Q3 2022 Sonos Inc Earnings Call
[music].
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the <unk> third.
Third quarter fiscal 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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James for Galanis head of Investor Relations you May begin your conference.
Good afternoon, and welcome to <unk> third quarter fiscal 2022 earnings Conference call I'm, James Laguardia and with me to the Arizona, CEO , Patrick Spence CFO Brittany Bagley.
Legal officer, Eddie Lazarus for those who joined the call early today's hold music as from the new episodes of live music series from the basement created by Sun, a soundboard remember Nigel got rich so on US radio partner with Nigel to produce this latest installment with new episodes coming out monthly before I hand, it over to Patrick I would like to remind everyone that today's discussion will include forward looking statements regarding <unk>.
<unk> events and our future financial performance. These statements reflect our views as of today, only and should not be considered as representing our views as 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 is fully detailed under the caption.
<unk> 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 fiscal 2022 results posted to the Investor Relations portion of our website as a reminder, the press release.
Implemented earnings presentation and conference call transcript will be available on our Investor Relations website investors thoughts on stock comp.
Turn the call over to Patrick.
Hello, everyone.
Earlier today, we announced that our CFO Brittany Bagley will be leaving us to pursue another professional opportunity Eddie Lazarus, our chief legal officer will succeed Brittany as interim CFO effective September one.
On behalf of everyone at <unk> I want to thank Britney for her hard work and dedication over the past three years as CFO and the previous seven as an investor and board member.
He played an instrumental role in helping us drive financial performance make smart investments in the future and increase shareholder value.
We greatly appreciate everything Brittany, personas and wish her well and our future endeavors.
While many of you know Eddie as our Chief legal officer. He also his past experience in finance and strategy.
In his previous role at Tribune. He ran both strategy and legal and was very involved in the company's strategic planning and capital allocation decisions.
The board member at Sequoia Fund, a concentrated long only equity funds.
And he has always played an active role in our strategic planning and stepped in to provide day to day guidance for the finance and technology organization. During britney's parental leave last year. So he knows the team and the intricacies of our business with.
With our experienced Chief Accounting Officer, Chris Mason, our head of Investor Relations, James Bhagwan Us and the rest of the reporting and planning organization, we have a deeply experienced finance and accounting team that will ensure we don't Miss a beat.
Now turning to earnings since we reported Q2 earnings we have seen the macroeconomic backdrop becomes significantly more challenging.
As you all know the dollar has appreciated significantly relative to other major currencies and high inflation has adversely affected consumer sentiment globally, particularly in the categories in which we play.
While our results weren't in line with our ambition our teams executed well against this challenging backdrop delivering constant currency revenue growth of 2% year over year.
On a reported basis revenues of $371 8 million were down 2%.
We delivered adjusted EBITDA of $42 1 million, representing a margin of 11, 3%.
Our results in the quarter were negatively impacted by three primary factors.
First as many other companies have already discussed this earning cycle, we saw a softening of demand of consumer demand in our product categories starting in June .
We believe this is in part a reflection of consumers shifting their near term focus from goods to services and travel.
Second we remain supply constrained in some of our key products like Amp and beam and as a result, we continue to have a backlog, which caused us to miss out on revenue opportunities in the quarter.
And third the strengthening of the U S dollar throughout the quarter resulted in a $15 million foreign currency headwind.
Let me provide some additional detail on what we saw from a consumer demand and product perspective in the quarter and how that's informing our view of Q4.
Softening consumer demand across our product categories had an outsized impact on realm, which is lapping its successful launch in the same quarter last year.
In June we launched <unk>, our compact sandbar, which offers the best Bang for your back under $300.
We observed that the launch was impacted by softening consumer demand compounded by a substantial drop in TV sales versus last year.
As a result raise significantly missing our expectations for the year.
Nonetheless, we remain incredibly excited about having a terrific product at a new price point that has the potential to reach new customers.
