Q1 2021 Sonos Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the <unk> fiscal first quarter 2021 earnings conference call at the time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need.
The press Star one on your telephone please.
Please be advised the today's conference is being recorded.
I would like to hand, the conference over to your Speaker today, Cameron Mclaughlin Vice President Investor Relations. Thank you. Please go ahead.
Thank you good afternoon, and welcome to sell on those first quarter fiscal 'twenty 'twenty, One earnings conference call I Am Cameron Mclaughlin and with me today, our son of the CEO, Patrick Spence and CFO Brittany Bagley project for those of you who joined the call early today's hold music, including highlights from the recently launched artist curated stations by.
The Angelo and F. K, a twigs on some of those radio H D. Before I hand, it over to Patrick I would like to remind everyone that today's discussions 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 for.
For discussion of these risk factors is fully detailed under the caption risk factors in our filings with the SEC. During this call. We will also refer to certain non-GAAP financial measures for information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures. Please refer today's today's press release regarding our first quarter fiscal 2021 results posted to the other.
A portion of our website as a reminder of the press release of supplemental earnings presentation, and our conference call transcript will be available on our IR website at investors <unk> Dot Com I will now turn the call over to Patrick.
Thanks Kamran.
'twenty 'twenty 'twenty 'twenty, one is off to a great start for Sonus I'm, So proud and appreciative of all the hard work by our team and our partners. These results are incredible in their own right, but doubly so in the face of the pandemic and all of the challenges. It brings while we anticipated delivering a strong first quarter. Our results were meaningfully ahead of our.
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On the heels of the strength the momentum we continue to see and our ambitious roadmap, we have even greater confidence in our ability to drive transformational 'twenty 'twenty. One results, we are increasing our outlook for the year on all of our key metrics.
As I highlighted last quarter, we have hit an important inflection point that proves that our unique bottle delivers for both customers and investors.
Our approach from the beginning has been to build a system of premium products and now services that deliver an amazing experience, whether you start with one of them or start with many.
This creates a virtuous cycle, where customers returned to out of additional so on those products and services over time.
Our bottle has two important drivers the first is attracting new customers and the second is driving additional purchases from existing customers.
We made big gains on both fronts in this quarter.
We added a record number of new homes, and we saw our existing customers returned to add additional products at a record level.
Britney will cover the financials in detail, but I wanted to highlight one thing the.
The first quarter illustrates the strong free cash flow and adjusted EBITDA, Our model delivers as we scale it.
We delivered a record 25.8% adjusted EBITDA margin, thanks to our innovative products, our ability to expand gross margins and our continued operating expense leverage.
This is a strong proof point for the profitability and sustainability of our model.
Revenue during the first quarter increased 15% year over year to a record $645.6 million.
As you know we've been focused on leading with direct to consumer and our DTC performance accelerated in the first quarter.
We had a very strong holiday selling period led by growth across all of our product categories.
As you know we limit regular promotions keep our campaigns for you and targeted throughout the year and believe strongly in maintaining our premium position in the marketplace. The.
Biggest driver of new customers continues to be existing customers, telling their friends and family members about Sone US there is no better Testament to the power of the brand than that.
While our efforts to improve availability proved helpful. During the quarter to drive stronger performance than expected. We do remain out of stock on three products, we anticipate being largely in stock by the end of the second quarter.
As a result of our strong performance and outlook for the remainder of the year. We are on track to deliver our 16th consecutive year of revenue growth now expecting to deliver 17% to 21% growth for the year on a comparable 52 week basis compared to our prior outlook of 11% to 15% gross.
As we look forward to fiscal 'twenty 'twenty, one we see tremendous opportunity and remain focused on the following priorities for this year.
The first is the continued to deliver innovative new products that both new and existing customers love plus services that enhance and further differentiate the customer experience, we remain committed to maintaining a relentless focus on innovation in our traditional product segments and you'll see continued innovation and experimentation in services as we believe there is plenty of.
Unity, given our highly engaged customer base.
We remain committed to logic of at least two new products per year and are well on track as we look at our fiscal 'twenty 'twenty one product roadmap. We are excited to introduce our newest product next month stay tuned for details. We are pleased with the momentum we are seeing around some of those radio and so on this radio HD, we look forward to developing more direct paid relationships with our customers.
