Q3 2024 Sonos Inc Earnings Call
Jay Allen: My name is Jay Allen. I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos third quarter fiscal 2024 conference call. All lines have been placed on mute to prevent any background noise.
J.L.: My name is J.L., and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Third Quarter Fiscal 2024 conference call. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to James Baglanis, Head of Investor Relations and Treasury. You may begin.
Jay Allen: Thank you for standing by. My name is Jay Allen. I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos third quarter fiscal 2024 conference call.
Jay Allen: After the speaker's 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. If you would like to withdraw your question, press star 1 again.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
James Baglanis: I would now like to turn the conference over to James Baglanis, Head of Investor Relations and Treasury. You may begin. Good afternoon, and welcome to Sonos' third quarter fiscal 2024 earnings conference. I'm James Baglanis, 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 Sonos radio station, Backyard Barbecue.
I would now like to turn the conference over to James Baglanis, Head of Investor Relations and Treasury. You may begin.
James Baglanis: Good afternoon and welcome to Sonos third quarter fiscal 2024 earnings conference call.
I'm James Baglanis and with me today are Sonos CEO , Patrick Spence.
Speaker Change: 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 Sonos radio station, Backyard Bar-B-Q.
James Baglanis: 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 of any subsequent events.
James Baglanis: These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward look. Discussion of these risk factors is fully detailed under the caption risk factors in our filings with the SEC. During this call, we will 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 2024 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and a conference call transcript will be available on our investor relations website, investors.sonos.com. I will now turn the call over to James. Thank you, James. And hello everyone.
James Baglanis: 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 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.
Patrick: A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.
Jay Allen: During this call, we will 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 2024 results posted to the investor relations portion of our website.
Jay Allen: As a reminder, the press release, supplemental earnings presentation, and a conference call transcript will be available on our investor relations website, investors.sonos.com. I will now turn the call over to Patrick.
James Baglanis: Thank you, James, and hello everyone. I am committed to making this right with our customers and partners. It's the company's number one focus right now, and I will not rest until we're in a position where we've addressed the issues and have customers raving about Sonos again. A few years ago, we decided to embark on a complete ground-up rewrite of our operation. This would have been reason enough, but equally important, we viewed re-architecting the app as essential to the growth of Sonos as we expand into new categories and move ambitiously outside the home.
Patrick Spence: It was the magic of the Sonos experience that brought me to the company 12 years ago. We pour our heart and soul into everything we do, and we're proud of what we build and the way Sonos brings joy to our customers. That's why it's so painful to let customers down the way we have with our new. I am committed to making this right with our customers and partners. I am the company's number one focus right now, and I will not rest until we're in a position where we've addressed the issues and have customers raving about them. A few years ago, we decided to embark on a complete ground-up rewrite of our eyes.
Patrick: Thank you, James, and hello, everyone. It was the magic of the Sonos experience that brought me to the company 12 years ago. We pour our heart and soul into everything we do, and we're proud of what we build and the way Sonos brings joy to our customers' lives.
Speaker Change: That's why it's so painful to let customers down the way we have with our new app. I am committed to making this right with our customers and partners. It's the company's number one focus right now and I will not rest until we're in a position where we've addressed the issues and have customers raving about Sonos again.
Patrick Spence: One reason was to address the performance and reliability issues that had crept in over the last 20 years and were negatively affecting our customers. This would have been reason enough. But as we viewed re-architecting the app as essential to the growth of Sonos as we expand in new categories and move ambitiously outside. In addition to its more modern user interface, the new app has a modular developer platform based on modern programming languages that will allow us to drive more innovation and thus let Sonos deliver all kinds of new features over time that the old app simply could not accomplish. Some of these new features are already on our drawing boards and could represent our entry into new categories. Others are still to be implemented. Without a modern app, they would have remained beyond our reach.
Patrick: A few years ago, we decided to embark on a complete ground-up rewrite of our app.
