Q4 2020 Sonos Inc Earnings Call

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<unk> fourth quarter and fiscal 2020 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your Speaker today, Cammeron Mclaughlin Vice President Investor Relations. Thank you. Please go ahead.

Thank you good afternoon, and welcome to Sonos fourth quarter and fiscal 2020 earnings conference call I Am Cammeron Mclaughlin and with me today are Sonos CEO patch expenses and CFO Britney Bagley before I hand, it over to Patrick I'd 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 are fully detailed under the caption risk factors in our.

Filings at the FCC. During this call. We will also refer to certain non non-GAAP financial measures for information regarding our non-GAAP financials, and a reconciliation of GAAP to non-GAAP measures. Please refer to todays press release regarding our fourth quarter and fiscal 2020 results posted to the Investor Relations portion of our website as a reminder.

The press release supplemental earnings Slide presentation and conference call transcript will be available on our Investor Relations website at investors Dot Sonos Dot Com I will now turn the call over to Patrick.

Thanks, Kevin and good afternoon, everyone. We ended fiscal 2020 on an exceptional note and delivered meaningfully ahead of our expectations in light of the uncertainty and challenges presented throughout this past year. The entire team at Sonos has risen to the occasion and proven an ability to creatively adopt and persevere.

Extremely proud of what our team has accomplished throughout fiscal 2020, and I'm more energized than ever about our future growth.

Before we get into the results I wanted to take a step back and remind everyone of the business model that we've really built the whole company around I believe we have hit an important inflection point that proves that our unique model delivers for both customers and investors.

Recall that our approach has been to build a system of awesome products and services that deliver a whole home and now beyond the home audio experience, whether you start with one product, which is what most customers do or start with many.

This creates a virtuous cycle, where customers return to add additional SaaS products to their home overtime.

Obviously, what's important in this model is that were able to do two things. The first is that we show an ability to add new homes and the second is that we get existing customers to add additional products.

As challenging as 2020 has been for everyone. Our model has proven resilient.

In terms of attracting new customers, we just delivered the fiftyth year in a row, where we've grown the number of homes were in by 20% or more ending this year with nearly 11 million households globally even.

Even with this strong growth in new homes, we continued to see 2.9 products per home in fiscal 2020.

And when it comes to existing customers, adding additional products, we have typically seen 35% to 40% of our annual product registrations coming from existing customers, who are adding another selling this product to their home.

This year it hit 41% as the launch of move was a particular success with our existing customers.

I believe we're at an inflection point in the fourth quarter, because we are seeing the kind of free cash flow and adjusted EBITDA. This model can deliver as it scales in fiscal 2020, we delivered a record 8.2% adjusted EBITDA margin and that rises to 10.6% if you exclude tariffs.

We are on track to deliver 12% to 14% adjusted EBITDA margins next year, which is ahead of our prior targets.

We achieved our 15th consecutive year revenue growth and we are planning to accelerate revenue growth in fiscal 2021.

We attribute this success to our business model that makes US a system for your whole home not just a single product solution into our consistent approach to innovative new products.

Our new product launches are resonating with a record number of new customers as well as with our existing customers who repurchase from us at a record rate.

We remain committed to maintaining a relentless focus on innovation in our traditional hardware segment and you'll see continued innovation and experimentation in services as we believe there is plenty of opportunity given our highly engaged customer base.

For example in April we launched Sonos radio and AD supported streaming radio service available free to all of our customers on.

Non sonos radio represents nearly half of total listening time globally.

So unless radio comes preloaded on the Sonos out, bringing all streaming radio into one place from the moment you set up along with constantly refreshed mixes of new and original programming curated by Sonos we'd.

We've experienced early customer success and Sonos radios now the fourth most listened to service on Sonos.

We continue to we continued to experience tremendous demand for our products in fiscal 2020.

The strong man demand has been especially notable for our newest products move arc when I sell sub amp and port and we saw demand exceed our expectations and our supply for five of our key products in the fourth quarter we.

We've made progress addressing the strong demand we are seeing although we don't fully expect to catch up on demand for amp and ARCC, specifically until next quarter.