Over time, and we'll be talking more about this at our Investor event next month.
Second we will continue to focus on strengthening our direct to consumer efforts and engaging even more deeply with consumers.
We are increasingly focused on direct distribution and engagement to ensure we are delivering a great end to end experience for our customers.
We have seen the consumers are willing to engage and transact with the trusted brand like Sonus and expect that that will only increase over time.
Third we will continue to strengthen and support our incredible partnerships. We've been very pleased with the results of our Ikea partnership and the opportunity of it has created to introduce new consumers to the Sonus brand and our platform.
We will look to continue to enhance our partnership with Ikea This year and bring additional new partners onto the platform.
As far as our longer term strategic priorities in the future I look forward to discussing this at our first investor event on March nine.
We're excited to have all of you join for that and I've never been more excited about the opportunity ahead for Sonus let.
Let me turn it over to Brittany now.
Thank you Patrick.
We are thrilled to be starting fiscal 2021 on such a positive note delivering well in excess of our expectation and further solidifying our ability to deliver a record year.
Let me add some color on our strong first quarter results and our increased fiscal 'twenty 'twenty one outlook.
Starting with the first quarter, we delivered adjusted EBITDA of 166 million. This was the 78% increase compared to our 93 million range yes.
Excluding tariff duties and refunds in each of the quarters adjusted EBITDA increased 45% over Q1 of last year.
Our adjusted EBITDA represents the 25, 8% EBITDA margin compared to 16, 6% last year.
This is our most profitable quarter ever.
We were able to deliver this tremendous result due to strong.
Well, that's the leverage and top line growth.
The new in the first quarter increased 15% or 12% on a constant currency basis, the nearly $646 million as we continued to experience strong demand for our new on existing products and an overall strong holiday selling season.
Revenue exceeded our expectations, because we pulled more supply into the quarter for our efforts around the airfreight and overall shipping and logistics processes globally.
The Americas grew 21% on EMEA grew 13% or 5% adjusted for the positive currency impact.
APAC decreased 17%, primarily because of slower module orders out of Ikea, given the lighter foot traffic in their stores due to COVID-19 on the cyclicality of our product launch timing.
So on a speaker revenue was up 13% year over year.
Driven in part by the continued success of park.
So on a system products revenue increased an impressive 9% driven by the continued strength of our installer channel and component products.
Partner products and other revenue decreased 40% driven by the lower Ikea revenue noted earlier.
Gross margins were also incredibly strong in the quarter and reached a record $46 four per cent.
This was the 590 basis point improvement.
Of which 400 basis points was due to the benefit from tariff refunds compared the tariff expenses in the first quarter last year.
We were mostly exempt from tariffs in the first quarter and started receiving refunds for tariffs previously paid.
One of the two impact we had of $3 million benefit to gross profit during the first quarter.
The 190 basis point increase excluding the impact from tariffs was primarily driven by mix shift the higher margin products and higher margin channel mix, especially as we continued the strong DTC performance.
As well as product of material cost reduction.
These benefits were partially offset by industry wide increased shipping and logistics call on additional airfreight to meet our demand.
Given the incredibly strong demand both on our products and across the global supply chain, we continued to be out of stock on a number of our products through the beginning of the second quarter.
In addition to the shipping and logistics challenges. We also faced challenges in our supply chain from ongoing COVID-19 restrictions in Malaysia, as well as component shortage.
Our terrific supply chain team continues to ramp to meet this demand and we are still working to be fully transitioned for Malaysia by the end of the summer.
Overall, we are starting to see improved availability for our products and we expect to be largely back in stock by the end of the quarter.
However, arc Amp and move specifically may continue to face supply shortage of into the third quarter on the back of continued stronger demand and supply chain constraints.
This is included in our fiscal 'twenty on outlook.
Turning to operating expenses, we saw strong leverage during the first quarter on pause we continued the benefit from efficiencies, resulting from our restructuring efforts implemented last year and the higher first quarter sales volume.
R&D as a percentage of revenue decreased to 120 basis point.
Sales and marketing as a percentage of revenue decreased to 230 basis points.