Looking beyond the short term, we expect that rate will be very successful as it continues to receipt received excellent reviews from tech and lifestyle media.
Changing consumer spending patterns influenced our retail partners outlook, who in tune in turn are taking a cautious approach to their inventory positions.
As a result of the macroeconomic softness we are seeing we are extending the timeline, we expect it to take to hit our long term target of $2 5 billion in revenue, 45% to 47% gross margins and 15% to 18% adjusted EBITDA margin.
However, nothing has changed our conviction and the tremendous long term opportunity ahead personas, regardless of short term economic fluctuations our category leadership is proven and established our brand is strong our awareness among our affluent target customer base is growing.
Individuals continue to find new and exciting ways to consume content throughout their lives and accordingly, they are increasingly demanding better products and services to bring this content to life. This trend plays to our strengths.
Yes, Don this flywheel of new household acquisition and existing customer repurchases continues to spin.
We have a robust product roadmap and a track record of at least two new product launches annually.
We have a large addressable market and secular tailwind that further underscore the long term opportunity for stonehouse.
Despite the macro dynamics of Q3, we gained or held share in key categories across our geographies and we saw steady repurchase trends among our growing base of existing households.
In the past few quarters I've spoken extensively about the power of our flywheel and this is yet another proof point that the model. We've built is working so no. It is not a typical one and done purchase our existing customers show us time and time again that the return on a predictable basis to purchase additional products.
This is true of customer cohorts that started prior to the pandemic.
<unk> of those cohorts that started with Santos during the pandemic and true of those cohorts that have started this fiscal year.
We see consistent repurchase behavior across all of these cohorts.
We are focusing on what we can control, creating and delivering products that delight consumers relent.
Relentlessly driving innovation is critical to fueling the stone this flywheel and delivering long term growth.
We continue to thoughtfully invest in innovation, both organically as you've seen with our five product and service launches this year and through acquisitions like you saw with the acquisition of <unk>, which closed in the quarter. The <unk> team has integrated seamlessly and we are very excited to take advantage of Mike's groundbreaking technology to further differentiate our existing and future product poor.
Folio.
While investing in the delivery of our product roadmap is of the utmost priority. We are also taking a hard look at our expense base.
We are investing in an exciting number of new products and services in both existing and new categories.
I am confident that these put us in a position to emerge from this period stronger and take a greater share of the $96 billion.
Global audio market.
Now I'll turn the call over to Brittany to provide more details on our results and look outlook.
Thank you Patrick.
We delivered year over year top line growth of 2% on a constant currency basis or a decline of 2% on a reported basis to 371 8 million with EBITDA margins of 11, 3%.
As Patrick called out and we are now seeing a more challenging macro environment and the continued strengthening U S dollar impacting our results.
And we have continued to be supply constrained on certain products, especially app.
These factors led to mixed performance across our region.
Year over year revenue in the Americas grew 4% on a reported and constant currency basis.
EMEA declined 11% on a reported basis and 1% on a constant currency basis.
EMEA revenue was 30% of our business in Q3 and is experiencing particularly soft results given the ongoing war in Ukraine, and weakening currency relative to the U S dollar.
APAC declined 7% or 4% on a constant currency basis.
APAC comparisons got significantly harder from Q2, as we grew over 100% since last Q3.
So no speaker revenue increased 1% year over year, driven by the introduction of Ray in Q3, and the ongoing strength in art and one partially offset by lapping the launch of Brown last year.
So no system products revenue declined 19% due to supply availability constraints.
Partner products and other revenue decreased 8%, primarily driven by lower accessory sales.
Gross margin increased 250 basis points relative to Q2 to 47, 3%.
Timing of expenses related to higher component costs was the primary driver of the sequential improvement.
On a year over year basis gross margin increased 30 basis points, driven by higher selling prices, partially offset by higher component costs.
As we have discussed in prior quarters, we continued to invest in the business this year, notably in R&D.
We're proud to have launched five new products, including beam Gen. Two ROE Marcel realm colors, Rea and filling those voice control.
