash.

The debt balance is comprised of $58.6 million outstanding under our revolving credit line and $49.3 million outstanding on the term loan we used for the PDP acquisition. Inventories at quarter end were $102.3 million, compared to $76 million at this point last year. PDP added $26.7 million to inventory and this addition was partially offset by our continued reduction initiatives in non-PDP product inventory. As Cris mentioned, during the quarter, we repurchased approximately 688,000 shares for an average price of $14.70, returning about $10.1 million to shareholders through our share repurchase program.

Given the attractive levels of the share price, and the strong fundamentals of the company and its growth trajectory. This initiative demonstrates our continued confidence in the company's long-term prospects and our commitment to delivering shareholder value. As of quarter end, we have $21.3 million in potential buybacks remaining under the buyback plan. We will continue to consider share buybacks in our quarterly capital allocation review.

Now turning to guidance. We continue to expect full year revenue to be between $370 million and $380 million, which equates to 45% growth at the midpoint compared to 2023. With strong progress on the margin front and the PDP integration progressing smoothly, we are raising our full year adjusted EBITDA guidance for 2024. We expect full year adjusted EBITDA to be between $55 million and $58 million, which increases the midpoint to $56.5 million, up $2 million from our prior guidance.

As a reminder, our 2024 guidance includes contributions from PDP beginning on March 13th, 2024 when we closed the transaction. And now, I'll turn the call back over to Cris for additional comments. Cris?

Cris Keirn -- Chief Executive Officer

Thanks, John. As we reflect on our transformation over the past year, it's clear that our strategic initiatives are paying off. The acquisition of PDP has not only expanded our product offerings but also enhanced our operational capabilities. We are now better-positioned to capitalize on market opportunities and drive sustainable growth.

The synergies from this acquisition are already evident in our improved operational efficiencies and expanded market reach. Our commitment to innovation, execution and growth remains unwavering. We are continuously exploring new technologies and product features that will set us apart in the competitive gaming accessories market. Recent innovations like our cross-play technology and the groundbreaking stealth pivot controller are just the latest testament to this commitment, and we are confident that they will drive meaningful growth in the coming quarters.

Looking ahead to the holiday season, we're optimistic about our prospects. The holiday season is a critical period for our industry, and we are well prepared with a strong, refreshed lineup of amazing products that cater to the diverse needs of gamers. We anticipate robust demand and are confident that our innovative products will resonate well with consumers. I want to thank and recognize our entire team at Turtle Beach for their excellent efforts and contributions, which have delivered another strong quarter.

We're excited to close out 2024 on a high note and remain confident about our renewed growth strategy and execution for this year and beyond to drive value for our shareholders and gaming customers. And with that, let's turn to Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Sean McGowan from ROTH Capital Partners. Please go ahead.

Sean McGowan -- Analyst

Thank you. Hi, guys. I'll just ask a couple and then maybe circle back to be fair. But just one clarification or a little more color, Cris.

When you're talking about market share, can you give a little bit more color on the headset business year-over-year share increase or changes and how that kind of breaks out console versus PC?

Cris Keirn -- Chief Executive Officer

Sure, Sean, great question. So when you look at this year, we've really upgraded across our wireless headsets line. We talked about last quarter that we introduced the new Stealth 500, 600, Atlas Air in Q2 and we drained the channel prior to that. So we saw some expected share loss up to those launches.

And here in the third quarter, we've done the same thing. We've drained the channel of the old generation of Stealth 700s and then we've reloaded the channel mid Q3 with the new Stealth 700. So when you look at our trends, we're up about 100 basis points from the prior quarter with those new launches in Q3. Even though we were draining the channel for the Stealth 700s and as we look ahead, we expect to continue to build on that as we go into the holiday.

As we normally do, we normally pick up share during the holiday season. We expect that to be the case this time as well.

Sean McGowan -- Analyst

OK. And when I said console versus PC, I realized it's not as relevant as it used to be, but what about the -- like some of the newer console like Switch? Or how is that looking?