Our products continue to rank as the leading products in the premium home audio category in fiscal 2020 Weve.

We've experienced particularly strong growth in our installer channel throughout fiscal 2020 and expect this channel to continue to be a strong contributor as we look forward.

So this brand is by far the leading choice amongst installers professionals in fact, according to a 2020 CE Pro report of the brand sold by the top 100 installation professionals Sonus is the leading brand in wireless speakers sound bars and sub offers.

Our 92% share in the wireless audio category. Among these industry professionals. According to the report significantly outpaces, our competitors and undercut scores the strength of our brand the quality of our products and our dominant competitive position in the categories. We serve.

Furthermore, our commitment to investing in product innovation and new capabilities continues to add to the strength of our intellectual property we.

We are on track to be granted close to 200, new patents in 2020 up from 147 granted in 2019.

According to the most recent 17, I'd analytics patents scorecard, which metric measures the strength of patent portfolios Sonus ranked number three in the electronics category.

Our gross margin expansion illustrates the value proposition of our products and we are continuing to drive our product differentiation through investments organically and inorganically.

As a premium audio platform, we exited fiscal 2020 with gross margin excluding the effect of tariffs of 45.6% an increase of 370 basis points from last year.

We are getting more creative and more productive in our sales and marketing so that we can leverage our spend to deliver record new customers and continue building a powerful consumer brands.

This is delivering the profitability that we've been talking about since our IPO well in advance of when we thought we would actually achieve it.

We are doing that while driving expected, 13% revenue growth at the midpoint next year on a comparable 52 week basis.

All of you know, we've been focused on and investing in direct to consumer and we've seen a significant acceleration in our direct to consumer channel in fiscal 2020 day.

DTC revenue increased 84% year over year and represented a record 21% of total revenue that's up from 12% last year.

The investments we made in this channel and our marketing strategies positioned us to capture this opportunity and drive strong sales and margin even in the face of retail store closures during the year.

According to a recent future source reported only 25% of audio hardware owners in key markets said, they were comfortable buying audio products online prior to the COVID-19 pandemic.

But during the pandemic this has increased to 63%.

Now some of that revenue may shift back to in store. We believe a significant portion of sales will remain online and that our direct to consumer business will continue to represent a growing portion of revenue overtime.

As we look forward to fiscal 2021, we see tremendous momentum and opportunity and are focused on the following strategic priorities and strategies from.

First continuing to deliver innovative new products and beginning to deliver more on the services side.

Just last week, we introduced Sonos radio HD undo AD free high definition streaming subscription tier Sonos radio for 799 per month.

Soon as radio HD features even more exclusive content directly in the Sonos out now in lossless CD quality audio the highest quality of any radio streaming service.

This new service, we focused on making one of our customers most value listening experiences radio easier and better.

Radio HD exclusive content debuted with Dolly Parton and song Teller radio.

The new HD station will evolve with all these hits favorite artists and special commentary on songs and moments throughout her career.

Soon as radio HD is a complementary offering to the hundred plus streaming music services offered on our platform today, and we look forward to developing more direct paid relationships with our households overtime.

We are committed to launching at least two new products per year and are well on track as we look out at our fiscal 2021 product roadmap.

You know, we don't share details of the products, we're working on for competitive reasons, but we're confident that these new products will resonate with customers regardless of whether COVID-19 has us spending more time at home or not.

This confidence comes from the resilience, we have seen in our business model and our customer base. This year.

Second we will continue to focus on the expansion of our direct to consumer efforts and engaging even deeper with our customers.

We are increasingly focused on direct distribution engagement to ensure we are delivering a great end to end experience for our customers. We have seen consumers are willing to engage and transact with a trusted brand like sonos and expect that to only continue to increase over time.

We will continue to efficiently evolve, our marketing strategies, making our brand even more accessible and showcasing content and experiences.

This fall, we launched an innovated innovative multifaceted strategic marketing campaign with Disney leading up to the widely anticipated premiere of the second season of the man to Orient.

As we spend more time at home our living room said become a hub for entertainment and we worked with Disney to provide an even more immersive experience for one of the best sounding series streaming today.