We have also made three technology acquisitions this year to support our long term product roadmap.
Additionally, we have been investing in our systems to support further scale and are pleased to have successfully completed the go live of our new ERP system and the corridor.
While we had some minor bumps as with every ERP implementation, we have successfully been able to execute on our business and report our financials. Thanks to a great effort across the teams that Phil announced.
Excluding legal fees and transaction cost Opex grew 4% year over year, driven by product development professional fees and additional head count partially offset by lower variable compensation.
We delivered adjusted EBITDA of $42 1 million, representing a margin of 11, 3%.
Adjusted EBITDA declined by 10% year over year, driven by the higher investments in the business and lower revenue.
From a free cash flow standpoint, we had negative cash flow from operations in the quarter, primarily due to inventory investments.
Heading into the holiday quarter, we usually have a seasonal buildup of inventory, but given the softer demand we're seeing our inventory level levels are higher than we would like them to be in Q3.
We have now adjusted our inventory build and component buys and believe we will get a better inventory position after the holiday quarter.
Despite the use of cash in Q3, we still delivered $76 million in cash from operations in the first nine months of the year and ended the quarter with $440 million of cash and no debt.
As we work through our inventory position over the next few quarters, you should see a return to a more normalized free cash flow profile.
Our balance sheet remains strong and affords us significant flexibility to navigate this uncertain economic environment.
During Q3, we used 100 million of cash on the acquisition of mine and we remain very excited about adding this technology to our future product roadmap.
I also spent $43 million on share repurchases.
Over the first nine months of the year, we have deployed $117 million of cash towards repurchases, which leaves $33 million remaining at the end of Q3 on our 150 million authorization.
Now turning to our fiscal 'twenty two outlook.
In light of the slowing macro environment softening run rates in our business.
And caution from some of our retail channel partners, along with FX headwinds and continued supply constraints, we expect a challenging Q4.
As we evaluated these trends, we decided to push an anticipated product launch from Q4 into Q1 of 'twenty, three which should lead to better launch timing, but which further impacts our Q4 expectation.
The cover these factors in a little more detail. We are currently forecasting the run rates, we're seeing on our product registrations to be stable to slightly softer through Q4.
We are also resetting our expectations on rate during the second period. So it continues to get strong reviews.
Registrations are our best proxy for sell through in our closest sense for real time demand along with our DTC channel.
And we are watching these closely as we forecast.
From a sell in perspective, which is how we recognize revenue in our non DTC channel.
We are expecting softer ordering from our retail partners.
Our current channel inventory remains healthy ahead of holiday sell in.
But we are seeing extra caution as partners evaluate their inventory positions and decide how many weeks of inventory they will stock, which is especially impacting our revenue in EMEA.
We are also assuming that the dollar continues to be strong, resulting in an estimated $50 million FX impact for the year, including a 17 million dollar impact in Q4.
Finally, we will start to be in a better supply position on amp in Q4, but do you still expect to have a backlog exiting the year we.
We have seen the supply situation improve relative to last quarter and are catching up on our product availability.
While we noted in Q2, we were watching many of these factors we have now seen their impact and it has been particularly challenging to have supply constraints concurrent with demand weakness.
We do see some easing in the demand for critical components as well as the cost of shipping and logistics, but these benefits will largely not be seen until 'twenty three given lead times.
We continue to believe our supply chain strategy and continued diversification with Malaysia, and Vietnam will serve us well.
As a result of all these factors we are lowering our full year revenue guidance to a range of $1 73 to $1 75, 5 billion. This range represents revenue growth of 1% to 2% year over year.
The midpoint of this guidance implies Q4 revenue was $306 million down 15% year over year.
On a constant currency basis. This would still represent four 4% growth for the full year with Q4 down 10% at the midpoint.
If we had been fully in stock on an and not shifted our product release, we would have expected growth in Q4 on a constant currency basis.
