Q1 2024 Sonos Inc Earnings Call - Q&A
Operator: Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to Sonos' first quarter fiscal 2024 conference call. Please note that this call is being recorded. All participants are now in listen-only mode.
Afternoon, My name is brianna and I'll be your conference operator today at this time I would like to welcome everyone to Stonehouse first quarter.
'twenty 'twenty four conference call.
Brianna: Please note that this call is being recorded all participants are now in listen only mode.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star 1 again.
Speaker Change: After the Speakers' remarks, there will be a question and answer session. If he would like to ask a question. Please press star followed by the number one on your telephone keypad.
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Operator: Thank you. I will now turn the call over to James Boglanas, Head of Investor Relations. You may begin your conference. Thank you, Brianna.
Speaker Change: Thank you.
Speaker Change: I will now turn the call over to James for GLONASS head of Investor Relations you May begin your conference.
Speaker Change: Thank you Brad good afternoon, and welcome to <unk> first quarter fiscal 2024 earnings Conference call I'm, James <unk> and with me today are <unk> CEO, Patrick Spence CFO theory, Casey and Chief legal and strategy Officer, Eddie Lazarus for those who joined the call early today's hold music is a sampling from our say it loud station, which is key.
James Boglanas: Good afternoon, and welcome to Sonos' first quarter fiscal 2024 earnings conference call. I am James Maguanas, and with me today are Sonos CEO Patrick Spence, CFO Saori Casey, and Chief Legal and Strategy Officer Eddie Lazarus. For those who joined the call early, today's hold music is a sampling from our Say It Loud station, which is curated in collaboration with Black at Sonos in recognition of Black History Month. Before I hand it over to Patrick, I would 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 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 risk factors in our filings with the SEC.
Speaker Change: <unk> in collaboration with Black at Sonus and recognition of Black history month before I hand, it over to Patrick I would 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 as of any subsequent date.
Speaker Change: 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 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.
James Boglanas: 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 first quarter fiscal 2024 results posted to the investor relations portion of this website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on our investor relations website, investors.sonos.com. I would also like to note that, for convenience, we have separately posted an investor presentation on our investor relations website, which contains certain portions of our supplemental earnings presentation. I will now turn the call over to Patrick. Thank you, James. And hello everyone.
Speaker Change: And a reconciliation of GAAP to non-GAAP measures. Please refer to today's press release regarding our first quarter fiscal 2024 results posted to the Investor Relations portion of this website as a reminder, the press release supplemental earnings presentation and conference call transcript will be available on our Investor Relations website investors Dot <unk> Dot com I would also like to note that.
Speaker Change: For convenience, we have separately posted an investor presentation to our Investor Relations website, which contains certain portions of our supplemental earnings presentation I will now turn the call over to Patrick.
Patrick Spence: Thank you James and Hello, everyone I'm pleased to report that we kicked off fiscal 2024 with a successful first quarter.
Patrick Spence: I'm pleased to report that we kicked off fiscal 2024 with a successful first quarter. We exceeded our expectations by delivering revenue of $612.9 million, a gap gross margin of 46.1%, and adjusted EBITDA of $115 million, and free cash flow of $269 million. We also delivered on the commitment we made last quarter to vigilantly work down our owned inventory position. This performance sets us up well to meet our previous outlined fiscal 2024 targets of 1.6 to 1.7 billion revenue, 45 to 46 percent gap gross margins, and 150 to 180 million dollars in adjusted EBITDA, while continuing to improve free cash flow conversion relative to last year. These results were hard won as we navigated the cyclical challenges in our categories in a highly promotional environment. As we have discussed in the past, the home theater category has not yet recovered and remains subdued across all of our geography.
Patrick Spence: We exceeded our expectations by delivering revenue of $612 $9 million, a GAAP gross margin of 46, 1% and adjusted EBITDA of $115 million and free cash flow of $269 million we.
Patrick Spence: We also delivered on the commitment we made last quarter to vigilant vigilantly worked down our own inventory position.
Patrick Spence: This performance sets us up well to meet our previous outlined fiscal 'twenty to 'twenty four targets of one six to $1 7 billion revenue, 45% to 46% GAAP gross margins and $150 million to $180 million in adjusted EBITDA, while continuing to improve free cash flow conversion relative to last year.
Patrick Spence: These results were hard won as we navigated the cyclical challenges in our categories and a highly promotional environment.
Patrick Spence: As we have discussed in the past the home theater category has not yet recovered and remain subdued across all of our geographies.
Patrick Spence: This is in part due to a slow market for TV purchases, as well as difficult economic conditions in parts of EMEA and APAC. We saw some modestly improved performance in the streaming audio category, though the market remains highly competitive. Despite these conditions, we continue to execute and win. We decided to do something different this holiday season.
Patrick Spence: This is in part due to a slow market for television purchases as well as difficult economic conditions in parts of EMEA and APAC we.
Patrick Spence: We saw some modestly improved performance and the streaming audio category. So the market remains highly competitive.
Patrick Spence: Despite these conditions, we continue to execute and win.
Patrick Spence: We decided to do something different this holiday season, we opted to run an extended pre Christmas promotion on select products. This is atypical for us, but we felt it was necessary to meet consumer expectations of discounting throughout the holiday season, rather than having the promotions concentrated heavily in the select windows of Black Friday cyber Monday.
Patrick Spence: We opted to run an extended pre-Christmas promotion on select products. This is atypical for us, but we felt it was necessary to meet consumer expectations of discounting throughout the holiday season rather than having the promotions concentrated heavily in the select windows of Black Friday and Cyber Monday. Customers responded in force. We exceeded our own sales expectations and saw market share gains in key categories, all while delivering strong gross margins for the quarter. Specifically, we saw further share gains in U.S. home theater and also saw our market share improve sequentially in streaming audio in both the U.S. and Europe. We also saw one of the highest levels of products per new customer of any holiday season in years.
Patrick Spence: Customers responded in force, we exceeded our own sales expectations and some market share gains in key categories, all while delivering strong gross margins for the quarter.
Patrick Spence: Specifically, we saw further share gains in U S home theater, and also saw our market share improved sequentially and streaming audio in both the U S and Europe.
Patrick Spence: We also saw one of the highest levels of products for new customer of any holiday season in years.
Patrick Spence: All of this is a testament to our strong brand, our terrific product lineup, and the value that our products offer. Because this successful extended promo happened later in the quarter, we believe it may have had the effect of pulling some sales from Q2, and as a result, our first half outlook remains unchanged. With a solid Q1 in the books, we now turn our undivided attention to the launch of our highly anticipated new product, which we will announce and ship in Q3. This launch will give us a foothold in a new multi-billion dollar category, expanding the number of categories we plan from five to six and further diversifying our business. In anticipation of both the untapped opportunity in our existing categories and opportunities in this new category, we plan to expand our distribution footprint meaningfully.
Patrick Spence: All of this is a testament to our strong brands, our terrific product lineup and the value that our products offer.
Patrick Spence: Because of this successful extended promo happened later in the quarter. We believe it may have had the effect of pulling some sales from Q2 and as a result, our first half outlook remains unchanged.
Patrick Spence: With a solid Q1 in the books, we now turn our undivided attention to the launch of our highly anticipated new product, which will we will announce and ship in Q3.
