Yahoo Finance Sonos, Inc. (NASDAQ:SONO) Q1 2024 Earnings Call Transcript
Sonos, Inc. (NASDAQ:SONO) Q1 2024 Earnings Call Transcript February 6, 2024
Sonos, Inc. beats earnings expectations. Reported EPS is $0.639, expectations were $0.6. Sonos, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: At this time, I would like to welcome everyone to Sonos First Quarter Fiscal 2024 Conference Call. Please note that this call is being recorded. [Operator Instructions] I will now turn the call over to James Baglanis, Head of Investor Relations. You may begin.
James Baglanis: Thank you, Briana. Good afternoon, and welcome to Sonos first quarter fiscal 2024 earnings conference call. I’m James Baglanis and with me today are Sonos CEO, Patrick Spence; CFO, Saori Casey; and Chief Legal Officer and Strategy Officer, Eddie Lazarus. For those who joined the call early, today’s hold music is a sampling from our Say It Loud station, which is curated in collaboration with Black at Sonos in recognition of Black History Month. Before I hand it over to Patrick, I would like to remind everyone that today’s discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date.
These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC. During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today’s press release regarding our first quarter fiscal 2024 results posted to the Investor Relations portion of this website. As a reminder, the press release, supplemental earnings presentation and conference call transcript will be available on our Investor Relations website, investors.sonos.com.
I would also like to note that for convenience, we have separately posted an investor presentation to our Investor Relations website, which contains certain portions of our supplemental earnings presentation. I will now turn the call over to Patrick.
Patrick Spence: Thank you, James, and hello everyone. I’m pleased to report that we kicked off fiscal 2024 with a successful first quarter. We exceeded our expectations by delivering revenue of $612.9 million, a GAAP gross margin of 46.1%, an adjusted EBITDA of $115 million and free cash flow of $269 million. We also delivered on the commitment we made last quarter to vigilantly work down our owned inventory position. This performance sets us up well to meet our previous outlined fiscal 2024 targets of $1.6 billion to $1.7 billion revenue, 45% to 46% GAAP gross margins, and $150 million to $180 million in adjusted EBITDA, while continuing to improve free cash flow conversion relative to last year. These results were hard won as we navigated the cyclical challenges in our categories and a highly promotional environment.
As we have discussed in the past, the home theater category has not yet recovered and remains subdued across all of our geographies. This is in part due to a slow market for TV purchases as well as difficult economic conditions in parts of EMEA and APAC. We saw some modestly improved performance in the streaming audio category, though the market remains highly competitive. Despite these conditions, we continued to execute and win. We decided to do something different this holiday season. We opted to run an extended pre-Christmas promotion on select products. This is atypical for us, but we felt it was necessary to meet consumer expectations of discounting throughout the holiday season rather than having the promotions concentrated heavily in the select windows of Black Friday, Cyber Monday.
Customers responded in force. We exceeded our own sales expectations and saw market share gains in key categories; all while delivering strong gross margins for the quarter. Specifically, we saw further share gains in U.S. home theater and also saw a market share improve sequentially in streaming audio in both the U.S. and Europe. We also saw one of the highest levels of products per new customer of any holiday season in years. All of this is a testament to our strong brand, our terrific product lineup, and the value that our products offer. Because this successful extended promo happened later in the quarter, we believe it may have had the effect of pulling some sales in from Q2, and as a result, our first half outlook remains unchanged. With a solid Q1 in the books, we now turn our undivided attention to the launch of our highly anticipated new product, which we will announce and ship in Q3.
This launch will give us a foothold into a new multibillion dollar category, expanding the number of categories we play in from five to six, and further diversifying our business. In anticipation of both the untapped opportunity in our existing categories and opportunities in this new category, we plan to expand our distribution footprint meaningfully. This means signing agreements with a few key distribution partners to broaden our reach and drive new households. We will provide further updates in the quarters to come. The other place we see opportunity is in our marketing efforts, particularly the role Sonos plays in connecting to culture. This past weekend, we partnered with the Recording Academy to Host Immersive Experiences at the 2024 GRAMMY House.
Connecting our brand to culture is a priority and we brought the magic of Sonos to life with exciting red carpet activations and amplified sound experiences throughout the event. Partnering with the hip hop duo Flyana Boss to welcome guests and share experience from the celebration. Our Chief Commercial Officer, Deirdre Findlay said it best this collaboration reinforces our profound connection to the creator community and underscores our commitment to delivering unparalleled listening experiences. We’ve also built upon the success of our partnership with Sonance. Recently announcing our 8-inch in ceiling speaker by Sonos and Sonance. We designed this in direct response to the needs of our customers and their installers who asked for more size, options and flexibility during installation.
