Sonos, Inc. (SONO) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Sonos Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cammeron McLaughlin. Please go ahead. Cammeron McLaughlin: Thank you. Good afternoon, and welcome to Sonos second quarter fiscal 2021 earnings conference call. I am Cammeron McLaughlin. And with me today are Sonos' CEO, Patrick Spence; Brittany Bagley, CFO; and Eddie Lazarus, Chief Legal Officer. For those of you who joined the call early, today's hold music included highlights from the recently launched artist-curated stations by M.I.A and Ghostface Killah on Sonos Radio HD. Patrick Spence: Thanks Cammeron and hello everyone. We are thrilled to yet again report a record quarter for Sonos. I first want to recognize the fantastic work by our people and our partners during this challenging time. These results are a testament to all of the hard work they've put in every day. And I am so proud and very grateful. Our second quarter results exceeded our expectations as we experienced even stronger than expected demand for all of our products, and our team did an incredible job meeting as much demand as they could in the quarter. As a result of our strong second quarter performance, we are increasing our revenue and adjusted EBITDA outlook for the year. Our strong results are a testament to the fact that we have a unique model that serves customers and enables us to build a sustainable profitable business. The power of our business model is that customers can start with one product and expand the more over time. And our customers have proven that they do just that. We are experiencing tremendous demand for our newest product Roam from new and existing customers alike. Roam is not only our smartest and most versatile speaker, it's also our most affordable. Roam provides the opportunity for millions of new customers to get started with Sonos and is the right product at the right time, as the weather warms up and we begin to gather again with friends and family. Eddie Lazarus: Thanks Patrick. So, let me provide just a brief update on our cases against Google. As background and as I shared in our investor event in March, we estimate that Google infringes over 150 U.S. utility patents from 30 different patent families. All of those patent families are still alive and we continue to obtain high value patents from them. Brittany Bagley: Thank you, Eddie. We are excited to report another quarter of stellar results, further solidifying our ability to deliver a record year. The strong demand for our products and the fact that our customers have proven that they will wait as they work to fulfill their orders, further demonstrates the power of our offering and brands. Let me add some color to our results, starting with the second quarter. We delivered adjusted EBITDA of $48.5 million compared to a loss of $28.4 million last year. Our adjusted EBITDA margin expanded to 14.6% during the quarter. We were able to deliver this tremendous result with exceptionally strong gross margin, top line growth and ongoing operating expense leverage. This is also the first Q2 in our history where we have been net income positive, and we are pleased to see more consistent profitability across our quarters. Revenue in the quarter increased 90% to nearly $333 million. This anniversary, the 17% year-over-year revenue decline in the prior year quarter, which stemmed from partner inventory rebalancing and retail store closures at the start of the COVID-19 pandemic. The outperformance versus expectations was largely a result of our ability to fulfill more demand. This was driven by ongoing supply chain capacity investments, as well as improved shipping and logistics processes. Even with the improved supply position in the quarter, we continue to be out of stock on a number of our products, which further points to the strong demand we are seeing. Operator: Our first question will come from Katy Huberty of Morgan Stanley. Please go ahead. Katy Huberty: Thank you. Good afternoon and congratulations on the really strong results. As I think through guidance, you've passed through the revenue upside from the March quarter and some incremental upside that you're assuming from -- it sounds like the Roam, but the EBITDA outlook for the next two quarters is lower than three months ago. So, can you just walk through some of the pressures in more detail that you expect over the next couple of quarters? It sounds like it's a combination of mix and the supply chain dynamic. And then maybe on supply, just comment on where you're seeing the biggest bottlenecks and where you see costs increasing in the back half of the year. Brittany Bagley: Hey, Katy. Yeah. Happy to. So, as a reminder, we don't give quarterly guidance, but we give annual guidance. And so, we are increasing our annual outlook. We're really excited with the increase we're able to provide on both revenue and EBITDA. But we are not increasing our gross margin outlook, even though we had pretty incredible gross margins in Q2. And that's really because we're expecting increasing component costs, some need for additional airfreight to mitigate the impact of those components shortages and the smaller benefit from product mix in the second half of the year. So that's really impacting the gross merging hold relative to our low value last quarter. In terms of supply, we are seeing same impacts that I'm sure you're hearing from all the companies across the PE landscape, which is -- there's a general semiconductor shortage out there and everyone's trying to figure out how to get their components and the volume that they need. And we're in the same place on that as you know the broader industry. Katy Huberty: Okay. Thank you. And then, can I just ask a follow-up to Eddie. Just on the back of the ruling in Germany today and expected ruling in August in the U.S., one of the questions that I