Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sonus fourth quarter in fiscal 2019 conference call. At this time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press.
Star one and your telephone if you require any further assistance please press star zero.
I'd now like to hand, the conference over to your speaker today, Ms. Cammeron Mclaughlin Sornosa Investor Relations. Thank you. Please go ahead.
Thank you good afternoon, and welcome to Sonus fourth quarter in fiscal 2019 earnings Conference call I Am Cammeron Mclaughlin and with me today are so no CEO Patrick's band and CFO Britney Bagley for those joining the call early today's hold music comes from a play less inspired by the launch a Thanos move is included in our share.
Other letter today.
Before I hand, the call over the Patrick I'd like to remind everyone that today's discussion will include forward looking statements regarding future events in 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 above expectations reflected in the forward looking statements.
Discussion of these risk factors, it's fully detailed under the caption risk factors in our filings or the FCC. During this call. We will also refer to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and free cash flow for complete information regarding our non-GAAP financial information and a reconciliation of those measures. Please refer to her today shareholder letter.
Regarding our fourth quarter in fiscal 2019 results posted to the Investor Relations portion of our website with that I'll turn the call over the Patrick Thank you Karen and thanks to all of you for joining US today as we report on our first full fiscal year as a public company.
As we get started I want to ground doesn't that journey, we have been on what we set out to achieve this past year.
When I took on the role of center CEO almost three years ago, we set out to do two things. The first was to accelerate our pace of new product introductions. Both in terms of new products, extending our leadership in the home and new products that take us into categories beyond the home and the second was to deliver sustainable profitable growth on a consistent basis as we exit 2019.
I'm pleased to report major progress on both fronts, while continuing our run of record setting results.
Revenue for fiscal 2019 increased 11% to a record 1.261 billion and adjusted EBITDA increased 28% to 89 million.
This marks the third consecutive year, we've exceeded the financial goals, we set forth of 10% plus revenue and 20% was adjusted EBITDA growth.
Well as achieving the important milestone of positive free cash flow.
We generated more than 97 million in free cash flow in fiscal 2019, ending the year with 339 million in cash.
Moreover, we achieve these cash flow metrics, even as we increased our product philosophy and investment in innovation to drive growth over the long term.
We exited fiscal 2018 with over 9 million homes around the world using Sonos. This is a terrific milestone and only reinforces our confidence about the opportunities in front of us the quality of other products the uniqueness of our platform and the strength in premium positioning our brand drove continued growth in purchases by both new and existing cost.
Immersed in fiscal 2019, we added nearly 1.7 million new households, the most we've ever out it in a year and an increase of 9% from last year.
Additionally, and this is what are the things that sets us apart from any company. We can think of our existing households accounted for 37% of our new product registration. This means 37% of the products registered in the year, where from customers who were adding an additional sonus product to their home this strength in customers.
Buying more overtime is also reflected in the increase we've seen in average number of registered products per household going from 2.8 to 2.9 in fiscal 2019.
Together. These results illustrate our continued ability to acquire new sonus customers and to convince our existing customers to continue to add to their system.
Since inventing multi room audio over 17 years ago, Sonus has consistently grown our revenues and profits innovated and enhanced our product offering in platform and further advanced our leadership position the quality of our products across design ease of use sound quality, the openness of our platform and the premium positioning our brand drugs growth in purchases bye bye.
Both new and existing customers, we continue to invest in innovation and differentiation our core areas of strength.
We made tremendous progress in fiscal 2019 toward our stated goal of increasing product velocity and moving outside the home unveiling several new products, including Sonus move Sonus want to sell so no sport and Sonus and.
These introductions demonstrate our ability to extend our leadership within the home while introducing our first product that takes sonos outside the home.
Move takes freedom of choice to the next level, marking the first time, you can take sonus anywhere and adds a product category our existing customers have been asking for.
Expanding our product offering outside the home will also introduced and I was to a much broader market than the current 18 billion in home.
No market.
We see significant opportunity in the years ahead, leveraging our software and hardware expertise in new categories.
In addition to new products, we also expanded our partner ecosystem with the launch of new products with partners like so Nance and Ikea.
These partnerships give us access to both new categories and a vast number of new customers Ikea has unparalleled global reach with over 1 billion consumers visiting their 422 stores in over 50 countries all shopping exclusively for their homes.
Partnering with Ikea creates new ways for us to monetize our existing technology by enabling the sonus experience and software in products manufactured and sold by Ikea.
