Q2 2020 Earnings Call

[music].

Hello.

Welcome My name is Susan and I Love Your conference operator.

Hi, I would like to welcome everyone to someone else the schools.

Second quarter 2020 earnings conference call all lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question answer session. If he would like to have sequestering.

So the number 100 times, sometimes if he would like to withdraw your question. Please system houses. Thank you.

However, in Mclaughlin Vice President Investor Relations you May begin your conference.

Thank you good afternoon, and welcome to so no second quarter fiscal 2020 earnings conference call I Am Cammeron Mclaughlin and with me today, our son US CEO, Patrick sense and CFO Britney badly for those joining the call early today's hold music comes from a play last set of included in our shareholder letter the music for many of the.

Artists that Sonus has worked with thus far in 2020, including lows featured on Sonos radio.

Before I hand, the call over to Patrick I would 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 from expectations reflected in the forward looking statements that discussion of these risk factors, it's fully detailed under the caption risk factors in our filings with the SNC.

During this call. We may also refer to several non-GAAP financial measures, including gross margin and adjusted EBITDA, excluding the impact of terrorists adjusted EBITDA adjusted EBITDA margin and free cash flow for a complete information regarding our non-GAAP financial information and a reconciliation of those measures. Please refer to the day shareholder letter regarding.

Second quarter fiscal 2020 results posted to the Investor Relations portion of our website I'll now turn the call over to Patrick.

Thank you, Kevin and Hello, everyone. Thank you for joining us today.

On top of everybody if someone else, we sincerely hope you're managing your ways for these challenging times at our thoughts grow to all those impacted by this global pandemic.

Since the pandemic hit our immediate priorities have been to support our people serve our customers and ensure we weathered the storm could emerge stronger.

We transitioned to working from home in mid March adequately seen how resilient adoptable and agile for people are our team has risen to the challenge and maintained an incredible level of productivity and teamwork. Despite the stresses of stay at home orders and life in general.

This is evidenced by the fact, we launch Sonus radio on April 21st and are announcing three new products today.

We have long instilled a learn and adjust culture and that approach is resonating as we creatively and quickly solve for the needs of our customers colleagues and communities.

As you can see from our Q2 results at the early Q3 trends, we're operating in volatile and unpredictable times.

We're confident that we're well positioned for the long term and we will emerge stronger from this crisis, but the short term visibility is challenging which is why were withdrawing our prior fiscal 2020 guidance at this time.

Our second quarter was challenging as we experienced a 17% year over year decline in revenue.

Coming off a strong first quarter, we've been expecting some softness in the second quarter Q twos, usually the quarter, where retail retail partners rebalance their inventories after the holiday quarter. We typically see few orders early in the quarter and better partners replenish later in the quarter.

This Q2, we saw one of our large us retail partners and our German distributor doing this rebalancing, but we did not see the replenishments later in the quarter as the Cobot 19 pandemic hit and everyone started to close stores and focus on health and safety.

This led to a 23% year over year decline in revenue in March specifically.

Despite this we continued to gain share in the streaming home audio category in the U.S. and UK.

Maintained a leadership position during the quarter, which we attribute to the quality of our products and the strength of our brands.

Our continued focus and investment in our direct to consumer efforts paid off as we saw 32% year over year increase revenue through direct to consumer channels in Q2.

In April the first month of our Q3 direct to consumer revenue accelerated to approximately 400% year over year growth.

Of Copel course, most physical retail locations were closed in April which made it a challenging sales environment to begin with but we wanted to help make people's lives a little more joyful, while they were spending more time at home. So we threw it our original plan add on April 2nd we launched digital campaign at home with Sonus with some tips on how to get the most of your Sonos and targeted.

Promotional offers that ran through may fit.

The other encouraging data point from April was that move was one of our top selling products and it did not have a promotional offer associated with it.

This underscores that our products are resonating with consumers and.

At our brand is premium position.

Thanks to the success of our direct to consumer efforts, we expect that our total revenue in April April will declined less than 5% year over year.

We're pretty pleased with this given the physical retail was closed for the month. It is hard to know what the next few months, we'll bring and we don't view either March or April as indicative of our natural run rate, but it illustrates that our products and brand are resonating with consumers. During this time.

What are the most illustrative data points on how strong engagement was in April was listening hours, we experienced a 48% year over year increase in listening hours in the month of April.

Proud that we've been able to make life at home a little more joyful for the more than 10 million homes that we're in today.

