Sonos Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 6, 2024

There are 10 speakers on the call.

Operator

My name is Brianna, and I will be your conference operator today. 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. All participants are now in listen only mode. After the speakers' remarks, there will be a question and answer session.

Operator

To withdraw your question. Thank you. I will now turn the call over to James Boglanis, Head of Investor Relations. You may begin your conference.

Speaker 1

Thank you, Brianna. Good afternoon, and welcome to Sonos' Q1 fiscal 2024 earnings conference call. I'm James McGlaunis, and with me today are Sonos' CEO, Patrick Spence CFO, Saori Casey and Chief Legal 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.

Speaker 1

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 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 Q1 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.

Speaker 1

Sonos.com. I would also like to note that for convenience, we have separately posted an investor presentation to our Investor Relations Web 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. I'm pleased to report that we kicked off fiscal 2024 with a successful Q1. We exceeded our expectations by delivering revenue $612,900,000 a GAAP gross margin of 46.1 percent and adjusted EBITDA of $115,000,000 and free cash flow of $269,000,000 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 $1,600,000,000 to $1,700,000,000 revenue, 45% to 46% GAAP gross margins and $150,000,000 to $180,000,000 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 in a highly promotional environment.

Speaker 2

As we have discussed in the past, the home theater category has not yet recovered and remained 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 continue to execute and win. We decided to do something different this holiday season.

Speaker 2

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 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.

Speaker 2

S. Home theater and also saw our 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.

Speaker 2

All of this is a testament to our strong brand, our terrific product lineup and the value that our products offer. Because the 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 plan from 5 to 6 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.

Speaker 2

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 and culture is a priority and we brought the magic of Sonos to life with exciting red carpet and amplified sound experiences throughout the event, partnering with the hip hop duo Flyinaboss to welcome guests and share experience from the celebration.

Speaker 2

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 inches 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 $9.99 per pair.

Speaker 2

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.

Speaker 2

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 $100,000,000,000 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 installed 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.

Speaker 2

Great things are happening here at Sonos and the best is yet to come. Before I turn the call over, 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, Sayori Casey joined Sonos at a very exciting time as we kick off our new multiyear product cycle.

Speaker 2

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 Sayori to briefly introduce herself.

Speaker 3

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 2 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.

Speaker 4

Thank you, Sayori. Hi, everyone. I just wanted to start by saying I'm 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 Sayori on a seamless transition as she takes the helm of this deeply talented finance organization.

Speaker 4

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 Sayori, Patrick and the rest of our executive leadership team as I dedicate more of my time to crafting the strategies who 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 $612,900,000 a year over year decline of 8.9% or 10.5% constant currency.

Speaker 4

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.

Speaker 4

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 varies 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 continue to be impacted by the difficult macroeconomic environment there.

Speaker 4

GAAP gross margin was 46.1%, up 3 70 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. 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 $115,000,000 representing a margin of 18.8%.

Speaker 4

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 $179,000,000 in the quarter, up $44,000,000 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 $467,000,000 of cash and no debt. Free cash flow was $269,000,000 an improvement from $168,000,000 in Q1 of last year. This result was primarily driven by working capital improvements resulting from a focus on better managing our inventory to adjustments to our sourcing plans as well as the implementation of newly adopted payment terms with our suppliers.

Speaker 4

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 $173,000,000 down 43% year over year And down 50% from where we ended Q4. Finished goods were $113,000,000 down $168,000,000 or 60% sequentially. This is the lowest level of finished goods inventory we have held in years as we exited the holidays carrying $147,000,000 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.

Speaker 4

Our component balance of $60,000,000 was down 8% sequentially. As previously discussed, we do expect our component balance to increase in the near term at an average price of $0.1587 per share, representing 1.2% of common shares outstanding as of Q4. As a reminder, have approximately $177,000,000 remaining on our previous $200,000,000 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. Not forgotten, which is unchanged from what we outlined last quarter.

Speaker 4

Revenue. We expect revenue in the range of $1,600,000,000 to $1,700,000,000 roughly flat year over year at the midpoint. Embedded in this guidance is the key assumption that we will generate more than $100,000,000 of revenue from new product introductions in FY 2024, the lion's share of which will come in the second half of the year from the new multi $1,000,000,000 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.

Speaker 4

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, including GAAP cost of revenue. On adjusted EBITDA, adjusted EBITDA is expected to be in the range of $150,000,000 to $180,000,000 representing a margin of 9.4 percent to 10.6%. 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% of revenue. We will continue to manage expenses diligently to drive sustainable profitable growth in the future.

