Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Second Quarter Fiscal 2022 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speaker’s remarks, there will be a question-and-answer session [Operator Instructions] Thank you. Bill Newby [ph], you may begin your conference..

Thanks, Emma and good afternoon, everyone and welcome to Sonos' Second Quarter Fiscal 2022 Earnings Conference Call. I'm Bill Newby and with me today are Sonos' CEO, Patrick Spence; and Brittany Bagley, CFO; Chief Legal Officer, Eddie Lazarus will also be available during the question-and-answer session.

Before I turn 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. 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 second quarter fiscal 2022 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 will now turn the call over to Patrick..

Thanks, Bill and hello, everyone. Our music today was brought to you by award-winning artist Lorde. Her new Sonos Radio station solar system launched today and showcases the songs and stories that move, shape and inspire her both at home and outdoors.

Last quarter I talked in detail about the power of our flywheel and Q2 was another proof point built is working. We delivered record-setting Q2 revenue ahead of our expectations, representing more than 20% year-over-year growth.

That's even more impressive in light of the fact that we delivered this 20% growth on top of the 90% year-over-year growth we delivered in Q2 of last year. And growth again this quarter was constrained by supply. Our consumer demand remains strong and we continue to work through a backlog.

We once again delivered sustainable profitable growth achieving adjusted EBITDA of $47 million in Q2, despite increased component costs and higher shipping and logistics costs. These results are a testament to the execution of our amazing team and to the fact that Sonos is not a typical one-and-done purchase.

New customers are drawn to Sonos as a result of our existing customers' passionate evangelism. Word of mouth remains the number one driver of new customers. And our continuous product innovation, which causes existing customers to return on a predictable basis to add additional products.

This is the flywheel that is core to our growth and it continues to deliver. Of course product innovation is a critical part of powering that flywheel, which is why we were so excited to announce a trio of new innovations today. The first is Ray, our new compact soundbar that delivers incredible sound for its small size.

Ray raises the bar for at-home entertainment with new acoustic innovations that deliver balance sound, crisp dialogue and solid base. Ray brings our category-leading simplicity and versatility to a more accessible price point, which we expect will attract more new customers to Sonos and provide a new way for existing customers to expand their system.

When we were launched Sonos One, it opened up a whole new range of customers to Sonos and we're looking to Ray to do the same thing for our home theater segment. Second, Sonos voice control is the first voice experience purpose-built for listening to and controlling your music on Sonos.

Designed with privacy at its core, Sonos voice control is the simplest way to control your music, offering complete command of your Sonos system using only your voice.\ Sonos voice control works on every voice-capable Sono speaker, processing requests entirely on the device.

No audio or transcript is sent to the cloud, stored, listen to or read by anyone. Sonos voice control will be available in the United States on June 1. Third is that Sonos Roam, our ultra portable smart speaker is now available in three new colors olive, wave and sunset.

Influenced by natural serenity, evening skis, and outdoor living, Roam's new colors are as versatile as the speaker itself, complementing interior and outdoor styles while harmonizing with the rest of the Sonos system.

As with all Sonos products, the brand's newest speakers deliver great sound that helps you play more, hear more and really feel more, whether at home or on the go. Innovation is in our DNA and remains a critical element of our ability to fuel the Sonos flywheel.

We continue to invest in innovation both organically as you've seen today with Ray and through acquisitions like you've also seen today with the introduction of Sonos Voice Control which builds on the Snips acquisition we made in 2019.

Our premium product portfolio continues to bring new households into the Sonos family and drive increased purchases among existing customers. Separate from what we are doing internally to drive growth, we continue to see three macro trends that we expect will offer significant tailwinds to our business for years to come.

We've previously labeled these the Golden Age of Audio, Hollywood at Home and the Great Reshuffling. Whether it's audio or video, individuals continue to find new exciting ways to consume content throughout their lives increasingly demand better products and services to bring this content to life. This is where Sonos leads the way.