Jay Allen: One reason was to address the performance and reliability issues that had crept in over the last 20 years and were negatively affecting our customers' experience.
Patrick: This would have been reason enough, but as important, we viewed re-architecting the app as essential to the growth of Sonos as we expand into new categories and move ambitiously outside the home.
James Baglanis: In addition to its more modern user interface, the new app has a modular developer platform based on modern programming languages that will allow us to drive more innovation fast and thus let Sonos deliver all kinds of new features over time that the old app simply could not accommodate. Some of these new features are already on our drawing boards and could represent our entry into new categories. Others are still to be imagined.
Jay Allen: In addition to its more modern user interface, the new app has a modular developer platform based on modern programming languages that will allow us to drive more innovation faster.
Jay Allen: and thus let Sonos deliver all kinds of new features over time that the old app simply could not accommodate.
Jay Allen: Some of these new features are already on our drawing boards and could represent our entry into new categories, others are still to be imagined.
Patrick Spence: But without a modern app, they would have remained beyond our reach. While the redesign of the app was and remains the right thing to do, our execution, my execution, fell short of the mark. Since I took over as CEO, one of my particular points of emphasis has been the imperative for Sonos to move faster. That is what led to my promise to deliver at least two new products every year, a promise we have successfully delivered on.
Patrick Spence: For Sonos, a company built on innovation at the intersection of software and hardware and the delivery of joyful experiences, we needed the new app to set ourselves up. While the redesign of the app was and remains the right move, My execution fell short of the mark. Since I took over as CEO, one of my particular points of emphasis has been the imperative for Sonos to move fast. That is what led to my promise to deliver at least two new products every month. Our promise, we have successfully kept. With the app, however, my push for speed backfired.
Patrick: But without a modern app, they would have remained beyond our reach.
Jay Allen: For Sonos, a company built on innovation at the intersection of software and hardware and the delivery of joyful experiences, we needed the new app to set ourselves up for the future.
Speaker Change: While the redesign of the app was and remains the right thing to do, our execution, my execution, fell short of the mark.
Patrick Spence: Since I took over as CEO , one of my particular points of emphasis has been the imperative for Sonos to move faster.
Jay Allen: That is what led to my promise to deliver at least two new products every year. A promise we have successfully delivered on.
Patrick Spence: With the app, however, my push for speed backfires. It's important to note that this was really a redesign of the entire system, not only the app, but also the player side of our system, as well as our cloud infrastructure. And this was an enormously complex undertaking.
Patrick Spence: It's important to note that this was really a redesign of the entire... not only the app, but also the player side of our system, as well as our cloud, and this was enormously complex. As we rolled out the new software to more and more users, it became evident that there were stubborn bugs we had not discovered. As a result, far too many of our customers, especially those with some of our older products, are having an experience that is worse than what they previously had. For some, this meant existing speakers missing from their Sonos systems, while others saw latency issues or errors while setting up new products.
Speaker Change: With the app, however, my push for speed backfired.
Jay Allen: It's important to note that this was really a redesign of the entire system, not only the app, but also the player side of our system, as well as our cloud infrastructure. And this was an enormously complex undertaking.
Patrick Spence: As we rolled out the new software to more and more users, it became evident that there were stubborn bugs we had not discovered in our testing. As a result, far too many of our customers, especially those with some of our older products in their systems, are having an experience that is worse than what they previously had. For some, this meant existing speakers missing from their Sonos systems, while others saw latency issues or errors while setting up new products.
Jay Allen: As we rolled out the new software to more and more users, it became evident that there were stubborn bugs we had not discovered in our testing.
Jay Allen: As a result, far too many of our customers, especially those with some of our older products in their systems, are having an experience that is worse than what they previously had.
Jay Allen: For some, this meant existing speakers missing from their Sonos systems, while others saw latency issues or errors while setting up new products.