We would note that these are matters of timing in this revenue will be earned in fiscal year 'twenty three instead.
We are narrowing our gross margin guidance range to 45, 7% to 45, 9% for fiscal year 'twenty two.
At the midpoint this implies a 41% gross margin for Q4.
This margin is below the levels of the last few quarters for two main reasons.
The first is elevated component costs required to improve our in stock position, we incur these costs in advance and expense in the quarter, we expect to sell the product.
Other major impact in the quarter as FX. Despite our expected Q4 gross margin performance, we remain committed to operating our business with a long term annual gross margin target of 45% to 47% and we do expect to achieve that in fiscal year 'twenty two.
Our Q4 revenue decline flows through to adjusted EBITDA. As a result, we are lowering our full year guidance range to $250 million to $230 million.
This represents an adjusted EBITDA margin in the range of 12, 4% to 13, 1%.
For Q4 at the midpoint this implies adjusted EBITDA of negative $30 million.
Despite the importance of continuing to invest in our long term road map for the amazing products, we expect to deliver in 'twenty three and beyond we are taking cost actions given the change in the forecast.
This includes pausing, our hiring our travel and making other adjustments to opex as we look at Q4 and fiscal year 2003.
We expect to provide further guidance regarding fiscal year 'twenty three on our Q4 earnings call.
As Patrick discussed nothing has changed regarding our conviction in the long term growth potential of Stonehouse. We continue to believe that Thanos can achieve $2 5 billion of revenue, 45% to 47% gross margins and 15% to 18% adjusted EBITDA margin, but because of the changes in the.
Economic environment, it will take us longer than previously anticipated to deliver on these targets. When we have more certainty on these factors we will provide a further update on timing.
Despite the uncertain environment, we have significant brand equity a resilient <unk> premium customer and a large and growing market opportunity.
We believe these attributes along with a history of consistently delivering innovative new products to support our flywheel and position us well to deliver tremendous shareholder value over time.
We're operating in a dynamic and challenging environment, but we are proud of our team's execution and we are confident we will build upon our category leadership and exited as an even stronger business.
Finally, thank you Patrick for the kind words. It is bittersweet then after 10 years of being involved with stonehouse, including almost three five years as CFO I will be moving on to a new career opportunity, where I will serve as both CFO and chief business Officer.
I'm, so proud of what's known hotels achieved and despite the macro trends discussed I know sonus is well positioned for the long term the product roadmap healthy gross margins incredible IP and strong balance sheet all position the company for future success.
Has been truly a pleasure to work alongside such a talented and dedicated executive team.
Want to thank Patrick Eddie My incredible leadership team and the wholesale knows team for their support.
I continue to be a CNS donuts and wish them the best of luck moving forward.
With that I'll turn the call over to Eddie.
Good afternoon.
First off I'd, just like to say, how much I've enjoyed and appreciated having the chance to work so closely with Britney These last three plus years.
He has been a wonderful colleague.
She will continue to thrive in your next endeavor.
I'm also honored to step into issues to lead a world class finance team and work with Patrick even more closely on seizing the business opportunities that lie ahead of us.
I would just also say that my additional responsibilities as interim CFO will not impact our strategy to defend our intellectual property and hold Google accountable for their infringement.
To that end there have been a few recent developments.
And the so called patent showdown in our Federal Court case against Google in Northern California.
Judges rendered a split decision on the two representative claims at issue.
Judge ruled that Google does infringe <unk> patents, but also ruled for Google and the other brands.
We respectfully disagree with that adverse ruling.
Second Google filed two new cases against us in Northern California, alleging infringement of a total of seven patents and two mirror image cases cases at the International Trade Commission based on the same pad.
We will defend vigorously against this attempt to dissuade us from pursuing our patent rights.
Our track record in defending against Google is strong as reflected most recently in a ruling in Google's Canadian case against US where the court found Sotos does not infringe the patent at issue.
This follows our successful defenses in Germany, the Netherlands and France.