Patrick Spence: This launch will give us a foothold into a new multibillion dollar category expanding the number of categories. We plan from five to six and further diversifying our business.
Patrick Spence: In anticipation of both the untapped opportunity in our existing categories and opportunities in this new category, we plan to expand our distribution footprint meaningfully.
Patrick Spence: This means signing agreements with a few key distribution partners to broaden our reach and drive new business. We will provide further updates in the quarters to come. The other place we see opportunity is in our marketing efforts, particularly the role Sonos plays in connecting to culture. This past weekend, we partnered with the Recording Academy to host Immersive Experiences at the 2024 Grammy Awards.
Patrick Spence: This means signing agreements with a few key distribution partners to broaden our reach and drive new households.
Patrick Spence: We will provide further updates in the quarters to come.
Patrick Spence: The other place we see opportunity is in our marketing efforts, particularly to raw soon as plays in connecting the culture.
Patrick Spence: This past weekend, we partnered with the recording Academy to host immersive experiences at the 2024 Grammy House.
Patrick Spence: Connecting our brand to culture is a priority, and we brought the magic of Sonos to life with exciting red carpet activations and amplified sound experiences throughout the event, partnering with the hip-hop duo Flyin' A Boss to welcome guests and share experiences from the celebration. Our Chief Commercial Officer, Deirdre Findlay, said it best, "This collaboration reinforces our profound connection to the creator community and underscores our commitment to delivering We've also built upon the success of our partnership with Sonance, recently announcing our 8-inch in-ceiling speaker by Sonos and Sonance. We designed this in direct response to the needs of our customers and their installers, who asked for more size options and flexibility during installation.
Patrick Spence: Connecting our brand and culture is a priority and we brought the magic of Sonus to life with exciting red carpet Activations and amplified sound experience stripped the event partnering with the hip hop duo duo flying a boss to welcome guests and your experience from the celebration, our Chief Commercial Officer, Deirdre Findlay said it best this collaboration reinforces our pro.
Patrick Spence: Bound connection to the creator community and underscores our commitment to delivering unparalleled less unparalleled listening experiences.
Patrick Spence: We've also built upon the success of our partnership with Sonance recently announcing our eight inch in sealing speaker by Santos and Sundance.
We design this indirect response to the needs of our customers and their installers, who asked for more size options and flexibility during installation.
Patrick Spence: This product will be available in spring 2024 for $999 per pair. As we navigate this unique consumer environment, I want to reiterate that we are laser focused on what we can control. We are taking share without compromising on gross margin. We are at the onset of a multi-year product cycle as we harvest the benefits of our research and development investments to enter new categories and launch new products, starting with the one we will be announcing and shipping in Q3. We are expanding our distribution to ensure we meet the customer where they want to shop; we are reinventing our brand marketing and activation to tap into culture and address new audiences. We are positioning the company to accelerate its growth while keeping expenses in check to deliver margin expansion in the years to come. The eventual recovery of our categories should only further fuel this re-acceleration.
Patrick Spence: This product will be available in spring 2024 for $999 per pair.
Patrick Spence: As we navigate this unique consumer environment I want to reiterate that we are laser focused on what we can control.
Patrick Spence: We are taking share without compromising on gross margin.
Patrick Spence: We are at the onset of a multiyear product cycle as we harvest the benefits of our research and development investments to enter new categories and launched new products, starting with the one we will be announcing in shipping in Q3.
We are expanding our distribution to ensure we meet the customer where they want to shop.
Patrick Spence: We are reinventing our brand marketing and activation to tap into culture and address new audiences.
Patrick Spence: We are positioning the company to accelerate our growth while keeping expenses in check to deliver margin expansion in the years to come.
Patrick Spence: The eventual recovery of our categories should only further fuel this reacceleration.
Patrick Spence: The opportunity ahead remains large as we have just 2% of the $100 billion global audio market and 9% share of the total households in our core markets.
Patrick Spence: The opportunity ahead remains large, as we have just 2% of the $100 billion global audio market and 9% of the total households in our core market. Each year, our business is driven by both the acquisition of new households that are to enter our installed base and by our loyal customers who continue to make subsequent purchases over time. Our ability to capture a disproportionate share of this opportunity ahead of us will only improve from here. Great things are happening here at Sonos, and the best is yet to come. Before I turn the call over to you, I want to thank Eddie for his contributions over the past 16 months as CFO. He rose to the occasion and helped us navigate a highly uncertain environment.
Patrick Spence: Each year, our business is driven by both the acquisition of new households that aren't to enter our install base and by our loyal customers, who continue to make subsequent purchases over time.
Patrick Spence: Our ability to capture disproportionate share of this opportunity ahead of us will only improve from here.
Patrick Spence: Great things are happening here at <unk> and the best is yet to come.
Speaker Change: Before I turn the call over I want to thank Eddie for his contributions over the past 16 months as CFO.
Speaker Change: Eddie Rose to the occasion and helped us navigate a highly uncertain environment.
Speaker Change: I am confident he will continue to make a great impact on <unk> in his new role as Chief strategy Officer.
Speaker Change: Our new Chief Financial Officer theory, Casey joined <unk> at a very exciting time as we kick off our new multi year product cycle. She.
Patrick Spence: I'm confident he will continue to make a great impact on Sonos in his new role as Chief Strategy Officer. Our new chief financial officer, Saori Casey, joins Sonos at a very exciting time as we kick off our new multi-year product cycle. She brings more than 30 years of corporate finance experience, most recently serving as vice president of finance at Apple. There is no doubt in my mind that we will benefit tremendously from the wealth of experience she brings to the table. Now, I'll turn the call over to Sayori to briefly introduce herself.
Speaker Change: She brings more than 30 years of corporate finance experience. Most recently, serving as vice President of finance at Apple there.
Speaker Change: There is no doubt in my mind that we will benefit tremendously from the wealth of experience she brings to the table.
Casey: Now I will turn the call over to say already to briefly introduce herself.
Sally: Thank you Patrick it's an honor to step in as the Chief Financial Officer of a consumer brand is iconic and stonehouse.
Speaker Change: He spent the past two weeks meeting with our leadership across the organization and I'm struck by the caliber of talent here at Mcdonalds and I'm very energized by the opportunity to work hand in hand, with our people to help lead us into the next phase of growth I look forward to getting to know our analysts and investors in the weeks to come.
Sayori Casey: Thank you, Patrick. It's an honor to step in as the Chief Financial Officer of a consumer brand as iconic as Sonos. I've spent the past two weeks meeting with our leadership across the organization, and I'm struck by the caliber of talent here at Sonos. And I'm very energized by the opportunity to work hand in hand with our people to help lead Sonos into the next phase of growth.
Speaker Change: Now I'll pass it over to Eddie to provide more details on our results and our outlook.
Eddie: Thank you hi, everyone.
Eddie: I just wanted to start by saying I'm incredibly grateful for the opportunity served as CFO of <unk> during the last 16 months.
Eddie: I'm proud of all that we accomplished and of the hard work the team put in including in delivering this very strong holiday quarter.