Patrick Spence: Regardless of the issues experienced, our customers deserve better from us. Since launch, we've introduced nine new software updates that address these issues. We are able to rapidly deliver these major software updates because of the modular developer platform of our new app. First, fixing the app.
Patrick Spence: Regardless of the issues experienced, our customers deserve better. The app situation has become a headwind to existing product sales, and we believe our focus needs to be addressing the app ahead of everything else. This means delaying the two major new product releases we had planned for Q4 until our app experience meets the level of quality that we, our customers, and our partners expect. While this has the painful effect of reducing our Q4 sales expectations,
Jay Allen: Regardless of the issues experienced, our customers deserve better from us.
Jay Allen: The app situation has become a headwind to existing product sales, and we believe our focus needs to be addressing the app ahead of everything else.
Jay Allen: This means delaying the two major new product releases we had planned for Q4 until our app experience meets the level of quality that we, our customers, and our partners expect from Sonos.
Patrick Spence: We believe it will set our future products up for greater success on the medium. We have been working tirelessly on fixing the bugs in the new app, adding back certain features, and exploring every option for improving the customer. Since launch, we've introduced nine new software updates that address We expect the app will get better every two weeks with each subsequent release, and we're committed to continuing to improve the experience on that same cadence and even faster. We are able to rapidly deliver these major software updates because of the modular developer platform of our I want to highlight three important areas where we're taking action. First, fixing the app.
Jay Allen: While this has the painful effect of reducing our Q4 sales expectations, we believe it will set our future products up for greater success over the medium to long term.
Jay Allen: We have been working tirelessly on fixing the bugs in the new app, adding back certain features, and exploring every option for improving the customer experience.
Jay Allen: Since launch, we've introduced nine new software updates that address these issues.
Jay Allen: We expect the app will get better every two weeks with each subsequent release, and we're committed to continuing to improve the experience on that same cadence, and even faster where we can.
Jay Allen: We are able to rapidly deliver these major software updates because of the modular developer platform of our new app.
Nick Millington: I want to highlight three important areas where we're taking action. First, fixing the app. I've asked Nick Millington, the original software architect of the Sonos experience, to do whatever it takes to address the issues with our new app.
Patrick Spence: I've asked Nick Millington, the original software architect of the Sonos experience, to do whatever it takes to address the issues with our new... We have identified the key bugs, have a plan to fix them, and are improving our processes and staffing to ensure we successfully execute our actions. One of our board members, Tom Conrad, has over 30 years of experience in software engineering, and he is helping us ensure that our software efforts are on the right track, as well as providing another expert.
Patrick Spence: We have identified the key bugs, and have a plan to fix them, and are improving our processes and staffing to ensure we successfully execute our action plan. We expect these investments will come at a cost in the range of 20 to 30 million dollars in the short term but are necessary to right the ship for the long term. And given we've been at this for 20 years, we know it's needed to win in the long term.
Jay Allen: We have identified the key bugs, have a plan to fix them, and are improving our processes and staffing to ensure we successfully execute our action plan.
Speaker Change: One of our board members, Tom Conrad, has over 30 years of experience in software engineering, and Tom is helping us ensure our software efforts are on the right track, as well as providing another expert perspective.
Patrick Spence: Because we expect that our app will continue to get better every day, we're making more and more customers happy with each and doing everything we can to put all of these issues behind us in time for the important holiday. The second is supporting our... We are increasing our investment in customer support to be able to engage with more of our customers and partners and do it fast. Our customer support has always been something that has set us apart, and we need to ramp this up faster to help our customers navigate.
Speaker Change: Because we expect that our app will continue to get better every two weeks, we're making more and more customers happy with each release.
Speaker Change: We're doing everything we can to put all of these issues behind us in time for the important holiday season.
Speaker Change: The second is supporting our customers. We are increasing our investment in customer support to be able to engage with more of our customers and partners and do it faster.
Speaker Change: Our customer support has always been something that has set us apart, and we need to ramp this faster to help our customers navigate in the near term.