Overall, our litigation results as it continued to affirm the strength of our portfolio and our prospects for attaining damages and a fair royalty.
We look forward to our day in court for the patent showdown trials scheduled to commence later this year in October .
With that I would like to turn the call over for questions.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Tom Forte with D. A Davidson your line is now open.
Great. Thank you I have one question and one follow up first off Brandy, though it's been a pleasure working with you and I wish you. The best of luck in the future and then Eddie you clearly are capable wearing many hats, which is very impressive.
For my first question do you think your sales are being impacted by either the decline in the housing market with rising interest rates and or consumers devoting a larger portion of the discretionary spending on travel.
Hey, Tom It's Patrick I'll take that one we're watching the housing market closely our Americas revenue grew actually 4% in the quarter, we believe that.
To your point we've also.
<unk> heard from others and I don't think seen anecdotally.
The focus this summer on travel and services spend so.
From everything we've seen there is something to that and then I think really as we think about the pattern.
It was really something that hit us in June as we talked about so we didn't see the demand materializes as we had expected after.
What was in April and May that were.
In line with what we'd expected.
And we obviously had ray and Rome colors launching in June as well and we just didn't see.
The demand really materialized in the way that we'd expected given the macro environment and that really.
Pounded because we also saw retailers.
See that same macro weakness across all of their inventory positions not center specifically.
Start to back off.
Any orders of products and just get more cautious.
Across the board, which also.
<unk> as we go through that so.
Hopefully that's helpful in terms of understanding what we saw.
Great. Thanks, Patrick and then for my follow up can you talk about your ability to just places outside the U S for the strong dollar.
I can take that one it's certainly something that we are looking at and we'll always keep in mind as we think about our commitment to maintaining that 45% to 47% gross margin and but we obviously also took price.
Increases last September and so it's something that will.
Really want to make sure is the right long term decision for the business as we contemplate something like that.
Great. Thanks for taking my questions.
Thank you thanks, Tom.
Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.
Thanks, Patrick.
If you add to put macro.
Versus execution.
Is this all paint the macro or are there any.
Competitive or any.
Miss steps from an execution perspective on the inside how would you how would you frame that.
99% macro is there.
How would how would you how would you frame the balance.
That's.
This is exactly the question we asked ourselves brand as we started to see the macroeconomic and what are the one of the things that.
We paid close attention to is that market share and what's happening in the market.
More generally and as I mentioned like we're holding steady from everything we can see across our key categories or gaining share.
So we feel good about our position right now.
We're also looking at the reviews from the media.
From our customers and from our channel partners as it comes to new products like Ray.
Those.
Our living up to the kind of reviews, you would expect from any <unk> product.
And the feedback from retailers has been good and the feedback from retailers has been that we are holding or gaining share. So we feel good about the position. We're in right now so we largely.
We largely chalk it up to macro but I also believe we can always get better at execution and so you know as I mentioned, we're going to make sure that the investments we have been making the investments we're planning to make.
All will pay off for the long term and are prudent in the environment that we're in but <unk>.
<unk> largely macro from what we can see today Brian .
And then deterioration in June was that kind of.
Second part of June and I guess in the July and August have you seen things stabilize.
Improved down Morris can you give us that.
Some color on.
Penni can you just follow up on that decision.
Push out the new solution in the quarter to next year was that just was.
Was it was it just because it wasn't ready or was it youre just like why push it out now in this environment. If you can clarify that.
Yeah happy to so you know I.
I would say.
As we looked at June it really was as Patrick just that a lot of the macro factors that we talked about.
We've also continued to see the dollar strengthened so FX was that part of that as we look going forward and then as you remember probably right.
Got to general availability in June so we were able to see how that product was doing and really factor that performance into our go forward outlook and so as I said in my remarks, we are expecting as we look at run rate now that we see a stabilization in most of our run rates.
From a registration basis, and then maybe some slight continued softening for some product lines. We've tried to be pretty thoughtful just as we look through the registration data.