The collaboration also brings the so no sound experienced a unique form factors at new price points. We've been very pleased with the Ikea performance on the first day of large Ikea sold more than 30000 symphonic table lamps, and bookshelf speakers illustrating significant early demand.
In addition, our data suggest that Ikea households are purchase purchasing their next on those product in a similar way to traditional sonex new households.
Assistant with our expectation that once introduce the simplicity of the Sonus experience customers will add more products to augment their home sound system.
And today, we are delighted to share with you the acquisition of Snips.
Snips is a private by design voice platform and the amazing team will bring expertise and strategic intellectual property that will make the voice experience on sonos even better.
We're not looking to replicate what general purpose voice assistance offer instead, we'll be enhancing customer choice ease of use in control and privacy as we continue to differentiate the end to end Sonus experience.
Snaps and our ongoing software investments add to our considerable intellectual property value ranked second in the electronics category and Ninetyth overall in the latest I Triple the patent power report.
We are working towards realizing the value of our IP assets over time since our settlement with Denon. We've engaged many companies in constructive conversations and are prepared to take action as necessary in order to protect our rights.
As we look ahead to fiscal 2020, I could not be more excited about what we have planned we have a robust an innovator product roadmap that will fuel our continued growth and expand our market opportunity, we will deliver against our promise new product velocity through fiscal 2020 and continue to test new unique offerings like trade up Sonus, where business in Sonus flex.
Last week, we remain committed to our long term growth targets and have a clear line of sight to continue delivering sustainable profitable growth to enhance shareholder value over the long term.
I'll now turn it over to Britney to say a few words.
Thank you Patrick.
I'd also like to welcome Cameron to her first earnings call. It since joining in August she's been a wonderful addition to the team.
Let me add some additional color on our strong 2019 result, we came in just above our revised guidance and ahead of average annual target goal.
2019, as another Great example of US doing what we say we're going to do.
In the fourth quarter revenue increased 8% to 294.2 million.
Gross margin declined 40 basis points year over year to 42.2%.
Our adjusted EBITDA loss for the fourth quarter was 3 million compared to 20 million profit last year.
The loss was primarily driven by increased sales and marketing to support the launch of Moon and increased R&D headcount to support new hardware and software development.
Turning now to our fiscal 2019 results revenue for the full year grew 11% to a record 1.261 billion.
This already impressive growth was even better on a constant currency basis at 13.4%.
The Americas grew at 12.4% and EMEA grew at 1.3% or 5.8% on a constant currency basis.
Hey, Pat grew significantly up 78% on the strength of the Ikea module business.
Our wireless speaker category was down 5.1% year over year, but it gained momentum in the back half in performed particularly well in Q4, partly due to the addition of move.
Home theater grew 17% year over year, but it was down in Q4 as we lapped the introduction of being last year.
Components had a strong Q4 and full year due to the refresh in Barcelona introduced in November of 2018, and other was driven by strong Ikea modules.
Fiscal 2019 gross margin decreased 120 basis points to 41.8% due to a variety of factors, including product mix unfavorable foreign currency impact on the launching of a new distribution channel, partially offset by product a material cost reduction.
Sales and marketing as a percentage of revenue decreased 420 basis points on top of the 340 basis point year over year decrease in fiscal 2018.
We benefited from differentiated high impact creative and the adoption of more efficient direct to consumer and digital marketing tool.
The reduction in sales and marketing coupled with the strong continued growth of 1.7 new million new households means the cost to acquire our customers is coming down.
So in those customers continue to add more to their system over time, meaning a customer's true lifetime value has yet to be fully realized.
We are continuing to invest in R&D.
R&D as a percentage of revenue increased 110 basis points in fiscal 2019, as we supported the increased product velocity Patrick mentioned, while also continuing to invest in software and the consumer experience, which truly differentiate donor.
Snaps will be a great addition to this effort and we are excited to add this team and its capabilities to sell note in fiscal year 20.
We achieved a 20% increase and adjusted EBITDA 89 million in 2019. This represents a 7% margin up from 6.1% in 2018.
We have talked about our ability to scale Sonus and drive outsized adjusted EBITDA.
Which we have demonstrated again in 2019.
We also drove a significant improvement in free cash flow and how the healthy balance sheet.
As a reminder, since our last earnings call. Our board authorized a 50 million share repurchase program, we see tremendous value in our stock and our strong balance sheet enables us to implement this repurchase program, even as we invest in our long term road map and maintain our flexibility to pursue new strategic.