Cris Keirn -- Chief Executive Officer

Yeah, that's a great point. And you know Circana actually switched up the way they categorize headsets, you've probably seen that across the industry. They've now combined as well the console and PC categories into one gaming headset category. We like that a lot because it really does reflect how gamers are using their accessories, very much multi-platform these days.

So if you look at the -- if you do break it down between console and PC, we are seeing larger gains on the console side. But our headsets are up as well year over year. In Q3, I believe our PC headsets were up 150 basis points in the U.S. here.

So we're seeing gains on both as we get these new products in the market.

Sean McGowan -- Analyst

OK. And then, for you, John, a couple of housekeeping type kinds of things. So when you say you don't expect the PDP inventory step-up in the ROCCAT brand to proceed going forward. You mean we won't see any in the fourth quarter.

I just want to be specific on that quarter.

John T. Hanson -- Chief Financial Officer

Right. So relative to PDP inventory step-up that is completed that we took charges in both Q2 and Q3 for that, but that is now completed. And then, relative to ROCCAT, we do not expect any additional reserves as part of the brand transition work.

Sean McGowan -- Analyst

OK. So if I dare, does that mean we could see gross margins in the fourth quarter in excess of 40%.

John T. Hanson -- Chief Financial Officer

Well, I think what -- certainly, they'll be in the upper 30% range. We would -- there is typically some higher promotional activity in Q4 in and around Black Friday, Cyber Monday, etc., for the holidays. And so, that will offset some of the other benefits. But our aggregated -- but our margins, our run rate margins going forward are certainly in the target range, which is the upper 30s, which we've previously disclosed.

Sean McGowan -- Analyst

OK. Great. And then, my last question, I guess, to you, John, G&A in the fourth quarter, the relationship of G&A in the fourth quarter to the third quarter kind of bounces around historically. Should we expect given that you don't have those -- well, maybe you do.

You have recurring business acquisition expenses in the fourth quarter? And if we exclude them, would there be a meaningful increase in G&A in the fourth quarter?

John T. Hanson -- Chief Financial Officer

So integration work, although it's progressing smoothly and ahead of schedule, as Cris noted earlier, Sean, we do expect to continue to incur some integration-related expenses, obviously, in Q4, but they'll be certainly at a much lower level.

Sean McGowan -- Analyst

And if you were to exclude that as you add back to EBITDA, would you expect these --

John T. Hanson -- Chief Financial Officer

Our expenses would rise slightly in Q4 as we invest more in terms of marketing, which is what we've historically done here which is what you've noticed.

Operator

And your next question comes from the line of Drew Crum from Stifel. Please go ahead.

Drew Crum -- Analyst

OK. Thanks. Hey, guys, good afternoon. Cris, you talked about pulling forward some shipments to avoid potential port strikes during the quarter.

Given that and based on your retail performance, where does that leave you with respect to channel inventory as you enter 4Q?

Cris Keirn -- Chief Executive Officer

Yeah, Drew, it looks really good. Channel inventory at this point, we saw it, I would say, be higher than normal as we exited Q3. And now, as we are into November, it's really at what I would call normal levels heading into holiday. So it was really a temporary call it, maybe a three-week-or-so pull in on a few of those shipments as the retailers are looking to avoid any delays from any potential port strikes.

But as we get into prepping for holiday now in November, it looks very normal compared to previous, let's call them normal holidays.

Drew Crum -- Analyst

Got it. OK. That's helpful. And then, John, I think you mentioned you would anticipate a sequential increase in promo spend during 4Q over 3Q.

But just kind of looking at that year on year, should we anticipate higher promo spend this fourth quarter versus last fourth quarter?

John T. Hanson -- Chief Financial Officer

Yeah. Certainly. The -- we're bigger. We've got more products and we have the new wireless that are now coming out of the market.

So yes, the answer is, yes, we do expect the marketing to be higher here year over year.

Drew Crum -- Analyst

OK. Makes sense. And then, maybe just one last one for me. Can you address your plans around uses of cash through the balance of the year? Should we expect you to continue to buy back stock? Or do you plan to pay off the outstanding balance on the revolver or maybe both?