This campaign was an excellent example of two powerful brands coming together to promote their premium products and services to share advance around the world.

We are excited to share more insight into our evolving marketing strategies at our first investor day in March.

Third we will continue to strengthen and expand our partnerships.

We've been pleased with the results of our Ikea partnership and the opportunity is created to introduce new consumers to the Sonos branded platform. We will look to continue to evolve our partnerships with Ikea and you should expect to see additional Ikea products launched next year.

And finally, we remain focused on delivering sustainable profitable growth and expanding our adjusted EBITDA margin, we believe that our leadership in the category coupled with our strategy is to drive accelerated direct to consumer growth position us to deliver strong profit margins and cash flow going forward.

Let me now turn the call over to Britney to provide more details on our results and our outlook.

Thank you Patrick.

Let me add from additional color on our strong fourth quarter and fiscal 2020 results in fiscal 2021 outlook.

Starting with the fourth quarter, we significantly outperformed on both revenue and profit.

Adjusted EBITDA increased dramatically to 46.4 million from.

Loss of 2.8 million last year.

Excluding tariff adjusted EBITDA was $48.9 million.

We delivered tremendous operating expense leverage and gross margin expansion during the quarter, culminating in a record 13.7% adjusted EBITDA margin.

We were able to drive this performance through our impressive gross margin expansion and Opex leverage.

Gross margin increased 530 basis points to 47.5%.

We were largely exempt from tariffs for the quarter, except for a rate of seven in house per cent on our component product in September and 25% on our accessories throughout the quarter, which are captured in our partner products and other revenue category.

These results show the underlying power of our margin driven by mix shift into higher margin products and channel.

No.

Product and material cost reduction.

Leverage on the higher sales volume and no promotional activity during the quarter.

Revenue in the fourth quarter increased 16% year over year to nearly $340 million.

Which was up 36% sequentially as we continued to experience strong demand for our new and existing products.

Although there are we.

We had an extra week in fiscal 2020, which hit in the fourth quarter.

Excluding the impact of this week, which we believe contributed approximately 25 million during the quarter revenue increased 7% year over year.

Our direct to consumer channel increased 67% from the prior year, which helped support both revenue and margin in the quarter.

Turning now to our fiscal 2020 result.

Our outperformance in the fourth quarter, along with our restructuring resulted in top line growth and significantly higher profitability than we guided to at the beginning of year.

Adjusted EBITDA increased 22% to a record 109 million and adjusted EBITDA margin increased 120 basis points a record 8.2%.

Good day. These numbers are they still includes 32 million and Tara.

We will receive a refund of approximately $30 million and largely mitigate the ongoing impact in fiscal 2021.

Excluding Terra fiscal 2020, adjusted EBITDA would have been $141 million or 10.6% adjusted EBITDA margin.

This profitability is meaningfully ahead of our original outlook of 5.3% to 5.9% even on less revenue than expected.

The revenue impact was the result of reduced retail partner orders from the effects of Soviet 19, and demand outstripping supply.

Does the strong adjusted EBITDA margin performance resulted from gross margin expansion and Opex control.

And we delivered this while continuing to invest in our product.

Gross margin for the year increased 130 basis points to 43.1%.

Excluding terrorists gross margin increased 370 basis points to a record 45.6% driven by mix shift into higher margin products and channel along with ongoing material cost reduction.

In fiscal 2020, we achieved our 15th consecutive year of revenue growth, we delivered 5% revenue growth was 3% excluding the 50 Threerd week generating total revenue of 1.3 to 6 billion.

Profit to sell the continued strength in our business has been the result of successful new product launches strong growth in new household as well as increased repurchasing by our existing households.

Direct to consumer revenue increased 84% and represented a record 21% of total revenue compared to 12% from there.

The Americas grew 11% and EMEA declined 3% for two per cent on a constant currency basis, primarily stemming from a tougher market environment throughout the year.

APAC increased 2% as Ikea slowed down ordering due to cool the thinking and the physical store closures.