Opportunities like snip.
Looking ahead, we are excited for a strong fiscal 2020 supported by the great products and partnerships, we launched in 2019, including move Ikea, one FL port any up.
Our fiscal 2020 outlook is for revenue of 1.365 to 1.4 billion.
This represents growth of 8% to 11% for the year and at the midpoint is consistent with our average annual target of 10% revenue growth.
As a reminder, effective September 1st 2019, our products are subject to 15% tariff under lift or.
While there is frequent speculation on the trade negotiation, we are assuming for the purposes of this call that this remains an effect for the full year at 15%.
We have discussed in prior quarters, our goal of diversifying our supply chain outside of China and have accelerated our effort specifically by pride prioritizing the production of U.S. bound products to Malaysia.
Our manufacturing capacity in Malaysia is ramping up quickly and we believe we will have largely eliminated the go forward impact of tariff by the end of the fiscal year.
In the year, we do expect tariffs to have a net negative impact to our profitability of 30 million with about half of that coming in the first quarter, which is our largest sales corridor.
We anticipate that efforts to diversify our supply chain into Malaysia will offset the impact to greater extent in the back half of the year.
Fiscal 2020, GAAP gross margin is expected to be in the range of 41.2% to 42.2%.
Excluding tariff related costs GAAP gross margin would be in the range of 43.2% to 44.2% in fiscal 2020, representing 140 to 240 basis point improvement from fiscal 19.
Strong improvement in gross margins over 2019 is driven by the introduction of higher margin new products and improvements in material and product call.
Thanks to the great work of our teams gross margins inclusive of tariffs are still in line with 2019, and excluding tariffs would be coming in towards the high end of our long term guidance.
The result is an adjusted EBITDA range of 72 to 82 million, including tariff.
Excluding tariff related costs, which we view as one time adjusted EBITDA would be in the range of 102 to 112 million representing growth at the midpoint inline with our average annual 20% growth target.
Ultimately we are investing in the business.
As noted in our shareholder letter today, we plan to align our revenue reporting with how we look at our business internally the evolving nature of our products into new categories, and how our customers are purchasing from us across multiple categories.
For example, the beam maybe your living room Speaker and two one upsells are great for creating rear surround sound in your home theater setup.
Our products are used an increasingly flexible ways inside and now outside of the home.
The result, beginning with next quarter's earnings we will report our product revenue in the following categories.
Well no speakers, which is essentially consolidating wireless in home theater into a single category more reflective of what our consumers are buying from us.
So no system products, reflecting our component products and other related non audio producing selling those products.
And partner products, and other revenue, which will be inclusive of our partner revenue licensing accessories and other.
Accordingly, we will no longer report wireless home theater components and other revenue.
We're very pleased with the strong consistent results. We delivered in 2019, we look forward to 2020 and believe we are on track to deliver another year of strong revenue and adjusted profitability growth.
With that we look forward to answering any questions.
As a reminder to ask a question you will need to press star one in your telephone to withdraw your question press the pound key.
And your first question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Hi, Thanks for taking my question does is ashwin on behalf of Rod.
Patrick maybe there's a question for you on holiday demand expectation.
I wanted to get your thoughts on how you're thinking about demand, particularly in Europe , there Google assistant.
During the.
And now that you have supported.
Can you talk about your expectations of two man.
Hello.
You know I, we've obviously built that into the guidance that we provided and we've certainly you know I think it's been great like you to your point about adding Google voice, Google assistant across the countries in Europe , because it's much more.
Relevant there.
In terms of what's happened, but nothing.
I wouldn't say anything in particular that I would point out.
Difference or new really to that story, we expect.
Growth that we but we expect growth across.
All the regions as we think about holiday.
Okay and my follow up is on the trade up program can you give us more color on the reception there.
Customer reception and.
Okay kind of help us understand sort of impact it would have on your margin profile.
The program see significant uptake.
You know, it's really early days right now for the trade up program. This is a program, where we're providing our long standing customers with an opportunity to upgrade to the newest generation of products and then to responsibly be able to recycled they're all their product so.
Now early days, we'll see how things develop over.
Over the next few months.
And we obviously have trade up built into our guidance for fiscal year 20, and I think you can see that absent tariffs are showing really nice gross margin results. So I wouldn't view that as a big drag.
Thank you.
Your next question comes from the line of Adam Tindle from Raymond James Your line is open.