Innovation remains the core of Sotos folks in the products, we built and the culture that fuels it.

We design products and experiences that are easy to use deliver brilliant sound and give users the freedom of choice when it comes to voice in music services.

Today, we are excited to announce the launch of Sonos arc five in sub.

Arc is our premium smart soundbar that brings immersive cinnamon cinema quality sound to your home with features like support for Dolby Atmos.

Going to many years of success with our play bar and category leadership, we're thrilled to bring a new premium sound bar to market. This is our best somebody yet and really pick them eyes is what we're all about boat.

The choice for anyone who loves movies and music.

The five is our most powerful speaker delivering the same studio quality sound as the beloved play fives, and bringing increase memory processing power and into wireless radio. It also features a stunning new front growth.

Our use of features the same iconic design and bold base as its predecessor, but upgrades it with increase memory processing power and more arc five and sub will be available. This June.

We continue to explore the will services play in the future of Sonos and continue to experiment with new business models like we have done in the past with flex and so on this for business.

We also continue to see long term opportunities to expand upon our partnership model I remain pleased with our partnerships with Ikea and Sonia.

As you saw in late April we launched Sonus radio.

We had seen that are consumers are spending nearly half of all listening comments on those listening to radio content.

Inspired by and built for Sonus owners, so unless radio is a free AD supported radio service available in the Sop <unk> three.

Streaming music news sports and original Sonus programming. So this radio integrates a growing list of 60000 radio stations into one place.

Since launch a significant number of so those households have listened to Sonus radio and is quickly resin up the rigs and become the six most you service on the centers platform.

While the short term is unpredictable I'm confident that we're well positioned for the long term and we will emerge from this crisis well position to drive sustainable profitable growth.

I will now turn the call over to Britney.

Thank you Patrick.

As we have discussed over the last few quarters Sonus has been focused on balancing strong topline growth.

Creasing profitability with the need to continue to invest in our business future product.

Despite the significant challenges this quarter and the potential long term impact from the global pandemic that is still our priority.

Because of that sustainable profitable growth, we continue to be in a position of strength today, where we can focus on what assessed for the long term business. In addition to taking the necessary short term actions.

We also believes that a prudent balance sheet.

And with M&A and share repurchases is the right capital allocation strategy.

Say that philosophy sort of been flat.

We ended the second quarter with 283 million in cash and cash equivalents and very minimal long term debt.

We also have inflation $80 million undrawn revolver, providing even further flexibility.

We have Ron a variety of scenarios as you can imagine and are confident in our cash position, even if a weak economic conditions persist.

During the second quarter, we use 83 and half million in cash from operations largely due to the timing of inventory payables following our holiday quarter.

Q2 is typically a seasonally low quarter for cash.

We looked at the rest of the year, we continue to focus on managing our cash in preserving our strong balance sheet.

We also repurchased approximately 30 million of our stock early in the quarter.

We currently have approximately 17 million remaining under the 50 million repurchase authorization.

In March we took action to review our planned investments for the year and made adjustments to preserve flexibility and liquidity, while continuing to support our critical business me.

As you have seen we have adjusted our marketing approach.

Reducing certain planned investments so also launching the at home with your nose campaign.

We have taken steps to manage our inventory more tightly given the end market weakness.

Eliminated many discretionary expenses beyond just travel and typical in office expenses.

We're focused on having a lower operating expense run rate in the second half of fiscal 2020 as compared to the first.

Which means we have also paused on some of the continuing hiring and investments we're making.

You should expect some variability around sales and marketing given the timing of events in Q3, including our promotion and new product launches.

We are confident that these are the right measures to take at this time. So we'll continue to review and Jeff as we learn more over the coming weeks and months.

Revenue in the second quarter decreased 17% or 16% on a constant currency basis to 175 million.

Coming off a strong first quarter, we had highlighted that we were expecting some softness in the second quarter from demand Poland.

As Patrick noted we also saw challenges primarily from a large partner in the U.S. rebalancing inventory as well as weakness in our German market from inventory rebalancing with our distributor.

Overall across all of them our market there was a significant impact in March from the weekend global demand environment.

Based physical retail closures stemming from Nicole Kidman pandemic.

Impacted both end demand and replenishment orders from our partners in the majority of our end market.

As a result, our revenue in March declined 23%.

Don't know speaker revenue represented 66% of total revenue during the second quarter and decreased 27% from the prior year.