As everyone is aware, external headwinds have picked up since our last earnings call. These include increasing supply chain pressures and COVID lockdowns across some of the largest cities in China. This is prolonging and in some cases intensifying industry-wide chip shortages and resulting in higher component and shipping costs.

At the same time, we are watching the impact of the war in Ukraine on Europe as well as rising global inflation and the strengthening of the US dollar. While we have a large customer base across Europe, we did not have any material revenue from Russia or Ukraine and are no longer doing any business there.

Despite these headwinds, we remain confident that we can deliver on our fiscal 2022 revenue outlook. We are monitoring demand closely. And from everything we can see today, our consumer demand remains healthy. As I mentioned at the top of the call, we continue to have a backlog of orders.

Fulfilling this demand for the balance of fiscal 2022 will cost us a little more than we had previously expected due to the increase in component and logistics costs and this is reflected in our updated gross margin outlook.

While our short-term focus is all the hard work our teams are doing to minimize the impact of the industry-wide supply challenges, there remains tremendous long-term opportunity ahead for Sonos. Our growth pillars are proven and strong. The Sonos flywheel of new household acquisition and existing customer repurchases continues to spend.

We have a robust product road map and track record of at least two new product launches annually and we have an addressable market that is large and growing as well as macro tailwinds that even further underscore the opportunity ahead. I also want to take a brief moment to provide an update on our activities defending our intellectual property.

We were encouraged to see the ITC's importation ban go in effect in March marking the most recent development in our victory against Google. Both sides have appealed aspects of the ITC decision to the Federal Circuit. And while that plays out we are actively litigating our second case against Google in federal court in Northern California.

Now, I'll turn the call over to Brittany to provide more details on our results and our outlook..

one, consumer demand signals from Q2, partially offset by our constrained supply outlook; two, strong new product introductions; and three, the pricing actions taken last September that are rolling through. While demand has remained healthy and we had a strong Q2, the current supply challenges likely limit any further upside to our top line outlook.

We expect Q3 revenue, in particular, will be relatively more challenged by the supply constraints we are seeing. We did end Q2 with a backlog and currently expect that we'll continue for the rest of the year for some products such as AMP where it has been particularly difficult to match supply and demand.

The cost of supplying our revenue has increased across components as well as shipping and logistics impacting our margin not just in Q2 but for the rest of the year. We expect to continue to need a material amount of spot buys to offset component shortages and for the lockdowns in China to continue lifting.

While the manufacturing capabilities in Malaysia have been very helpful over this period, there are still supply chain dependencies on China and we are working through the impact and costs as a result. We will also further diversify our manufacturing footprint by expanding into Vietnam, which we expect to have operational next year.

As a result of these increased costs we are lowering our gross margin range to 45.5% to 46% for the remainder of the year, down from 46% to 47%, but still within our long-term guidance range of 45% to 47%.

This implies roughly 44% to 45% gross margins for the second half, but there maybe some volatility in each of these quarters depending on the timing of spot buys. Given the margin headwinds we have moderated some of our OpEx investments for the back half of the year.

However, the gross margin impact is still partially flowing through to adjusted EBITDA. As a result, we are narrowing our adjusted EBITDA guidance range to $290 million to $310 million down roughly 2.5% at the midpoint. This represents an adjusted EBITDA margin in the range of 14.9% to 15.5% for the full year.

We remain committed to our fiscal year 2024 target of $2.5 billion of revenue gross margin in the 45% to 47% range and adjusted EBITDA in the 15% to 18% range. Despite the uncertain environment, we have significant brand equity, a resilient and loyal premium customer, and a large and growing market opportunity.

We believe these attributes along with a history of consistently delivering innovative new products support our flywheel and position us well to deliver tremendous shareholder value over time.

Overall, we are very proud of the Q2 we delivered and believe the growth shows the durability of our value proposition to customers and the strength of our execution in a challenging supply environment.

We believe we still have a record fiscal year 2022 in front of us supported by our new and existing customers, the new products we have introduced and the price increases we took in September, leading to double-digit top line growth and attractive profitability and supported by a strong balance sheet.

