Q3 2021 Sonos Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the solar knows third quarter fiscal 2021 earnings conference call at this time.
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 this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance press star zero.
I would like to hand, the conference over to your speakers today Cameron Mclaughlin Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to <unk> third quarter fiscal 2021 earnings conference call I Am Cameron Mclaughlin and with me today are sone, <unk> CEO, Patrick Spence, Brittany, Bagley, CFO and Eddie Lazarus Chief Legal officer for those who joined the call early today's hold music was inspired by our recent partnership with Liberum.
More F C featuring tracks when the Beatles 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 in them.
Certainties that could cause actual results to differ materially.
From expectations reflected in the forward looking statements a discussion of these risk factors is fully detailed under the caption risk factors in our filings with the SEC. During this call. We will also refer to certain non-GAAP financial measures for information regarding our non-GAAP financials, and a reconciliation of GAAP to non-GAAP measures. Please refer to today's press release regarding our.
Third quarter results posted to the Investor Relations portion of our website as a reminder, the press release supplemental earnings presentation and conference call transcript will be available on our earnings or our Investor Relations website at investors that someone else Dot com I will now turn the call over to Patrick.
Thank you Cameron and Hello, everyone before going into details on our record third quarter results.
I want to recognize the tremendous work that our people and partners continue to do.
As I reflect on our continued strong execution and performance I'm extremely proud of what our team has been able to accomplish.
The momentum in our business the strength of our brand and the unwavering consumer demand for our products. It makes me even more confident and excited about our future.
We are pleased to report outstanding third quarter results driven in large part by the continued surging demand for our products.
We're breaking records on both our top and bottom lines.
We achieved a record third quarter adjusted EBITDA margin of 12, 3% and delivered a record $379 million in revenue up 52% from the prior year.
As a result of our expected strong second half performance, we are raising our fiscal 2021 outlook.
We now expect fiscal 2021 adjusted EBITDA of $275 million at the midpoint up from our prior outlook of $238 million and revenue of 1.702 billion at the midpoint compared to our prior outlook of 1.65 billion.
This represents adjusted EBITDA growth of over 150% adjusted.
Adjusted EBITDA margin of over 16% and revenue growth of over 30%, excluding the 50 <unk> week in fiscal 2020.
It's important to remember that this is not simply a favorable COVID-19 comp comparison. This growth is on top of the growth we were able to deliver in fiscal 'twenty 'twenty.
And of course, we're doing it at much larger scale and doing it profitably.
Our model is working.
Our upwardly revised outlook calls for revenue growth of approximately 30% in the second half of fiscal 2021 adjusting for the extra week last year up from our prior outlook of 20% growth.
This is comparable to the 33% growth we delivered in the first half of the year. Despite the fact that supply chain constraints, which are broadly shared across our sector have increasingly impacted our efforts to fulfill the ever growing demand for our products.
Our customers have shown both patients and loyalty their willingness to wait for our products. While we continue to work to build supply truly underscores the power of our system based approach and our brand.
Purchasing sonus is a considered decision to enter our system.
Not just by a single product like so much of our consumer so much of consumer electronics.
At this point, we expect to exit fiscal 2021 with a significant backlog, which we expect to work down in fiscal 'twenty to 'twenty two.
Given the exceptional momentum we are experiencing and the unwavering demand for our products. We are ahead of schedule toward achieving our fiscal 'twenty 'twenty four targets outlined at our Investor event back in March and are on track for what we believe will be a promising fiscal year 2022.
Stepping back from our immediate results for a minute I want to revisit the three macro trends. We identified earlier this year and we believe are and will continue to help fuel our continued growth as we look to the end of fiscal 2021 and beyond.
First the Golden age of audio the sheer volume of music audio books and podcast, we have access to now is incredible. According to future sources recent audio tech lifestyle survey of audio product owners the percentage of respondents listening at least an hour a week to streaming audio content in 2020, one has increased to 73% across the year.
The us, Germany, and U K compared to 63% in 2020.
And we believe that as more and more people become creators and find interesting new audio formats like social audio even more time will be spent with Audi.
As the leading premium home audio brands Sonus is well positioned to continue to capitalize on this.
The second trend is Hollywood at home with more and more video content going direct to home. There has been a decade of change in the past year with companies, bringing the newest movies right into our homes. The number of street. The streaming movie premieres Triple last year and is not showing any signs of letting up.