We believe this category with more significantly impacted by inventory rebalancing measures and the effects of code on.

Consumer demand.

In contrast, our solar system products revenue, which represented 27% of total revenue during the quarter increased 22% year over year, driven by the performance of some of those.

And the launch as soon as poor in late fiscal 2019.

Partner products and other revenue increased 4% driven primarily by our Ikea and Sony is partnerships, which launched in the second quarter fiscal 2018.

In April as discussed we launched our at home with Sonus program. We thought it was important to get back in front of consumers with relevant messaging and opportunities during this challenging time.

As Patrick mentioned, so no smooth was one of our best selling product even without a promotion.

We have seen an increasing percentage of our sales shift to online purchasing during the quarter given the physical retail closures.

Our direct to consumer revenue during the second quarter increased 32% year over year.

We saw this further accelerate in April with approximately 400% year over year growth in our direct to consumer channel.

Overall April is showing meaningfully better trends compared to March.

We expect total revenue in April to declined less than 5% year over year.

We're very pleased with these results given physical retail remains mostly close.

This represents a big shifts in consumer buying behavior for our products primarily to the online channel.

This is also improving our inventory position relative to Q2.

Gross margin during the second quarter declined 130 basis points due to the introduction of terrorists in September 2019.

Excluding the effect of tariffs gross margin would have increased 230 basis points to 45.3%.

Total tariffs expenses through the first half of the year were approximately 26 million.

We have not experience any lasting impact due to cope with 19 as it relates to our manufacturing capacity.

Currently we still expect to complete our supply chain diversification into Malaysia by the end of the year.

We have also submitted a request for exclusion from west for ebay and are hopeful that we will obtain a positive outcome.

As a reminder, since February 13th we have been subject to 7.5% tariff.

In China.

Now for a little more color on Opex.

During the second quarter fiscal 2020, GAAP operating expenses increased 11% on a year over year basis.

While we made significant reduction starting in March we had also been investing for long term growth.

Overall, the majority of the increase is driven by higher headcount in our R&D organization as we continue to invest in new product features.

Research and development expenses increased 24% to 49.6 million.

Includes the addition of business.

Sales and marketing expenses increased 2% to 50.5 million and DNA expenses increased 9% to 26.1 million, primarily due to an increase of legal fees related to our IP litigation.

Excluding the 1.7 million in IP litigation fees during the quarter DNA expenses increased 2%.

Year to date, we have generated adjusted EBITDA of 64.8 million.

Adjusted EBITDA for the quarter was a loss of 28.4 million.

As we look forward to the rest of the year, we don't know what a normal run rate for our business looks like.

Physical retail will be open.

Or how the economy will recover given the uncertainty unpredictability and volatility we are withdrawing our previously issued revenue gross margin and adjusted EBITDA guidance for fiscal 2020.

Despite the challenging environment. We are excited about what we have seen from our five week at home with Sonus campaign, the ongoing engagement from our customers.

Launch of arc, five Saab and so knows radio we believe that the strength of our balance sheet allows us to continue making prudent investments.

The resiliency of our teams as they continue to operate from home allow us to continue delivering great experiences.

We believe we are well positioned and capitalized to create value over the long term.

And when that we will open the lines for questions.

Thank you.

In order to ask a question simply press star So number one on your telephone Keith.

Participants on the compiled by someone else.

Our first question comes line is having <unk> of Morgan Stanley. Your line is open.

Thank you good afternoon I hope you all are ours are staying healthy and say.

A couple of questions from me does the incredible success the direct channel in the month of April change your thinking about the path to market for your business over the long run and how do you think about the advantages of having that correct customer relationship purposes.

The advantages of having a larger.

Third party store network.

[noise] Katy its Patrick I'll take that one.

Yeah, I think the.

In times like these I think what happens is trends that were already underway accelerate in a big way and as you know last few years, we've our fastest growing channel has been our DTC channel in it and it goes to the type of products that we create but as well the importance that we see around our brands and.

I think that day to day engagement through the system Macau listening hours, we see and as well the engagement and why we're experimenting a bit with some of those radio is that ongoing engagement with our customers and it. It all comes together right in terms of how people use the product and then as well how they add another selling those products to their system. So I do we've invested in it we're going to come.

When you too if you would have told me that we could grow DTC. The way, we did in April and and it wasn't without some bumps in terms of like a little longer hold times on the phone for people, who were doing telesales and you know like that we'd like to some delayed shipments through there, but all at all it was amazing to deliver that level of growth and.