With that, I would like to turn the call over to questions..

[Operator Instructions] Your first question today is from the line of Erik Woodring with Morgan Stanley. Your line is now open..

Hey, good afternoon, guys. Thank you for taking my question. Brittany and Patrick, I know, you mentioned a number of the drivers. But when you strip away some of the pricing changes, channel fill backlog, the concern amongst bears is that demand is at risk of deteriorating.

So maybe can you just share some details or data that gives you confidence that in the investment community confidence that that is not the case that demand remains strong and it's kind of tracking in line at least with your expectations? And then I have a follow-up..

Yeah. Thanks, Erik. Patrick I'll let you kick-off. .

Yeah. Thanks, Brittany. Thanks, Erik. I think the – we obviously have better insight, I would say than most companies in terms of understanding what's actually lighting up and how we – how that's actually trending.

The other big thing, I would say is, we have a DTC business which now we - is about twice as big as it was pre-pandemic that gives us great visibility into what consumers are actually doing in a pretty real-time basis a very real-time basis. And so we obviously are making sure that, we're watching this very closely.

We work very closely with our retail partners. That's a big channel for us, and then as well, the custom install channel. And you can imagine we're asking these questions all the time. We're rigorously working with our teams and watching what the consumers are actually doing.

I'd say, from my perspective, there's some pretty conflicting data out there right now, and you see companies like us, and Apple and Tesla all seeing a lot of demand and not able to fulfill all of that demand. And I think it speaks to the power right now and strength of the affluent customer.

I think Bank of America came out with a report yesterday, as well on the – right now the strength of the more affluent customer as well.

So Brittany, I don't know, if you want to add anything on to that?.

Yeah. Thanks, Patrick. I mean, I agree with all of that. And then Erik what I would add is I think the growth we just posted in Q2 of 20% with strength across our regions and across all of our product lines is a nice indicator of the fact that we are seeing underlying demand.

And when we're able to get the supply in that we're – we're seeing really nice growth numbers. It's not even like we fulfilled all the demand we had in the quarter, because as I referenced we do still have a backlog coming out of the quarter. So that's what we look at.

Patrick took you through some of the places where we go dive to really understand those demand drivers. And then as we look at the second half of the year, it's really some of the things I laid out, which is the price increases are rolling through.

That still leaves you with some healthy growth numbers that are really supported by the new product introductions we have. And while we do look at our demand rates and so far our consumer has continued to show that, they have interest in demand for Sono's products. Remember, we are still supply constrained.

And so to some extent that acts as a natural hedge against the potential for weakening demand because we don't currently expect that we can fulfill all the demand that we do see..

Great. That's really helpful. And then maybe as my follow-up, Patrick, I'll ask this one for you.

Just kind of conceptually, what was the driving force behind the decision to launch an internal kind of smart assistant? How do you think it's differentiated? Whether this come from customers? Was this kind of in your plan all along? Just would love a little bit more color there on the driving force behind that? And what you expect to see from that? Is that a -- is that a new product -- is that a demand driver? Is that a platform enhancer kind of how would you think about it? Thanks..

Yes, we're very excited with Sonos Voice Control. We acquired Snips, great team based in Paris two years ago 2019 actually, I think it was. And they've been working on this. And it was very different than every other assistant that's out there today. So, it is private, it is on-device.

And so something we've heard from customers is, they were unwilling to use some of the big tech voice assistance, the generic -- the more general assistance.

And we thought we could do something interesting that served both the privacy needs, but as well a deeper music experience and a deeper listening experience and very Sonos quality and Sonos level. And so, as you start to use it, you'll see that this is made for people, who want to listen to music, listen to audio.

I mean that's where we really focused in on. And so it is an inch wide and a mile deep, whereas all the ask-anything assistance are much more mile-wide inch deep. And the other thing is that, we haven't done it at the exclusion of our partners. And so you can run Amazon Alexa alongside the Sonos Voice Control as well.

And really Erik it all goes to something that is so important to lifetime value which is engagement. So, we know that those customers that engage in voice, engage more heavily with their Sonos and that that fundamentally helps drive higher lifetime value.