Patrick Spence: And finally, winning back our customers and partners. We are enacting programs this quarter to both support and thank our customers and partners for sticking with us through this period and turning their dissatisfaction into delight. These programs will run across Q4 and Q5.
Speaker Change: And finally, winning back our customers and partners. We are enacting programs this quarter to both support and thank our customers and partners for sticking with us through this period and turn their dissatisfaction to delight. These programs will run across Q4 and Q1.
Patrick Spence: We expect these investments will come at a cost in the range of $20 to $30 million in the short term but are necessary to right the ship for the long term. And given we've been at this for 20 years, we know it's needed to win in the long run. Now turning to the other important launch of the quarter, I'm pleased to share that, even with the challenges of the app, our first headphones, Ace, are off to a good start.
Speaker Change: We expect these investments will come at a cost in the range of 20 to 30 million dollars in the short term, but are necessary to right the ship for the long term.
Speaker Change: And given we've been at this for 20 years, we know what's needed to win in the long term.
Speaker Change: Now, turning to the other important launch from the quarter, I'm pleased to share that even with the challenges of the app, our first headphones, Ace, are off to a good start.
Patrick Spence: As you may have heard me say before, this is our most requested product ever. To support the launch of ACE, we signed a number of new distribution partnerships. To recap, it is deeply disappointing for me personally, and for all of us at Sonos, to be on track for the first three quarters of the year and to have a successful new product launch in an exciting new category, only to revise our expectations for the fourth quarter due to the challenges with our new app. It's my number one focus, and I will not rest until we're in a position where we've addressed these issues and have customers raving about Sonos.
Patrick Spence: As you may have heard me say before, this is our most requested product ever. Headphones is a very exciting category for us to play in, as the premium over-the-ear headphone category is a $5 billion addressable market, growing by double digits annually, which stands in contrast to the cyclical downswing we continue to navigate in our. Our goal of participating in more and more categories is to continue to diversify our revenue streams, and headphones are a great opportunity to do just that. Customer Reviews have been, and Sonos Ace is rated 4.6 of 5 stars on Sonos.com and 4.5 of 5 stars on Best Buy.
Speaker Change: As you may have heard me say before, this is our most requested product ever.
Speaker Change: Headphones is a very exciting category for us to play in, as the premium over-the-ear headphone category is a $5 billion addressable market, growing by double digits annually, which stands in contrast to the cyclical downswing we continue to navigate in our existing categories.
Speaker Change: Our goal of participating in more and more categories is to continue to diversify our revenue streams, and headphones are a great opportunity to do just that.
Sonos ACE: The customer reviews have been outstanding, as Sonos ACE is rated 4.6 of 5 stars on Sonos.com and 4.5 of 5 stars on Best Buy.
Patrick Spence: In its first month, ACE gained a meaningful share in the premium over-the-year category in our key countries, despite competitors dropping their prices and offering unprecedented promotions in tandem with our long-term growth. We take those competitors' actions as a complement to the quality of our offer. To support the launch of ACE, we signed a number of new distribution partners. Last quarter, I mentioned we went live as a first-party seller on Amazon in the United States.
Speaker Change: In its first month, ACE gained a meaningful share in the premium over-the-year category in our key countries, despite competitors dropping their prices and offering unprecedented promotions in tandem with our launch.
Speaker Change: We take those competitor actions as a complement to the quality of our offering.
Speaker Change: To support the launch of ACE, we signed a number of new distribution partnerships.
Patrick Spence: We have since expanded this partnership to Europe. Additionally, you can now find Sonos Ace on the shelves of InMotion stores in many major airports around the world. InMotion is a premier airport electronics retailer, and we are delighted to build upon this partnership.
Speaker Change: last quarter i mentioned we went live as a first party seller and amazon in the united states we have since expanded this partnership to europe additionally you can now find s nosace on the shelves of emotion stores in many major airports around the world
Speaker Change: InMotion is a premier airport electronics retailer, and we are delighted to build upon this partnership over time.