John T. Hanson -- Chief Financial Officer

Sure. So the answer is, yes, obviously, it's going to be a function of collections. We do -- with certain retailers, they do have different payment terms during the holiday, a little more extended, but our cash will be focused primarily on paying down the ABL, as well as to the extent there is an opportunity for us to buy additional shares back, then we would look to do that.

Operator

And your next question comes from the line of Jack Codera from Maxim Group. Please go ahead.

Jack Codera -- Analyst

Hi. This is Jack Codera calling in for Jack Vander Aarde. Thank you. Going into 4Q holiday season, are you expecting the PDP business to have any differences in terms of seasonality? I know they're both kind of consumer electronics, very similar fit.

But do you expect to continue to contribute roughly that 28% if you back into that total revenue number?

Cris Keirn -- Chief Executive Officer

Yeah. Good question, Jack. I think that it will be pretty normal. You look at the businesses combined now between headsets, controllers, some of the specialty controllers like the RIFFMASTER, very similar seasonality to the historic headset business.

So I would say yes.

Jack Codera -- Analyst

OK. That's helpful. And then, just one other. How are you viewing the consumer? I saw some highlighted data points in the presentation, which were helpful, and you kind of mentioned the refreshed product portfolio.

Are there any other individual indicators in the mix that are giving you confidence in like a strong holiday season? Any color there would be helpful.

Cris Keirn -- Chief Executive Officer

Sure. Yeah. When you look at the gaming industry in general, we're all enjoying the benefits of a very strong Call of Duty launch. You've probably seen the numbers on that.

Black Ops 6 is doing extremely well, lots of engagement from gamers. That's good for everybody in the industry. So we are really happy to see that. We think that will help drive some of the market here even through holiday.

We've seen that historically. We are also seeing continued benefits of replacement on the pandemic cycle purchases. So all those purchases when everyone spiked back in 2020, 2021 we started to see a lot of those really kick in, in the last couple of weeks of 2023. A lot of late holiday purchases last year and that's really sustained for the peripherals categories and gaming accessories, that's really sustained and why you're seeing that accessories are outperforming the broader market this year.

So we think that's going to carry through in the holiday. There's a lot of new products that we've got out in the market. We know new releases drive share and drive additional purchases because we've got a ton of great new tech out there for gamers. So we're excited about how that's going to look, and that's why we're feeling good about the holiday.

Operator

[Operator instructions] Your next question comes from the line of Sean McGowan from ROTH Capital Partners. Please go ahead.

Sean McGowan -- Analyst

Yeah, I'm back. John, on the promotional spending that you are talking about in the fourth quarter, will all of the impact of that increase both sequentially and year over year. Will all of that be seen in the gross margin? Or is it going to be kind of split also between selling, marketing and the gross margin level?

John T. Hanson -- Chief Financial Officer

Yeah. So when we talk about promotional spend, the reference really is to the gross margin Sean? From my perspective, right? So yes, it's margin impacting. But marketing outside the opex, marketing opex we do expect to rise in the fourth quarter over Q3 for all the reasons, right? It's a big quarter, very important. And then, there's overall different market dynamics with Black Friday and as well as Cyber Monday, etc.

Sean McGowan -- Analyst

Right. OK. And then, last one truly for me on -- for Cris. Can you talk a little bit about some of the new categories outside of controllers and headsets.

Some of the things you either have launched or planning to imminently launch -- give us an update on what's going on with some new segments?

Cris Keirn -- Chief Executive Officer

Sure, sure. Yeah. We've refreshed a bit of the mice and keyboards here in the quarter. You saw the new Kone 2 mice that launched, that was looking historically at ROCCAT, the flagship product.

Got some great reviews out there on the Kone 2. That will help support us as we transition into the Turtle Beach brand for PC. We're seeing very good results, as we mentioned earlier on the PC headset side, and we are seeing those gamers come along with us in the category. So happy with the progress there, and the team has done a great job on the brand transition.