Nothing that I would call out semantically on those because that's probably one of the next question. There is nothing dramatically I would call out across those just in a stable to slightly softer.
But I would call out as we talked about that our retail partners.
In the Americas, but especially in EMEA are also being quite cautious on how they think about inventory right now in inventory.
They go into the holiday quarter.
As we look at it.
I would say we did not have too much inventory in the channel with our retail partners at all right now.
Comfortable with where that fits.
Except for the fact that they are being quite cautious as to that obviously impacts, but we're expecting to see promise that when basis that is more of a one time impact as they readjust how many weeks on hand, they want to have so that's a lot of what we're looking at and when we look at all of those things.
<unk> retailers being cautious heading into the holiday quarter and what the environment looks like we thought that the product will do better if we launched it in Q1 rather than in Q4.
Great. Thank you very much.
Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.
Yes. Thanks for the question I guess I wanted to come back to the inventory comment that you just made there Britney and.
And ask.
Of course, we see this as well with Tvs and all kinds of other things in retail.
I'm curious what you guys think it takes for retailers to get to a point, where they feel they know how much inventory. They want to have on hand, do you think that from your experience still know that after we get through the back to school season or.
How do you think this flows on through the back end of the year here in terms of People's decisions on inventory. If you think inventory levels are in fact pretty low and then I have a follow up to that.
Yeah, I would say, we think theyre low for our products that we track most closely and so our view is that.
As are our partners look at continued sell through rate and continued movement of that inventory.
That will continue to have sort of constructive conversations around what they need to do that said they are balancing their overall inventory levels not just their inventory levels with Donaldson.
Something that we do need to watch to your point from a TV sales.
Sales standpoint.
Everybody wants to sell what they can sell in the holiday quarter, and so that is where we have a bit of confidence that our products are are still good products for them to have in the store and important holiday products for them to carry.
Okay. Thanks Brittany.
I wanted to come back to the systems.
Weakness and I know you called out supply as the main driver of that and I'm, just curious, particularly the amp. We noticed the lead times are still really long.
What is the what is the challenge there with that product and do you think there's any macro effect. There you really do think thats all just supply. It just seems like it's an expensive product and it's a specialist installer type of products I Wonder how those people are behaving. These days in addition to the <unk>.
Apply constraints.
Yeah, Brian It's a great question I would say, it's one that we have a little bit less and visibility on right now just because we haven't had the product in stock too.
How that changed I can tell you from what we are seeing and as we talk to installers.
They continue to have an enormous amount of demand for that product and can't wait for us to get back in stock on it.
It is one of the products, where we've had the biggest challenge from a component standpoint, and I think you can tell from my gross margin commentary in Q4 that we are doing absolutely everything we can they get the components, we need to get that product back in stock and expect.
By the end of Q4, and certainly by Q1 that will be back to the inventory levels that we need on out.
Great. Okay. Thanks, Brittany. Thank you.
Thank you.
Your next question comes from the line of John Babcock with Bank of America. Your line is now open.
Hey.
Thanks for taking my question I guess, just following up on that discussion on the supply chain could you just talk about general trends in that area and also trends for component cost on how that's looking for you.
Yeah. It is.
Starting.
She's on mute.
Okay, sorry, I was on mute thank you Patrick.
Okay.
Cause you knew I was talking.
I would say.
We have seen improvement in that.
No area, so I would say, particularly on shipping and logistics as I called out in my remarks.
We are starting to see some improvement there we have started to see some improvement from a component standpoint. There are some components that are are challenging to get but between the work that our teams have done is we've talked about on past quarters to really get as many components and as we can I think.
As we look look ahead, where we are seeing improvement in both our ability to maintain supply.
I think as demand has softened a bit not just for us but for others in the industry as well that's also going to provide some using from a supply chain standpoint.
Gotcha.
And then just generally.
We get into the first quarter of 'twenty three.
Well I guess really early and now and then.
Fourth quarter, but as you move into the first quarter 2003.