This product will be available in spring 2024 for $999 per pair. As we navigate this unique consumer environment, I want to reiterate that we are laser focused on what we can control. We are taking share without compromising on gross margin. We are at the onset of a multiyear product cycle as we harvest the benefits of our research and development investments to enter new categories and launch new products, starting with the one we will be announcing and shipping in Q3. We are expanding our distribution to ensure we meet the customer where they want to shop. We are reinventing our brand marketing and activation to tap into culture and address new audiences. We are positioning the company to accelerate our growth while keeping expenses in check to deliver margin expansion in the years to come.
The eventual recovery of our categories should only further fuel this reacceleration. The opportunity ahead remains large as we have just 2% of the $100 billion global audio market and 9% share of the total households in our core markets. Each year, our business is driven by both the acquisition of new households that enter our install base and by our loyal customers who continue to make subsequent purchases over time. Our ability to capture disproportionate share of this opportunity ahead of us will only improve from here. Great things are happening here at Sonos and the best is yet to come. Before I turn the call over, I want to thank Eddie for his contributions over the past 16 months as CFO. Eddie rose to the occasion and helped us navigate a highly uncertain environment.
I’m confident he will continue to make a great impact on Sonos in his new role as Chief Strategy Officer. Our new Chief Financial Officer, Saori Casey, joins Sonos at a very exciting time as we kick off our new multiyear product cycle. She brings more than 30 years of corporate finance experience, most recently serving as Vice President of Finance at Apple. There is no doubt in my mind that we will benefit tremendously from the wealth of experience she brings to the table. Now I’ll turn the call over to Saori to briefly introduce herself.
Saori Casey: Thank you, Patrick. It’s an honor to step in as Chief Financial Officer of a consumer brand as iconic as Sonos. I’ve spent the past two weeks meeting with our leadership across the organization and I’m struck by the caliber of talent here at Sonos, and I’m very energized by the opportunity to work hand in hand with our people to help lead Sonos into the next phase of growth. I look forward to getting to know our analysts and investors in the weeks to come. Now, I’ll pass it over to Eddie to provide more details on our results and our outlook.
Eddie Lazarus: Thank you, Saori. Hi everyone. I just wanted to start by saying I am incredibly grateful for the opportunity served as CFO of Sonos during the last 16 months. I’m proud of all that we accomplished and of the hard work the team put in, including in delivering this very strong holiday quarter. It’s already been a great pleasure to work with Saori on a seamless transition as she takes the helm of this deeply talented finance organization. I have no doubt she’ll build upon our success and help lead Sonos into the next phase of growth. In my new role, I look forward to partnering with Saori, Patrick and the rest of our executive leadership team as I dedicate more of my time to crafting the strategies that will position Sonos to succeed over the long term.
And of course, I will continue to oversee legal and our strategy to defend our intellectual property and specifically to hold Google accountable for their widespread infringement of our patents. Turning now to the numbers. Q1 revenues were $612.9 million, a year-over-year decline of 8.9% or 10.5% constant currency. On a sequential basis, revenues increased 101%, though conditions in our categories remain challenging. Q1 revenue came in ahead of our initial expectations due to strong customer response to the extended promotions that we ran in the quarter and to a lesser extent, timing of channel fill. We believe that these two factors had the effect of pulling some Q2 sales into Q1. Hence, I would note our overall expectations for revenue in the first half are unchanged from last quarter.
I’ll discuss this further when we cover our guidance. Products sold declined 15% year-over-year, which was more than revenue on a percentage basis due to a 7% increase in revenue per product sold. This increase resulted from favorable product mix partially offset by increased promotional activity. Performance varied significantly on a regional basis, revenue in the Americas was down 1% year-over-year, whereas EMEA and APAC each declined by 20%. Sales in our categories in both EMEA and APAC continued to be impacted by the difficult macroeconomic environment there. GAAP gross margin was 46.1%, up 370 basis points year-over-year, which was modestly ahead of our expectations. The year-over-year increase was due to lower component costs, fewer spot component purchases, lower inventory related provisions and FX tailwinds, partially offset by additional promotional activity by additional promotional activity.