As a result consumers are demanding a theater theater like audio experience in the home and that is something we deliver better than anyone.
And the third trend fueling our growth is the great reshuffling. This is the untethering of people from their commutes in offices, which has enabled them to reevaluate, how and where they want to live.
According to recent Zillow research fast rising home values and new location options, resulting from remote work drove U S movers toward even larger homes last year with a shift from urban to suburban Zip codes being the most prevalent.
We believe this will be a multiyear cultural trend that benefits don't have significantly as consumers will continue to invest in their homes and have even more spaces to fill with sound.
As we look toward the long term, we remain focused on our three strategic initiatives first the expansion of our brand. This is all about understanding our customers better than anyone and how we're evolving our brand and marketing strategies to reach more of those customers.
As you have seen in recent weeks, we've announced exciting new partnerships that provide opportunities to extend the sonus brand and introduce it to new and broader audiences.
To celebrate the launch of Rome, our first ultra portable smart speaker, we recently kicked off a multifaceted partnership with the North face a heritage brand that inspires all of us to get outside and explore the world.
First up as soon as radio station called never stop exploring which invites all of us to Sonically experience some of its athletes farthest flung adventures.
And just yesterday, we announced a new exciting partnership with Liverpool Football club marketing Sotos as first ever sports team partnership.
After a year of empty stands Sonus and Liverpool FC are excited to welcome back the 12th Man.
Named for the fans, whose very energy and sound can win games and intimidate the opposition.
And with millions of Red supporters globally, Liverpool FC sounds, it's well outside the walls of the stadium reverberating through countless towns and cities connecting people all around the world.
As part of the multi year agreement Sonus will amplify the Reds passion for sound by creating immersive sound experiences within the stadium focusing on internal lounges and player areas as well at the at the Axa Training Center the club's training base.
Starting on August 21, we will also be featured on at Anfield pitch side L. E. D. At every Premier League home game with animation sequences, featuring Sonus products branding and key messaging.
We have a tremendous opportunity ahead in the categories. We play today and we have ambitious plans to expand into new categories.
Two expanded or new customer segments and to layer services on top of everything.
Our newest product roam fits this profile.
And it's been a huge hit driving strong demand from both existing and new customers alike. In fact roam set a new record for the number of registrations for new product released in the first full week after its launch.
We remained focused on our efforts to introduce at least two new products each year and have already exceeded this target for fiscal 2021 with the introductions of Sonus radio HD roam and new partner products with Audi and Ikea.
And July Ikea introduced the latest product stemming from our long term partnership the symphonic picture frame Wi.
Wi Fi speaker, enabling consumers to enjoy both room filling sound and a beautiful piece of art.
As we look ahead, our long term product roadmap remains robust and we are excited to unveil what comes next.
Third driving operational excellence to achieve sustainable profitable growth for the long term you are seeing us continue to execute ahead of our plan and deliver margin expansion and healthy top line growth, we're laser focused on extending our trend lines as well as investing for the long term.
I've never been more excited about the future of Donuts, we continue to see strong demand and we are in the best position we've ever been we have a huge opportunity in front of us and we're just getting started.
Now I'll turn the call over to Eddie to provide an update on our IP litigation.
Thank you Patrick.
With the judges initial decision in their international Trade Commission patent case expected on Friday.
I thought I'd give it give everyone a brief refresher.
As I shared at our Investor event in March we estimate that Google Infringes over 150 U S utility patents from 30 different patent families.
All of those patent families are still alive, and we continue to obtain high value patents from them.
We included five patents in our action against Google at the ITC.
That's basically the limit of what you've been fit one case before that tribunal.
Those five patents were directed to grouping and synchronizing playback amongst smart devices vol.
Volume control for a group and individual devices stereo pairing incentive.
Google has thrown everything at us in this case, but.
But we believe that the evidence before the ITC demonstrates Google to be a serial infringer of Sonus is valid patents.
And that the ITC case represents just the tip of the iceberg.
We will have more to say once the judge issues. His initial decision, but for now we remain confident that the ITC will find Google to be a patent infringer and has happened recently and Sonus as case against Google in Germany that other court will do the same.
Let me now turn the call over to Brittany to provide more details on our results and our outlook.
Thank you Eddie.