And G&A, excluding IP litigation and transaction related costs as a percentage of revenue decreased 70 basis points.
Our model continues to generate strong free cash flow and we saw another significant increase this quarter.
We generated cash flow from operating activities of $215 million and free cash flow of $203 million of 97% for my $103 million last year.
We are ending the quarter with $678 million in cash.
Which puts us on a strong position to invest organically in our business pursue M&A and return capital to shareholders through our authorized share repurchases.
We currently have no down on our balance sheet as we paid down our outstanding $25 million in short term debt in January.
Given the tight inventory position this quarter, we had particularly strong free cash flow from working capital, which will normalize as we work towards the sustainable inventory position during the rest of the year.
We are very proud of the strong quarter, we were able to deliver looking across profitability revenue and cash flow and are excited about what is the top.
With that I will turn to our upwardly revised fiscal 2021 outlook.
We remain aware of the continued uncertainty in the broader macro environment with COVID-19 and.
And we continue to face challenges in the supply chain.
However, we feel confident of our outlook given the continued momentum on the strong first quarter, we were able to deliver on.
Our new products are performing particularly well and we think the trend of spending more time in your home whether that is listening the audio content or home theater products will likely endure even if the vaccines rollout and life begins to look more normal again.
We now expect adjusted EBITDA in the range of $195 million to $225 million up from our prior outlook of 170 million to $205 million.
This represents 13% to 14% adjusted EBITDA margin expansion of 460 to 610 basis points from the prior year.
Gross margin is now expected to be in the range of 46 to $46 five per cent compared to our prior range of 45.3 to 45, 8%.
This one instead of just due to the strong first quarter, we experience as well as ongoing benefits from channel mix material cost reduction.
On the expected continued benefit from our higher revenue.
We also continue to have $25 million to $29 million of tariff refunds, we expect to receive.
However, given the timing is uncertain. This is not included in our outlook and will be recognized only when we receive the refund.
We do expect to make additional opex investments in our marketing operations and incentive compensation to support the revised topline growth and outlook for the year.
Total revenue for fiscal 2021 is now expected to be in the range of 152 5 billion to $1 575 billion representing growth of 15% to 19% as reported.
Excluding the 50 <unk> week from fiscal 2020. This represents growth of 17% to 21 per cent for the year.
This compares to our prior revenue outlook in the range of one point for 4 billion to $1 5 billion, which represented growth of 9% to 13% or 11% to 15% excluding the extra week.
We continued to execute and deliver strong results in the first quarter positioning us well to deliver an even stronger fiscal 2021 of cross profitability on revenue growth.
We have a strong balance sheet, which will allow us to continue to invest in growth organically and through M&A and to return capital to our shareholders through share repurchases.
We look for to connecting with you all again I don't virtual investor event on March nine.
With that I would like to turn the call over the questions. Thank you.
As a reminder to ask the question you'll need the press star one on your telephone to withdraw your question press the pound key.
Your first question comes from the line of Adam Tindle from Raymond James Your line is open.
Okay. Thanks, Good afternoon, Patrick I, just wanted to start on additional color on the record number of new customers in the quarter as I think about historically something like the Ikea partnership for example of few years ago that allowed you to reach of new demographic, but theres nothing I can really point to this quarter. So I'm just wondering if there's some additional color.
As to what's driving that this quarter and I'd imagine you're gonna alluded to a network effect essentially so why is that reaching an inflection now.
Yeah. Thanks, Adam.
First thing I would say I think there's really three things in the first I'd say is obviously theres more people at home. So I do think that has something to do with it.
The second is around.
What we've seen in terms of street in streaming video and really.
A lot of customers start a lot of the streaming services now running.
Running for your first run movies simultaneously in theaters and as well at home and more people spending time there.
The you know our home theater results were fantastic. So I think that is something that is a tailwind for us and then finally is the flywheel of our network effect like you mentioned, which you know really as we've seen and hit that inflection point in fiscal Q for the.
The the fact that the number one driver remains people telling their friends and family about so knows I think really we see that just building on itself time and time again and it built two of another degree.
In this quarter and so I think that bodes well for momentum in the future, but those are the three kind of catalysts, we saw this quarter.