And so we think, with any of these experiences, with anything we're investing in, we're looking at what does it do for customer engagement. And in this case, we're very confident that Sonos Voice Control will be something that will get our customers even more interested and even more engaged with Sonos.

And as they do that, we expect that they will expand their system and continue to tell their friends and family that they should as well get Sonos. And so that's what we're going to be watching for and monitoring as we go through this and we're super excited for the world to get to experience it..

Awesome. Thanks. Congrats again guys..

Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open..

Yes. Thanks for the question. I've got two. Actually, I wanted to come back to the voice assistant Patrick, and just ask you a couple of things.

One is, have you had discussion with your -- the big platform music providers Google, Apple, these guys that also have their own music platforms? Are they -- I'm assuming they're okay with that voice system, but of course they've got their own that are competing with it.

So could you talk a little bit about the competitive dynamic there? And then, on the voice assistant two, I wonder could you talk a little bit -- I saw the Jean Carlo as to voice. And I'm wondering, I've seen other things like this where people actually will pay for additional voices.

I'm wondering if that's a business model that you considered? And what other options you might have for making revenue out of that? And then I've got a follow-up. Thanks..

Thanks, Rod. Yes, I look at Sonos Voice control is very complementary to what Amazon and Google have today. So again, we've built this and one of the things I've talked about in the past is the importance of being able to run multiple voice assistants on our products and I think it's a differentiator.

So the nice thing is, and of course we've talked to all of our partners about this and -- so Apple as well. And so everybody understands what we're doing. It's not at the exclusion of anyone else. This is to create a better experience for our listeners and for music and audio podcast specifically, right, as we get into all of that.

And so this is complementary, should drive higher engagement. That's our plan as we go through this and that fundamentally then translates into higher lifetime value. Basically people that have been using voice and listen, the voice will come back and purchase products.

And so, we think that continues to power that flywheel, right? So every investment that we want to make should power the flywheel. Very interesting on the voice side of it. We will definitely be looking at, are there interesting ways to potentially find other revenue sources as we go through this.

Today we want to focus in on the -- that engagement and make sure that we've nailed the experience in a way that does drive customer engagement and that translates into LTV.

But, Rod, I think very much, we're interested in -- always interested whether it's with voice or anything of other potential revenue opportunities, particularly, as we think about services. .

Great. Okay. Thanks, Patrick. And then, Brittany, I had one for you.

I just wondered if you could update us on -- I know, given there's order backlog, there must still be depleted channel inventory, but could you maybe update us on where the channel inventory sits, at least from your point of view? And I'm also curious, like, if demand did deteriorate, are backlog orders cancelable or they're not really canceled? Those are orders that are going to go through no matter what? Thanks..

Thanks, Rod. I think that coming out of Q2 we're in a much better position on inventory across our channels. So I think, as you look across physical retail, our installer channels, and our DTC, a lot of our lead times have come in for many of our products.

AMP is the one that I highlighted, is still having fairly significant lead times and that's one that's been pretty hard for us to keep in supply, given both demand and supply considerations for that. So we do still have a backlog. We're not perfectly in stock, but we're looking a lot better.

Supply is going to continue to be pretty challenging as we go through the back half of the year, though. And so, we'll be having to monitor that really closely to try and stay as much in stock as we can for as many products as we can stay in stock on. Our back orders are generally cancelable.

We have tracked those through the last multiple quarters and we have incredibly low cancellation rates and nothing about those cancellation rates has changed to this point. So that is still looking fairly healthy to us..

Great. Okay. Thanks a lot. Appreciate it..

Thank you..

Your next question comes from the line of John Babcock with BoA. Your line is now open..

Hey, good afternoon. That’s early evening.

I guess, just to start out, I was wondering if you could talk about the -- what capabilities and talent that brings to Sonos and also how technology will help improve Sonos' products over time?.

Yes. We're super excited about the team there. As Brittany mentioned, a smaller, lighter, more energy efficient, better sounding in terms of what's there. And you're going to be very unsatisfied.