And be able to satisfy customer demand was just very encouraging for the future and so I do think it's an important part of the future.

And.

This is one of those times, where you take stock of this strategy and how much more do you quit.

Your foot on the gas around these kind of things and so it definitely makes me think this is going to be an even bigger part of our future and it also but also points out that.

These kind of times, we are we are the ones that ultimately.

You are made sure that we're getting people product quickly and it's all about tried to deliver to customers as best as possible. There were a lot of distractions from the other channels right and going through this and so.

Some are focused on essential goods and those kind of things and so we it's something that we think support we think we could be the customer demand and I think strength that strengthens the brand for the long term and and is obviously good for the bottom line as well. So yeah. We are definitely thinking how we continue to build on us into the future.

That's great and then a follow up Britney how should we think just qualitatively about the remainder of the corner obviously the the promotion.

Ended may may fast.

But then you have three new products shipping footwear.

The second half of June do you think there will be enough scale in that we can see some strength off those new products.

It's a great question Cavium and I think one of our challenges in looking forward even for the rest of the quarter has been that you know the two months that we really have March and April have behaved so differently.

And so you know obviously part of that was probably people were really getting their heads around what this month in March and you know in hindsight, there's probably some of this that even started in February as people started anticipating this given other things going on around the world, but with all of that you know the the sort of drastic difference.

On April makes it really hard for us to predict what else. We think is going to happen in Q3. So we've got the headwinds of physical retail continuing to be close who knows when that's going to reopen and then you've got the balance from all of this strength in our DTC channel the new products coming out.

You know as I as I mentioned, we're ending April in a much better inventory positions. So when do we start to see some of those orders and replenishment orders coming into Q3. So you know with all of that those those are sort of the factors were thinking flu and one of the reasons, it's really hard to guide or or get a good handle on what the rest.

We are the year will look like.

Okay.

Thank you Patrick and I, just squeeze one more in high level or how would you describe the differentiation. So notes radio versus other music streaming services. Then do you see it is cannibalistic of the other platforms or more of a complimentary service.

Absolutely complementary there's always been the radio service on Sotos, we hadn't touched it in 15 years Weve. What we've done is use it as an opportunity to showcase what's possible in our office now.

Obviously theres the monetization benefits on advertising and so were you are putting our toe in the water on services, which are excited about but it also does presents the opportunity for partners to showcase their certain play lists are stations and those types of things and so I think it's going to be very complementary and it and again it allows us to showcase the best of Sonos and how.

Oh integrated solution to be and show our partners, what's possible with are up inside the sent us ecosystem. So I think it's.

Good all around.

Thank you see well.

Thank you.

And our next question comes line of John back half of Bank of America. Your line is open.

Hey, good afternoon, and actually I just wanted to follow up on the question on kind of the fiscal third quarter here.

And I know, you're not really willing to provide guidance, but I thought maybe you might be able to provide us some sense as to how revenues kind of trended through April and into the first part of me here and then also I think you mentioned that your inventories have.

Rebalanced, but also want to get a sense for where they stand right now.

Yeah, John So as we look at revenue in April it's down less than 5% year over year. So thats, a pretty big contracts are down 23% in March and.

Yes, it still down, but I think we're pretty happy with that number given how much of physical retail has really remains close we're just seeing huge shift in demand to online and DTC. So that's really the best color. We can give on on Q3, because that's what we know it's sort of it it's less of an unwell.

Yes at this point in more of its just really hard to predict what the future will look like even among from now.

Okay, that's fair.

And then just with regards to the growth in the direct consumer business and I know he kind of already asked about this as well but.

In general awareness, how large is that now as a percent of sales or that kind of 15% is that kind of in the ballpark and also how sustainable do you believe that that growth actually is as you as it can move beyond the pandemic here.

And so we didnt disclose it as a percentage of sales for this quarter. We just gave you the gross numbers. It was laugh at 12% and sales in fiscal year 19. So that's the last person just sales number we Don So you can triangulate a bit from there.

You know in terms of sustainability I think we're very pleased with the results and as Patrick was talking about we're going to work hard to.

Make sure that that we can keep some of that continued momentum in the DTC business, but you know part of that will depend on how permanently have consumer buying habits change and when do they want to go back to the physical retail stores and it was this a permanent trend for the consumer. So I think we're gonna have to wait and see a lot on how consumer.