Sayori Casey: I look forward to getting to know our analysts and investors in the weeks to come. Now, I'll pass it over to Eddie to provide more details on our results and our outlook. Thank you, Sayori. Hi everyone.
Eddie: It's already been a great pleasure to work with <unk> on a seamless transition as he takes the helm of this deeply talented finance organization.
Eddie: I have no doubt she will build upon our success and help lead us into the next phase of growth.
Eddie: In my new role I look forward to partnering with CRE, Patrick and the rest of our executive leadership team as I dedicate more of my time to crafting the strategies that will position <unk> to succeed over the long term.
Eddie Lazarus: I just wanted to start by saying I'm incredibly grateful for the opportunity to serve as CFO of Sonos for the last 16 months. We're proud of all that we accomplished and of the hard work the team put in, including in delivering this very strong holiday quarter. It's already been a great pleasure to work with Sayori on a seamless transition as she takes the helm of this deeply talented finance organization. I have no doubt she'll build upon our success and help lead Sonos into the next phase of growth.
Eddie: And of course, I will continue to oversee legal and our strategy to defend our intellectual property and specifically to hold Google accountable for their widespread infringement of our patents.
Eddie: Turning now to the numbers.
Eddie: Q1 revenues were $612 9 million.
Eddie: A year over year decline of eight 9% or 10, 5% constant currency.
Eddie: On a sequential basis revenues increased 101%.
Eddie Lazarus: In my new role, I look forward to partnering with Sayori, Patrick, and the rest of our executive leadership team as I dedicate more of my time to crafting the strategies that will position Sonos to succeed over the long term. And, of course, I will continue to oversee legal and our strategy to defend our intellectual property and specifically hold Google accountable for their widespread infringement of our patents. Turning now to The Numbers. Q1 revenues were $612.9 million, a year-over-year decline of 8.9% or 10.5% cost incurred.
Eddie: So conditions in our categories remain challenging Q1 revenue came in ahead of our initial expectations due to strong customer response to the extended promotions that we ran in the quarter and to a lesser extent timing of channel fill.
Eddie: We believe that these two factors had the effect of pulling some Q2 sales into Q1, hence I would note our overall expectations for revenue in the first half are unchanged from last quarter.
Eddie: I'll discuss this further when we cover our guidance.
Eddie: Products sold declined 15% year over year, which was more than revenue on a percentage basis due to a 7% increase in revenue per product sold.
Eddie: This increase resulted from favorable product mix, partially offset by increased promotional activity.
Eddie: Okay.
Performance varied significantly on a regional basis revenue in the Americas was down 1% year over year, whereas EMEA and APAC each declined by 20%.
Eddie Lazarus: On a sequential basis, revenues increased 101%. Therefore, conditions in our categories remain challenging. Q1 revenue came in ahead of our initial expectations due to strong customer response to the extended promotions that we ran in the quarter and, to a lesser extent, timing of channeling. We believe that these two factors had the effect of pulling some Q2 sales into Q1. Hence, I would note our overall expectations for revenue in the first half are unchanged from last quarter. I'll discuss this further when we cover our guidance. Products sold declined 15% year over year, which was more than revenue on a percentage basis due to a 7% increase in revenue per product sold. This increase resulted from a favorable product mix, partially offset by increased promotional activity. Performance varied significantly on a regional basis.
Eddie: Sales in our categories in both EMEA and APAC continued to be impacted by the difficult macroeconomic environment there.
GAAP gross margin was 46, 1% up 370 basis points year over year, which was modestly ahead of our expectations the.
Eddie: The year over year increase was due to lower component costs fewer spot component purchases lower inventory related provisions and FX tailwind, partially offset by additional promotional activity.
Eddie: Hi.
Eddie: But.
Eddie: Promotional activity.
Eddie: GAAP gross profit dollars declined by 8% year over year.
Eddie: Q1 performance demonstrates the resilience of our underlying gross margins and underpins our confidence that we will meet our fiscal 2024 target of $45 to 46%.
Eddie: Adjusted EBITDA was $115 million, representing a margin of 18, 8%.
Eddie: Absolute dollars declined year over year, our margin increased by 40 basis points due to gross margin expansion, partially offset by lower revenue and increased advertising and marketing spend.
Eddie Lazarus: Revenue in the Americas was down 1% year over year, whereas in ME and APAC, each declined by 20%. Sales in our categories in both EMEA and APAC continue to be impacted by the difficult macroeconomic environment. Gap gross margin was 46.1 percent, up 370 basis points year over year, which was modestly ahead of our expectations. The year-over-year increase was due to lower component costs, fewer spot component purchases, lower inventory-related provisions, and FX tailwinds, partially offset by additional promotional activity, but by additional promotional acts. GAAP gross profit dollars declined by 0.8% year over year.
Eddie: Okay.
Eddie: non-GAAP adjusted operating expenses were $179 million in the quarter.
Eddie: Up $44 million sequentially, primarily due to reset of annual bonus accrual from below target fiscal 2023 attainment season.
Eddie: Seasonal increase in advertising and marketing expenses and increases in revenue driven fees, resulting from higher quarterly revenue.
Eddie: We ended the quarter with $467 million of cash and no debt.
Eddie: Free cash flow was $269 million, an improvement from $168 million in Q1 of last year.
Eddie: This result was primarily driven by working capital improvements, resulting from our focus on better managing our inventory to adjustments to our sourcing plans as well as the implementation of newly adopt payment terms with our suppliers.
Eddie Lazarus: Our Q1 performance demonstrates the resilience of our underlying gross margins and underpins our confidence that we will meet our fiscal 2024 target of 45 to 46 percent. Adjusted EBITDA was $115 million, representing a margin of 18.8%. So absolute dollars declined year over year, but our margin increased by 40 basis points. Due to gross margin expansion, partially offset by lower revenue and increased advertising and marketing spend, non-gap adjusted operating expenses were $179 million in the quarter, up 44 million sequentially, primarily due to the reset of annual bonus accrual from below target fiscal 2023 attainment, seasonal increase in advertising and marketing expenses, and increases in revenue-driven fees resulting from higher quarterly revenue. We ended the quarter with $467 million of cash and no debt.
Eddie: Last quarter, we emphasized that improving fee free cash flow would be a top priority of fiscal 'twenty four and this quarter's result shows progress towards that goal.
Eddie: Okay.
Eddie: At period end inventory balance was $173 million.
Down 43% year over year and down 50% from where we ended Q4.
Eddie: Finished goods were $113 million down $168 million or 60% sequentially.
Eddie: This is the lowest level of finished goods inventory we upheld in years as we exited the holiday is carrying $147 million less inventory on our balance sheet and we did in Q1 of fiscal 'twenty three.
Eddie: We will diligently work to keep inventory balances in check going forward.
Eddie: A component balance of $60 million was down 8% sequentially. As previously discussed we do expect our component balanced increase in the near term before reaching a peak sometime in this fiscal year.
Eddie: And finally before turning to guidance, we repurchased $23 million of stock in the quarter at an average price of $15 87 per share representing one 2% of common shares outstanding as of Q4.