But for competitive reasons, I want to keep our future plans under wraps, but we are super excited to get that into our products and we got some interesting ideas. And I know it's hard for all of you, but just as you see with Sonos Voice Control today, we want to make sure that, when we actually have it ready we bring it out to the world.

And that's when we talk about it. So, we've got plans. And we're super excited about that. And it's all part of the innovation, and the product roadmap that helps power our Flywheel..

All right. Got you, I fully understand. And then, just next and last question, could you just talk about the impact that the COVID-related shutdowns in China are having on your manufacturing? I know you touched on this a little bit earlier, but I was hoping to get a little bit more color on that.

And then, also, generally, how you've been able to mitigate that impact?.

Yeah. So I would say it's really impacted us in two ways. One, we continue to have manufacturing in China. And so, it did impact the capacity of that manufacturing, while they were in lockdowns. And then, two, China continues to have a significant part of the supply chain.

And so, all of those other pieces that go into our products also had manufacturing shutdowns, and/or we couldn't get them out of the ports in China which were also shutdown to get them over to Malaysia, to support our manufacturing in Malaysia.

And so, it's really been across the board in terms of hitting shipping and logistics, hitting the supply chain from a component standpoint, and then also hitting our manufacturing. So we're starting to see that situation improve. And we're obviously watching it very closely, as are many other companies who are working to get their products out.

That is, at this point from what we can see and what we can tell that's factored into our supply constraints in our guidance for the second half of the year. We are very glad we have Malaysia from a manufacturing standpoint. So obviously, we're doing everything we can to get what we need, to have where we need it to be.

So that's pretty much what it is at this point. It's just that balance in managing through shipping and logistics..

Great. Thank you..

Your next question comes from the line of Thomas Forte with D.A. Davidson. Your line is now open..

Great. Thanks for taking my questions.

So one question and one follow-up, so I know you talked about this in your prepared remarks, but I was hoping you could sell up in one answer, how inflation is impacting your business both from a component standpoint, a consumer demand standpoint and then, also potentially, a labor standpoint?.

Tom, I would say our consumer demand continues to be really healthy in Q2. So, we passed along, price increases last September. And so far those continue to really not have an impact from what we can tell from an elasticity standpoint.

So, it's certainly something we're watching, as inflation continues to be out there and all of the, sort of knock-on effects from trying to manage inflation. So right now we're saying we're keeping an eye on it, but we are continuing to note that we had very healthy consumer demand in Q2. It is definitely impacting from a supply chain standpoint.

So what I would say is, shipping and logistics costs and supply chain challenges have been with us for really a number of quarters/years at this point. And so, I think that was one of the first places that inflation hit. And it's not really new. We've been living with it there for a while.

What you see is one of the reasons that our gross margins are coming down is actually really just because of the limitation from a component standpoint. And so because the component environment hasn't improved we're having to continue to make really significant spot buys to try and get that supply and that availability in..

Great. Thank you. So my follow-up -- sorry..

No go ahead please..

My follow-up question is can you talk about the chip shortages to the extent that you can reengineer the products for the chips that are available? And then also if there's any risk to your two major product announcements a year goal for product launches because of the chip shortages?.

Having launched now five products this year I think we're really safe for this year in terms of new product launches. And just as a reminder that was Beam in the beginning of the year. Now it's Ray. I'm very excited to have gotten Ray launched.

It's a great entry level price point for the home theater category and I think it's a great time to really introduce that entry-level home theater product. It's also Roam SL and Roam Colors both great entry level come get to know Sono's price points.

And then it's the Sono's Voice Control, which Patrick already talked about really driving engagement interaction with our customers.

So it's not to say it wasn't an enormous amount of work from all the teams and really great execution to be able to get us in the position to have the supply to be able to launch those products but we're really happy with the cadence of innovation that we've released this year..

Great. Thank you Patrick. Thank you Brittany. It sounds like you guys are navigating the challenges beautifully. Thank you..