<unk>, you're actually changes coming out of it.

Okay. Thank you.

And our next question comes line of Rod Hall at Goldman Sachs. Your line is open.

Hi, guys. Thanks for the question.

I guess Brittany I wanted to start with you and see if you could answer.

Yes, I know that Patrick in his comments talked about.

The U.S.

Distribution channel, you F. retail partner and into German.

Distributor not reloading on inventory.

And I wondered if that inventory reload occurred in April or you anticipated to occur in the next couple of months. They ended this quarter or do you did not know that's the first question. They have a follow up for that.

Yeah, I don't want characterizing it as a bit of rebalancing from so it's two things there was inventory rebalancing that went on which I think.

We had called in our Q1 that we did things there was some demand pull in and we were trying to get a view on on some softness in Q2, and so we did see some inventory rebalancing from those two partners.

What we then salt was you know covidien team hit on a real drop off in demand was at the end markets were much weaker and then with the closure of physical retail and everyone being much more careful about how much inventory. They held we saw a lack of replenishment orders.

And with weaker demand there was also enough inventory that everyone had so as we come through April.

We think we're in a much better inventory position, we think that that sets us up well to start getting replenishment orders, but you know it's kind of anyone's guess on when those will really come in it'll depend on the retailers that channel you know when the physical actually reopen how well as each retailer doing with their online sales how are they seeing demand.

So there's a bunch of factors that that make it harder for us to call when that will happen.

Okay Alright. Thank you for that and then I wanted to come back to the point of direct distribution, Patrick and see I mean, obviously this is.

It's unfortunate vol happened, but in a way.

Lucky from a direct distribution point of view, I guess and I Wonder if you have any ideas or you might keep people on that platform.

In the future since it's such an attractive distribution methodology for you book I think from our brand point of view as well as a financial point of view.

Yeah, Thanks, Ron and I think the you know the thing that we've learned as people are willing to purchase audio products in a big way online. So theyre, they're not having to listen you don't necessarily as we go through it. So people found and we thought through the data people were comparing like the shipment times to read through this period. So it's kind of its a.

I think the proposition has to be.

At this stage how quickly are you going to get it from a partner and when we were in a position where it was quickest to get it from so knows for sure.

Finally in terms of going through this we as well our customers we communicated a lot in terms of how soon could help in your home office. How it can help you enjoy all that all of the video streaming that you're.

Watching and how being plays into that the home cinema side all of these things and we we communicated like never before in the month of April as well and I hear from a lot of our customers and I did not here that we over communicated and so I think that ongoing communication about what we're doing.

Is actually a really important learning from the month of April as well and you know our product was born of the home and built for this time and.

So we're I'm very proud of the fact that we're bringing joy the people's homes in this time and so I think we've learned that we can engage even more with our customers. The other thing that we had and we saw was people trading up right to get to the new products I think as people were home and saying you know what nows the time I got to move from that product.

I'd like 15 years ago to the do AFE or that do court right does that go through that and so I think helping our customers with that journey.

Keep in letting them know that theres, something new there that engagements important I think things like sort us radio and being able to serve up.

As well messages through that vehicle as well is going to help in terms of that engagement and so there's always a balance between when it becomes a noise right to customers for some of these things, but I think we've learned a weekend engage more with our customers and they will respond by going to Sonus dot com and from a hygiene perspective.

Really good about the service, we're providing there.

He is going to be critical and I'm glad like we reinvested a lot in terms of building that out over the last couple of years and making sure that we could.

You know address a spike in DTC demand I mean, who could have imagined it would be a.

400% Spike, but you know that we could do this and so we're going to continue to do that we'll look at like making sure the technology in place to do it with the best in class companies are doing but I think all of this stuff is self reinforcing and we'll see very shortly.

What kind of demand, we get for a premium sound bar as well Bobs basically sight unseen I mean, where our brand is but I think we're uniquely positioned as a brand where people trust us and trust that it will be good sound and they also know that if you know necessary. They can return it right that's not going to be there should we.

Push the other thing I would say Rod is we did push on to make sure people understand we have a money back guarantee so if they want to do that Italy will easily take it back and so there's no.

You know there's no friction there at all and so pushing on some of those hygiene things has actually been even more important.

We need to be thoughtful about going forward.

Great. Okay. Thank you Robert.

And our next question comes the line of Matt Sheerin Stifel. Your line is open.

Yes. Thanks, Thanks for taking my question.

