Sonos Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 15, 2023

There are 10 speakers on the call.

Operator

Good afternoon. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to Sono's 4th Quarter and Fiscal 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, There will be a question and answer session.

Operator

And if you would like to withdraw your question, please press star 1 again. Thank you. I will now like to turn the conference over to James Bougouinis, Head of Investor Relations. James, you may begin.

Speaker 1

Thanks, Christa. Good afternoon, and welcome to Sonos' 4th quarter and fiscal 2023 earnings conference call. I'm James Beglanis. And with me today are Sonos' CEO, Patrick Spence and CFO and Chief Legal Officer, Eddie Lazarus. For For those who joined the call early, today's hold music is a sampling from our new Sonos Radio HD exclusive station, Lazy Day Country.

Speaker 1

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 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. The 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.

Speaker 1

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 Q4 and fiscal 2023 results posted to the Investor Relations portion of our 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 like to also 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.

Speaker 2

Thank you, James, and hello, everyone. Earlier today, we announced our Q4 and fiscal 2023 results, which came in roughly in line with the midpoint of our guidance for revenue and adjusted EBITDA. Revenue of $1,660,000,000 was down 6% year over year or down 3% excluding foreign exchange and adjusted EBITDA was 154 While our business is more resilient than many of our competitors, thanks to our strong brand and loyal customer base, it was a challenging year in the categories in which we play today. The good news is that we've retained strong market share positions in the countries we play despite our competitors offering deep discounts throughout the year. In fact, we recorded our highest market share in home theater in both the United States and Germany this year since 2019.

Speaker 2

This is a testament to the strength of our brand, our product portfolio, and the execution of our team. We know we're in a down part of the business cycle when it comes to home audio, And we know that eventually consumers will return. There are strong secular trends that will help drive our business over the long term. Work from home is going to be an enduring phenomenon. So too will be increased home consumption of video content.

Speaker 2

And as the touring success of Taylor Swift and Beyonce attest, Music and the joy it brings remains an essential and thriving part of our culture. Sonos benefits from all of this. In fiscal 2023, we once again proved that we're willing to make necessary changes towards driving sustainable profitable growth. We made the difficult decision to right size our expense base in mid June when we conducted a 7% reduction in force and substantially reduced our real estate footprint. I am confident that we are investing at the right level to achieve our long term growth objectives, and our plan is to strictly limit any future headcount growth to initiatives that will drive incremental growth.

Speaker 2

We appointed 3 highly successful executives to key leadership roles at Sonos. They've hit the ground running, and I have high expectations for the contributions they will make across marketing, sales, and product both in fiscal 24 and the years to come. Most importantly, we further expanded our lead over the competition by doing what we do best, producing great products. This year's new product introductions were focused primarily on raising the bar in our existing categories to ensure that picking Sonos over the competition is the easiest decision in the world. We already had great products in the market with the 1 and Move, But these products are often a customer's first Sonos purchase, so it is of critical importance that we continue to innovate and further separate ourselves from the competition.

Speaker 2

This is why we launched Move 2, our new and improved premium portable all in one speaker, which we are confident is the best on the market. And our customers agree. Sales are ahead of expectations and Move To is rated 4.9 out of 5 stars on sonos.com, driven by the immense benefit of a higher fidelity stereo The stereo sound stage, deeper bass and 24 hour battery life. It is a similar story for the 2 Era speakers we launched earlier this year. We have the best in class all in one at an entry level price point with Time Magazine recently named the AeroOne 300 1 of the best inventions of 2023.

Speaker 2

The down cycle in consumer discretionary spending put a damper on the revenue growth from these products in fiscal 2023, But they will be best in class for years to come and they will drive our brand and category strength well into the future. As we start our new fiscal year, I would like to take a moment to reintroduce the key pieces of the Sonos story. Why we are different from virtually every other consumer electronics We have a large and growing installed base of ardent Sonos supporters who consistently purchase additional products to expand their Sonos system. They generate buzz for our new product launches. They eagerly flock to our retail partner stores to test and purchase our new products.

Speaker 2

They preorder from our direct to consumer channel, sonos.com. They asked their local custom installers to outfit their homes with our products. And most importantly, they sing our praises to their friends and family As evidenced by word-of-mouth being one of the top contributors to our household growth. Our installed base is a layer cake of cohorts Of new households acquired over the last 18 years. Each year, our business is driven by both the acquisition of new homes That enter our install base and by our loyal customers who continue to make subsequent purchases over time.