That's helpful and maybe just as a follow up wanted to ask on the Google Litigation you had the La Grande license win just a couple of months ago. If I recall correctly I think theres some dates approaching for the Google of litigation in the spring summer timeframe. So just wondering if this la Grande licensing when it gives you some momentum into the Google decision.
And any color or context, you can give us around Google litigation update thank you.
Adam It's Eddie Lazarus, the Chief legal officer to respond to that day.
Buddy.
So in terms of dates are we have two very active cases against Google right now the for.
First up is in the International Trade Commission and that will go to trial.
On February 22nd so coming right up on.
And we would expect a preliminary decision out of the ITC.
In early May.
And then in addition to that net that case involves five patents.
And then we have a second case in the Western district of Texas.
It involves five completely different patents in that case.
<unk> is expected to go to what's called the Markman hearing in July of this year that said, that's the hearing where the patent.
Certain patent terms are defined and then that is scheduled for trial in June of 2022, So that's on a.
The are quite healthy schedule as well.
Hi.
I wouldn't draw any direct connection between the the La Grande agreement and the Google Litigation will just say that we have started entering into license agreements with the number.
The of companies.
That process is ongoing and yes, I'd say it reflects.
The strength and vitality of our IP portfolio, which has been ranked among the most valuable consistently by outside experts.
Okay. Thanks to you both and congrats on the strong results.
Thanks, Adam.
Your next question comes from the line of Katy Huberty from Morgan Stanley. Your line is open.
Thank you good afternoon did the upside in the quarter came mostly from the direct business or have you started to see retailers ramping inventory levels as foot traffic recovered. So I'm just trying to understand whether that restocking catalyst is still in front of you or you started to see that in the in the December quarter, and then of a follow up.
Hey, Katy it's Brittany.
So we thought really strength in our products across the board, but because we were supply constrained for the quarter I would say that.
Is it safe to say that there is restocking in front of us as we continue to get all of those products back in stock.
Okay, Great and then.
You did not flow through the entire EBITDA beat.
From the first quarter to the full year guide and so just wanted to get some color as to whether your view of profitability in the coming quarters has has changed and whether because of the strength that you saw on the first quarter. You are looking to step up investments I know you mentioned higher compensation expense.
Yeah. So overall, we still expect higher profitability for the year and higher gross margin and gross and EBITDA margin for the year than what we were looking at before but we do have some additional opex investments to make to support that higher revenue. So that's coming for us both in sales and marketing.
In our direct channel the support those businesses and then it is coming on incentive compensation.
Okay, and then just one for Patrick I mean, clearly youre not going to talk about future products, but in the past.
Seeing the three categories of of launch as you know one is just upgrades of existing products. The other is price point expansion with an existing Tam and then the <unk>.
Third is real cash.
On the expansion any color as to which of those three categories. We should we should expect that you might address silver over the next year with the with the two new product launches.
Ah I think it's fair to say all of them.
Okay.
Thank you congrats on the quarter.
Thanks Katie.
Your next question comes from a line of Rod Hall from Goldman Sachs. Your line is open.
Yeah, Hi, Thanks for the question and great quarter.
So I wanted to start off with the go back to the litigation.
In particular, the ITC situation and just ask.
We've seen these kind of ITC cases come before and even know the ITC may rule in one direction or another.
Let's say they rule for you there tends to be a delay in of many times not on implementation of that ruling so is there anything that.
You could say from your point of view that would make us think that.
Whatever that ruling is will stick or do you think that theres going to be of kind of a lengthy process of back and forth whereby the nothing gets implemented and then I have a follow up.
I would just say that we have a great deal of confidence in all of the cases that we bring.
And.
We are we believe that Google is infringing a very.
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And that we're going to continue with this process.
Until the way.
We've indicated our IP rights.
Okay, great. Thank you and then I wanted to come back to just the supply situation. We continue to hear that there are.
Growing problems in the semiconductor supplies globally and I Wonder if you guys could talk a little bit about what youre seeing there and whether you expect to see you've talked about the supply constraints already but.
Do you see of worsening situation there.
How does that affect your ability to deliver product. The next couple of quarters. Thanks.