Eddie Lazarus: Free cash flow was $269 million, an improvement from $168 million in Q1 of last year. This result was primarily driven by working capital improvements, resulting from a focus on better managing our inventory, to addressments to our sourcing plans, as well as the implementation of newly adopted payment terms with our suppliers. Last quarter, we emphasized that improving free cash flow would be a top priority of Fiscal 24, and this quarter's result shows progress towards that goal. Our period end inventory balance was $173 million, down 43% year over year and down 50% from where we ended Q4. Finish goods were $113 million, down $168 million, or 60% sequentially. This is the lowest level of finished goods inventory we have held in years as we exited the holidays carrying $147 million less inventory on our balance sheet than we did in Q1 of fiscal 23. We will diligently work to keep inventory balances in check going forward. Our component balance of $60 million was down 8%.
Eddie: As a reminder, we have approximately $177 million.
Eddie: Remaining on our previous $200 million share repurchase authorization.
Eddie: Our balanced capital allocation strategy remains unchanged and consistent with that we expect to continue to be active in the market repurchasing stock.
Eddie: Now forgotten.
Eddie: And which is unchanged from what we outlined last quarter.
Eddie: Revenue.
Eddie: We expect revenue in the range of one six to $1 7 billion.
Eddie: Roughly flat year over year at the midpoint.
Eddie: And this guidance is the key assumption that we will generate more than $100 million of revenue from new product introductions in FY 'twenty four.
Eddie: The lion's share of which will come in the second half of the year from the new multibillion dollar category that we will be announcing in shipping in Q3.
Eddie: On gross margin.
Eddie: We expect GAAP gross margins in the range of $45 to 46%, implying GAAP gross profit dollars flat to up 9% year over year.
Eddie: non-GAAP gross margin is expected to be 45, 4% to 46, 4% due to approximately $7 million of stock based comp and amortization of intangibles included in GAAP cost of revenue.
Eddie Lazarus: As previously discussed, we do expect our component balance to increase in the near term before reaching a peak sometime in this fiscal year. And finally, before turning to guidance, we repurchased $23 million of stock in the quarter at an average price of $0.1587 per share, representing 1.2% of common shares outstanding as of Q4. As a reminder, we have approximately $177 million remaining on our previous $200 million share repurchase authorization.
Eddie: On adjusted EBITDA.
Eddie: Adjusted EBIT is expected to be in the range of $150 million to $180 million, representing a margin of nine 4% to 10, 6%.
Eddie: At the midpoint adjusted EBITDA is 165 million, representing a 10% margin up from 92, 3% in fiscal 2023.
Eddie: non-GAAP operating expenses are expected to be between 39 and 40% of revenue.
Eddie: We will continue to manage expenses diligently to drive sustainable profitable growth in the future.
Eddie Lazarus: Our balanced capital allocation strategy remains unchanged, and consistent with that, we expect to continue to be active in the market, repurchasing stock. I forgot, which is unchanged from what we outlined last quarter. Revenue. We expect revenue in the range of $1.6 to $1.7 billion, roughly flat year over year at the mid- Embedded in this guidance is the key assumption that we will generate more than $100 million of revenue from new product introductions in FY24, the lion's share of which will come in the second half of the year from the new multi-billion dollar category that we will be announcing and shipping in Q3, and Gross Margins. We expect GAAP gross margins in the range of 45 to 46 percent, implying GAAP gross profit dollars flat up 9 percent year over year; non-GAAP gross margin is expected to be 45.4 percent to 46.4 percent due to approximately 7 million stock-based compensation and amortization of intangibles included in GAAP cost of revenue. Unadjusted Eats.
Eddie: As previously discussed we're not providing formal guidance for free cash flow in fiscal 2024. So we continue to expect to significantly improve our free cash flow conversion.
Eddie: Okay.
Eddie: Turning to Q2.
Eddie: We expect to see revenue decreases.
Eddie: Revenue decreased 59% to 61% sequentially, which is a bit more than our typical seasonal decline as we estimate that our additional promotional activity pulled Q2 revenue into Q1 and because of timing of channel fill.
Eddie: Taken together, our first half revenue expectations are unchanged from what we outlined last quarter, we expect <unk> drove gross margin to be a bit lower bit below the low end of our annual guidance range, primarily due to deleveraging from lower revenue in the quarter.
Eddie: And for non-GAAP operating expenses to decrease by $15 million to $20 million from the $179 million in Q1, primarily due to seasonal decrease in sales and marketing, resulting in adjusted EBITDA of negative <unk> 34 to negative $47 million.
Eddie: Typically I end with commentary about our Google litigation.
Eddie: Theres not a lot to report this quarter as we continued to drive.
Eddie Lazarus: Adjusted EBIT is expected to be in the range of $150 million to $180 million, representing a margin of 9.4% to 10.6%. At the midpoint, adjusted EBITDA is $165 million, representing a 10% margin, up from 9.3% in fiscal 2023. Non-GAAP operating expenses are expected to be between 39 and 40 percent of revenue.
Eddie: We continue our drive to defend and monetize our IP.
Eddie: We are waiting for the federal circuit to decide the appeals stemming from the case, we had one at the ITC.
Eddie: When that appeals process finishes, we will restart our damages lawsuit for infringement of the valuable Appeals.
Eddie: The valuable patents involved in that case.
Eddie: Also next week, we will file our opening brief in our appeal from the case in Northern California, where the judge and validated a jury verdict in our favor.
Eddie Lazarus: We will continue to manage expenses diligently to drive sustainable, profitable growth in the future. As previously discussed, we're not providing formal guidance for free cash flow in fiscal 2024, but we continue to expect to significantly improve our free cash flow conversion. Turning to Q2, we expect revenue decreases for revenue to decrease 59% to 61% sequentially, which is a bit more than our typical seasonal decline, as we estimate that our additional promotional activity pulled Q2 revenue into Q1, and because of the timing of the challenge. Taken together, our first half revenue expectations are unchanged from what we outlined last quarter.
Eddie: Yeah.
Eddie: Patrick talked a lot about the future drivers of our growth. So instead I will just say that this is where execution comes in.
Eddie: We need to deliver on our promise of driving gross margin back into our annual target range. This year and keep it there in the future and we need to do that while keeping expenses in check.
Eddie: Success on these two fronts will be paramount to delivering our promise of expanding margins in FY 'twenty four and the years to come.
Eddie: At the utmost confidence in our team's ability to do just that.
Eddie: Yeah.
Speaker Change: I'd like to turn the call over now for questions.
Speaker Change: Thank you at this time I would like to remind everyone in order to ask a question. Please press star one.
Speaker Change: Your next question comes from Erik Woodring with Morgan Stanley. Please go ahead.
Eddie Lazarus: We expect 2Q gross margin to be a bit below the low end of our annual guidance range, primarily due to deleveraging from lower revenue in the quarter, and for non-GAAP operating expenses to decrease by $15 to $20 million from the $179 million in Q1, primarily due to seasonal decreases in sales and marketing, resulting in adjusted EBITDA of negative $34 to $47 million. Typically, I end with commentary about our Google. There's not a lot to report this quarter, as we continue our drive to defend and monetize our IT. We are waiting for the Federal Circuit to decide the appeals stemming from the case we won at the ITC. When that appeals process finishes, we will restart our damages lawsuit for infringement of the valuable patents involved in that. Also, next week, we will file our opening brief in our appeal from the case in Northern California, where the judge invalidated a jury verdict in our favor. Patrick talked a lot about the future drivers of our growth. So instead, I'll just say that this is where execution happens.