Speaker 2

In recent years, our customers have started with an average of 1.6 products And within a 3 year window, over 1 third of those customers have repurchased additional products at a relatively steady clip. As more recent years cohorts continue to age, early indications are that their behavior is consistent to that of the pre COVID cohorts, Which we have illustrated on Page 31 of the earnings deck and Page 15 of the investor presentation. We see tremendous opportunity To drive repurchase participation even higher being via marketing efforts and new product introductions. This steady, consistent behavior across our installed base is why we saw average products per household grow to 3.05 at the end of fiscal 2023, Which is up from 2.98 in the prior year. Simultaneously, through price optimization and favorable product mix, we've increased the revenue we generate per product sold.

Speaker 2

We expect this trend of driving greater lifetime value across our cohorts to continue. As we've noted in the past, 40% of our households are single product households today, whereas our average multi product household has 4.4 products. We're starting to get into the range we have previously discussed of 4 to 6 products for every Sonos household. We estimate that converting our single product households to the average multi product Household install size represents a $6,000,000,000 revenue opportunity now. This highlights the long runway we have to further monetize our install base And gives confidence in our ability to eventually deliver on our long term financial targets.

Speaker 2

Today, we have just 2% of the $100,000,000,000 global audio market And a 9% share of the households in our core markets. To be prudent, we have built our fiscal 2024 plan with the assumption that the weak consumer demand we saw in this quarter will persist. Obviously, we cannot control the conditions affecting our categories, but we can control the products we will bring to market. So that's what we have concentrated our efforts on. As I said, fiscal 2023 was a year of raising the bar in our existing categories.

Speaker 2

Fiscal 2024 will be different. This year marks the beginning of a multi year product cycle which will demonstrate the payoff of the investments we've made in research and development over the past few years. In the second half of the year, we will be launching a major product in a new multi $1,000,000,000 category that will complement our current offerings, Excite customers and drive immediate revenue. All told, we expect to generate over $100,000,000 From new product introductions this year with this exciting new product accounting for a large portion of this revenue in the second half. Our expectation of revenue between $1,600,000,000 $1,700,000,000 is effectively flat to fiscal 2023 at the midpoint.

Speaker 2

This is far short of what we believe the growth rate for a company can be in normal times, but we believe this is prudent Given that we have been in a post pandemic downswing in the cycle for our categories that may not yet be at its end. As I've lived through multiple times in my 25 years in tech, we fully expect that consumer behavior will normalize in time and our relentless focus on innovation, execution and an exciting product roadmap will result in us returning to low double digit revenue growth. We also expect to return to our annual target range GAAP gross margin in fiscal 2024 And are setting our guidance midpoint at 45.5%. We fell short of where we wanted to be in fiscal 2023, But we have line of sight to improvement in fiscal 2024, which Eddie will discuss shortly. We will be monitoring and adjusting expenses as necessary To drive some margin expansion this year.

Speaker 2

We have already taken the extraordinary step of holding salaries flat this year, except for a small number of employees receiving promotions. We have been and will continue to work the balance between constraining costs in a down environment with prioritizing investments to deliver the new products and services that will yield significant revenue and margin expansion this year and the following years. Bringing it all together, we are targeting $165,000,000 of adjusted EBITDA at the midpoint of guidance, which is a margin of 10%, up 70

Speaker 3

basis points from fiscal 2023, despite our guidance for

Speaker 2

revenue to be points from fiscal 2023 despite our guidance for revenue to be flat at the midpoint. Once we return to a normalized demand environment, we will make more swift progress towards our target of 15% to 18% adjusted EBITDA margins. As we navigate this challenging environment, we do so with a strong balance sheet, More than $200,000,000 of cash and no debt. And that is after repurchasing $55,000,000 of stock in Q4, more than we have ever done in a single quarter. We recognize the importance of returning capital to shareholders and mitigating dilution to our share count.

Speaker 2

To that end, I am pleased to announce that our Board of Directors has authorized a new $200,000,000 share repurchase program. We have an exciting few years ahead of us and believe that repurchasing stock at these levels is a great use of capital. We improved our cash generation in fiscal 2023 And expect to continue to do so in fiscal 2024. We will continue to pursue a balanced capital allocation strategy between organic investment, Returning capital to shareholders and opportunistic M and A to accelerate our roadmap and drive profitable growth. In closing, I want to reiterate that we are laser focused on what we can control, and our long term commitment is to drive both top and bottom line growth.