Speaker 4

As previously discussed, we're not providing formal guidance for free cash flow in fiscal 2024, Turning to Q2. We expect to see revenue decreases to 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 $15,000,000 to $20,000,000 from the $179,000,000 in Q1, primarily due to seasonal decrease in sales and marketing, resulting in adjusted EBITDA of negative $34,000,000 to negative $47,000,000 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.

Speaker 4

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 and our appeal from the case in Northern California, where 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.

Speaker 4

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.

Operator

Thank you.

Speaker 5

Guys. Good afternoon. Congrats on a really good quarter. I had two questions, maybe one for Patrick and one for you, Eddie. Patrick, it's nice to see you obviously talking about gaining share, whether that's in the U.

Speaker 5

S. Home theater market or sequentially in some of The streaming markets. Can you maybe just take a step back and give us a bit more detail on kind of the trends you're seeing that are notable either by product, price point or end market? And then and specifically, just can you just help us understand when you call out partners normally

Speaker 2

And we talked about a little bit last quarter in terms of how promotional it's been throughout calendar 2023. I think really what we saw in the holiday quarter was our products, you know, really standing out and our brand kind of shining through, if you will. And particularly when I think about the streaming audio category, the ARR 300 and ARR 100 and our strategy of continuing to raise the bar in those existing categories paid off in terms of winning the share and in fact, helping drive some growth in those categories, which I think is interesting. And again, just Another reflection of our leadership position in that category. And then in a tough soundbar market, continued strength from Arc and Beam in terms of being able to Really take leadership spots across all of the markets there.

Speaker 2

And I think ultimately consumers see the value, They see the value in the ecosystem. We have the advantage versus our competition of the fact that people are coming back and adding more to their system as well. And they're thinking about Sonos as a system and helping power our flywheel. So I think all of those things together Have just enabled us to navigate a 2023 where these categories were very challenged. And We are making sure we put ourselves in that position and I think to be successful going forward.

Speaker 2

And I think we as we look at our marketing efforts, as we look at our distribution efforts, I think we feel good that we can continue to compete and win. There's lots of opportunity there, as I talked about in terms of our share of both the overall audio market and then as well in terms of the number of homes that we're in today. And yes, and so I think at this point, we feel good about our ability to continue to execute and win in the face of whatever the market throws at us.

Speaker 5

Okay, that's really helpful. Thank you, Patrick. And then maybe Eddie, Just for you, gross margins in the Q1 kind of did the opposite of how you guided. You talked about them being below the long term below the annual target and they came in above. Can you maybe just help us understand, 1, why you outperformed despite the more promotional period year over year.

Speaker 5

And then second, kind of as we think about the full year guide, why we should be expecting maybe a flat to slightly worsening trajectory of gross margins this year when 90 days ago, I It was a bit more of a recovery shape as we look through the year. So just trying to understand how the year might look a little bit different than you thought 90 days ago when it comes to gross margin trajectory?

Speaker 4

So on the gross margin, we did a little bit better on the component costs and logistics costs than we expected. Those things fluctuate sometimes quite quickly, and it turned out especially on the shipping side of things that we did better than we thought. And we did have a little bit of an FX tailwind, too. So while we are always pleased to do better than expected, they were Just turned out that this time the surprises were a little bit in our favor. As for the rest of the year, Things in the world are still quite volatile.

Speaker 4

We're looking at the Red Sea situation very carefully, which could raise shipping costs again. We're also looking out at what's coming in the second half to see whether where we think Gross Margins Night Land for things that we have upcoming. And so just penciled out the way it has, But we're delighted that we over performed in the Q1. It, I would say, derisks the gross margin guidance from where we stood before the quarter. And fingers crossed, nothing will happen in the interim to disrupt the good trajectory.

Speaker 5

Super. Thanks very much, Eddie.

Speaker 2

Thanks, Eric.

Operator

Your next question comes from Steve Frankel with Rosenblatt. Please go ahead.

Speaker 6

Good afternoon and congratulations on the performance. Patrick, I wonder if you might give us some color on The larger initial purchase sizes by your new consumers, how much is that driven by them just moving up the product line versus maybe a trend towards people buying more product in the initial bundle.

Speaker 2

Yes. Thanks, Steve. We have been Working hard, particularly our DTC team, but as well now with some of our partners on how we get people started the right way with Sonos, which As everybody on this call will know, is being able to enjoy multi room, being able to enjoy home theater in all glory with Surrounds and A Sub. And so we've been made a very concerted effort to have more people start in that way, and it's paying off. And so We're going to continue to try and get more people started that way because we know that if we do that, they're happier customers, their NPS is higher, and we also know that their lifetime value is higher.