GAAP gross profit dollars declined by 0.8% year-over-year. Our Q1 performance demonstrates the resilience of our underlying gross margins and underpins our confidence that we will meet our fiscal 2024 target of 45% to 46%. Adjusted EBITDA was $115 million representing a margin of 18.8%. Though absolute dollars declined year-over-year, our margin increased by 40 basis points due to gross margin expansion, partially offset by lower revenue and increased advertising and marketing spend. Non-GAAP adjusted operating expenses were $179 million in the quarter, up $44 million sequentially, primarily due to reset of annual bonus accrual from below target fiscal 2023 attainment, seasonal increase in advertising and marketing expenses, and increases in revenue driven fees resulting from higher quarterly revenue.
We ended the quarter with $467 million of cash and no debt. Free cash flow was $269 million an improvement from $168 million in Q1 of last year. This result was primarily driven by working capital improvements resulting from a focus on better managing our inventory through adjustments to our sourcing plans as well as the implementation of newly adopted payment terms with our suppliers. Last quarter, we emphasized that improving free cash flow would be a top priority of fiscal 2024, and this quarter’s result shows progress towards that goal. Our period end inventory balance was $173 million, down 43% year-over-year and down 50% from where we ended Q4. Finished goods were $113 million, down $168 million or 60% sequentially. This is the lowest level of finished goods inventory we have held in years as we exited the holidays carrying $147 million less inventory on our balance sheet than we did in Q1 of fiscal 2023.
We will diligently work to keep inventory balances in check going forward. Our component balance of $60 million was down 8% sequentially. As previously discussed, we do expect our component balance to increase in the near-term before reaching a peak sometime in this fiscal year. And finally, before turning to guidance, we repurchased $23 million of stock in the quarter, at an average price of $15.87 per share, representing 1.2% of common shares outstanding as of Q4. As a reminder, we have approximately $177 million remaining on our previous $200 million share repurchase authorization. Our balanced capital allocation strategy remains unchanged. And consistent with that, we expect to continue to be active in the market, repurchasing stock. Now for guidance, which is unchanged from what we outlined last quarter.
Revenue. We expect revenue in the range of $1.6 billion to $1.7 billion, roughly flat year-over-year at the midpoint. Embedded in this guidance is the key assumption that we will generate more than $100 million of revenue from new product introductions in FY 202. The lion's share of which will come in the second half of the year from the new multibillion-dollar category that we will be announcing and shipping in Q3. On gross margin, we expect GAAP gross margins in the range of 45% to 46%, implying GAAP gross profit dollars flat to up 9% year-over-year. Non-GAAP gross margin is expected to be 45.4% and to 46.4% due to approximately $7 million of stock-based comp and amortization of intangibles included in GAAP cost of revenue. On adjusted EBITDA.
Adjusted EBIT is expected to be in the range of $150 million to $180 million, representing a margin of 9.4% to 10.6%. At the midpoint, adjusted EBITDA is $165 million, representing a 10% margin up from 9.3% in fiscal 2023. Non-GAAP operating expenses are expected to be between 39% and 40% of revenue. We will continue to manage expenses diligently to drive sustainable, profitable growth in the future. As previously discussed, we're not providing formal guidance for free cash flow in fiscal 2024, but we continue to expect to significantly improve our free cash flow conversion. Turning to Q2. We expect to see revenue decreases – for revenue to decrease 59% to 61% sequentially, which is a bit more than our typical seasonal decline as we estimate that our additional promotional activity pulled Q2 revenue into Q1 and because of timing of channel fill.
Taken together, our first half revenue expectations are unchanged from what we outlined last quarter. We expect 2Q gross margin to be a bit lower – a bit below the low end of our annual guidance range primarily due to deleveraging from lower revenue in the quarter. And for non-GAAP operating expenses to decrease by $15 million to $20 million from the $179 million in Q1 primarily due to seasonal decrease in sales and marketing, resulting in adjusted EBITDA of negative $34 million to negative $47 million. Typically, I end with commentary about our Google litigation. There's not a lot to report this quarter as we continue to drive – as we continue our drive to defend and monetize our IP. We are waiting for the Federal Circuit to decide the appeals stemming from the case we had won at the ITC.
When that appeals process finishes, we will restart our damages lawsuit for infringement of the valuable appeals – of the valuable patents involved in that case. Also next week, we will file our opening brief in our appeal from the case in Northern California with the judge invalidated a jury verdict in our favor. Patrick talked a lot about the future drivers of our growth. So instead, I'll just say that this is where execution comes in. We need to deliver on our promise of driving gross margin back into our annual target range this year and keep it there in the future. And we need to do that while keeping expenses in check. Success on these two fronts will be paramount to delivering our promise of expanding margins in FY 2024 and the years to come.
I have the utmost confidence in our team's ability to do just that. I'd like to turn the call over now for questions.
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