Speaker 2

We are positioning the company and our capital allocation to accelerate our growth as our categories regain their footing, and we are excited to enter new categories as you will see later this here. Our investments in R and D over the last several years will begin to pay off more significantly this year and should drive accelerating growth in fiscal 2025 and fiscal 2026 as economic conditions normalize The opportunity ahead remains large and our ability to capture a disproportionate share only improves with the proactive measures we have And will continue to take. While it's certainly turbulent in the short term, I have great confidence that our plans will drive value for our shareholders over the long term. Now I'll turn the call over to Eddie to provide more details on our results and our outlook.

Speaker 4

Thank you, Patrick, and hello, everyone. As Patrick observed, we finished the year characterized by 3 things. 1st, softening consumer demand in our categories as we work Through economic transitions following the pandemic. 2nd, important improvements in our product lineup that will serve us for years to come. And 3rd, A tight focus on cost to match the softer demand environment.

Speaker 4

Turning to the numbers, Fiscal 2023 revenues were $1,660,000,000 a year over year decline of 3.3% constant currency and 5.5% reported. Foreign exchange was a $39,000,000 headwind to revenue, and a very significant portion of that headwind flowed through to reduce gross profit and adjusted EBITDA. Product registrations, which reflect consumer demand, grew 5% year over year, whereas products sold, Which reflects sales to our retailers and installers and our DTC channel, declined 9% year over year. The variance between these two figures Represents the reduction in channel inventory levels that we saw across both the retailer and installer channels. This reduction puts us in a healthy channel inventory position across our channels and geographies as we enter the holiday season.

Speaker 4

Products sold declined by more than revenue on a percentage basis due to a 4% increase in revenue per product sold. This increase resulted from some price increases and favorable product mix, partially offset by increased promotional activity and FX headwinds. Performance varied significantly on a regional basis. Revenue in the Americas was up slightly year over year, Which continued our unbroken streak of increasing revenue every year in the Americas since we went public in 2018. By contrast, revenue in EMEA declined 10% and in APAC 32% year over year.

Speaker 4

The softer performance in EMEA and APAC relative to the Americas reflects the particularly difficult macroeconomic environment affecting those regions, Which impacted both retailer sell in and run rate registration trends. On a channel basis, retail and other, Which includes IKEA and other business initiatives declined 7% and was cumulatively 55% of sales. As previously noted, EMEA and APAC were particularly challenged in the year, whereas the Americas were more resilient. DTC was roughly flat year over year And was 24% of sales. Installer solutions came in at 21% of sales, declining 7% Year over year as our dealers work down channel inventory.

Speaker 4

As we called out on previous calls, we entered f y 23 With too much stock in the installer channel and thanks to registrations significantly outpacing sell in, we are entering f y 24 In a much cleaner channel inventory position. GAAP gross margin was 43.3%, Down 220 basis points year over year. Gross margin was impacted by a return to normal level of promotional activity versus f y 22, Higher component costs, a 120 basis point FX headwind, and over 100 basis points of excess component provisions, Partially offset by fewer spot component purchases, price increases, and lower air freight expense. While this year's gross margin is below our annual target of 45% to 47%, I am confident that we can get gross margin back into this range In fiscal 2024. Adjusted EBITDA was $154,000,000 representing a margin of 9.3%.

Speaker 4

The year over year decline was driven by lower revenue, gross margin contraction and ongoing investments in our product roadmap. Non GAAP adjusted operating expenses were $612,000,000 in fiscal 2023. There were a number of moving pieces impacting our expense base in the year, including lower bonus payout for our employees, deferred program spend to protect profitability, and the 7% RIF we announced in mid June. Taking these factors into account, we estimate that our normalized expense base Was approximately $665,000,000 or 40% of revenue. I will discuss this further while providing guidance, But I would note that the midpoint of our guidance for f y 24 assumes operating expenses stay roughly flat to this normalized f y 23 level.

Speaker 4

We ended the year with $220,000,000 of cash and no debt. Free cash flow was $50,000,000 An increase of 125,000,000 year over year. This result was primarily driven by working capital improvements Resulting from a focus on better managing our inventory. Our total inventory balance ended the year at $347,000,000 Down 24% year over year. I'm proud of our team's efforts to work down our finished goods balance sheet.

Speaker 4

We are entering the holidays carrying $108,000,000 less inventory on our balance sheet than we did in Q4 of fiscal 2022. Finished goods were $282,000,000 up 17% sequentially as we built inventory into the holidays. Our component balance of $65,000,000 was up 12% sequentially. As previously discussed, We expect our component balance to continue to increase in the near term before reaching a peak sometime in this fiscal year. Further managing our owned inventory and improving cash conversion remains a top priority, and we expect to exit the Q1 in an even better inventory position.