Speaker 2

And so that's been a concerted effort and will continue to be a concerted effort Even as we think about new categories that we go into, how do we get customers to be seeing the full value of the Sonos ecosystem. So that's an important part of the strategy and it's paying off in Q1.

Speaker 6

And then one more, maybe some insight into channel inventories in the installer channel and in European Retail.

Speaker 4

We feel very comfortable where we are in both of those channels. We On the IS side, all last year, we were deleveraging that channel, registrations were running significantly ahead of sell in, And we feel like we've gotten back to a more balanced place with respect to the IS channel. So we feel like that's in good shape going forward. As we said, European Retail has been soft, but we but that softness isn't based on excessive channel fill. It's really just the consumer environment there has been subdued.

Speaker 6

Great. Thank you.

Speaker 5

Thanks, Steve.

Operator

Your next question comes from Jason Haas with

Speaker 7

I'm curious if you could talk about what you think is needed to see a pickup in the industry demand broadly. There's some expectation that we should inevitably see a pickup in housing with lower rates. So I'm curious to what extent you think that could potentially help your business and the industry broadly?

Speaker 2

Yes. I think, Jason, that's probably one of those factors that Certainly, helps ultimately TV sales have been down as well. So as that picks up At some point, I'm sure that will help and just general consumer sentiment towards buying goods versus services, interest rates, all of those things. But at the same time, I would also just make sure everybody hears loud and clear that we believe we have opportunity despite these challenges, right. We are definitely making every effort we can to take more and more of the addressable market that's out there because there is a lot for us.

Speaker 2

And even in a more challenged environment, we've shown the ability to take more. And that's something that I think with Our marketing efforts and kind of the things that we're renewing there, some of the distribution agreements I referenced, and then the work in the new categories. I actually think we have an opportunity to go and take more. And so we're very focused on that. And then I think it's just A nice tailwind as those things come back whenever they do, but we're staying very focused on the things we can control.

Speaker 8

That's great. And then as a

Speaker 7

follow-up question, I wanted to ask about the cadence of EBITDA through the year. I know you've given some good color on it. Was getting this question even before you reported results. It sounds like the cadence hasn't really changed too much. But basically the question I've been getting is just it seems like it's going to be a little bit more back half weighted year from an EBITDA perspective versus if we look at the years pre pandemic.

Speaker 7

So I'm curious what's driving that? I recognize you'll have the new product instructions, so I'm sure that's part of it. But any other tailwinds that we should be aware of for the second half of the year?

Speaker 4

I would say that it reflects the fact that this year, the percentage of revenue that we'll get in the first half is a little bit lighter than we typically do because of this significant new product introduction. So if usually the first half would be 55% to 60 percent of revenue this year. We're projecting 52%, and that's because that we have this new category, multi $1,000,000,000 category we're going into. And so the EBITDA will follow that. We're going to have a dip in the 2nd quarter, which is typically our weakest.

Speaker 4

And then it will rebound for the back half of the year.

Speaker 7

Got it. That makes sense. Thank you.

Speaker 2

Thanks, Jason.

Operator

Your next question comes from Jake Norrison with Raymond James. Please go ahead.

Speaker 8

Okay, perfect. Thank you. Of course, there's a lot of excitement around entering a new product category in the back half of this year. How are you internally thinking about a new product launch into what is potentially a soft consumer macro environment versus A more typical traditional stronger market that you've seen in the past.

Speaker 2

Well, I think, Jake, when we're thinking about a new category that is new to us, it's all opportunity. And so we are approaching it with the kind of energy, excitement and prudence around investments that I think we always do. But we are I think everybody across the company is super excited to get in there. And I think just like we've shown in the categories that we're the leader in today, I believe we'll have a great opportunity to take Others share and at the same time probably bring some buyers into the category that weren't even contemplating being buyers this year. So We're excited right across the company and we're aggressively getting ready to launch because we think this is a big long term opportunity.

Speaker 8

Okay, perfect. And then last one for me. Welcoming Sayori as CFO, can you just Speak to what this organizational change will enable from an operations and maybe even a long term strategic standpoint. Thank you.

Speaker 2

So yes, Aori is 2 weeks in at this point picking up the finance team and technology team. And really, I think the thing that we've talked a lot about is her expertise in helping drive growth and scale in a sustainable profitable way with companies in the past like Cisco and Apple and she knows consumer electronics and the right kind of investment and financial profiles. And so she is going to help us make sure we are investing wisely for the future to drive the kind sustainable profitable growth that we've talked to in the past. So I could not be more excited to see her impact on the organization,

Operator

Your next question comes from Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.