Hey, Thanks Don.
Don't improve from a macro standpoint, how long do you ultimately think about product launches that I mean is the goal.
Get out product launches that you were thinking about ahead of the holiday season. So you watch that quarter any way or do you continue to push that back I mean, what's the general general approach our thinking around that.
Okay.
We always consider the type of product that it is John and the timing around that so we're trying to take as many factors as we can into account obviously readiness is one of those but also.
What is it so if it was so Rome is a great example of making sure that lined up for instance.
With last spring summer.
Hitting a time like that and so.
I think this is a bit unique in terms of where we are right now, but certainly we'll look.
To see what the situation is happening on the macro front.
As we think about the other product launches to make sure we want to set them up for the most success possible and so we remain committed to at least two new products to new product launches every year as you know we've done five across this year and so we will also make sure that we're balancing that with what we need to do to continue to drive.
Yes, and reach our long term targets.
Okay. Thanks, and then just last question and maybe it's a little bit early on this from the standpoint, but as it pertains to the inflation reduction Act.
Obviously, some tax changes there.
<unk> gotten a chance to kind of go through that and provide some initial read but any color on that would be great.
Sure.
Yeah.
I would say just Justin initial read but.
It does not really impact us from a tax standpoint, we still have a valuation allowance up.
We're still not really a taxpayer at this point and so at least at least from what we've looked at and for the foreseeable future not a big impact for us.
Okay. Thank you.
Your next question comes from the line of Eric Woodring with Morgan Stanley . Your line is now open.
Hey, guys. Thanks for taking my questions I guess, maybe if we just start on the fiscal <unk> kind of implied guide.
Love to just kind of get a better sense maybe of the biggest.
The impacts of the biggest headwinds to revenue right I think I think Britney you implied if you had been able to fulfill and backlog and launching new product that would have delivered I think it's about $35 million of additional revenue, but correct me if im wrong I don't want to speak out of line FX is an incremental $17 million headwind. So.
Theres a fair amount that's still leftover there I'd just love to know maybe if you could help us kind of think about ranking rank ordering what the biggest impact would be for the remainder of revenue headwind in the September quarter that'd be helpful. And then I have a follow up thanks.
Yeah of course, Eric.
We don't quantify those what we said is that on a constant currency basis. If we had been in stock on <unk> and if we hadn't pushed the product launch we would've grown so that's obviously a big part of it we did quantify FX for you at about 17 million.
And then I would say the rest of the Delta between I think what we were hoping to achieve in Q4 and what it looks like we're achieving in Q4 is really what we would attribute to macro softness from a demand standpoint.
Across our product line, including how ray is delivering and so that would that would be sort of the rest of the delta on that change in Q4 guide.
And that macro point is.
Both both run rate, but also this dynamic with retail partner inventory that we called out.
Alright, okay.
Makes a lot of sense. Thank you Brittany and then maybe just a quick clarification on I know you mentioned higher levels of balance sheet inventory that you've kind of worked through over the next call it quarter or two as you get past the holidays, but any way you can help us understand kind of the mix of raw materials. There versus finished goods. If there was kind of.
Perhaps your comments imply maybe it's more finished goods and it historically would be but just want to make sure we're thinking about that correctly. Thank you.
Yeah of course, and you'll see the full breakout we break that out in our Q. So in our Q gets published Youll see the exact numbers.
I'd say its more on both we've got more component inventory than we typically hold and we have more finished good.
We have more component inventory because we've been trying to.
Drive ownership of more components to mitigate some of these supply chain challenges. We've had and then we have more finished goods I would say because.
The demand trajectory relative to what we were ramping too has just changed.
The good news for US is our products are long lived products will keep them for a long time they stay.
The last well and so it'll just be a prospect for us.
As we go through Q4, but then it really as we get into Q1, which is our seasonally highest quarter of working down that inventory. What we have done is we have certainly slowed down the amount of new finished goods that were producing to spend some time correcting for that inventory and get back to a more normal.