Speaker 4

We completed our $100,000,000 share repurchase authorization by repurchasing 4,000,000 shares for $55,000,000 at an average price Of $13.71 per share, representing 3.1% of common shares outstanding as of Q3. For the full year, we repurchased 6,600,000 shares at an average price of $15.25 per share, Which was more than off which more than offset our equity grants for the year, taking our basic share count down by 1,700,000 shares, A net reduction of 1.3%. As Patrick mentioned, our board announced a new $200,000,000 share repurchase authorization. Returning capital to shareholders and managing dilution remains a high priority within our balanced capital allocation framework. And finally, before turning to guidance, I'll now quickly recap our Q4 results.

Speaker 4

We reported revenues of $305,100,000 Towards the higher end of our guidance range of $290,000,000 to $310,000,000 Revenue in the Americas increased 2% year over year, Which was relatively in line with our expectations for the quarter. Revenue in EMEA and APAC declined by 9% and 28% respectively year over year Due to softening demand. As we noted last quarter, we see the challenging macroeconomic climates in both regions weighing on our results. Q4 gross margin came in below our expectations at 42%, up 2 70 basis points year over year, But down 400 basis points sequentially from q3. This decline was due to timing of recognition of contra revenue related to select channel fill Ahead of the holiday season and higher excess component provisions.

Speaker 4

Gross profit dollars increased 3.2% year over year. Adjusted EBITDA was $6,300,000 slightly above our expectations, primarily due to lower operating expenses. Total non GAAP adjusted operating expense of $135,600,000 declined by $14,000,000 Or 9% from q3 due to lower bonus accrual and a full quarter's impact of our mid June riff. Now for our fiscal 2024 guidance. We expect revenue in the range of $1,600,000,000 to $1,700,000,000 Representing a year over year decline of 3% at the low end and growth of 3% at the high end and roughly flat year over year at the midpoint.

Speaker 4

Embedded in this guidance is the key assumption that we will generate more than $100,000,000 of revenue from new product introductions in FY24, The lion's share of which will come from the new multi $1,000,000,000 category that we will be entering in the second half of fiscal twenty twenty four. Because of the timing of our new product launches and their associated revenue contributions, we expect the shape of this year to differ from past years With the first half representing somewhere between 51% to 53% of our full year's revenue. Our guidance assumes that the weak consumer demand we saw in Q4 of fiscal 'twenty three persists throughout fiscal 'twenty four, With the low end assuming trends softened somewhat further, any recovery in run rate trends of our categories broadly would drive upside to our We expect GAAP gross margins in the range of 45% to 46%, Which would bring us back into our annual target range with a midpoint of 45.5%. This implies GAAP gross profit dollars flat To up 9% year over year with the midpoint being 5% growth. We foresee improvements in component costs, Favorable product mix, fewer spot component purchases, and lower ex excess component provisions, all contributing To recovery from the 43.3 percent we reported in fiscal 2023.

Speaker 4

As a reminder, fiscal 2023's GAAP gross margin Was impacted by approximately 120 basis points of FX headwind and over 100 basis points of excess component provisions. We will continue to guide GAAP gross margins as we have done in the past. But to make it easier to model our business, we have begun providing GAAP to non GAAP gross Profit and gross margin reconciliations. As such, non GAAP gross margin is expected to be 45.4 to 46.4 percent due to approximately $7,000,000 of stock based comp and amortization of intangibles allocated to GAAP cost of revenue. Adjusted EBITDA is expected to be in the range of $150,000,000 to $180,000,000 representing a margin of 9.4% to 10.6%.

Speaker 4

At the midpoint, adjusted EBITDA is $165,000,000 Representing a 10% margin, up from 9.3% in fiscal 2023. Non GAAP operating expenses Are expected to be between 39 40 percent of revenue. At the midpoint, this is approximately $649,000,000 of 2% year over year from our normalized non GAAP operating expense base in fiscal 2023. We have other expense reduction initiatives underway as well as we relentlessly seek out cost savings. As Patrick mentioned earlier, We are entering a period of harvesting the fruits of our past investments, enabling us to strictly limit hiring going forward.

Speaker 4

And future headcount growth will be tied to a significant incremental benefit to our growth ambitions. In the event that we see top line performance tracking ahead of our outlined expectations, we will balance investment and allow some of the incremental gross profit dollars to flow through to adjusted EBITDA. We are not providing formal guidance for free cash flow in fiscal 2024 at this time. However, we do expect to significantly improve our conversion ratio from the 33% we saw in fiscal 2023. As for Q1, we expect to see revenue increase sequentially by approximately 90% to 100%, roughly in line with past seasonality.