We are excited to report another quarter of strong result, further positioning us to deliver a record fiscal 2021.
As Patrick mentioned, the continued strong demand for our products and our customers' willingness to wait for products, while we navigate the industry wide supply constraints demonstrates the power of our platform and brand.
That continues to show up clearly in our strong result.
Now, let me add some color to the third quarter.
We delivered adjusted EBITDA of $46.7 million compared to a loss of $2.7 million last year.
Our adjusted EBITDA margin expanded to 12, 3% during the quarter.
We were able to deliver this tremendous result, due to strong gross margin.
Record topline revenue growth and ongoing operating expense leverage.
Revenue in the quarter increased 52% to nearly 379 million.
The Americas grew 48% in EMEA grew 51% or 37% on a constant currency basis APAC grew 101%.
All regions continued to see strong demand across our products.
So no speaker revenue was up 58% year over year led by the introduction of Rome, and the continued success of Arkansas.
So in our system products revenue increased 13%, even while constrained due to product availability.
Partner products and other revenue increased 103% driven by accessories growth in our new product introductions that Ikea.
Gross margins reached 47% an improvement of 300 basis points versus last year.
We received approximately $5 million in tariff refund and recognized approximately 4 million in tariff expense during this quarter.
Excluding the impact of tariffs from both quarters gross margin increased 110 basis points to 46, 8%.
This 110 basis points of gross margin improvement relative to last year was primarily due to lower promotional discount would be comped at home Mcdonald's campaign, and fixed cost leverage on the higher sales volume.
These improvements were offset by channel mix as we anniversary the retail store closures and the outsized DTC growth, we experienced last year as well as by the increase in component costs and higher industry wide shipping and logistics call. We continue to experience.
Turning to operating expenses.
As a reminder, we incurred 26 million in restructuring and related charges in the third quarter of last year.
Excluding these costs, we experienced a year over year increase in all opex categories as we invest to grow.
As we stated last quarter, we expect to continue making additional opex investments in our product marketing and operations to support the higher revenue volumes and long term growth initiatives.
We also have experienced higher incentive compensation assumptions, given our increased outlook.
Excluding $4.9 million of restructuring costs in the year ago quarter, R&D increased 5% due to higher personnel and other R&D related costs to support our continued growth.
Sales and marketing, excluding $19.8 million in restructuring costs last year increased 17% due to higher marketing expenses as well as higher revenue related to LTE.
G&A, excluding the $1.4 million in restructuring cost and the $1.2 million of incremental legal fees related to IP litigation increased approximately 26% during the quarter, primarily related to investments and incentive compensation.
During the third quarter, we had $70.8 million loss from operation and had free cash flow of $55.9 million largely due to strong net income performance and working capital management.
We are ending the quarter with $671 million in cash and cash equivalent which continues to put us in a strong position to invest organically in our business pursue M&A and return capital to shareholders through our authorized share repurchase.
As of the end of the third quarter, we repurchased $22 million of our stock and had approximately 28 million outstanding on our authorization.
We currently have no debt on our balance sheet.
Now turning to our outlook.
As you are aware the global supply situation has continued to get more challenging.
We and others across the industry are seeing significant increases income stream and a variety of components.
Our team continues to work to mitigate as much as we can to deliver on our strong demands. We appreciate that our customers have proven that they will wait for a product which is resulting in a backlog that we will work through in fiscal 2022.
Given our strong Q3, and what we know about product availability through the remainder of the year. We are increasing our total revenue for fiscal 2021 to one 695 billion to $1 seven 1 billion representing growth of 28% to 29%.
Excluding the 50 <unk> week from fiscal 2020, this represents growth of 30% to 31% for the year.
This is a meaningful increase from our guidance of 1.44 to one 5 billion provided at the start of the year underscoring the stronger than anticipated demand we continue to experience.
Our updated fiscal 2021 revenue outlook translates into fourth quarter revenue at the mid point of approximately 345 million, representing 10% growth adjusted for the 14th week last year.
While we are continuing to experience strong demand for our products our ability to fulfill that demand is being impacted during the fourth quarter due to the supply constraints me and so many other companies are facing.
This is expected to offset some of our potential revenue growth in the fourth quarter.
We do expect to exit the year with a backlog that we anticipate fulfilling in fiscal 2022.
We are increasing our gross margin outlook to a range of 46 and a half to 46, 9% from our prior range of 46 to 46, 5%.