hear from investors is what happens after these rulings? What's the typical timeline, or the construct in which a financial payment or stream of payments would be decided once these rulings come in? Eddie Lazarus: Katy, thanks for the question. I wish I had a definitive answer for you. It's going to depend, I think, in large part on what the ITC rules and exactly what the details of that are. We feel very good about our position at the ITC. But what's involved with the ITC is not a damages case, but an importation ban, and what the implications would be on that for discussions between Sonos and Google is just going to have to wait and see exactly what the court rules. From our perspective, the real importance of the German case is that, it's a demonstration. It's a ruling that shows we have strong and valid patents, not only here in the United States, but also in Europe, and that Google does in fact infringe them. And we're going to keep pursuing that line and showing over and over again, whether it's at the ITC or in Europe or in Texas or wherever it may be, that is the case. And we hope and expect that Google will recognize the validity of our position, and come to the table with it. Katy Huberty: Thank you very much. Operator: Our next question will come from Tom Forte of D.A. Davidson. Please go ahead. Tom Forte: Great. One question and one follow-up. So, the first question I have is, I know it's early as far as the product was just released, but how are you thinking about the ability to Roam to bring new customers to Sonos, and then the opportunity to get them to buy additional Sonos products over time? Patrick Spence: Hey, Tom. It's Patrick. We are feeling very good in terms of Roam's ability. Like you said, it's early, but we think this is one that could not have been better time as the world reopens. You've probably seen the -- just tidal wave of positive reviews that have been out around the products. The momentum, as I mentioned in my comments, has been tremendous and I'm seeing on social media and hearing anecdotally, of a lot of new people that are coming into Sonos as a result. So, I believe this is going to be a key driver, as we think about new homes going forward and tapping deeper into the kind of audience that we've been trying to penetrate. And I think we'll learn over time, but I don't see any reason why -- starting with a Roam, won't have the long-term kind of products for home that we've seen with our mix overall, and getting close to that -- getting -- basically, I think we're at 2.9 products for home right now. So, I expect it to be another one. It's part of the system. It's the first Bluetooth product that works, both in the home and then also out. And so, I think that as well makes it more valuable to people and more versatile. So, very excited about this and it has a new home driver. Tom Forte: Excellent. And then for my second question, one of the things, and you did many calendar last year during the pandemic was advanced your direct-to-consumer efforts. How should we think at a high level about your direct-to-consumer efforts, as physical stores are reopening and pandemic restrictions are easing and customers may be returning to the stores more than -- at least, versus last year. Patrick Spence: Yeah. It’s definitely a different year when it comes to kind of approaching that. But I think what we've seen -- we've set out DTC continues to be important in terms of telling our story and putting our a good foot forward in terms of what we're doing. But if Q2 has taught us anything, it's that, right across the board we're seeing great engagement from all of our channels. And we expect that to continue through the year. So, we're seeing growth across the board, and expect that to continue, because I think there's opportunity in all of the channels that we're working in. Tom Forte: Great. Congrats on the quarter. And thanks for taking my questions. Patrick Spence: Thanks, Tom. Operator: Our next question will come from Rod Hall of Goldman Sachs. Please go ahead. Rod Hall: Yeah. Thanks for the question. I guess, I wanted to start with the inventory level. In March, it's up more than what we've seen in prior Marches and the days of inventory is up a little bit too. And I just wonder, are you guys lengthen component inventory on to try to mitigate some of the supply issues that one of the ways that you plan to correct for that? And do you -- should we be expecting higher levels of inventory maybe next quarter as well? And I've got a follow up. Brittany Bagley: Hey, Rod. It's Brittany. Thank you for the question. So, most of the inventory you're seeing on our balance sheet right now is actually finished goods inventory, and not as because we are supporting significantly higher demand this Q2 than we are -- have supported in other Q2s. So, part of it is just to support the higher sales volume. And then, I would say another part is just timing around when we have in transit inventory in a sort of quarter-to-quarter. So that's really the dynamic you're seeing. Obviously, we're doing everything we can on components as is everyone else right now. But we're pretty much turning that -- those components into finished goods as fast as we can, so we can go meet the back orders and the demand we're seeing. Rod Hall: Okay. That's great. Brittany, that makes sense. The second question I had for you guys was on inflation. We've had a lot of different companies talking about insulating inputs. I know semi is inflating, but I'm wondering if you've seen that for your products. Do you see other things basic inputs to the products inflating in price, or do you anticipate that as we move through the year? Brittany Bagley: We've seen some on the shipping and logistics side, as we've been calling out as we go through the year. And then, yes, we are seeing it in component costs, which we will particularly calling