So no speaker revenue was up 3% year over year, driven by the launch of new products, but was also negative and negatively impacted by reduced orders from our physical retail partners affected by corporate banking and supply constraints as demand rebounds.

So no system products revenue increased 17% driven by the continued strength of our installer channel and component products import.

Partner products and other revenue increased 12% driven by the strength of our other products in this category.

Operating expenses for the year should investment in R&D as we continue to support new products and customer experiences Inc.

Moving integrating the acquisition.

We showed leverage across sales and marketing and DNA when you take into account the restructuring expenses.

R&D, excluding restructuring and severance as a percentage of revenue increased 220 basis points are.

Our software in consumer experience continues to differentiate our products.

In fiscal 2020 more than 50% of our R&D investment was allocated to software engineering.

Sales and marketing, excluding restructuring and severance cost as a percentage of revenue decreased 120 basis points.

It was on top of a 420 basis point year over year decrease in fiscal 2000, Inc.

We've done it shifted from differentiated high impact freedom and the adoption of more efficient direct to consumer marketing.

DNA, excluding restructuring and severance IP litigation and transaction related costs as a percentage of revenue decreased 40 basis points in fiscal 2020, primarily due to leverage on the higher sales volume in the quarter.

Our model continues to generate strong.

Another significant increase this year.

We generated cash flows from operating activities of 162 million and free cash flow of 129 million up 32% from 97 million last year.

We ended the year with 407 million in cash, which puts us in a strong position to invest organically in our business.

Pursue M&A and return capital to shareholders through share repurchases.

We completed the 50 million share repurchase authorization that our board approved in September 2019 at an average price of $13 an 18 cents.

We announced today that the board has authorized another $50 million share repurchase program.

We continue to see significant value in our stock, particularly in light of our increased profitability growth and execution.

We are confident in the earnings power of our model and believe that there are significant value creation opportunities that lie ahead.

Now, let's look ahead to what we expect to be an excellent.

Excellent fiscal 2021 with ongoing increases in profitability a rebound in top line growth on the back of strong demand.

While we remain cognizant of the uncertainty and the broader environment and with Covidien, Inc.

We are expecting a strong fiscal 2021, regardless with impressive adjusted EBITDA margin expansion as we reduce our exposure the tariff and further scale our office.

Our fiscal 2021 outlook is for adjusted EBITDA in the range of 170 million to 205 million. This represents 12% to 14% adjusted EBITDA margin.

Spansion of 380 to 580 basis points.

This is significantly above prior expectations for fiscal 2021.

This also excludes the impact of any refund the terra given the uncertainty of timing.

Gross margin is expected to be in the range of 5.3% to 45.8% with minimal impact from Tara.

Have continued to make progress on diversifying our manufacturing and remain on track to have our flow shifts from Malaysia completed by the summer.

As a result, we do not expect a meaningful tariffs expenses in fiscal 2021.

We also expect to maintain our direct to consumer business at similar levels for 2020, despite our expectations that physical stores will remain open.

In addition, we expect stable margin compared to fiscal 2020, as we see limited additional benefit in product or channel.

Offset by increased shipping and logistics costs.

Total revenue for fiscal 2021 is expected to be in moving into 1.44 billion to 1.5 billion.

Which represents growth of 13%.

Excluding the 50 Threerd week from fiscal 2020, this represents growth of 11% to 15% for the year.

The stronger than expected tightened shows how well our business is performing as we look ahead to net.

Let me share some color now as it relates to the first quarter of fiscal 2021.

Well, we don't give quarterly guidance, we thought it would be helpful to provide some additional information, especially given the supply chain come from.

And has continued to outpace our expectations.

We are investing in expedited airfreight shipments in order to better meet the demand and have as much product available as possible in the first quarter.

Even with that as Patrick mentioned, we will continue to be well on Sop for some key products in the first quarter.

Accordingly, we anticipate that the first quarter of fiscal 2021 will contribute slightly less total revenue as a percentage of the total fiscal year compared to the first quarter last year.

We have also been expanding capacity in light of that to me on.

That's it by the end of the second quarter, we will be flow in soft across all our products.

As you May know many supply team from strength.