Yeah, Rod, it's Patrick I'll take that the that's something we've been dealing with in the quarter.
As well.
It just says everything is ramped back up in demand on those kinds of things and I think Britney hit it in her comments about the work by our operations and supply chain team, they've just done an incredible job and of one of the things where we invested in US getting ahead to make sure that we of the components that we need as we think about the year and really we've been investing aggressively to try and.
The catch up to the demand and so.
In our forward outlook, we've factored in.
What we can see and the what's the team's managing of this particular point of time.
As you well know this is a ongoing thing that we deal with all the time around different components and different things and so it's.
It's particularly acute I know for automakers right now.
We think we're in good shape in terms of where we are at this particular point in time.
That's great. Thanks, Patrick.
Your next question comes from the line of John Babcock from Bank of America. Your line is open.
Thanks for taking my questions just starting out I know you watch the son of a SHT back in November just wanted to get a quick sense for how that's performing.
So to your expectations.
Yeah on it it's a little early for us to really be talking about that we've only had it in the market of couple of months, but look for us to provide some sort of update on both the HD and our AD supported business at our Investor event in March.
Okay.
And then.
I don't recall the.
Specific kind of numbers provided around kind of DTC growth and how much that was as a percentage of revenue I was wondering if you might be able to provide some color around that.
And then I guess.
The other piece I mean, just overall.
With the gross margin I mean, it seems like that was solidly above your guidance I was just wondering if you might be able to provide a little bit more color on.
The variance was relative to where you were expecting last quarter.
Yeah, I think both of those look Patrick had some commentary about how DTC continued to accelerate and continue to be very strong for us.
No sort of change in our guidance relative to what we outlined in Q4 in terms of what we're looking for for the year and we'll provide an update at the end of the year in terms of where we land on DTC as a percentage of revenue so stay.
Stay tuned on that but I did also talk about how that he has been one of the positive drivers for off on gross margin. So if you think about what I talked about in terms of gross margin improvement, it's really been better product mix relative to what we were expecting better channel mix relative to what we were.
And a lot of that is the benefit from DTC the.
The supply chain team has done a great job getting down material costs, even through this challenging supply chain time, and so those are some of the benefits you know offset a bit by the overall logistics and shipping costs that we and everybody else have been facing in the quarter.
Okay and then if you don't mind me just with one quick follow up just on.
EBITDA for the quarter can you just quantify overall what benefit you had.
The tariffs it sounds like you might have.
You know perhaps had some.
The money that you guys received in sort of maybe that benefited the EBITDA, but just wanted to kind of clarify that.
Yeah sure. So we had pretty minimal terrorists expense for the quarter and then we started receiving refunds in the quarter and so our net benefit was $3 million and so that hit gross margin. So there's a net 3 million benefit that you see coming through in gross margin and then that does flow all the way through to EBITDA.
Okay. Thanks Brent.
Your next question comes from the line of Brent Thill from Jefferies. Your line is open.
Good afternoon. This is James on for Brent. Thank you for taking my questions could you talk about the promotional activity that you saw in the holiday quarter and how much you think that impacted your revenue and profitability and compared to prior holiday quarters. When you say that this year was more or less promotional than prior years and I have a follow up.
Okay.
I would say that our promotional activity. This year was very consistent with last year's promotional activity. What I would say is probably the difference that you saw from Austin really everyone. In the industry is that it happened a little bit earlier this year relative to normal people just got started with that earlier given.
Shipping lead times in some of the logistics around the holiday quarter.
You know what I would say is that that's always a benefit for us in this quarter as you know one of the reasons for the holiday quarter is our seasonally biggest quarter for the year and then you see that I think reflected all the way through our P&L as you see we outperformed on the gross margin and EBITDA negative.
The negative impact from the typical promotional activity.
Great and digging a little bit deeper into your geographic performance what are your expectations for APAC. This year given the work you've done on Ikea I was just curious if youre starting to see any evidence of a rebound following a pretty aggressive physical store closures in that region and then curious if your guidance assumes any any material snapback.
And in that particular region. Thanks.
Okay.
Yeah. So I would remind you that inside of APAC. We report both APAC and we report Ikea and so what we're really calling out for the APAC region is that those numbers are getting hit right now because of Ikea. So Ikea has had any store closures.