out for the second half of the year that increase -- the majority of that component cost increase that we're calling out in the second half of the year really is on the semiconductor side, given the shortages that industry is seeing. Rod Hall: Great. Okay. Thanks a lot, Brittany. Appreciate it. Thank you. Brittany Bagley: Yeah. Absolutely. And we -- as I mentioned, we've baked as much of that as we can foresee into our forecast. So, it's all incorporated right now, as much as we have the visibility. Rod Hall: Yeah. Makes sense. Thank you. Operator: Our next question will come from Brent Thill of Jefferies. Please go ahead. Brent Thill: Patrick, is there a common threat that you saw in that 150% of forecasted demand on the Roam? I know, my kids grabbed a hold of it and took off and it's gone. I don't even have it in my office anymore. So, it's -- it seems like a younger audience is getting pulled in. Is there any other common themes you're seeing that, that are surprising you out of the initial launch here. And I guess follow-up to Brittany. I visit to your website today is a full month out now to get the Roam on June 11th. I mean, do you run the risk of losing some demand to others if they're looking for a portable in the short-term and how do you ensure you take care of the customer's response on that at this point? Patrick Spence: Yeah. Brent, you can always buy another one. So, I think the nice thing is we're going to see multiple Roams in some homes as well. It definitely is speaking to I think, new people in the existing homes and then as well new customers. And so, the Bluetooth speaker market is a massive one in its own, right? It’s the ultra portable Bluetooth speaker market, and we've got the unique Sonos value position of it being a great speaker in the home and outside, and as well having things like sound swap, the better sound quality, all of the things that we've done to it. So, I just think it's going to help us disrupt that category in the way that we have many of the others that are there. And all -- I'll actually take the question in terms of the delay right now. If you order on sonos.com, one of the things we've looked at over the past few months, not even relative, just specifically to Roam, but overall on products is what the cancellation rate of the orders look like, right? Because we've been in a situation where products like Arc or Amp have had delays along the way. And we are seeing incredible strength in terms of those orders. They do not appear to be perishable in any way. People do not come back and cancel. We've seen that in terms of the -- at any significant rate and the rate has not changed, despite some of the shipping dates pushing it further. So, we feel good about where the product quality is and how it stands out and the brand overall. And once people are in the system -- like, I think this is where it makes a big difference to be part of the system, as opposed to just another product, right, or a typical hardware company. And so, being part of the system, I think means more people will wait for the product and they can -- they’ve had a good experience with their entire Sonos system, and they know what they're going to get when they get any of our new products. So, we're seeing -- we're not seeing perishable demand. Brent Thill: Thanks, Patrick. Brittany Bagley: And we're also trying pretty hard to do the best job from a customer experience standpoint that we possibly can, given the back order situation that we're in. So, I know our teams are working really hard to make sure that when we make commitments about shipping dates, we hit those shipping dates and we're delivering on expectations. I think we all recognize that that relationship with the customer and doing a good job there is more important now than ever. So, that's the other piece of it for us. Brent Thill: Thanks. Operator: Our next question will come from John Babcock of Bank of America. Please go ahead. John Babcock: Hey, good evening and thanks for taking my questions. I might've missed this earlier, but were any patents in the German case, which is overlapping with the case in the United States? Eddie Lazarus: Not directly overlapping, but relatively similar to patents at issue in the Texas case. It's a direct control patent over in Germany, and we had several direct control patents in the Texas case. John Babcock: Okay. Thanks. And then, next question just wanted to kind of talk about inflation a bit again here. Assuming this isn't necessarily transitory, and I guess we'll see how that plays out. What opportunities that Sonos to have -- to have offset that, whether that comes from commercial opportunities or whether that comes from cost adjustments? If you could kind of talk about that, that'd be helpful. Brittany Bagley: Yeah. Thanks. I mean, what I would say is we're very committed to continuing to deliver on that long-term gross margin target. We put out there of 45% to 47%. So, we feel very comfortable in our ability to continue to hit that and deliver on that year-over-year. We are a premium product. We're really strong brands. So, we'll look at all of our options as needed over time. The other thing I would say is we are in a particularly tight global supply chain situation. And while I can't call at all when that will end, certainly there will be investments to add more capacity in the semiconductor industry over time, which over time should be a good long-term trend relative to the current price increases we're seeing. John Babcock: Gotcha. And also, I don't know the extent to which you can comment on this. It is a little bit early, but broadly, could you give us some sense of what the impact might be for Sonos on the tax side from proposals making their way through Congress? Brittany Bagley: Well, so, we obviously watch that really closely. But we are not a cash tax payer right now. And so, right