Good afternoon. This is Madison on for Adam and Thanks for taking my questions I wanted to start on the household growth you mentioned the letter you added a record number of new households can you talk about the key drivers that have led to this acceleration despite lower marketing spend and have some business model innovation with partnerships like Ikea are impacting this.
Yes, Thanks Madison.
They could be you know the new product velocity has certainly helped right. So as we set out then have started to introduce new products. It keeps the.
It allows us to drive a lot of earned promotional dollars basically like through the through those two tent pole moments that two times year. When we have big press moments in the world C. So no. Since he has done is innovating. So that's been a key driver I'd also point to the system. This system. This than just like the continued loyalty of our cost.
Summers to go out and tell their friends and family about Sonus continues to be a key driver in the last point would be finding new methods to actually drive more awareness of so no. So our efforts around digital and direct to consumer have allowed us to become more efficient on the sales marketing side.
Madison I'll, just add I think we're pretty excited about what Ikea could do for us longer term to continue driving down the new household acquisition costs, but I would remind you that they really would only have shown up in our household numbers since August because they've been in stores in August and September . So they really are pretty small contributor to.
This 1.7 million. So most of this 1.7 million is really being driven by our existing products and channel.
Okay. That's good color. Thank you and just for a follow up if I have my model right for fiscal year 20, let's say gross profit dollars will still grow by high single digits, including the tariff impact.
EBITDA will be down by mid teens year over year can you just help me bridge. The gap there is there anything outside of terrorists contributing to contributing to this maybe related to the acquisition and then what are the natures of these costs related to tariffs are they really one time, meaning that we should get it 30 million dollar tailwind into fiscal year 20. Thanks.
Yes, great question. So as we think about it we've done a lot of work Tim. Please prove our gross margins in fiscal year 20, and absent tariffs, we would be both growing EBITDA of 20% and investing back into the business.
That's really critical for us and long term to continue to grow to continue to deliver new products to continue to deliver software that differentiate so notes and so we are going to continue to do that so.
You know absent tariffs, what you're really seeing as we are investing back into the business and the more majority of that is really in R&D.
That said the tariff costs really are one time, what we're giving you as the net number of what it's costing us to actually pay but Tara and so.
Regardless of what happens to tariff when we get into fiscal year 21, we will be shipping our us out products from Malaysia, and that will get us out of the tariff impact.
Okay. Thanks for taking the questions.
Your next question comes from the line of Robert Mueller from RBC capital markets. Your line is open.
Hi, I was wondering if you could just discussed the engagement from Ikea users in terms of how much time, they're spending on the up and then also if you have any commentary about the popularity of the two products in which one has been performing stronger order.
Yeah, we.
We're not going to break out the unit sales, but I will tell you that I think the thing we've been watching and that's most important is how.
The customers that start with an ikea product come back and repurchase and so so far.
We've seen that those customers follow the same trend as the Sonos branded customers, which is a you know.
The huge thing as we think about the lifetime value that these customers will bring into Britain is earlier point you know Ikea is a good who is going to be a great new household driver and when you combine that with the fact that we're seeing that kind of behavior in return repeat purchase I.
I think we're an excellent position and we're very pleased with the start we're off to we'd like you.
Okay, and then just along those lines are the returning for more acute or the actually transition to the full sales branded products.
We're seeing we're seeing both.
In the mix right now and we expect we probably will see both and you know will continue to watch that over time and see if any particular trends pop out but at this point, we're seeing both.
Okay, great. Thank you very much.
Thank you.
Your next question comes from a line of brands Phil from Jefferies. Your line is open.
Hi, This is David onto Brent Thanks for taking the question.
Could you comment on the early demand you're seeing for the move as we head into the holiday season, especially at the $299 price point.
Looks like you're calling it out as a big driver for 2020. So you must be feeling good about where you are in terms of how'd selling so far.
And then either revenue 1% in America is 2% in EMEA on constant currency basis is there anything to call out as to why those regions didn't grow as fast as the competition or something to call out on an ACO front. Thanks.
I'll take the first one and let Britney answer the second one.
On the move we're pleased with the way we're off to start it's a great product I just look today and its rate at a 4.6 out of five on Amazon, which is pretty amazing for new products and one of our best that's on there.
All of our new products are great contributors to our growth, but so our existing ones.
So we're pleased and it absolutely plays a big part in our fiscal 2008 growth story.
Yes. So the thing that you saw in Q4 is that both the Americas enemy out we're lapping the introduction of beam in Q4 last year. So that's really the impact that you're seeing on a quarterly revenue growth from a year over year standpoint, you can see we're continuing to really perform on our growth TARP.