No across their stores and that will really depend on COVID-19 and when they get to reopen and then as Patrick has talked about you know we are expecting new product launches with them coming up and so you know the timing of when the product launches happen and how they transition to the new products, obviously gets factored into.
Their outlook and their revenue as well.
Great. Thanks, so much.
Yeah.
Your next question comes from the line of Kevin Robinson from D. A Davidson your line is open.
Thanks, so much and congrats on a fantastic quarter I was just wanting to get a better understanding of where we stand on the inventory, including your ability to maintain supply of the top line of products. I know you mentioned that you're out of still out of stock on three products and expect it to become back in stock in the second quarter, but for the Skus, where youre not able to maintain supply do you.
I think there's a lot of sales or do you think that the consumers are waiting for them to become once again in stock. Thank you.
Sure happy to answer that so what we said specifically is that.
As expected we are getting back into a better in stock position on the majority of our products in Q2, but there are three product arc amp and move which will likely continue to be out of stock into Q3, that's because we continue to see really excellent demand for.
The other products and are working to keep up there.
On that that is really a you know sort of like a challenge that we've had ongoing for the last couple of quarters as we've been chasing supply on we have and continue to be you know very pleasantly surprised by how willing are customers have been until week for their products to come in I think you.
Can probably see it you were getting back in stock now so it's a little bit less obvious, but you know the the shipping times and the lead times on some of those products and then the fact that we are still in the App.
Absolutely, beating revenue for a cost I think combined the paint a picture of you know just how willing people have been to wait for our products and that's really because they are fantastic product and when you are a part of the sterno system. It's worth waiting for a product that works since I just don't know system, So you're you're seeing the lawyer.
The T of our customers and the benefit of that system Ness of the Patrick talks about.
Thank you.
Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.
Yes. Thank you very much I wanted to ask just about your guidance on topline guidance for the year, which basically raising it by roughly 75 million.
Just came off of a quarter that beat consensus by roughly $55 million.
So just trying to get a sense of is that a conservative view.
Reflecting what you just talked about the product constraints.
The issues are you being conservative and what should we think about sort of the cadence of the quarters through the year.
Typical seasonality or lessen the seasonal because theres not.
As much inventory in the channels as you talked about as it typically is going into Q2.
Yeah, you know look I would say, we do our best of share what we know right now I think you know.
As we called out when we gave the guidance we continue to have in the supply chain challenges and of course you know.
There's questions about what will what will the world look like as we get all of the vaccines rolled out and stuff like that we continue to be pretty confident in our ability to manage through the supply chain challenges and in our ability to maintain a really relevant and wonderful products for people in their homes.
Even as vaccines potentially roll out I think we know that the world isn't going back to normal overnight. It doesn't look like worked isn't necessarily going to go back to normal. So I think some of these trends of people staying in their homes consuming content in their homes continuing to watch movies at home rather than.
And movie theaters is really here to stay which is you know why you see us carrying more than just the beat from Q1 through to the quarter, even with all of that going on so that that's really what we're looking at when we look out at the rest of the year.
In terms of seasonality you know nothing to call out for the rest of the year really we're not providing any kind of quarterly guidance.
The other than sort of the color around when we expect to be back in stock on some of our products.
Okay and in your gross and thank you for that and your gross margin guidance for the year they are pretty robust.
And how should we think about any impact from a higher percentage of sales through the channel as some of those channel partners like best buy.
Ikea come back is that going to be just offset by the continued strength in direct to consumer as well as improving product mix with new products.
I would say, we've sort of factored in everything we know about both product mix and what's coming from the new product standpoint, and channel mix to the best that we can predict it into that gross margin forecast that we provided.
Okay. Thanks very much.
Thank you.
And there are no further questions at this time, Patrick Spence I turn the call back over to you for some closing remarks.
Great. Thanks, Robin and thanks to all of you for joining us.
It was a fantastic quarter, we're off to a great start for the year I've never been more excited about the future of Sony I was I think we've got.
Some great momentum, we've got a great brand and we have an amazing roadmap. So we look forward to seeing everybody on March 9th for our very first investor event and sharing some more details of the future then take care everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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