now, what that would really do would be increasing the value of the NOLs and the R&D tax credits that we have on the books. So, we'll keep a close eye on that, but it will become much more critical to us as we move into being a cash tax payer, which we are not today. John Babcock: Okay. Thanks, Brittany. Operator: Our next question will come from Matt Sheerin of Stifel. Please go ahead. Matt Sheerin: Yes. Thank you for all the details so far. Just another question regarding the supply constraint you're seeing. It seems like you don't really have any visibility into when that eases. I know you previously had talked about coming out of Q2 and things seem to have gotten worse. So, in any -- anything you're hearing from your manufacturing partners in terms of when that eases? And I also know that you were in the middle of switching or moving manufacturing out of China into other parts of Asia. And could you update us on how that's going? Brittany Bagley: Yeah. Absolutely. So, I'll start with the second one. So, we have been actively diversifying into Malaysia. It is part of our long-term manufacturing strategy and it very much continues to be relevant and important to us. I think that you can see from the magnitude of the tariff numbers that we have this quarter relative to what we were talking about a year ago, that we had significantly mitigated the impact of tariffs through that Malaysia strategy. So, we are well on our way to hit our milestones and targets from that perspective. And then really what has changed is, rather than focusing on mitigating tariffs or dealing with supply chain and logistics, you are seeing incredible tightness in semiconductor components across the industry. So, just to be very clear, it's sort of not us, it's not something that is directly in our control. It is an industry-wide issue. And so, certainly, we talked to our manufacturing partners, but there are CEOs of major semiconductor companies talking about this on TV and stuff like that. And giving various answers in terms of when they're going to be ramping capacity up and when they see descending. And so, I'm certainly no smarter on this than they are. And the best we can do is, continue to secure the components we can secure to meet really incredible demand that we have. And so, it'll just be that balance for us as we go through the rest of this year and for as long as this last. So, no update on when we're going to be back fully in stock, because the landscape has just shifted. And honestly, our demand has been so strong that, it's hard to keep up, which is a great problem to have, but it's one that we've continued to see. Matt Sheerin: For sure. Okay. That's it for me. Thanks so much. Brittany Bagley: Thank you. Operator: All the questions we have today. I'll now turn the call back over to Patrick Spence for closing remarks. Patrick Spence: Thank you very much. And thank you to all of you for attending. We think we've taken another great step on our way to our long-term ambition. As I outlined, the opportunity ahead is enormous, and we're just getting started. So, thanks everybody and we'll see you next quarter. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.SONO Ratings Summary
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Sonos Reports Smaller-Than-Expected Loss Despite Revenue Decline
Sonos (NASDAQ:SONO) delivered fourth-quarter results that exceeded analyst expectations, despite ongoing challenges in the audio market.
For the quarter, Sonos reported an adjusted loss of $0.18 per share, significantly better than the anticipated $0.39 loss. Revenue reached $255.38 million, beating the consensus estimate of $249.64 million. However, sales reflected a 16.3% year-over-year decline from $305.15 million in the same period last year, highlighting continued headwinds in the audio category.
For the full fiscal year 2024, the company posted revenue of $1.52 billion, an 8.3% drop compared to $1.66 billion in fiscal 2023. Despite the decline, Sonos reported an adjusted profit of $0.56 per share for the year.
Sonos Announces Plans to Cut Workforce by 7%
Sonos (NASDAQ:SONO) intends to reduce its workforce by approximately 7%, as revealed in a filing with the U.S. Securities and Exchange Commission. The company also plans to downsize its real estate and review its expenditure.
Sonos stated that these actions are part of its commitment to optimizing costs while continuing to invest in its product roadmap for future growth.
The company anticipates incurring restructuring and related charges amounting to around $11 to $14 million, with $9 to $11 million designated for employee severance and benefits costs.
Last month, Sonos announced its Q2 results and revised its full-year guidance to a range of $1.625 billion to $1.675 billion, down from $1.7 billion to $1.8 billion in fiscal 2022. This adjustment reflects a decline of 7% to 4% and is attributed to weakened consumer demand and tightening inventory among channel partners.
Sonos Announces Plans to Cut Workforce by 7%
Sonos (NASDAQ:SONO) intends to reduce its workforce by approximately 7%, as revealed in a filing with the U.S. Securities and Exchange Commission. The company also plans to downsize its real estate and review its expenditure.
Sonos stated that these actions are part of its commitment to optimizing costs while continuing to invest in its product roadmap for future growth.
The company anticipates incurring restructuring and related charges amounting to around $11 to $14 million, with $9 to $11 million designated for employee severance and benefits costs.
Last month, Sonos announced its Q2 results and revised its full-year guidance to a range of $1.625 billion to $1.675 billion, down from $1.7 billion to $1.8 billion in fiscal 2022. This adjustment reflects a decline of 7% to 4% and is attributed to weakened consumer demand and tightening inventory among channel partners.