From a broader industry wide challenge non desoto.

The impacts on everything from component availability 60, more availability and port congestion as well as higher shipping and logistics.

All of which we are actively working through.

Operating expenses are expected to be relatively consistent on a dollar basis as compared to the fourth quarter fiscal 2020.

Except for the increased sales and marketing investments typical in the first quarter.

The first quarter is seasonally our highest promotional quarter. This.

This along with the fact, we will continue to be exempt from the majority of tourists through the first quarter.

Growth in a similar growth margin profile as the first quarter fiscal 2020, if you also exclude the terra.

The benefit if mix is largely offset by the increased logistics cost in the quarter.

We have factored all of that color in from annual revenue growth margin and adjusted EBITDA guidance and look forward to talking more about the quarter, our first quarter earnings call.

Obama soft on our fiscal 2020, I am impressed by the resilience of our business model. Despite early challenges in physical retail our products continue to resonate with both new and existing customers and we launch incredibly successful new product.

Will drive continued strong performance in fiscal 2021 and beyond.

We did all of this one making from hard decisions to lower expenses.

So investing in R&D for the future and delivering record profitability and cash flow.

Our strong growth margin expansion and significant increase in adjusted EBITDA for fiscal 2021 puts us in a position to continue to deliver profitability and growth.

Our strong balance sheet normal book to invest in the business and return capital through share repurchases.

We have a stronger business than we did a year ago on a breakout.

Very excited about executing on this in the next year.

I'm also excited to share that we are planning a virtual investor event on merchandise.

Well some time on our strategy and we introduced updated long term financial targets.

Well look out from more details in the coming week.

And with that I would like to turn the call over to questions.

As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound or cash Keith Please stand by while we compile the culinary roster.

Your first question comes from the line of John Babcock with Bank of America. Your line is open.

Good day, and then thanks for taking my questions.

I was wondering if you could talk a little bit about some of the supply constraints that you guys are saying I mean, obviously I think different topic goes hand in different ways I was going to commodity able to quite a little bit more color about what exactly is impacting some of which are the growth.

Yeah. So I would say, we continue to see demand outperform our expectations, which continues to put pressure on our supply chain even as we.

Increase our capacity.

Net much like other companies in the industry as I mentioned, we're seeing everything from challenges from its component availability container availability congestion in court higher shipping and logistics costs.

Okay. Thank you.

So there you know obviously, we like it.

Looks like from the web site that you have pretty strong back orders on a couple of your products and you mentioned that it's going to take a little while to get that back down to normalized level. I was wondering given that you know if you could provide any sort of initial.

Color on sort of the holiday season demand that you're seeing so far.

Recognizing you might feel that might not be able to say much but just want to see what I'm I feel we got.

I think that guidance that we can give is that due to the fact that we are constrained a bit on inventory, we're expecting Q1 revenue to be slightly lower as a percentage of total year revenue than what we saw last year.

But we are investing in things like air freight and doing everything we can get as much supply into Q1 as we can and then we do keep the web site pretty updated in terms of shipping dates and how things are stretching out.

Okay. Thanks for that and then.

Last question before I turn it over I was wondering if you could talk about the reception that you're seeing so far for the Sonos radio each day.

Yeah, I think that it's.

Yes. So we've just launched that one obviously John So just last week, we're excited to really test our first in a new service into the.

Moving to the world, but it is super early at this point so you.

You know, we'll talk a little more about that at our first investor day coming up in March and kind of the way we're thinking about services.

But we're excited about it.

Hi, Good initial response and more to come on that it's early days.

Thank you.

Your next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.

Thank you congrats on a really strong quarter.

Wonder if we can come back to the holiday season, and just hear how you're thinking about.

Promotions your retail partners stocking inventory and.

Linear already of of demand, which is typically pretty backend loaded in the December quarter, how is that different this year given.

What's expected to be more of a a stretched out period of of demand and more.

More business going direct versus through retail partners.

It's a great question I think its a lot.

You know what you referenced which is people are seeing the holiday quarter start a bit earlier this year.

We have.

