Sonos CEO: Q1 earnings ‘really proved the strength of our brand’

Sonos CEO Patrick Spence joins Yahoo Finance Live to discuss company earnings, cost cuts, promotions and consumer trends, speaker sales, and the outlook for the brand.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: Investors had a positive view on Sonos's holiday quarter as the speaker maker was praised for its improved supply and ability to run successful promotions. I spoke with Sonos CEO Patrick Spence on what made a difference this quarter.

PATRICK SPENCE: Well, as you saw from our results that we announced last night, we had a record quarter. Customers really showed up. It was the first quarter that we actually had healthy inventory in three years, the first holiday quarter we had healthy inventory.

And it really proved the strength of our brand. We were able to gain share in all the categories we play, the countries we play. So we're feeling really good about where we are exiting the holiday quarter.

BRIAN SOZZI: When you say you're taking market share-- I know you talked a lot about that on the earnings call-- who do you think you're taking it from, and what devices?

PATRICK SPENCE: Everybody today, from what we can see, we're taking it from. I look at the legacy players, and a lot of the legacy audio players used heavy discounting during the holidays. But we did not. We used very targeted promotions, which are very much in line with the kind of promotions we would do prepandemic. So we were not out there doing heavy discounting.

And then when it comes to the big tech players, I just haven't seen a lot of innovation or push in terms of trying to do anything interesting in audio. And so we've kind of stood out on both the strength of our brand and the strength of our product portfolio, and we're taking it across the board.

BRIAN SOZZI: We've talked a lot in the past, Patrick, about how many Sonos speakers people own. I mean, you know, I own a ton of these things. What does your data say? Are they still just buying one or you're finally starting to grow that number of speakers per household?

PATRICK SPENCE: So it's growing every year, and we're up to three now per-- for the average household. But the really interesting thing is that's skewed because there are about 40% of our customers that have one speaker. And so really what we're working on is how do we take all of those folks that have one into that four to six range, which we think is kind of the right range right now for most of our customers?

And you know, and that helps power our flywheel because, as well, those customers, the more products they have, usually the higher net promoter score they have and, as well, the more likely they're going to advocate to their friends and family for Sonos as well. And so it's this mutually beneficial thing that happens in our flywheel. And so we're really focused on helping those single-player homes get to multiple products.

BRIAN SOZZI: When you talk to your customers, what are they-- are they building out home theaters, or are they just adding another speaker per room?

PATRICK SPENCE: Yeah, home theater was big in the holiday quarter. It was a record quarter for us in terms of selling sets. And so we sold theater sets. We also sold stereo pair speakers as well. And I think-- I think the way that we're merchandising now through direct-to-consumer and some of our retail channels is actually helping customers get started with Sonos in the right way, and really maximize their lifetime value as well.

And so it's been really interesting to watch. Home theater is an area where we gained a ton of share in the quarter. And I think that's a testament to having Arc, Beam, and Ray in the mix now.

BRIAN SOZZI: Are you fully cleaned up with your inventory?

PATRICK SPENCE: We feel really good about where we are right now, so I don't want to jinx it. But coming out of the holiday quarter, you could see we generated a ton of free cash flow, got in a good place. And so we're feeling pretty good about that. We're feeling pretty good about supply chain and all of the inventory issues being behind us. But it's something the team has to sweat the details on every day.

BRIAN SOZZI: Do you still have to promote, or have you pulled back on that?

PATRICK SPENCE: We are doing our normal kind of promotion. So we did a Black Friday, Cyber Monday promotion, which was very much in line with the kind of things we would do prepandemic. And then we're, as well right now, running a Super Bowl promotion.

This is a big time of year where people are purchasing TVs, and so we want to make sure they get the best sound possible. So our home theater products right now are in promotion. And so these are all planned, all factored in as part of our guidance, and really kind of a return to normal.

BRIAN SOZZI: Patrick, I've known you for a bit. I can't help myself. A few more questions. What do you do in your Super Bowl? What does your listening experience look like?

PATRICK SPENCE: Well, I can't tell you right yet, Brian, but I will be able to shortly.

BRIAN SOZZI: Oh, OK. All right. Well, we were going to get to the new product stuff, but I will save that one more question for a little bit later on. But you-- there's a lot of executives out there saying we are not seeing disinflation. And you talked about higher component costs still. So are you seeing any disinflation, or are any of these costs coming down?

PATRICK SPENCE: So what I think you're seeing-- and it'll differ by company-- is the components that went into the products that we sold in the holiday quarter were a little more expensive because they are-- we're still going through components that we purchased when supply chain was tighter. And so we definitely-- probably a good example of something that we didn't see in the holiday quarter that we saw the year before was high freight and shipping costs, right?

And so those have come down. I'm sure you've seen the data on that. We've started to see all the component costs coming down as well, or at least normalizing and stabilizing. But those take a couple of quarters to actually flow through into the numbers. And so we're getting all of that behind us, but it doesn't happen in real time.

As you know, these products take two to three years to build. We're always trying to be smart about inventory, but you want to make sure you have enough. With the supply chain crisis, we had to really make sure that we were ordering enough in advance. And so that's what you're kind of seeing flow through the numbers today.

BRIAN SOZZI: Perhaps you could push back on this one, Patrick. Morgan Stanley fired off a note to me. They are noting that-- they gave you credit, good quarter, inventory improving, but maybe this was a pull forward in demand because of the promotions you're in.

PATRICK SPENCE: I think that-- there's always a question-- there was the question of, you know, did the pandemic and everybody being at home pull forward demand? And I think we were able to show in the holiday quarter that, no, it didn't pull forward because consumers turned up when we had inventory and we ran a promotion.

The promotion was very similar to prepandemic, so it didn't-- from all of the data so far, it doesn't look like anything out of the ordinary in terms of what's happening. And so I would say it looks like more return to normal as opposed to some sort of pull forward.

BRIAN SOZZI: So fair to say you are trying new products for the Super Bowl.

PATRICK SPENCE: Perhaps.

BRIAN SOZZI: Perhaps. OK. Well, you're supposed to get in some new categories, correct? That is in your guidance. That is in the docket for this year.

PATRICK SPENCE: That's right, Brian. So we actually are working on four new categories. We feel it's an excellent time to really be investing and pushing forward into some new areas. One of those you'll see this year, and we've got three more exciting ones lined up. And we're also continuing to work on raising the bar in the categories we already play.

So I think it's really important to do both of those things. You can't just focus on those new categories. You have to look at the categories you're in and say, hey, is there more innovation and more things we can do in those categories to make it an even better experience for customers and keep pushing the bar on innovation?

BRIAN SOZZI: And now you know why I did not get the invite to the Patrick Spence Super Bowl party. The guy's testing out a whole bunch of new stuff that's probably going to be dropped in a month or two. That was Sonos CEO Patrick Spence.