Yes, not much more what we look at.
Got it thank you.
Your next question comes from the line of Sean Henderson from D.A. Davidson. Your line is open.
Hi, guys. Thank you for taking my question.
Similar to your efforts.
Then for your team looking to grow.
Oh partnership strategy.
Yeah, you know, we're just getting started with the Ikea one we're off to a good start.
More planned with them, but it's certainly something we're considering for the future nothing nothing to announce today, but something we're considering for the future.
Okay. Thank you and then just one quick follow ups. So how should we think about.
Your future product strategy.
Including any potential new verticals that you guys can movement.
Yeah, we're committed to continuing to deliver the kinda piece of new product introduction that you've seen from us over the last almost three years now.
So weve accelerated I think we feel good about that we are you will see a balance of both extending products that extend our leadership in the home and then also products that.
How does expand into categories were not in today and those can come both from sort of branded efforts and also from partnerships.
So you'll see a mix of both and you can continue to expect to see us.
Making sure that we're delivering on both of those fronts.
As we mentioned in the shareholder letter you should expect a few more product introductions. This year and will be really excited to talk about those and those happen.
Got it thank you very much.
Your next question comes on line of Matt Sheerin from Stifel. Your line is open.
Yes, Hi, this is kurtz worth on for Matt Sharon. Thank you for taking my questions.
First question I know you arent, providing specific quarterly guidance, but just hoping maybe you could provide anymore color on how Q1 sales are currently trending perhaps relative to historical seasonality. I think you said you expected growth in all regions, but any other color there would be helpful.
Yes, so we don't provide quarterly guidance and we are still early in Q1, but I would say that the best way to look at that would be a growth rate that is roughly consistent with the growth rates that we saw last year.
Understood.
And then just another question going back to the tariffs.
Sort of a two pronged question here.
For one are you using deepened on using the same contract manufacturers in Malaysia.
You've been using previously or are you sort of branching out to new ones and also have you considered passing along the tariff costs or was that really not enough in the strategy and once the tariffs were actually implemented. Thank you.
Yes, both great question.
We have diversified our contract manufacturers over time, but in Malaysia, we are using contract manufacturers that we're already working with so this is really about diversifying to Malaysia out of China.
In terms of passing along the cost I mean.
We certainly thought about it but that was not what we determined to be the best plan and because this really is a one year impact for us we need to do what's best for the business and our consumers and what's best for our business in our consumer then.
To diversify as quickly as we can and get out of having to pay these tariffs while also delivering what we need to deliver on from a brand and company perspective and continue to invest in our business for the long term.
Understood.
And your next question comes from a line of Katy Huberty from Morgan Stanley . Your line is open.
Hey, good evening, guys, it's Eric Woodring on for Katy So just touching more on the one Q dynamics here.
You don't give specific guidance so.
I imagine that you've incorporated this into your guidance, but just curious how you guys think about the timing of the holiday season being six days shorter this year than last year and kind of how that affects.
You think about one Q and then secondly, I'm as it relates to one Q historically call. It just shy of 100% of your annual EBITDA comes through in fiscal one Q is that how we should think about it kind of ex tariffs and that layer on the incremental tariff impact after that and then I've a follow up.
So, yes, we have incorporated holiday timing and to into our guidance and into my commentary. So yes, we've we've thought about that and I think all we're really going to stay on EBITDA is that we think about half of that cost of tariff will get.
Impacted in Q1, so we'll be adding back about 15 of the 30 in Q1.
Okay, Great. Thanks, and then and then just as it relates to tariffs.
Obviously, you've talked about might notes failing to Malaysia.
You know how far along are you on in that process do you plan on only moving us down capacity or are you, taking kind of a broader view towards diversifying and manufacturing base color over the longer term.
Over the long term, we are looking to diversify and have a solid and flexible manufacturing strategy, but right now because of tariffs. We are prioritizing you asked bound manufacturing so thats our priority for fiscal year 2000.
Great. Thank you very much.
And there are no further questions at this time Mr. Patrick expense I turn the call back over to you for some closing remarks.
Fantastic Thanks to everybody for joining today I think we've got our first year as a public company in the books and it was good one and we're looking forward to what we have planned in fiscal 20.
And I would also point out in our letter you'll find a playlist inspired by Sonos move so I hope, you'll all take a moment to enjoy that thanks, and we'll talk to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.