Patrick just a follow up regarding your comments about.

The upgrade program and you've got three new products.

Moving out you also have a your new app in operating system unveiling next month, which would also appear to be a catalyst.

To provide people to upgrade so could you talk about what you're seeing there in terms of that upgrade program and whether the new app.

You know will be a catalyst or will be.

That's helpful. There.

Yeah, Hey, Matt I think it'll be I think it will be a you know from our history like we havent really been through these cycles I think because we try to build products that you know last for a long long time and probably the Best example, right now we're going through our.

With Apple and support right and replacing their products from 12 to 15, we launched Twog 15 years ago, and so I think the given the other thing I'd point you to is the level of engagement the listening on Sotos over these two months has been incredible.

You know jump off the charts of Sonos radio shows the engagement level, there and then with the DTC brand engagement and trade up and so that is that is something we've just started the journey on we watch the program.

Late last year in terms it was that we tested that we made sure we could go and deliberate we made some adjustments right we.

We didn't get it right with recycle bode when we first launch the program. So we change that up and listen to customers and change that up and then through this period I think we're learning there is appetite there and where it's a little early to really build that in as we think about the future but.

It will be it'll be interesting to see what we learned because we won't be pushing on people to replace their play bar with and are but we have so many avid fans and I can tell you from having done it my own home. It is nice day difference right. The arc just takes it to a whole new level it'd be really interesting to see what real.

Earn on how.

You know that drives overtime and what our customers really want to do here, but I.

I'm pleased with where we are the trade up cycle and and as.

As to that you referenced the the EPS to that we're rolling out our who are less and I just sets us up well for the future and to be bringing more innovation of the platform through high rise audio and some of those other things that I think will help us over time break even more customers up to the newer products and so.

I'm excited about what we're doing a lot from.

Okay. Thank you that's helpful and just a question on.

On the gross margin I know, there's a lot going on here you had that.

Promotion in the month of April which sounds like it was very successful you also have still some headwinds on tariffs and manufacturing shifting out of China.

So could you talk about how we should think about gross margin.

Yeah, It's a great question.

So I would say you know we have been providing it with and without tariff to start. So that's that's sort of that the Vegas Delta in terms of how we've been talking about it from a manufacturing standpoint.

I don't think that we will diversify out for our U.S. sounds production into Malaysia by the ended the year now I say that sitting where we are today theres a lot that has to go into.

Getting back to normal at some point to make sure we can make goddesses transition, but from where we sit today.

We'll see that happening by the end of the year and then if that happens.

We will not be subject to terrorists anymore, unless you know the tariff program shift.

Oh, we're at 7.5% terrorists now so it went down as of February teams from the 15% we were paying before and then we have also apply for an exemption. So.

Optimistically, we hope to get that exemption and then that would be another mitigant on the care sector, but there's sort of multiple ways, where we're working to remove tariffs from the mix from a gross margin standpoint.

Without tariffs we were at a 45.3% gross margin for the quarter that is higher than you know our general long term guidance of 40% to 44% and what you're seeing here.

Really how were doing from a product mix standpoint, and then we had some benefit from channel.

Order as well so going forward, where we land on that margin.

Framework will really depend on the mix of the products for selling channels were in how good a job we're doing at negotiating down on material costs, obviously higher our volume leverage we have on some of those negotiations.

Those are the things that we're looking at as we go forward, obviously, where we're pulling guy. So we're not really providing any updated guidance for gross margin when either but those are the factors that are worth thinking through what he thinks it what's happened our gross margin in future quarters.

Understood and if there's one last question I can I sneak in here just regarding other so no it's radio which sounds like that's been also a successful to begin with.

Could you talk about sort of the PML model, there and what should we think about in terms of.

Contributing to profitability or is that more sort of a marketing customer engagement type of model.

That we should they be thinking about.

Oh really too early to talk about that one we really just launched in and so as as we scale them on it and see what kinds of reactions began and how our customers react and all of that and I think will be more prepared to talk a little bit about that very reasonable question in later quarters, but it's just too early into.

Uh huh.

Fair enough okay. Thanks very much.

Your next question comes lineup, Adam Tindle of Raymond James Your line is open.

Okay sounds good afternoon hypothetical that occurred on that lift from consumer.

Behavior to online channels.

Well, that's on kind of these opportunities and threats that it brings I think you put some some of the opportunities in the prepared remarks, specifically on the right.

Do you have one competitor that dominates online cert got another competitor that dominate commerce.