Erik Woodring: Hey, guys. Good afternoon, congrats on a really good quarter I had a I had two questions maybe one for Patrick and one for you Eddie.
Erik Woodring: Patrick it's nice to see you're obviously talking about gaining share whether that's in the U S home theater market or or sequentially in some of the streaming market can you maybe just.
Just take a step back and give us a bit more detail on kind of the trends youre seeing that are notable either by product price point or end market.
Erik Woodring: And then specifically can you just help us understand when you call out partners normally ordering levels in the earnings deck exactly what you mean by that and then I have a follow up thank you so much.
Speaker Change: Sure I'll talk about the what we see from a trends perspective is and we've talked about it a little bit last quarter in terms of how promotional it has been.
Speaker Change: Throughout calendar 2023.
Speaker Change: Really what we saw in the holiday quarter was our products really standing out and our brand.
Speaker Change: Shining through if you will and particularly when I think about the streaming audio category.
Eddie Lazarus: We need to deliver on our promise of driving gross margin back into our annual target range this year and keep it there in the future. And we need to do that while keeping expenses in check. Success on these two fronts will be paramount to delivering on our promise of expanding margins in FY24 and the years to come. I have the utmost confidence in our team's ability to do just that. I'd like to turn the call over now for questions. Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1. Your first question comes from Erik Woodring with Morgan Stanley. Please go ahead.
Speaker Change: The <unk> 300, narrow 100, and our strategy of continuing to raise the bar in those existing categories paid off in terms of winning the share and in fact, helping drive some growth in those categories, which I think is interesting.
Speaker Change: And again just.
Speaker Change: Another reflection of our leadership position in that category and then in a tough sandbar market.
Speaker Change: <unk> strength from arc.
Erik Woodring: Hey guys, good afternoon. Congratulations on a really good quarter. I had two questions, maybe one for Patrick and one for you, Eddie. Patrick, it's nice to see you obviously talking about gaining share, but can you maybe just take a step back?
Speaker Change: And beam.
Speaker Change: In terms of being able to really take leadership spots across all of the markets there.
Speaker Change: And I think yes, I think ultimately consumers see the value they see the value in the ecosystem, we have the advantage versus our competition of the <unk>.
Patrick Spence: The trends that are notable either by product or by category. You just help us understand when you call out partners' normal ordering levels by that, and then I have a follow-up. Sure, I'll talk about what we see from a trends perspective, and we talked about a little bit last quarter in terms of how promotional it's been throughout calendar 2023. I think really what we saw in the holiday quarter was our products, you know, really standing out, and our brand kind of shining through, if you will, and particularly when I think about the streaming audio category. You know, the AERA 300 and AERA 100 and our strategy of continuing to raise the bar in those existing categories paid off in terms of, you know, winning the share and, in fact, helping drive some growth in those categories, which I think is interesting.
Speaker Change: Fact that people are coming back and adding more to their system as well and theyre thinking about Santos as a system and helping power our flywheel. So I think all of those things together have just enabled us to now.
Speaker Change: <unk> again.
Speaker Change: 2023, where these categories were very challenged and so we are making sure we put ourselves in that position and I think to be successful going forward and I think we as we look at our marketing efforts as we look at our distribution efforts I think we feel good that we can continue to compete and win theirs.
Speaker Change: Lots of opportunity there as I talked about in terms of our share of both the overall audio market and then as well in terms of the number of homes that we're in today.
Speaker Change: And yes, and so I think.
Speaker Change: At this point.
Speaker Change: We feel good about our ability to continue to execute and win.
Patrick Spence: And again, just another reflection of our leadership position in that category. And then, in a tough soundbar market, continued strength from ARK and BEAM in terms of being able to, you know, really take leadership spots across all the markets there. And I think, you know, ultimately, consumers see the value; they see the value in the ecosystem. We have the advantage versus our competition because people are coming back and adding more to their systems as well. And they're thinking about Sonos as a system and, you know, helping power our flywheel.
Speaker Change: In the face of whatever the market throws at us.
Speaker Change: Okay. That's really helpful. Thank you Patrick and then maybe Eddie.
Eddie: Just for you you know gross margins in the first quarter kind of the opposite of how you guided you know you talked about them being below the long term below the annual target and they came in above can you maybe just help us understand why you outperformed despite the more promotional period year over year and then.
Eddie: Kind of as we think about the full year guide why we should be expecting maybe a flat to slightly worsening trajectory of gross margins. This year with 90 days ago I think it was a bit more of a of a recovery shape as we look through the year. So just trying to understand how the year might look a little bit different than you thought 90 days ago when it comes.
Patrick Spence: So I think all of those things together have just enabled us to, you know, navigate a 2023 where, you know, these categories were very challenged. And so, you know, we are making sure we put ourselves in that position and, I think, will be successful going forward. And I think we, as we look at our marketing efforts, as we look at our distribution efforts, I think we feel good that we can continue to, you know, compete and win. There's lots of opportunity there, as I talked about, in terms of our share of both the overall audio market and then as well in terms of the number of homes that we're in today. And yeah, and so I think, I think at this point, we feel good about our ability to continue to execute and win in the face of whatever the market throws at us. Okay, that's really helpful.
Speaker Change: The gross margin trajectory and that's it for me thanks, so much and congrats.
Speaker Change: Sure well thank you.
Speaker Change: So on the gross margin, we did a little bit better on the component costs and logistics costs than we expected.
Speaker Change: Those things fluctuate.
Speaker Change: Sometimes quite quickly and it turned out, especially on the shipping side of things that we did better than than we thought and then we did have a little bit of an FX tailwind too.
Speaker Change: So.
Speaker Change: While we are always pleased to do better than expected.
Speaker Change: It turned out that this time, the surprises where a little bit in our favor.
Speaker Change: As for the rest of the year.
Speaker Change: Things in the world are still quite volatile.
Eddie Lazarus: Thank you, Patrick. And then maybe Eddie, just for you, gross margins in the first quarter kind of did the opposite of how you guided, you know, you talked about them being below the annual target. Can you maybe just help us understand... One, why you outperformed despite the more promotional period. And then second, you know, kind of as we think about the full-year guide, why we, maybe flat to slightly worse, uh... when ninety days ago, I think it was a bit more of a recovery trying to understand how the year might look a little bit different. Sure, well, thank you.
Speaker Change: We're looking at the Red Sea situation, very carefully which could raise shipping costs again.
Speaker Change: We were also looking out at what's coming in the second half to see weather.
Speaker Change: We think gross margins might land for four <unk>.
Speaker Change: Things that we have upcoming and so just penciled out the way it has but but we're delighted that we over performed in the first quarter I would say de risks the gross margin.
Speaker Change: Guidance from where we stood before the quarter and fingers crossed nothing will happen in the interim to disrupt the good trajectory.
Eddie Lazarus: So on the gross margin, we did a little bit better on the component costs and logistics costs than we expected. Those things fluctuate, you know, sometimes quite quickly, and it turned out, especially on the shipping side of things, that we did better than we thought. And we did have a little bit of an FX tailwind too.