Speaker 4

Note that the 113% sequential growth observed in Q1 of fiscal 2023 Was driven by non recurring factors related to past supply constraints, including a significant amount of AMP backlog that was cleared in the quarter, As well as the launch of Submini. We expect GAAP gross margin for Q1 to be a bit below the low end of our annual guidance range of 45% to 46%, and non GAAP operating expenses to increase by 45,000,000 to 50,000,000 sequentially, Resulting in adjusted EBITDA margin in the mid teens. Last but not least, to touch briefly on our Google We suffered a setback in our litigation against Google in the Northern District of California when when the district court overturned the jury verdict Awarding us $32,500,000 for Google's infringement of 1 of our zone scenes patents. We disagree with this ruling and others that the court made, And we have already appealed. On a positive note, an administrative law judge comprehensively rejected Google's second case against us at the International Trade Commission, with a different judge having already indicated that she would be ruling against Google in the first of the cases they had filed.

Speaker 4

And finally, last week, the federal circuit held oral argument on the appeal and cross appeal from the case we brought School at the ITC, where the commission ruled that Google infringed 5 valid Sonos patents covering the setup, Synchronization, equalization, and volume control of smart speakers. Once the appeals process ends, We will be free to pursue our damages case based on these patents that is pending but stayed in the federal district court in Los Angeles. While the road has been long and the journey has a ways to go, we remain confident that we will ultimately prevail in our efforts to hold Google accountable For infringing on our patents and that we will obtain a handsome return on our investment in defending our innovations. To wrap up, I'd just like to commend our team for all their work through a challenging year. It speaks volumes about the strength of both our brand and our product portfolio That we were able to continue our strong market share performance despite everyone else in the industry deeply discounting their products.

Speaker 4

We will continue to drive innovation and quality as that sets us apart in good times and bad, and we can't wait to show you

Operator

Your first question comes from the line of Tom Forte from D. A. Davidson. Please go ahead.

Speaker 3

Great. So Patrick and Eddie, thank you for the I have two quick initial questions and then one quick follow-up. So my first two quick ones. Are you seeing disproportionate Numbers and your sales for lower priced items and then how are consumers responding to your promotion?

Speaker 4

So, Tom, we're not seeing anything special at the low end. In fact, the average sales price of our products went up 4% This year, year over year, and it had gone up significantly the year before as well. So we're seeing, you know, the premiumness Is working for us. And remind me the second question, Tom, sorry.

Speaker 5

Yes. So

Speaker 3

thank you for that, Eddie.

Speaker 4

Promotions. Yes. They're responding. The consumer is definitely looking For promotions, there's just no doubt about that. We've seen over performance in the Q4 and that was one of the things that Hit our gross margin and we've taken that into account in computing our guide for fiscal 'twenty four.

Speaker 3

Great. And then my second And follow-up question, what data points are you looking at to gauge future demand such as housing starts or anything else? I think the challenge for everyone right now in consumer electronics is to try to determine when the demand returns. I'm curious what high level data points you're looking at.

Speaker 2

Yeah. Tom, you're exactly right. I mean, I think that is the challenge for everybody. And I think, you know, having been in this cycle for about a year now, We're just being very prudent about how we look at our business and what we're hearing from our channels, how we're planning as we go through it. And so, you know, We're looking at all the data points that you probably look at.

Speaker 2

But at the same time, I think we really before we would say, You know, things are normalizing. We'd want to see it in our actual numbers. And that's going to be our approach for right now is, as you heard from us, we have been prudent And assumed that the, you know, the environment we've seen in 2023 will continue. And until we start to see something different in our categories or our results. We won't change our perspective on that.

Speaker 3

Thank you, Patrick. Thank you, Eddie.

Operator

Your next question comes from the line of Steve Frankel from Rosenblatt. Please go ahead.

Speaker 6

Good afternoon. Let me just backtrack for 1 minute and could you repeat The Q1 revenue guidance, are you saying just remind me again exactly what you're saying.

Speaker 4

The revenue guidance for

Speaker 7

Yes, sure.

Speaker 4

Right. So the revenue for Q1, we expect to be up Sequentially from Q4 90% to 100%, which is reflects kind of typical seasonality between Q4 and Q1.