Doesn't look like what's impacting now as we talked about gaining share in the quarters Occupancies up significantly, but just wanted to give you a chance to maybe address that longer term picture concern on those two major competitor.

Yeah. Thanks, a lot of I think the yeah. There's there's a couple of angles on that right one is.

What is what they're doing all the product side and you know we've always talked about the fact that from a product perspective tried to achieve something very different than we are and you know through Q1 in Q2, it's been interesting because they havent been is active in the marketplace like even at the.

Even for the Pocs as much and so you know as I mentioned that because we cited in or letter to.

Fiscal Q1 fiscal Q2 in the streaming audio category. We've gained share in there are major markets.

Across both quarters and so it's been it's been interesting to see that because there hasn't been as much focus and I would say from from them and so.

So it's kind of interesting.

The data and I think we have to be prepared and we are prepared that they come back at it a little bit more focused in the fall right when the usual launch things happen, but.

We'll see right in terms of that front and then I think when it comes to E. Commerce, we've been very thoughtful about the way that we've created or channel mix and over the last few years, our investments in DTC, So I am not.

I do not think that we are.

Unduly tied to any one partner.

All of this online or offline in terms of where we are we value all of the relationships and the work and the value that you.

Our channels.

I think what are the channels that probably gets under appreciated quite frankly as our installed solutions channel that there's a lot of the Aspen and support work in a lot of the installations and and so I think that that's continues to be an important ones in the future. We do really well in that channel. It's helpful. As we go through it I think the trend I think physical.

Retail as we've seen on a more macro level is pretty challenged in terms of not just the.

The crisis, but the crisis just started to accelerate trends that were already in place and I think.

From what I saw a best buy did a good job in terms the shift to curb side, but it doesn't pick up you know everything that they would have been physical was there so there'll be a place for physical but I am really bullish on our DTC coming off of this and what are those consumer touch points was how willing are people to purchase these products online without.

Listening and I think we're engaging with a brand the brand has enough awareness and a good reputation. It has the money back guarantee fit has speedy delivery and.

You know, we've shown that people want to engage and want to engage directly with the brands and you build up that trust and as you know overtime feel that the system right. So continued purchases and getting into new homes. At this point is very very important.

As we go through it so they're there you know you with the with Amazon and Google like they're always things that we're thinking about but I think we've shown in April if we stay focused on the kind of customers were going after and what's important to them and we focus on a direct to consumer efforts. It is great for our brand.

Dance and great for our business as well and so we'll continue to invest it I think the acceleration.

I would say of many brands like doing a little more direct to consumer through this is something that I I think we'll see more broadly as well.

Okay. That's helpful. Thanks, and this is a follow up I wanted to circle back to the comment about less than 5% year over year decline in April I heard you correctly. It doesn't sound like that was driven by some one time bake replenishment boost or something like that.

Viral isn't getting worse than may incrementally I know its challenges.

Yes, three new products hitting in June or other offsets that I'm not thinking about here to where the June quarter could be worse than that 5% year over year, the kind that you're already experiencing in April.

[laughter] Big thing that went on in April and it was really the first five weeks that we ran our at home with Sonus promotion campaign.

So I think the question will be that that did a great job getting us back in front of consumers that really compelling offerings and so as that campaign.

As of yesterday, what does that look like for you know what normalized run rate.

Sure.

If it hadn't if that if we hadn't had at April where we weren't running a campaign I think we might have been able to say okay. This might be a good sort of run rate base, but we really need to see how the reaction is.

Well off the at home with this promotion campaign.

Okay, because that was in the one thing I just what they got thrown there are two out of its just that everyone was at home right.

So so it was there were two kind of factors. One was you know promotion, we up the level of communications and how people get the most others on us, but let's not forget as well millions of people were.

Stuck at home and so we don't know as the as somebody things begin to lift to like do people.

What's the behavioral change that we're going to see too. So I just I just like that.

Got it everyone's asking three question, so I might as well as well I was little bit confused on April getting better within the decision to do the Opex reductions. So maybe just talk about you know how you went through that it.

Kind of gotten past the worst if it was getting at or why do we need to take actions on the cost structure right now.

So we took on our cost actions in the beginning of March. So when this head we tried to react pretty quickly to take some cost actions and knows where really I mean, there. There are things that sort of everyone has done including you know people aren't traveling we sit able to significantly reduce our in off.

<unk> expenses.