Super: Super Thanks, very much Eddie.
Eddie: Thanks, Eric.
Your next question comes from Steve Frankel with Rosenblatt. Please go ahead.
Steve Frankel: Afternoon, and congratulations on the performance Patrick I Wonder if you might give us some color on the larger initial purchase sizes by by your new consumers. How much is that driven by them just moving up the product line versus maybe a trend towards people buying more product and the initial bundle.
Eddie Lazarus: So while we are always pleased to do better than expected, you know, it turned out that this time the surprises were a little bit in our favor. As for the rest of the year, things in the world are still quite volatile. We're looking at the Red Sea situation very carefully, which could raise shipping costs again.
Patrick Spence: Yeah. Thanks, Steve we have been working hard, particularly our DTC team, but as well now with some of our partners on how we get people started the right way with Somos, which as everybody on this call will know is being able to enjoy multi room being able to enjoy.
Eddie Lazarus: We're also looking out at what's coming in the second half to see where we think gross margins might land for things that we have upcoming. It's just penciled out the way it has, but we're delighted that we overperformed in the first quarter. It, I would say, derisks the gross margin guidance from where we stood before the quarter. Fingers crossed, nothing will happen in the interim to disrupt the good trajectory. Thanks very much.
Patrick Spence: Home theater in all its glory with.
Patrick Spence: Surrounds and a sub and so we've been made a very concerted effort to have more people start in that way and it's paying off and so we're going to continue to try and get more people started that way because we know that if we do that there are happier customers other mps's higher and we also know that.
Eddie Lazarus: Thanks, Erik. Your next question comes from Steve Frankel with Rosenblatt. Please go ahead.
Patrick Spence: Their lifetime value is higher and so thats been a concerted effort and we will continue to be a concerted effort.
Steve Frankel: Good afternoon, and congratulations on the performance. Patrick, I wonder if you could give us some color on the larger initial purchase sizes by your new consumers. How much is that driven by them just moving up the product line versus maybe a trend towards people buying more products in the initial bundle? Yeah, thanks, Steve. We have been working hard, particularly our DTC team, but now with some of our partners, on how we get people started the right way with Sonos, which, as everybody on this call will know, is being able to enjoy multi-room, being able to enjoy, you know, home theater in all its glory with surrounds and a sub.
Patrick Spence: Even as we think about new categories that we go into how do we get customers to be seeing the full value of the sonus ecosystem. So that's an important part of our strategy and it's paying off and in Q1.
Patrick Spence: And then one more maybe some into.
Patrick Spence: Site into channel inventories in the installer channel and in <unk>.
Patrick Spence: European retail.
Patrick Spence: We feel very comfortable where we are in in both of those channels.
Patrick Spence: Yes.
Patrick Spence: On the on the EIS side, all last year. We were we were deleveraging that channel registrations were running significantly ahead of sell in and we feel like we've gotten back to a more balanced place with respect to the Ias channel. So we feel like that's in good shape going forward.
Patrick Spence: And so we've made a very concerted effort to have more people start that way, and it's paying off. And so we're going to continue to try and get more people started that way, because we know that if we do that, they're happier customers, their NPS is higher, and we also know that their lifetime value is higher. And so that's been a concerted effort and will continue to be a concerted effort. Even as we think about new categories that we go into, how do we get customers to see the full value of the Sonos ecosystem?
Patrick Spence: Hi.
Patrick Spence: As we said European retail has been soft, but but but that softness is isn't based on.
Patrick Spence: Excessive channel fill it's really just the consumer environment there has been subdued.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Steve.
Speaker Change: Your next question comes from Jason Haas with Bank of America. Please go ahead.
Jason Haas: Hey, good afternoon, and thanks for taking my questions.
Patrick Spence: So that's an important part of the strategy, and it's paying off in Q1. And then one more, maybe some insight into channel inventories in the installer channel and in European retail. We feel very comfortable where we are in both of those channels. We on the I.S.
Jason Haas: Curious if you could talk about what you think is needed to see a pickup in the industry demand broadly there's some expectation that we should.
Jason Haas: We see a pickup in housing with lower rates. So I'm curious to what extent you think that could potentially help your business in the industry broadly.
Patrick Spence: On the other side, you know, all last year we were deleveraging that channel. Registrations were running significantly ahead of sell-in. And we feel like we've gotten back to a more balanced place with respect to the I.S. channel.
Speaker Change: Yes, I think Jason that's probably one of those factors that certainly helps.
Patrick Spence: So we feel like that's in good shape going forward. You know, as we said, your European retail has been soft, but we but that softness isn't based on excessive channel fill. It's really just the consumer environment there has been subdued. Great, thank you.
Speaker Change: Intimately TV sales have been down.
Speaker Change: As well so as that picks up at some point I'm sure that will help and just general consumer sentiment towards buying goods versus services interest rates all of those things.
Steve Frankel: Thanks Steve. Your next question comes from Jason Haas with Bank of America. Please go ahead.
Speaker Change: At the same time I would also just make sure everybody hears loud and clear that we believe we have opportunity. Despite these challenges right. So we we are definitely.
Jason Haas: Hey, good afternoon, and thanks for taking my questions. I'm curious if you could talk about what you think is needed to see a pickup in industry demand broadly. There's some expectation that we should, you know, inevitably see a pickup in housing with lower rates. So I'm curious to what extent you think that could potentially help your business and industry, broadly. Yeah, you know, I think Jason, that's probably one of those factors that certainly helps. Ultimately, TV sales have been down as well.
Speaker Change: Making every effort, we can to take more and more of the addressable market. That's out there because there is a lot for us and even in a more challenged environment. We've shown the ability to take more and thats something that I think with.
Speaker Change: Our marketing efforts and kind of the things that we're renewing their some of their distribution agreements I referenced.
Speaker Change: And then the work in the new categories I actually think we have an opportunity to.
Speaker Change: Go and take more and so we're very focused on that.
Patrick Spence: So as that, you know, picks up at some point, I'm sure that will help and just general consumer sentiment towards buying goods versus services, interest rates, all of those things. But at the same time, I would also, you know, just make sure everybody hears loud and clear that we believe we have an opportunity, despite these challenges, right? So, you know, we are definitely making every effort we can to take more and more of the addressable market that's out there because there is a lot for us. And, you know, even in a more challenging environment, we've shown the ability to take more.
Speaker Change: And then I think it's just a nice tailwind as.
Speaker Change: Those things come back when they whenever they do but we're staying very focused on the things we can control.
Speaker Change: That's great and then as a follow up question I wanted to ask about the cadence of EBITDA through the year I know you've given some good color on it I was hearing this question even before you reported results. It sounds like the cadence hasn't really changed too much but can you say the question I've been getting is just it seems like it's going to be a little bit more back half weighted year from an EBITDA perspective versus.
Speaker Change: If we look at the years pre pandemic.
Speaker Change: Im curious whats driving that and I recognize you'll have the new product introduction. So I'm sure that's part of it but any other tailwind that we should be aware of for the second half of the year.