That's a very good visibility into the holiday quarter and demand from both our retail partners and with the increased direct to consumer business, what we're seeing on our own website. We've.

We ran our first promos last weekend.

So that was a bit earlier than we normally do and I think that's consistent with what other partners and resellers are seeing so I think you'll probably see.

Net loss backend loading the London.

Thats one.

And then as we think about fiscal 21.

You don't give specific quarterly guidance, but should we expect profit to continue to be concentrated in your first quarter or do the strong fourth quarter 20 results.

Set up as a precursor to smoothing out some of that earnings.

Linear city that has been very front end loaded in past years.

Yeah that's.

That's it I can do is we gave a little bit of color on both you know.

Revenue growth margin and Opex for Q1, so I, you know any quarter, where we have significantly higher revenue.

Tend to have better flow through all the way down to EBITDA, but I think if you take the color and the shaping around Q1 in sort of flow. It through the rest of the year is everything we know about Q1 is factored into that guidance.

You'll see that it's a it's a pretty nice increase in profitability for the whole year.

Okay, Great and then just last question should we think about you being able to lower sales and marketing expenses again in fiscal 21 or as you invest in direct to consumer and some of the retail channels open up again.

Well that returned to year on year growth.

Oh, Yeah, we guided to basically flat growth margin.

The midpoint of the 2021, and so you will see EBITDA.

EBITDA margin engine coming from Opex leverage.

Okay. So we should think about R&D continuing to grow and releasing significant leverage on the sales and marketing in June a line again.

We're not we're not calling mushy from about back from fiscal year 21, but you know you can see that because we're expanding EBITDA. So nicely that we have to be getting leverage on our opex as we go through the year.

Okay, great. Thank you so much.

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

Rod Hall with Goldman Sachs. Your line is open.

Your next question comes from the line of Adam Tindle with Raymond James Your line is open.

Thanks, Good afternoon, and congrats as well on the strong finish the fiscal year Patrick I just wanted to start on the fiscal 21 plan, we are balancing both growth and incremental profitability.

Companys cash flow positive you're in a net cash position just curious why pursue further EBITDA margin expansion in fiscal 21 versus perhaps investing more heavily acknowledged that you're still planning for growth, but maybe just touch on the plans different plans that you evaluated and why this is the right mix versus a more investment heavy approach.

Hey, Adam you know, it's been something we've talked about for a long time as you know, which is this philosophy of sustainable profitable growth as we approach it and so.

There, there's often things, particularly in the hardware world that companies do that sometimes.

Can can run for a quarter or two and you can show good numbers for a quarter or two but we believe in more sustainably building that building in a consistent way right. We've been at this 15 years now.

We've really built our business and we're showing the power of our model, whether weve had to work through the great recession or through.

Through a pandemic through competitors coming in copying our intellectual property and coming into our category and so weve I think found a good balance in terms of where we are and we've hit a scale point, where I believe that we.

We are doing.

What we can to drive.

The kind of growth that makes sense for us as a company in terms of reaching these new customers and servicing our existing customers and really making sure we're doing that in a sustainable way.

We will continue to look for opportunities, where we might want to invest more we may want to make acquisitions is Brittany talked about too.

What we are doing as we go through that and I think having the balance between what we're pursuing you know on the revenue side and then as well on the profitability side enables us to do that and to do it in a way that build the company for decades to come you know not just a quarter or two.

That's helpful. Thanks, and maybe as a follow up Brittany on the fiscal 121 plan on the gross margin line I think you talked about it expecting to be flat year over year ex tariffs.

Think about the obvious kind of moving parts on a year over year basis fiscal 20 that you're comparing to that obviously strong mix of higher ASP products that you're comparing to.

Think you are guiding DTC to the same level in 21 versus 20, so not an incremental tailwind on go to market. You also have the Malaysia facility coming onboard and I don't know if there's maybe some incremental cost to that so just thought about some you know a number of different headwinds what are the good guys that cheap gross margin flat year over year.

Yeah.

You know it would really be product mix. So you know, we're carrying through a pretty nice product mix from.

Our fiscal year 2008, as well as channel mix.