Speaker 9

Hi, guys. Thanks very much for taking my question. Patrick, you mentioned being more promotional during the holidays to meet consumer patience given what a lot of your competitors were doing. Presumably that's not going away this upcoming holiday season or the one after that. Did it start to change how you think about initial prices now that a more promotional holiday environment is starting to become the more new normal?

Speaker 2

If I've learned one thing, Alex, it's that we can't project what will happen next holiday necessarily, right, given some of The ways that these things work. And so this was a pretty unique holiday, I will say, and we're monitoring closely. And I was super Proud of the way the team adapted and move with a sense of urgency to kind of do the right thing to make sure that we were You're meeting the customers where they were in this quarter. But I'm very confident that we have the right level of product investment, innovation and brands, kind of leading products that Put us in a position where we will continue to deliver the kind of gross margin we've talked about and products that customers love, right, and are willing to pay for. And so, we have a good strategy when it comes to, I think the value for the price we provide at a premium level and we're going to continue to deliver that.

Speaker 2

So I think perhaps 2024, we see the kind of discounts we saw in 2023, but I also believe we can continue to execute and win as we did throughout that year with our strategy.

Operator

Your final question comes from Brent Thill with Jefferies. Please go ahead.

Speaker 9

Patrick, I'm just curious, you talked a little bit about these green shoots you're starting to see I mean, where are you seeing kind of the biggest excitement and the return to growth? What's been standing out You kind of axed out the new category you're going into, but what's standing on the existing categories that's reigniting now?

Speaker 2

Well, I think our ability to continue to gain share with the products that we have and seeing Era 300 and Era 100 Really helped drive streaming audio in the as a category in the holiday quarter was something that just For me, I think helps us kind of prove out our hypothesis about raising the bar in existing categories. But make no mistake, Brent, we want to be we believe that given the opportunity in our existing categories, plus the things we're investing in for the new categories. Our typical growth aspirations are higher for the long term than what we're seeing right now because of the challenged category growth rates. But we're going to continue to do everything we can through our product introductions, our distribution, our marketing to continue to compete and win in those existing categories. We know there'll be tailwinds when spending comes back in those categories, but we are doing everything we can in the meantime to Capture more of that, if you will.

Speaker 2

And then to your point, we have exciting new categories that we're entering 1 in Q3.

Speaker 9

Okay. And then I know you mentioned the outlook is unchanged, but when you think about the new category impact on the numbers for this year. Can you just remind us what you've embedded at that midpoint of 1.65?

Speaker 4

$100,000,000 in new product introductions this year.

Speaker 9

Perfect. Thank you.

Speaker 2

Thanks,

Operator

Brent. Seeing no further questions, I will now turn the call back to Sonos' CEO, Patrick Spence, for any closing remarks.

Speaker 2

Thanks, Brianna. I just want to hit 2 things in closing. First, we delivered a successful Q1 in a challenging and highly promotional environment. Our performance in Q1 puts us on track to meet our first half and fiscal twenty twenty four expectations in terms of revenue, gross margin and adjusted EBITDA. 2nd, we are laser focused on what we can control.

Speaker 2

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 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. Our commitment to operational excellence means improving our gross margins, tightly managing our expenses to deliver adjusted EBITDA margin expansion and working down our inventory position to improve our free cash flow conversion.

Speaker 2

We made great progress this quarter and we'll look to build upon our success in the quarters and years to come. Thanks for your time today, and we look forward to speaking with you again next quarter.

Operator

This concludes today's conference call. You may now disconnect. And we are clear.

Speaker 2

Thanks, Brianna. Thank you, Brianna.

Operator

Thank you, everyone. Have a great rest of your day.

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Key Takeaways

  • Sonos kicked off fiscal 2024 with Q1 revenue of $612.9 million, a GAAP gross margin of 46.1%, adjusted EBITDA of $115 million and free cash flow of $269 million, all ahead of expectations.
  • The company reduced its owned inventory balance by 43% year-over-year and finished goods by 60% sequentially, driving a notable improvement in working capital and free cash flow conversion.
  • An extended pre-Christmas promotion generated strong consumer demand, resulting in market-share gains in U.S. home theater and streaming audio, and delivered the highest products-per-new-customer in years.
  • Sonos reaffirmed its full-year guidance of $1.6 billion–$1.7 billion in revenue, 45%–46% GAAP gross margin and $150 million–$180 million adjusted EBITDA, with over $100 million expected from new product introductions including a Q3 category launch.
  • Key strategic initiatives include expanding distribution partnerships, leveraging cultural marketing activations (e.g., the Grammy House experience) and diversifying the lineup with innovations like the Sonos x Sonance 8-inch ceiling speaker.
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Earnings Conference Call
Sonos Q1 2024
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