Speaker 6

Okay, great. And then given what's going on with the consumer and what Your partners like Best Buy are doing in terms of inventory. Are you contemplating doing anything different in 20 20 Or to drive more business to your D2C channel.

Speaker 2

No. I mean, we the one thing we've been working on, Steve, is we do experiment With the what we're trying to do on a customer relationship management through our DTC. So trying to tap into that $6,000,000,000 opportunity with our existing customers. We have a team that is focused on trying to tap into that group and Experimenting with a variety of offers and information and reach out and some of these things. And so there are activities there That will be occurring during the year to try and accelerate repurchase, if you will.

Speaker 2

So there is something that there is always things that we're In DTC, I would say that our experiments to see how we might drive sales, particularly with our existing base. And then we'll usually take those learnings and share those with some of our large retail partners as we go through it. But We believe there continues to be opportunity in every channel, and we have a plan with each of our partners and in DTC that attempts to drive growth as well. So we certainly don't see it as trading off from one channel to the other.

Speaker 8

Okay, great. Thank you.

Speaker 2

Thanks, Steve.

Operator

Your next question comes from the line of Eric Woodring from Morgan Stanley. Please go ahead.

Speaker 6

Awesome. Thank you guys for taking my questions. Patrick, maybe if we start and take a step back, it's Clear that your flywheel was still working last year, right? You saw your kind of important installed base metrics Grow again year over year, some of them on an absolute basis accelerated, but revenue is down obviously and is expected to be flat next year. So maybe my question is, How should we pair those 2 dynamics together?

Speaker 6

The flywheel is working, but it's not translating into growth. What changes that?

Speaker 2

Yes. And I think this is it gets to the fact that we also held a strong market share position despite In our categories, sales overall being down 10% to 20% year over year. And so and that's with Tons of discounting by our competition as well and consistently throughout the year, pretty unprecedented from everything that I've seen. And so the fact that we can hold our own in an environment like that, the model continues to work with people come back, if anything, You know, that part of the flywheel where we have existing customers returning to purchase helps us in a period like this because that is different The most consumer electronics company and creates revenue that helps make sure that we can work through this period. And then Eric, I think through both the combination of the new product categories that we're going into, plus consumers coming back to Purchasing audio products, electronics as we go into that, I think will allow us to get back to where we want to be from You know, a growth perspective overall on the revenue front.

Speaker 2

And so I think it's one of those periods. We obviously had upcycle the previous couple of years, and Now we've had a challenging 'twenty three, and we're going to be prudent in how we look at 'twenty four, given what we've seen over the last year. And But I also know, having been at this for a long time, that these things are cyclical, and we will see people coming back To the category, and we are going to be in an excellent position, when they do. And in the meantime, we're also going to focus on going into new categories that present new opportunities With new customers and we know that those customers will come back and purchase more products too. And so I think those things combined will put us in a good position to return to

Speaker 6

Okay. No, that's awesome. Thank you for the color there. And then, Patrick, you also made the comment that we're kind of sitting ahead Of a multiyear product cycle. We'd just love for you to expand on why you believe that is.

Speaker 2

That's that really is A result of the investments we've been making, the last few years. And so, I talked about last year at this time, the fact we're going into 4 new categories. We went into one last year, which was Sonos Pro, which is more of a slow build, in terms of that one, but a big opportunity for us long The one we'll get into this year has more immediate benefits to our business in terms we go through that. And so We have more coming, and we feel like we're in a good position now where we will be able to leverage those entries into new categories to drive good growth in each of the fiscal years ahead. And so that's something that we're very excited about.

Speaker 2

We know it's difficult On your side to model for things you don't know about, like our roadmap. And we felt it was important this year to give an indication of the new category we will be entering as it's quite material to what we're laying out for fiscal 2024. And, but obviously we don't get into the roadmap on a TikTok basis, but it's something that We've been investing in and we feel is going to help us as we try to drive that kind of consistent growth every year.

Speaker 6

Okay, that's helpful. And maybe just a quick follow-up on that. You've never necessarily shared that $100,000,000 new product contribution type of metric historically. Just curious if you can give us any color on maybe how that compares the past year, just to help us gauge how truly important you believe this new product and kind of new market could be for you. And that's it for me.

Speaker 6

Thanks so much.

Speaker 2

Thanks, Eric. This category is a multibillion dollar category. So we're super excited about it and super excited for what we have planned. The team has been Great job. Every category is a little different in terms of where we've been, timing, the existing customer base we have and all of those things.