Inventory position likely at the end of the holiday quarter.
Okay. That's really helpful. Maybe if I could just one final final follow up on the on the gross margins I just wanted to be clear, you're obviously I think maybe outperformed expectations and then posted really nice.
Strong gross margins in the fiscal third quarter, that's related effectively just to the timing of some of your when you are paying for components and the point is your fiscal fourth quarter might seem some more pressure because you are paying up for components for amp.
That's the right way to think about it I just want to make sure and then that's it for me. Thanks, so much.
Yes, that's exactly the right way to think about it. We are we are reconfirming and actually narrowing the range on gross margin gross margins within the guidance that we put out last quarter in terms of where we thought we would land for the year.
Still within our long term targets that you see a pretty big difference between Q3, and Q4 and that difference between Q3 and Q4 really is about that timing of when we take the extra charges on some of that.
Components spot buy inventory inventory that we.
Built in again.
It is not entirely on amps, but a lot of it can be attributed to amp and getting back in stock on that.
Okay. Thank you so much guys.
Okay.
There are no questions.
Your next question comes from the line of Tom Forte with D. A Davidson your line is now open.
Great. Thanks couple of quick follow ups for me. So in the press release, you talked about delaying your long term financial targets can you give any color on what that means and whats alignments.
Yes, Tom it's Patrick.
We believe that those targets are the right ones to be shooting for.
You can see that we have proven time and time again to be in that gross margin range.
Range. So we're very comfortable in terms of the way that we do.
<unk> delivered and continue to deliver on that we've been in the adjusted EBITDA range, there and believe it.
Very attainable given the way that we manage the business and the way we think about the future and this is really a matter of.
The macroeconomic headwinds hitting in such a way that we think it will just take a little longer to get to that $2 5 billion.
So you know as.
As the macroeconomic headwinds start to ease.
Certainly put more color around it as we see that but.
That hopefully gives you some idea of the way we're thinking about this.
Great. Thanks, Patrick two more quick ones. So I appreciate your current thoughts on M&A asset valuations have come down across the board can.
Can you just give your updated thoughts on your strategy.
Yeah, I mean, you saw us.
Pick up Mike.
And close that in the quarter and we're Super excited about what that Theyre breakthrough technology enables for the future.
We obviously in a period like this we want to be.
Both cautious but offer opportunistic in terms of what's out there and what can help accelerate our road map, we have a lot underway right now we have more underway.
Across a variety of different initiatives than we ever had.
So I want to balance that and make sure we're doing that in an effective way we talked about the fact that we are making sure that we're investing every dollar in a smart way and taking a hard look at that so we will continue to be focused on that and driving the sustainable profitable growth we've talked about since.
Before our IPO.
And we'll look for those opportunities if they come up we are committed to both the organic and the inorganic investments to make sure that we can take more and more of that 96 billion audio market.
Great. Thanks last one and thanks for taking all my questions and I apologize for not knowing the answer in advance, but can you talk about to what extent if at all your operating expenses are in local currencies U S. Dollar.
No no I apologize.
They are predominantly in local currencies.
Thank you Brittany.
Of course.
There are no further questions at this time I'll turn the call back over to Patrick Spence.
Thanks, Emma and thanks, everybody for your questions as I mentioned, we're focusing on what we can control at this point, we are investing in a tremendous amount of.
New innovation and new products that we think are going to help us come out of these macroeconomic headwinds and an even stronger position.
And so we were excited about what the future brings and we put ourselves in a strong financial position to.
Whether these macroeconomic headwinds and so that's exactly what we will do for as long as they present themselves.
We'll look for every opportunity to continue to grow and keep heading towards those long term targets.
Thanks, everybody and again, many thanks to Brittany for everything she has done for Sonus over the last decade of working together, we will miss her and wish her well on her next adventure. Thanks, everyone. We'll talk to you soon.
This concludes today's conference call. Thank you for attending you may now disconnect.
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