Product mix can go up and down from depending on what products, we have and the Merck at what's selling well what new products. We introduced so that's always a balance and one of the main drivers in our growth margin, but you've got product and you've got channel being supportive of you know consistent gross margin year over year.

We're looking at it ex tariff so we've really mitigated that EPS.

A headwind to our gross margin and then as I said, we are expecting a bit of an increase in freight and logistics as we go especially through Q1.

Okay, maybe just a quick housekeeping one for you from the Q1 revenue call it.

What would revenue also declined year over year or does that still grow year over year.

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I would expect it still to grow year over year, you've got quite a bit of room to sort of take our comments about the revenue will she will fill in.

With growth.

That's helpful. Thank you.

Your next question comes from the line of Matt Sheerin with Stifel. Your line is open.

Yes. Thank you good afternoon.

Just another question regarding your guidance for the December quarter on revenue, which is.

Although the seasonality that you've seen in recent years due to the supply constraints you talked about.

Does that also factor in.

A continued challenges within your retail channel customers, because a cobra related.

Shutdowns et cetera, and.

What do you how do you see that environment and as we look to the March quarter.

Got lessen the likelihood of from any inventory overhang that you typically have seen in the March quarter because of the retailers in the December quarter.

No, we're not assuming a big shutdown of physical retail again, but what we saw as we went through the last wave was that our DTC business was really able to pick up the demand from that and so that's how we're thinking about Q1.

Factoring in sort of everything we see right now from the retail landscape and.

Yes, yes, given our inventory challenges right now I really hope, we're not talking about inventory overhang as we get into Q2, but if we work because we really got our supply chain up and running it solved all the challenges so.

Okay. Thank you.

And then.

Regarding the <unk>.

Early success of the radio.

Growth radio so far and then moving that too.

Revenue generating model, how should we think about your long term strategy.

Generating revenue outside of the traditional hardware, how do you still sort of in that kicking the tires phase.

Marius projects.

Before we start to see some traction or what's what's the thinking there.

Yes, Thanks, Matt I think it is very much we're past kicking the tires, but we're just getting started in terms of where we are and we've seen some promising engagement so far from customers on both.

The AD supported radio that we launched earlier this year and now radio HD and we're learning and so we're kind of taking that into account and trying to understand what customers like.

What kind of experiences we can build that are unique to sonos.

And we've got a.

A bunch of ideas in this category and I look forward to sharing a little more on that when we get together in March for the Investor day Okay.

Okay and just a follow up is are these initiatives a drag on margins right now or is that just part of that the investments and at some point, we see some margin expansion because they're they're either.

Cash flow breakeven or profitable.

Probably early at this too early at this point to to say, but we're obviously investing in that but thats all factored into what you're seeing from an R&D investment level. Okay.

Okay. Thank you.

Yes, Matt I would just note that when we do our March 9th Investor Day, we're going to be bringing back our long term targets and updating them for you know everything we know right now so that will be a good time to talk about growth margin beyond the fiscal year 21, Titan forgiving right now.

Again, if you would like to ask a question press star one on your telephone your.

Your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Thank you.

Results with the profitability you mentioned the direct team are doing very well, but when you look at the other factors that are helping drive.

The margin profile going forward can you just highlight anything.

DTC what.

What other big drivers, you're seeing that are helping us.

Results from this.

Great progress forward on the bottom line.

Product mix is the other one that we are calling out so product mix is always a big driver for us is gross margin.

Done some work than ongoing material cost reductions and that's really what you're seeing coming through in addition to the channel net.

And this is radio in it.

Any of the revenue guidance or is that excluded.

Too early to make a call.

Everything we know about all of our products is included in our fiscal year 21 sites, but we do not break out anything for that one specifically as you can imagine having just launched it.

Pretty small.

Great. Thanks.

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

Yeah. Thanks for the chance again, sorry about that earlier.

So nice quarter, I guess I wanted to ask about the physical putting on guidance.

And visibility and kind of maybe what you're assuming their britney when you give that guidance are you assuming steady state in terms of the economy do you assume or a rebound I mean, how do you think about that.