Largely to reflect the benefit of tariff refunds received in the third quarter and leverage on the higher sales outlook offset by higher industry wide ponant in logistics related call.
Our fiscal 2021 gross margin guidance translates into a fourth quarter margin of 44% at the midpoint, reflecting the higher industry wide component and logistics related costs, we are seeing.
Consistent with past guidance. It assumes no additional tariff refunds are received in the quarter due to the uncertainty of tightening.
Year to date as of the third quarter, we have received $11 million in tariff refunds and recognized $9 million in tariff expense.
Representing a net tariff benefit of close to $2 million.
As a reminder, we have 22 and a half million of tariff, we unlocked that we expect to receive before the end of fiscal 2022.
We are increasing our fiscal 2021, adjusted EBITDA outlook to 270 million to $280 million from our prior range of $225 million to $250 million.
And well ahead of our initial fiscal 2021 guidance of 170 million to $205 million.
This new outlook represents 15.9 to 16, 4% adjusted EBITDA margin and expansion of 770 to 820 basis points from the prior year.
The higher adjusted EBITDA outlook compared to our prior guidance of $13 eight to 14, 9% is primarily driven by opex leverage on the upwardly revised sales outlook as well as tariff refund.
This updated guidance translates into fourth quarter, adjusted EBITDA margin of approximately 4% at the midpoint driven by the higher costs impacting gross margin as well as increased operating expenses as we ramp investments into the holiday in fiscal 2022.
Even with these higher costs. We are proud to report that we will have been adjusted EBITDA positive every quarter this year.
As we enter the final months of fiscal 'twenty 'twenty. One we remain focused on our continued strong execution and are well on track to deliver a record fiscal 2021 result, which are meaningfully higher than what we set out to deliver at the start of the year.
Even with constrained product supply, we are delivering strong topline growth of approximately 30% fueled by demand.
We are also delivering a material improvement in profitability with an expansion of 770 to 820 basis points and adjusted EBITDA forecasted relative to fiscal 2020.
Our fiscal 'twenty, one 'twenty, one outlook has exceeded our expectations and as a result, we are ahead of schedule on the fiscal 2024 financial targets, we outlined at our Investor event back in March.
We look forward to providing fourth quarter results and our fiscal 'twenty 'twenty two guidance on our next earnings call.
With that I would like to turn the call over to questions.
Okay. So as a reminder to ask a question you will need to press star one on your telephone.
So it is all your question press the pound key again that is star one on your telephone please standby, while we compile the Q&A roster.
First question comes from the line of Katy you boutique from Morgan Stanley. Your line is now open.
Yes. Thank you good afternoon, and congrats on the really strong quarter, maybe starting with Brittany. What is the specific revenue impact in the fourth quarter, that's embedded in guidance due to supply constraints and then how should we think about that backlog working lower through fiscal 'twenty two does it happen in the first half.
Should we think about the backlog work down spread through through most of fiscal 'twenty two.
Hi, Katy Great question, we're not specifically quantifying backlog, we've had backlog in multiple quarters. This year and we continue to see pretty significant backlog numbers as that demand continues to drive higher with limited supply. So it's been an ongoing challenge for us.
But also it's a pretty healthy backlog number and we'll roll that into 'twenty. Two we will really be able to fulfill that when we get better in balance from a supply demand perspective, and I really don't know when that will happen at this point.
And Britney a number of competitors in the smart home industry are raising prices if their products due to higher cost is that something that you're considering or do you see this as an opportunity to leave leave list prices and perhaps take some market share.
We always evaluate our prices be not just on cost, but you know where we are from a supply perspective, what the demand is and when we look at all of those factors, we will be raising some prices ahead of our next fiscal year.
Okay and then just finally I think since we have you assuming the ITC decision does go in your favor on Friday.
How should we think about next steps and a reasonable timeline to any financial benefit that's so noticed macy.
Yeah.
Well knock wood Euro prediction comes true.
But candidly.
Candidly I think the rest of that question is going to have it's going to depend on Google.
If Google is found to be.
Infringer of our patents, we would hope that.
They would.
Basically accept that verdict recognize that that we have 30 X.
That number of patents that they infringe.
And take a portfolio license at a favorable rate but.