We are trying. Thank you very much..

[Operator Instructions] Your next question comes from the line of Brent Thill with Jefferies. Your line is now open..

Good afternoon, Patrick. I want to go back to an important point you made about the more affluent customer. And I'm curious if you fast forward I think right now many clients are assuming that the macro is going to get worse.

I guess, just what you're implying and what you're saying is you ultimately believe that that customer base can stay more resilient through this as things get a little tougher.

And if they do, you feel like you're more insulated? I mean then you're asking not necessarily this quarter, but kind of six to nine months out what are the parts of the business that you feel are more defensive? And is it because -- partly because of the affluent base, or is there another characteristic that's helping? And then I had a quick follow-up for Brittany after you're done..

Yeah, Brent, I totally understand the question and concern. And, obviously, we've been watching both the kind of all the speculation that exists out there. But you're exactly on it right, which is really a couple of things. One is our customer and everything we can see from our customer today.

And even I would go back Brent to some of the behavior in the pandemic prior to stimulus and prior to things really turning up, we saw an incredible resilience with our customers and so that was something that I reflected on a little bit too in terms of where we are.

And I think if people are attending to then maybe retreat they're going to retreat to their homes right? And they may want something that is a little bit better in their homes and that's where we play, right? And again we're talking about products that are $170 to $900. So we're not talking about massive purchases.

We -- these are the kind of things that really help improve a home, improve a room, improve an outdoor space and they're still accessible right, for a lot of people.

The other thing I would say is that I think a lot of people miss is that we are $2 billion of a $96 billion category, right? So if we deliver this year -- and so -- that's just a lot of space. We believe we are taking share from everything we can see across all of our major countries we believe we're taking share in the markets.

And so yes, we are assuming that that continues. And right now everything we can see is really those challenges around supply. So that's what we see right now. And again, obviously, we're talking through the end of fiscal 2022, which has for us a quarter and half – less than that as well.

So I would just flag that Brent right as you think about the rest of the fiscal year. .

Okay. That's great. And for Brittany, I think, many of us are all tracking lead times on your website. You can see as a consumer it's good to see some of the lead times come in. Are you seeing that come in because of just better supply? Some of that asset has demand waned a little. It doesn't sound like demand is coming up.

But can you explain what you're seeing? And you mentioned the backlog is still strong. It will take a while.

Is the backlog up sequentially down? How do you size that backlog that you have to work through?.

Yes. I mean, look our goal is really not to run backlog. Our goal really is to have our products be in supply for our customers. And so we do want to get those products in stock so that people can have them ship out as soon as they order them. That's our goal.

And so I think what you're hearing from Patrick and I in Q2, I absolutely get the long-term questions. But in Q2 what we're saying is that 20% growth I think shows the kind of demand that we have when we can start actually getting some of those products in relative to Q1 where we talked about good demand, but just a lack of supply.

And so we're getting into that that nicer balance. We don't quantify backlog beyond that other than to say it's still large enough that it's worth calling out for people that it exists.

And so that's an indication that even though we're in a much better position on supply -- our supply challenges are means resolved and we do expect them to last through the rest of the year.

And I think that's -- I think that's the balance we're working between managing the demand we do see that we saw in Q2 -- the demand that our new products will generate in the back half of the year and then just our balance trying to get those supplied and available. .

Great. Thank you..

This concludes our Q&A session. I now turn the call back to Mr. Patrick Spence. .

Thanks, Emma. Thank you everybody for joining. I think our flywheel has really been on display in the results you see in Q2. We're excited to layer the new products on top of that. We still are working through the backlog. And, of course, you've seen the pricing that we took last September hit.

So we feel our consumer is strong right now and we're doing everything we can to navigate these supply challenges to really deliver for those consumers.

So thank you to everybody at Sonos for all of the amazing work to be able to deliver this quarter and the past, I think, eight that have dealt with supply chain challenges and to all of you for your time today. Thanks and we'll talk to you soon. Take care. .

This concludes today's conference call. Thank you for attending. You may now disconnect..