Speaker 2

And so we wanted to just give People an idea of the kind of impact they could expect from this year. And so we're super excited about it and Looking forward to this category and the ones we have to follow as well.

Operator

Your next question comes from the line of Jason Bank of America. Please go ahead.

Speaker 7

Hey, good afternoon. Thanks for taking my questions. I'm curious if this Recent unfavorable ruling, changes your litigation strategy at all, if it will have any impact on future Court cases if there's any implications from this?

Speaker 4

It doesn't change our strategy. We the judge in Northern California Adopted what we think is a legal doctrine that bears that Simply doesn't bear on our case, and that the facts that he brought to bear to support the ruling Aren't accurate. And so we intend to appeal. We feel very strongly that we have a good chance on appeal. So it doesn't otherwise affect our strategy.

Speaker 4

It also doesn't have implications for our other cases. The next Next big damages case that we'll be teeing up in in California in a different court involves 5 completely different patents. Happened either doctrinally or in terms of the patent. So we're just full steam ahead on the current strategy.

Speaker 7

Got it. That's good to hear. And then as my follow-up, I'm curious if you could talk about where you think your share gains are coming from. I think you mentioned, I think it's been a few quarters now. You mentioned that competitors have been very promotional.

Speaker 7

So it's good to see in light of that you picked up share. So, yeah, I'm just curious if you had any sense for where those were coming from.

Speaker 2

Yeah. I mean, I would say home theater has been a particular Least strong part and I think that's a testament to our portfolio. You'll recall we haven't introduced anything new in home theater over the last year, despite some of Our competitors doing so. So I think it just speaks to the quality of our product portfolio and the execution by our team at Retail, our DTC team and making sure that we're making it clear why our products in that category are better than the others that are They're leveraging so great communications, marketing, go to market efforts around those kind of things. And then our strong customer base that speaks You know, loudly to their friends and family about the quality of Sonos products.

Speaker 2

And I we've been believers in this model for 18 years. We've seen the power of it. And I think in challenging times even, you see the power of it because we haven't had to discount like so many across the industry have and And we've held up well. And so I think it comes from building a strong loyal customer base with a great innovative product portfolio over 18 years.

Speaker 7

Great. Thank you.

Operator

Your next question comes from the line of Alex Fuhrman from Craig Hallum Capital Group. Please go ahead.

Speaker 9

Hey, guys. Thanks for taking my question. It looks like the repeat customer metrics Really strong and seeing nice growth in the number of units owned per customer. Curious if you're seeing move to helping to bring in new customers as you were expecting to after that came out and then just thinking about the new Category that you plan on entering later this fiscal year. Do you think that's something that's really going to be appealing more To new customers or do you see that more as a natural extension to your existing customers?

Speaker 2

Yeah. Thanks, Alex. I think the thing I am always, what would I say, so pleased with in every product launch is How strong the turnout from our existing customers is ultimately for whatever product is that we're building and bringing to the world. And We have a very strong following that follows. So move to lots of existing customers coming in and purchasing that product to kind of in line with what we'd expect For new.

Speaker 2

And as we enter these categories, we certainly expect that existing customers will go out and buy products, You know, maybe multiple. And then over time, we expect any of the products that we're working on to help bring new customers Into the Sonos ecosystem. And that's what we typically see through everything that we build. And so, we have our eye on trying to Achieve kind of both of those things. It usually phases where we'll see the existing quickly jump on it, add it to their collection, and then We'll start to bring in new and as you know, we have a long product life as well.

Speaker 2

So I think it works very well from a return on investment perspective, too.

Speaker 9

Great. That's really helpful, Patrick. Thank you very much.

Operator

Your next question comes from the line of Jake Norsen from Raymond James.

Speaker 8

Good afternoon. Thanks for taking my question. I just wanted to double click on what is the internal thinking on product velocity Product velocity and the number of product launches for fiscal 2024. And then further, you know, how should we think about When is the right time to get marketing dollars behind Sonos Pro and drive up customer awareness? Thank you.

Speaker 2

Yes. So no changes to our at least 2 new products every year as we think about what it is We're building and as we've laid out and why we wanted to give some indication, this year we happen to be entering a very large multi dollar category. So I wanted to give a little color on that. But the overall philosophy remains trying to introduce at least 2 new products every year. Fiscal 'twenty three was definitely a year of raising the bar in existing categories and fiscal 'twenty four is a story of entering new categories, which we're very excited about.