All we can do is is pursue remedies as aggressively as possible. That's what we've been doing that's what we're going to continue to do until we get a fair resolution and we hope that the ITC decision is the next step and an important step along that way.
Fair enough. Thank you congrats again on the quarter.
Next question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.
Yeah. Thanks for the question I wanted to.
Come back to the the number of homes penetrated I know that you don't like to give that number annually, but I'm just curious how the roam has affected than the trajectory of the number of homes you are penetrating I would've assumed it.
These roam sales would've been at least in some part to people that didn't have shown us before but I wanted to check and see.
Just how much that's accelerated home penetration.
Hey, Rob where we're really excited about how roam is doing but you're right. We don't disclose you know new homes relative to specific products or you know outside of giving our annual number.
But I'll. So all I can really say is we are very happy with how realm is performing.
Would you be willing to say Britney how many of them are selling to people that didn't have solos before.
Not not something we disclose rod.
Okay fair enough.
Second question I had I wanted to come back to Eddie.
When we look at the Qualcomm Apple case in the ITC injunction there the ITC had determined that it was in the public interest not to enforce injunctions and then you know it has kind of implied since then that decision would be up to the president.
And I Wonder do you agree with that Eddie as you know, let's assume that an injunction is granted.
And you don't come to a license agreement is that the process. Then we were waiting on the administration to make a call on this or do you understand the mechanics different than that.
I think that if we obtained an importation band at the ITC its upheld by the full commission.
With that I would expect.
That the administration I think it's delegated to the USTR representative will sign that order and it will go into effect.
They say the the public interest calculation in the Qualcomm case is very different than the calculation here.
And this is a case where.
The very large companies infringing.
On the <unk> the.
The inventions of a much smaller innovative company and there's no reason to think that the administration wouldn't follow through on the ruling of the ITC.
Right right and we have it.
We understand that they have 60 days to sign now does that is that correct.
Well it will go to the full commission first and.
Both parties of course, I can appeal to the full commission to revise the initial decision.
And then once the full commission issues. Its order, yes, I believe 60 days is right.
Great. Okay. Thanks, a lot appreciate it.
Next question comes from the line is John Babcock from Bank of America. Your line is now open.
Hey, good.
Good evening, just wanted to I guess.
Follow up.
You know I'm one of the questions just earlier on the on the revenue guidance. There I know you didn't really.
You mentioned too much of that kind of impact the backlogs, but I just want to get a sense. I mean are you by chance happen to see any slowing in demand.
At all is that implied in your guidance or should we take it that water that comes down to the backlog side of things in and not being able to kind of keep up on that front.
Just wanted to get clarification there.
We really attribute it to the backlog demand continues to be strong and theres, nothing we see that and that implies any slowing of demand.
And you know our product dates that were able to fulfill continue to push out which is really an indication of that demand supply challenge we're having.
Got you.
And then another piece you know and this is also come up.
Across other campaigns as kind of the inflation side broadly and it seems that you've navigated pretty well.
Through this so far and quoting on component cost side and also some of the challenging supply chain logistics.
You know that.
I mean, ultimately what are you doing to fend off headwinds on this front.
And also you know.
How are you thinking about inflation and how that might impact the business you know in fiscal <unk>, but then also.
Over the next couple of quarters.
Yeah.
You know, we're certainly seeing the impact of inflation and component shortages in the supply chain, which is fully factored into the guidance that we're giving for the rest of the year that is one factor that we look at along with.
You know the overall supply demand balance and you know really healthy demand, we're seeing for our products and so one of the ways that we are going to manage that other than you know continuing to have great relationships with our suppliers trying to be disciplined around cost and all of that is is to.
A look at pricing and we will look at pricing on our products ahead of the next fiscal year.
Got you and are you I mean, it sounds like Youre, primarily facing higher costs from the components side and then also the supply chain are there any other areas, where you're experiencing inflation and also do you expect any increases in wages over the next year or so you.
Can you provide any color on that.
I mean, nothing I would specifically call out it's of course, a competitive market and so we'll be impacted along with everyone else is as that sorts out but the main piece that we're sort of seeing in calling out and impacting our results in and you know including in guidance is really around the component costs.
Okay. Thank you and then.
I guess just.
Last question overall, you know can you just provide any update on how some of those radio H T is.
Doing so far and then also.
I assume you had some expectations for roam heading into the year.