Did you consider not giving guidance at all and then I have a follow up to that.

Yeah, you know it it's a great question, it's sort of hard to have a crystal ball on.

The economy or the world right now and so.

You know, we always try and share when we know we share what we can share that's generally been our philosophy on guidance. That's why we gave guidance for Q4, when we cut and now we're giving you our best look at fiscal year 21, our guidance is a little bit wider than we would normally give to take into account a bit of that uncertainty.

The Q1 is also our largest corridor and we can see what we can see on Q1 in terms of demand trends and the underlying demand for our products as we have looked at Q4 and then as we've looked at 21 is quite high and it's really the success of arc.

Moving on new products, plus you know what we have coming for the year that gives us confidence to come out with the guidance range.

Okay. Thanks for that and then I wanted to on DTC are indicating a similar.

Percentage to this year.

21 next year, but you've had that.

Obviously, a move up because of co bid just wondering.

In your commentary earlier made it sound like you feel like that's a sustainable.

Friend, and I think I agree with that so I'm curious why that percentage doesn't go up in the guidance you know why not go ahead, an increases or do you feel like it's kind of.

Outpacing what it should be right now and that's.

That's why you're holding it flat.

You know we have a big benefit in fiscal year 20 on DTC from the fact that physical retail was closed and.

E Commerce in DTC, what's really the best available channel. So I think we're trying to be pretty balanced as we look at fiscal year 21 between the south.

That consumers are getting more comfortable buying products online we've been investing in our DTC channel we've been deepening those relationships. Those are all the pros I think the challenges you know.

Physical retailers have also adapted arguing curbside pickup and delivery and that continues to be an important channel for us. So we think being roughly flat year over year. It's a pretty nice result for our DTC business. When we expect physical retail to be opened in a strong partner and 21.

Yeah.

Great. Okay. Thanks, a lot.

Your next question comes from the line of Elliot often with D.A. Davidson. Your line is open.

Great. Thank you. Thank you I just want to follow up on the gross margin guidance I guess, what are the assumptions surrounding the promotional landscape.

For fiscal 21, and then kind of back to the DTC kind of.

How how that goes into forecasting it if there is any correlation you've seen the cash.

Some of the retail openings.

And your DTC business by geography.

So I would say on our Q1 she thing we called for our growth margin. If you exclude tariff from both.

Both periods to be fairly consistent year over year. So you can imagine that that means we're not doing any sort of big swing from a promotional standpoint, one way or the other given that type of consistency in our gross margin and then yes, we certainly look pretty closely at our DTC business and how that continued to per.

Form in Q4, when physical retail had largely be open and that's part of what's giving us the confidence and the 21 died on DTC.

Okay, Great and then.

What is the what are the Disney partnership mean for Sonos and kind of what other similar partnership could that look like in the future.

Yes, I think it's.

Great one that.

It was our intent to.

Go to an even broader mainstream audience and be able to bring our products to just didn't even even wider array of people. We've seen you know, we're seeing such trends in such tailwinds around streaming whether it be audio or video and that plays right into what we're doing and so.

You know, we we think based on what we've seen here in the kind of ambition that we have in terms of other new homes, we think we can get into.

We think there is an excellent way of doing it. We're obviously very selective in terms of the brands that we want to work with.

Around this but I think it is one of those effective ways of getting even more leverage as well out of our sales and marketing investments so I'm very.

Very pleased with that and then look forward to doing more in the future.

Great. Thank you.

There are no further questions at this time I will turn the call back over to Patrick sense.

Thanks, David and thanks to all of you for joining.

You know as as I mentioned I think we've had a real inflection point in terms of our model. Our model is working it's working and has worked for 15 years in terms of getting us to this point in terms of really being resilient in the face of the pandemic.

And we're excited about what we have in store for the next year, we're excited to share more of our strategic thinking as we get to that merchandise investor day, as well and I just want to say a huge thank you to the entire sonos team for what was delivering through a very challenging year, but adopting and being resilient in the face of everything that.

We were challenged with so thank you and we'll talk to you again soon ticker.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

Disconnect.

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