Patrick Spence: And that's something that, with our marketing efforts, and kind of the things that we're renewing there, some of the distribution agreements I referenced, and then the work in the new categories, I actually think, you know, we have an opportunity to go and take more. And so we're very focused on that. And then I think it's just a, you know, a nice tailwind as those things come back when they do, whenever they do, but we're staying very focused on the things we can control. That's great. And then, as a follow-up question, I wanted to ask about the cadence of EBITDA through the year. I know you've given some good color on that. I was getting this question, you know, even before you reported the results. It sounds like the cadence hasn't really changed too much.
Speaker Change: No I would say that it reflects the fact that this year the percentage of revenue that we will get in the first half is a little bit lighter than we typically do because of this significant new product introductions. So.
Speaker Change: It's usually the.
Speaker Change: First half would be 55% to 60.
Speaker Change: A percent of revenue this year, we're projecting 52%.
Speaker Change: And that's because.
Speaker Change: We have this new.
Speaker Change: New category multibillion dollar category, we're going into and so the EBITDA will follow that we're going to have a dip in the second quarter, which is typically our weakest.
Speaker Change: And then it will rebound for the back half of the year.
Speaker Change: Okay.
Speaker Change: Got it that makes sense. Thank you.
Speaker Change: Thanks, Jason.
Speaker Change: Your next question comes from Jake <unk> with Raymond James. Please go ahead.
Jason Haas: But basically, the question I've been getting is just, it seems like it's going to be a little bit more of a back half-weighted year from an EBITDA perspective versus, you know, if we look at the years pre-pandemic. So I'm curious, you know, what's driving that. I recognize you'll have the new product introduction, so I'm sure that's part of it. But any other tailwinds that we should be aware of for the second half of the year?
Jake: Okay perfect. Thank you.
Jake: Of course, Theres, a lot of excitement around entering a new product category in the back half of this year.
Jake: Are you internally thinking about a new product launch and to what is potentially a soft consumer and macro environment versus a more typical traditional stronger market that you've seen in the past.
Eddie Lazarus: I would say that it reflects the fact that this year, the percentage of revenue that we'll get in the first half is a little bit lighter than we typically do because of this significant new product introduction. So if normally, the first half would be 55 to 60% of revenue this year, we're projecting 52%. And that's because we have this new category, a multi-billion dollar category we're going into, and so EBITDA will follow that. We're going to have a dip in the second quarter, which is typically our weakest, and then it will rebound for the back half of the year. Got it. That makes sense.
Theres: Well I think Jacob we're thinking about a new category that is new to us it's all opportunity and so we are we.
Theres: We are approaching it with the kind of energy excitement.
Theres: And prudence around investments that I think we always do.
Theres: But we are I think everybody across the company is super excited to get in there and I think just like we've shown in the categories that we're the leader in today I believe we have a great opportunity to take.
Jason Haas: Thank you. Thanks, Jason. Your next question comes from Jake Norrison with Raymond James. Please go ahead. Okay, perfect. Thank you.
Theres: Take others share and at the same time, probably bring some buyers into the category that werent, even contemplating being buyers. This year. So we're excited.
Jake Norrison: Of course, there's a lot of excitement around entering a new product category in the back half of this year. How are you internally thinking about a new product launch into what is potentially a soft consumer and macro environment versus, you know, a more typical traditional, stronger market that you've seen in the past? Well, I think, Jake, when we're thinking about a new category that, you know, is new to us, it's all opportunity. And so we are approaching it with the kind of energy, excitement, and prudence around investments that I think we always do. But we are, I think everybody across the company is super excited to get in there.
Theres: Right across the company and where we're aggressively.
Theres: Getting ready to launch because we think this is a big long term opportunity.
Speaker Change: Okay, Perfect and then last one for me.
CFO: Welcoming salary as CFO can you just speak to what this organizational change will enable from an operations and maybe even a long term strategic standpoint. Thank you.
Salary: So yes, there is two.
Salary: Two weeks and at this point picking up the finance team and technology team and really I think the the thing that we've talked a lot about is her expertise in helping drive growth and scale in a sustainable profitable way.
Salary: With companies in the past like Cisco and Apple and she knows.
Patrick Spence: And, you know, I think, just like we've shown in the categories that we're in today, I believe we'll have a great opportunity to take others share and, at the same time, probably bring some buyers into the category that weren't even contemplating being buyers this year. So we're excited right across the company, and we're aggressively getting ready to launch because we think this is a big long-term opportunity. Okay, perfect.
Salary: Consumer electronics, and the right kind of.
Salary: Investment in financial profiles, and so she is going to help us make sure. We are investing wisely for the future to drive the kind of sustainable profitable growth that we've we've talked to in.
Salary: In the past so I could not be more excited to see her impact on the organization, but it will take a little bit more than two weeks.
Speaker Change: Yeah. Thanks for the color appreciate that congrats on the quarter.
Patrick Spence: And then last one for me, welcoming Sayori as CFO. Can you just speak to what this organizational change will enable from an operations and maybe even a long-term strategic standpoint? Thanks. So, yeah, Sayori's, you know, two weeks in at this point, picking up the finance and technology teams. And really, I think the thing that we've talked a lot about is her expertise in helping drive growth and scale in a sustainable, profitable way with companies in the past like Cisco and Apple. And she knows consumer electronics and, you know, the right kind of investment and financial profiles.
Speaker Change: Thanks Jake.
Speaker Change: Your next question comes from Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.
Alex Joseph Fuhrman: Hi, guys. Thanks, very much for taking my question, Patrick you mentioned it being more promotional during the holidays to meet consumer expectations, given what a lot of your competitors were doing.
Alex Joseph Fuhrman: Presumably that's not going away this upcoming holiday season, or the one after that does it start to change how you think about initial prices now that a more promotional holiday environment is starting to become the new normal.
Jake Norrison: And so she is going to help us, you know, make sure we are investing wisely for the future to drive the kind of sustainable, profitable growth that we've talked about in the past. So I could not be more excited to see her impact on the organization, but it'll take a little bit more than two weeks. Yeah, thanks for the call. I appreciate that. Congratulations on the quarter. Thanks, Jake. Your next question comes from Alex Fuhrman with Craig Hallam Capital Group. Please go ahead.
Alex Joseph Fuhrman: If I've learned one thing Alex it's that we can't project, what will happen next holiday necessarily rate given some of the ways that these things work and so this was a pretty unique all at a I will say and we're monitoring it closely and I was super proud of the way the team adapted and move with a sense of urgency to.
Alex Joseph Fuhrman: Kind of do the right thing to make sure that.
Alex Joseph Fuhrman: Hi guys, thanks very much for taking my question. Patrick, you mentioned being more promotional during the holidays to meet consumer expectations, given what a lot of your competitors were doing. You know, presumably that's not going away.
Alex Joseph Fuhrman: We were meeting the customers where they were in this quarter.
Alex Joseph Fuhrman: Confident that we have the right level of product investment innovation and brands.
Alex Joseph Fuhrman: Leading.
Patrick Spence: This upcoming holiday season or the one after that, does it start to change how you think about initial prices now that a more promotional holiday environment is starting to become the new normal? If I've learned one thing, Alex, it's that we can't project what will happen, you know, next holiday season, necessarily, right, given some of the ways that these things work. And so this was a pretty unique holiday, I will say, and we were monitoring it closely.