Just kind of curious because I would assume that part of that can be driven by future demand is going be driven by the retail opening so wanted to get a sense I guess more on the retail side here not just overall demand.
How the pace of retail openings is kind of progressing relative to your expectations on that.
Yeah.
So I'll take the radio one.
John So we're pleased with what we're seeing.
So far in terms of the listening you've seen that every month, we're doing kind of new collaborations we've done one with the north face as well. So that's progressing still early days on that front.
We also have seen some reopening.
And we've seen some backtracking when it comes to retail.
Overall in terms of kind of the retail footprint in different channels that we have throughout the world.
The one thing that stayed very consistent through that Britney's point is strong demand.
And so you know this.
It met all of our channel partners right now are installed solutions partners are retailers.
Would prefer to have a lot more centers products quite frankly as would our customers we service through direct to consumer so.
I think that just speaks to the demand for roam in all of the products that we have at this particular point you can get a feel for that obviously on our website to.
In terms of what people are looking for but I.
Spector will have some with the with retail channels will have some.
Openings and closings in different places just depending on what's going on with the virus, but again through this period, we've seen no change in the kind of strong demand that we're seeing you know regardless of what's happening with the with.
With the pandemic.
Okay, great. Thanks for all the detail.
Next question comes from the line of Matt Sheerin from Stifel. Your line is now open.
Yes, thank you very much.
First question Patrick.
It's regarding play.
Plan says that the company recently disclosed to name a new head of your software operations and I'm, hoping you can share with us reasons for that change and what you envision.
For the company's software strategy going forward.
Yeah.
So as he mentioned, we're looking for a new leader for our software team that this has been the you know really the differentiator you know for Sonus, we often talk about some of those being the story of software each audio.
It's a large proportion of our engineering team.
And we have a lot of ambition around where we can take.
Software from here and you know it's across the us across the stock right. So firmware app cloud.
Platform that we have a variety of partnership a P eyes.
And we'd like to use that to deliver some new experiences.
As well and so we're actively out there is the first time, we launched into high profile way, we got just a tremendous amount of.
Qualified applicant so I'm super excited about adding.
If somebody new to help take our software to another level and our product experience and so yeah. That's one of my top priorities right now.
Okay. Thank you and then a Brittany another question just regarding that.
Product issues that you're having in terms of the supply constraints.
There's also been manufacturing disruptions throughout Asia, particularly in Malaysia, due to Covid restrictions and I know your manufacturing partners have been shifting manufacturing from China to Malaysia. So I'm, hoping you can update us on that and whether that is also contributing to these disruptions.
Yeah, So you're absolutely right, Malaysia has had a movement control order because of Covid and what I would say has had an impact but you know because we're in the process of transitioning I would really say that that's had more of an impact on how quickly we can transition into Malaysia.
As you know we've continued to push out the timing for when we will be fully up and running in Malaysia.
We're hoping that that happens at some point in fiscal year 'twenty two at this point for the very reason do you mentioned that but we have been able to do our best to offset those challenges by continuing to manufacture in China and so that.
The shortness of supply is really less about you know the challenges in Malaysia, and more about a shortage of components and the components cost really the component shortage issues that we're seeing.
Okay. Thanks for that.
Yes.
Next question comes from the line of <unk> brand sales from Jefferies. Your line is open.
Hi, guys. This is David on for Brian. Thanks for taking the questions. Two if I may is there any update that you guys could give into the size of the DTC business and would you say you're prioritizing refilling inventory in that channel most other retail channels.
And maybe just on the on the gross margin I know you guys talked about being ahead of 2020 targets looks like especially so on the gross margin side.
I guess just structurally how much higher do you believe gross margin can go over time is there any sort of.
Soft target or color you could give there thanks.
Thanks, David I'll take the first one and I'll take the second one on the DTC front.
We had mentioned at the beginning of the year, our expectation that it would largely be in line with what we had seen in last years phenomenal increase in DTC sales.
And so we'll we will continue to feel good about where that is in terms of inventory.
And replenishment and kind of how we're really focused on how do we get products to customers. The fastest it's a balance in terms of working in particular with our installed solutions. Our partners. You know the people that are coming around and doing installs and those kind of things and making sure they have what they need.
Definitely servicing those direct to consumer but we are by no means you know.
Leaving our very valuable retail partners behind and so it's a day to day balance you know in our sales.