Speaker 2

On the Sonos Pro front, we continue to see good traction in the In the companies that we're in today, and we're doing some things in our IT side to make it easier for customers to be able to Sign up for that service. And I think as we do that and we learn, if we've got that right, then we can pour some gas on that fire and take it from there. So that's kind of the way we're thinking about that. We got lots of plans and exciting ideas of how we do more in Sonos Proso. Stay tuned for that over time.

Speaker 8

Perfect. Thank you very much.

Operator

Your next question comes from the line of Brent Thill from Jefferies. Please go ahead.

Speaker 5

Thanks This is David Lustberg on for Brent. 2 if I may, maybe to start. Could you just walk through your expectations for promotions this holiday quarter and how that level of promotion compares to prior years. I know you guys have pointed to deeper discounts at your competitors. So just curious how you're thinking about Being competitive on price, this holiday season.

Speaker 4

So we aren't going to change our philosophy, which is really around Promotional moments as opposed to being on promotion all the time. But this you know, the holiday season is the time for that. I mean, Black Friday, Cyber Monday is a crucial component of the quarter, and we are going to be putting out some very interesting and compelling offerings During that period and so so I don't think you're going to see a significant departure from past practice. But we've always promoted during this period and we will do so again.

Speaker 5

Got it. That's helpful. And then Maybe to follow-up, I don't know how much visibility you guys have here, but looks like you guys did about $33,000,000 in legal and transaction related costs this year, which is Roughly up 50% from last year, I think primarily related to the Google litigation. Is there any color that you provide or you can provide or that you have visibility into what that could look like in 24 as you guys, you know, keep on the gas as it relates to the Google litigation.

Speaker 4

We would expect it to be Very, very significantly lower. Last year was an unusual year and that we had multiple trials, Including 2 that we had to prepare for at the ITC, only one of which turned out went forward, plus the trial in Northern California, which was Very hotly contested. We don't have anything comparable to that on the map for 24. So at least as things stand at the moment, I would expect the expense to go down very dramatically.

Speaker 5

Super helpful. Appreciate it, guys.

Operator

We have no further questions in our queue at this time. I will now turn the call over to Patrick Benz for closing remarks.

Speaker 2

Thanks, Christa. And just, three quick things from my end. First, we are at the beginning of a multiyear product cycle. We have a product roadmap that builds on the success you have seen thus far, growing products per household and revenue per product. As you'll see from the new cohort data we Leased today in the earnings slides, our flywheel is real and the lifetime value of our cohorts continues to build over time.

Speaker 2

This gets turbocharged when we enter new categories, Starting with the one we enter in the second half of fiscal twenty twenty four. The runway to continue to monetize our installed base is very long. 2nd, while the environment remains challenging, our market Share performance shows that we are holding our own. Our innovation, brand and product portfolio continue to enable us to lead this category without having to sacrifice margin the way all of our competitors We are well positioned to accelerate revenue growth back to low double digits as our categories return to normal and these headwinds subside. And finally, we feel good about the size of the team we have now.

Speaker 2

We don't see a need to add a lot more people to deliver on our long term growth objectives. As you saw from our actions in fiscal 2023, we are always managing and optimizing our expense base to ensure the business will deliver sustainable profitable growth. We are confident we have a path to drive our EBITDA margins to our long term target of 15% to 18%. Thank you for your time and we look forward to updating you again next quarter.

Operator

This concludes today's conference call. Thank you for your participation.

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Key Takeaways

  • Q4 & FY23 results: Revenue of $1.66 billion was roughly in line with guidance (down 6% yoy, 3% ex-FX) and adjusted EBITDA was $154 million, reflecting resilient market share gains despite aggressive competitor discounts.
  • Fiscal 2024 guidance: The company expects revenue of $1.6–1.7 billion (flat at midpoint), GAAP gross margin of 45–46%, and adjusted EBITDA of $150–180 million (10% margin at midpoint), assuming continued weak consumer demand and >$100 million from new products.
  • Expense optimization & capital return: Sonos reduced headcount by 7%, froze salaries, trimmed real estate, and normalized non-GAAP operating expenses near 40% of revenue, while authorizing a new $200 million share repurchase program.
  • Product innovation & multi-year pipeline: New launches like Move 2 and Era 100 boosted ratings and sales, and fiscal 2024 marks the start of a multi-year product cycle with entry into a multi-$1 billion category expected to drive significant H2 revenue.
  • Installed base & monetization opportunity: Average products per household rose to 3.05, and converting 40% of single-product homes to the multi-product average represents a potential $6 billion revenue runway.
A.I. generated. May contain errors.
Earnings Conference Call
Sonos Q4 2023
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