Alex Joseph Fuhrman: Leading products that put us in a position where we will continue to deliver the kind of gross margin we've talked about in products that customers love right and are willing to pay for and so.
Alex Joseph Fuhrman: We have a good strategy when it comes to I think the value for the price we provide at a premium level and we're going to continue to.
Continued to deliver that so I think.
Patrick Spence: And I was super proud of the way the team adapted and moved with a sense of urgency to kind of do the right thing to make sure that we were meeting the customers where they were in this quarter. But I'm very confident that we have the right level of, you know, product investment, innovation, and brands, the kind of leading products that put us in a position where, you know, we will continue to deliver the kind of gross margin we've talked about and products that customers love, right, and are willing to pay for. And so, you know, we have a good strategy when it comes to, I think, the value for the price we provide at a premium level, and we're going to, you know, continue to, you know, continue to deliver that. So I think, you know, perhaps in 2024, we will see the kind of discounts we saw in 2023.
Alex Joseph Fuhrman: Perhaps 2024, we see the kind of discounts we saw in 2023.
Alex Joseph Fuhrman: But I also believe we can continue to execute and win just as we did throughout that year with our with our strategy.
Speaker Change: Great. That's really helpful. Thanks, very much Patrick.
Patrick Spence: Thanks, Alex.
Patrick Spence: Your final question comes from Brent Thill with Jefferies. Please go ahead.
Brent John Thill: Patrick I'm just curious.
Brent John Thill: You talked a little bit about these green shoots youre starting to see.
Brent John Thill: Where are you seeing kind of the biggest excitement in the return to growth.
Brent John Thill: What's been standing out to you kind of ex out the new category youre going into but what what's standing on the existing categories.
Brent John Thill: <unk> 90 now.
Brent John Thill: Well I think the I think our ability to continue to gain share with the products that we have in seeing era of 300, and <unk> hundred really helped drive streaming audio in the as a category in the holiday quarter was something that just for me.
Alex Joseph Fuhrman: But I also believe we can continue to, you know, execute and win just as we did throughout that year with our, you know, strategy. Great. That's really helpful.
Brent John Thill: I think it helps us.
Brent John Thill: Kind of prove out our hypothesis about raising the bar in existing categories.
Brent John Thill: Thanks very much, Patrick. Thanks, Alex. Your final question comes from Brent Thill on behalf of Jefferies. Please go ahead.
Brent John Thill: But make no mistake, Brent we want to be we believe that given the opportunity in our existing categories plus the things we're investing in.
Patrick Spence: Patrick, I'm just curious. You talked a little bit about these green shoots you're starting to see. I mean, where are you seeing the kind of biggest excitement and the return to growth? What's been standing out to you, kind of x out the new category you're going into, but what's standing out in the existing categories that's reigniting now? Well, I think our ability to, you know, continue to gain share with the products that we have and seeing era 300 and era 100, you know, really helped drive streaming audio as a category in the holiday quarter was something that, for me, helps us, you know, kind of prove out our hypothesis about raising the bar in existing categories.
Brent John Thill: The new categories are our typical growth aspirations are higher for the long term than what we're seeing right now because of the challenged category kind of category growth rates.
Brent John Thill: But we're going to continue to do everything we can through.
Brent John Thill: Our product introductions, our distribution, our marketing to continue to compete and win in those existing categories.
Brent John Thill: No there'll be tailwind when spending comes back in those categories, but we are doing everything we can in the meantime to capture more of that if you will and then to your point we have.
Brent John Thill: Exciting new categories that we're entering one in in Q3.
Brent John Thill: Okay, and then I know you had mentioned that outlook is unchanged, but when you think about the new category.
Brent John Thill: Impact on the numbers for this year can you just remind us what you've embedded at that midpoint at 165.
Brent John Thill: $100 million in new.
Patrick Spence: You know, but make no mistake, Brent, we want to be, you know, we believe that, given the opportunity in our existing categories, plus the things we're investing in for the new categories, our, our typical growth aspirations are higher for the long term than what we're seeing right now because of the, you know, challenged category, kind of category growth rates, but we're going to continue to do everything we can through, you know, our product We know there'll be tailwinds when, you know, spending comes back in those categories. But we are doing everything we can in the meantime to, you know, capture more of that, if you will.
Brent John Thill: Product introductions this year.
Brent John Thill: Okay.
Speaker Change: Terrific. Thank you.
Speaker Change: Thanks Brent.
Speaker Change: Again, if you would like to ask a question. Please press star one now.
Speaker Change: Seeing no further questions I will now turn the call back to <unk> CEO, Patrick Spence for any closing remarks.
Patrick Spence: Thanks, Breanna I just wanted to get two things in closing first we delivered a successful Q1 in a challenging and highly promotional environment. Our performance in Q1 puts us on track to meet our first half and fiscal 2020 for expectations in terms of revenue gross margin and adjusted EBITDA.
Patrick Spence: Second we are laser focused on what we can control, we're taking share without compromising on gross margin. We are at the onset of a multiyear product cycle as we harvest the benefits of our investments to enter new categories and launch new products, starting with the one we will be announcing and shipping in Q3, we are expanding our distribution to ensure we meet the customer where they are.
Patrick Spence: And then, to your point, we have exciting new categories that we're entering one in, in Q3. Okay, and then I know you mentioned the outlook is for change, but when you think about the new category impact on the numbers for this year, can you just remind us what you've embedded at that midpoint at 1.65? $100 million in new product introductions this year. Terrific. Thank you. Thanks, Brent. Again, if you would like to ask a question, please press star 1 now. If there are no further questions, I will now turn the call back to Sonos CEO Patrick Spence for any closing remarks. Thanks, Brianna. I just want to hit two things in closing.
Want to shop, we are reinventing, our brand marketing and activation to tap into culture and address new audiences are.
Patrick Spence: Our commitment to operational excellence means improving our gross margins tightly managing our expenses to deliver adjusted EBITDA margin expansion and working down our inventory position to improve our free cash flow conversion, we made great progress this quarter and we will look to build upon our success in the quarters and years to come.
Speaker Change: Thanks for your time today, and we look forward to speaking with you again next quarter.
Speaker Change: This concludes today's conference call you may now disconnect.
Patrick Spence: First, we delivered a successful Q1 in a challenging and highly promotional environment. Our performance in Q1 puts us on track to meet our first half and fiscal 2024 expectations in terms of revenue, gross margin, and adjusted EBITDA. Second, we are laser focused on what we can control.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
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Patrick Spence: We are taking share without compromising on gross margin. We're at the onset of a multi-year product cycle as we harvest the benefits of our investments to enter new categories and launch new products, starting with the one we will be announcing and shipping in Q3. We are expanding our distribution to ensure we meet the customer where they want to shop. We are reinventing our brand marketing and activation to tap into culture and address new audiences. Our commitment to operational excellence means improving our gross margins, tightly managing our expenses to deliver adjusted EBITDA margin expansion, and working down our inventory position to improve our free cash flow conversion. We made great progress this quarter, and we'll look to build upon our success in the quarters and years to come. Thanks for your time today, and we look forward to speaking with you again next quarter. This concludes today's conference call; you may now disconnect.
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