And then you know we've also looked at ways, they can bring down discretionary spending and all of that.

We're really trying to strike the balance between taking cost actions, where we think it's prudent for the business. While also continuing to invest in.

R&D and product and our future Roadmaps and that we come out of this.

Pretty strongly and I think the only sort of comment on future Opex would be.

Don't have guidance again, we don't know where Q3.

No that it will land at that number of less than five for Sun. So we need to keep watching and being flexible and nimble and balancing you know sort of the right decisions for the business from both a long term investment standpoint, and a an opex profitability cash flow standpoint.

Understood, Thanks, and best of luck.

Thank you.

And just remind her in order to ask a question simply by size on the number one how do you telephone keypad.

Next question comes line of French No of Jefferies. Your line is open.

Great. Thanks for taking my question, it's it's James on for Brent.

Just to could you touch on the strength of Sonus moves that you saw on April is there anything in particular that you'd call out that's driving that strength.

Is it mostly the DTC business, just any color there would be helpful. Thanks.

Hi, James.

You know I think it is.

As we've thought about it I think.

You know it wasn't on promotion, so I'd flag that which is pretty interesting, but the obviously the other side of this is is it is becoming springtime and people are you going your side around their home and that kind of thing and so I think the you know we are watching it closely but that probably has something to do with it.

As what it's been a a very well rated and reviewed product through we had seen some really good strength in Australia. When we launched it you know there last fall when it was heading into Australia summer and so I think this seasonality is an interesting aspect of it I also think the versatility.

As we had new homes come in and be thinking about which which product they're going to choose move is obviously one of which has a degree of versatility either other products do not so I think they I think you the reasons we.

Built the product.

Are starting to really prove out now which is pretty exciting for us and so we'll see how it trends through the rest of this.

Spring and summer period, but.

It's a it's a it's a really good greenshoe right now.

Yeah, that's that's really helpful. Thanks.

Another one just curious how your supply chain holding up given a shift in Malaysia, you know I believe that theres, they're saw lock down. So just would just be curious to hear you. Some color on what you're hearing from suppliers there and.

How we should think about that going forward. Thank you.

Yeah, I mean, I think you know, we're calling out that we do think that there's a material are lasting impacts to our supply chain from men.

He is already back off and running and then you know we are diversifying between China, and Malaysia and so.

Continuing to go through that process. They are on locked down right now, but there I think expected to open up again in the middle of May and so from what we can see now weve busy on track for our diversification into Malaysia Bye.

End of our fiscal year sort of consistent with our our plan.

If they do end up in locked down for much longer than we'll come back and an update that view, but that is our best view based on current information.

Great. Thank you guys.

And our next question comes in Alberta of D.A. Davidson Your line is open.

Great. Thanks, a wafer called out yesterday on bouncing sales and stimulants trucks came through was curious if you at all Socgen SaaS, playing rolling back them up in April.

Oh, I called that out for our business, specifically, but of course, it can be hard to tell.

Okay.

Okay, and then you spoke about cash preservation selling some lost on repurchase authorization. How are you guys seem about buybacks for the rest of the or.

Yeah, I mean, I think in any environment, we don't really talk about the timing of when we plan to execute against our authorization. So we're very focused on liquidity and our cash balance right. Now we continue to think that our stock is at an attractive valuation level.

We're not pulling or you know for sending our repurchase program. So we will we will see what makes it makes the most and for US as we continue to work through that authorization.

Great appreciate it.

And thank you I'd now like to turn the call back to Patrick Flynn for closing remarks.

Thanks, Suzanne and thanks to all of you for joining a I know its strange times challenging time. So I really appreciate you taking the time given everything that's going on in the World right now I want to say, thank you to our team who has stepped up in an incredible way to make sure we could launch radio and all the products today its just.

Been incredible to see our people just persevering through this the creativity. We've had people you know doing lab testing at home and and makeshift labs and their kitchens bathrooms. I mean, it's just been incredible to see and I think that creativity.

Spirit sets us up well for the long term and I'd, just really proud that we've been able to.

You know bring a little joy to people in their homes. During this period of time and that's what we plan to continue to do we've got some great new products as we go forward. We've got some experiments we're trying like radio.

So I think we're well set up for the future in the short term little hard to know what I'm, what's gonna piano, but I'm very optimistic I think we're well positioned for the long term. So thank you again, and we'll talk too soon take care.

And this concludes today's conference you may now disconnect.

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