Obviously, that's always a large task when we are moving from one brand to the other, and the team has done a fantastic job there. Some of the other categories, music, specialty controllers are really interesting for us this year. If you look at the market for the RIFFMASTER as an example, PDP team did a great job launching that product. That market is around, I want to say, $6.5 million or $7 million of retail sales so far this year of which we own 97% of that.

So that's been a nice upside surprise for us. The traction that Fortnite and Fortnite Festival is gaining with some of the really fun things that Epic is doing in that space. It's great to see that those gamers are out there, and we've got some new gear for them to play with outside of the normal sort of traditional controllers and headset categories. So that's really exciting.

We've also got some really cool products coming up in the fight stick category as well. So just with the combined company portfolios between Turtle Beach and PDP, just some really fun stuff coming out here in the holiday and into next year.

Operator

And your next question comes from the line of Martin Yang from OpCo. Please go ahead.

Martin Yang -- Analyst

Hi. Thank you for taking my question. I have a question regarding product design this year, especially the optics on your Stealth 700 Gen 3 both looks have a -- do have a very refreshed design. I think, similar changes are also consistent with your desktop app.

So can you maybe talk about is there anything new regarding the product design and how that implies on your future product both in headsets and other categories?

Cris Keirn -- Chief Executive Officer

Martin, great question. This is something we love to talk about internally and externally. We've really made a lot of investments in our R&D over the last several years to bring these really cool products to market this year. It's not just on the external design that you're seeing on that 700 and some of the improvements that you noted there on the desktop app and some of the investments we've made there.

The team has done a great job of also platforming all these new products on carbonized chipsets, and that's what you're seeing in the financial performance with the product mix move into these new products and really helping our business results, as well as bring in some really exciting products out to gamers. So we are excited about the new look and feel of all the products, all the great functionality that's in these products. It's what you're going to see from us moving forward on the innovation front. With the new PDP team that's onboard, it just adds to the brain power that we've got behind all these products and the expertise that we've got in the gaming industry.

So I thank you for noticing, number one. It's something that we take a great deal of pride in here through the whole organization and we love bringing these kind of products to market.

Martin Yang -- Analyst

Great. My next question is about how you feel about the potential uplift from a new crop of games in holiday season, for example, Call of Duty: Black Ops 6 seems to be -- has a lot of traction. Are you seeing a concurrent lift to your headsets demand because of some of the higher profile games launching into the holiday season?

Cris Keirn -- Chief Executive Officer

Yeah. It always has a good effect across the accessories space when you see a strong launch like we're seeing with Call of Duty. So we have seen that lift over the last few weeks. We did anticipate some lift, so that's included in our guidance for the year.

But as you get that product, if it continues to sustain, if you get some new surprises, which we always seem to have every year. Some nice surprise launches out there that drive engagement. That could be another catalyst for us for Q4 and as you go into 2025. This is why we're feeling good about the holiday for gaming.

If you look at how accessories have been doing all year, we don't really see that falling off here in Q4. We think that with all the new products on the market with great games out there like Call of Duty, as you noted, we are really in a good position here to see a strong holiday. So let's see how this plays out. We've got some -- a lot of time ahead of us here yet, as you know, the last two months of the year are always very heavy and a huge part of our years.

But we're feeling good about how we're positioned going in.

Operator

There are no further questions at this time. I will now hand the call back to Mr. Cristopher Keirn, CEO, for any closing remarks.

Cris Keirn -- Chief Executive Officer

Thank you, operator, and thanks, everyone, for joining the call. Have a great day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Unknown Speaker -- Investor Relations

Cris Keirn -- Chief Executive Officer

John T. Hanson -- Chief Financial Officer

Sean McGowan -- Analyst

John Hanson -- Chief Financial Officer

Drew Crum -- Analyst

Jack Codera -- Analyst

Martin Yang -- Analyst

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Turtle Beach (HEAR) Q3 2024 Earnings Call Transcript was originally published by The Motley Fool