Sales and go to market team has been doing that balance while our supply chain team really balances getting as many components and building as much as they can and going through it. So that's been the the the real challenge in a bit of a nuance to kind of work through Brittany.
Yeah. Thanks, Patrick.
Gross margin standpoint, what I would say is we committed to being between 45% to 47% gross margin and we take that commitment very seriously, which is why we're making sure that we manage through component cost increases and all of that and from <unk>.
Are you know really incredible performance on gross margins. This year were really already.
Almost the high end of that range that we are exceeding our own expectations on how fast and how sustainable we think being in that range and but we are not at a point, where we're raising long term guidance of changing that guidance in any way right now.
Got it and then maybe one more if I can.
Try and get it out of your guidance.
Any commentary you can provide on maybe like the size of the wound business and maybe how it compares to that of the move.
No, we don't disclose that but good try.
Thanks, guys I appreciate it.
Thank you.
Next question comes from the line of Adam Tindle from Raymond James Your line is open.
Hi, Thanks, This is Alex on for Adam.
I was just curious so I believe you had a survey out to some users over the last few days that basically asked if they were interested in and on device voice assistant.
Rather than using it what it isn't that went to the cloud.
That would kind of help your move in roam businesses those devices may not always an internet connection I'm just curious as you think.
Is that something that's in the pipe and if so is that.
So those were assistant or would it be a partnership with Siri or Alexa.
You know we are we don't talk a lot about our future roadmap, we prefer to actually bring that out and you know.
So I would say stay tuned.
Okay. Thank you and then.
We just didn't kind of following up.
The Google sent us lawsuit in Texas and I believe it was stayed last week until January of 'twenty, two and they in the courts decided to deny google's motion to move to the lawsuit to California is that kind of in line with what you were thinking and some.
Some of the courts.
Wording was google's arguments to fight all logic in some areas.
Is that kind of in line with your thinking and how does that kind of change your thoughts towards.
Towards that lawsuit in particular.
So we thought from the outset that the venue is proper in Texas, That's why we filed there.
And the trial court there has agreed with us notwithstanding google's efforts.
To to move it.
At Google is seeking.
What is called a mandamus or emergency appeal of that order.
But the the cases moving forward, while that's pending and.
Yeah.
Our.
Consciously optimistic that the that that case is going to stay in Texas and proceed on the track.
Just as we have anticipated from the start.
Okay perfect. Thank you so much.
We do have a follow up question from John Babcock from Bank of America, The Lyse open.
John Your line is now open.
Oh, sorry, I was on the I apologize for that but I just wanted to follow up just on the Google ITC case can you just talk about.
The range of outcomes I guess it could come here because I assume it's not just black and white you know what happens when it happens that way, but you.
How should we think about what could occur you know when things are kind of released on Friday.
We're in the middle of the night I think in Vermilions scenarios, but but I'm really not going to speculate where just day 48 hours away from from hearing what the initial decision is when.
When we get it we'll analyze it and I think it will be a lengthy opinion of what we're looking for.
Two two main items one.
How did our patent standup to Google's.
<unk> to their validity.
And second.
All of our patents, how many does Google infringe.
And we're as I said confident that our patents are strong and we believe deeply that Google infringes them and those are the those are the metrics, we'll be looking for most closely when the decision comes out.
Gotcha, Okay. Thank you that's all I have.
Next question comes from the line of election Shoemakers from D. A Davidson your line is now open.
Thanks for taking my question can.
Can we expect any promotional activity for the quarter and if so how do you think that will affect revenue and profit.
For Q4.
That would be promotional is really baked into our guidance already and we're not commenting on anything related to the holiday quarter or fiscal year 'twenty two at this point.
Okay. Thank you.
There are no further questions at this time I will now turn the call over back to Patrick Spence for closing remarks.
Thank you and thanks to everybody for joining us today I want to reiterate the fact that we have such strong demand right now and I want to thank our customers and our channel partners for their patience and loyalty through this one of the things that we watch most closely is how that backlog is standing up and people are proving.
Patient and waiting for their Sone OS like I said, it's a system not a one off product and people make a considered purchase.
And again I'd like to thank our teams that are navigating all of the.
Supply chain challenges that we're seeing right now and continuing to outperform so I appreciate all of those efforts and I. Appreciate all of you joining so thank you and we will talk to you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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