Patrick Spence: ACE represents an evolution of the role that Sonos can play in your life. With our categories, we are very well established in the home, and we will continue to innovate. For the first time, ACE enables us to be with you all day long, to be a part of the major moments in your day, whether at home, in the office, on a plane, or out for a walk. This is integral to our mission of being everywhere for our customers.
Speaker Change: ACE represents an evolution of the role that Sonos can play in your life.
Speaker Change: With our categories, we are very well established in the home, and we will continue to innovate there.
Speaker Change: for the first time ace enables us to be with you all day long
Speaker Change: to be a part of the major moments in your day whether at home in the office on a plane or out for a walk this is integral to our mission of being everywhere our customers experience sound
Patrick Spence: To recap, it is deeply disappointing for me personally and for all of us at Sonos to be on track for the first three quarters of the year and to have a successful new product launch in an exciting new category, only to revise our expectations for the fourth quarter due to the challenges with our new app. All the reasons that could have taken us off track, knowing that it is because we failed our customers and partners, is perhaps, I want to reiterate again that the entire team and I are committed to making this right with our customers and partners.
Speaker Change: to recap it is deeply disappointing for me personally and for all of us at sonos to be on track for the first three quarters of the year and to have a successful new product launch in an exciting new category only to revise our expectations for the fourth quarter due to the challenges with our new app
Speaker Change: Of all the reasons that could have taken us off track, knowing that it is because we failed our customers and partners is perhaps the most painful.
Speaker Change: I want to reiterate again that the entire team and I are committed to making this right with our customers and partners.
Patrick Spence: It's my number one focus, and I will not rest until we're in a position where we've addressed these issues and have customers raving about them. I'll now turn it over to Saori to take you through them. Thank you, Patrick. Hi everyone.
Speaker Change: it's my number one focus and i will not rest intoil we're in a position where we've addressed these issues and have customers raving about son us again
Speaker Change: i'll now turn it over to sayorry to take you through our financials
Saori Casey: Q3 revenues came in slightly ahead of our expectations at $397 million, up 6% year-over-year. Our positive year-over-year growth was driven by the introduction of our first over-the-year headphone, 8. This brings our year-to-date revenue to $1,262,700,000, down 6.5% year-over-year. Though our financial results over the past three quarters have put us on track to meet our annual expectations, the challenges from the launch of our app require us to adjust our Q4 expectations, as Patrick mentioned earlier.
Sayorry: Thank you, Patrick. Hi, everyone. Q3 revenues came in slightly ahead of our expectations at $397 million, up 6% year-over-year. Our positive year-over-year growth was driven by the introduction of our first over-the-year headphone, Ace.
Sayorry: This brings our year-to-date revenue to $1,262,700,000, down 6.5% year-over-year.
Unknown Executive: Though our financial results over the past three quarters have put us on track to meet our annual expectations, the challenges from the launch of our app require us to adjust our Q4 expectations, as Patrick mentioned earlier. I'll come back to this after I finish recapping our Q3 performance.
Speaker Change: Though our financial results over the past three quarters have put us on track to meet our annual expectations, the challenges from the launch of our app requires us to adjust our Q4 expectations as Patrick mentioned earlier. I'll come back to this after I finish recapping our Q3 performance.
Saori Casey: I'll come back to this after I finish recapping our Q3 performance. Gap gross margin was 48.3%, up 230 BIPs year-over-year, considerably better than our guidance we gave last quarter. This overperformance was primarily due to a one-time benefit from improved inventory management.
Patrick Spence: Gap gross margin was 48.3%, up 230 bps year-over-year, considerably better than our guidance we gave last quarter. This overperformance was primarily due to a one-time benefit from improved inventory management.
Saori Casey: Gross margin increased sequentially from our second quarter due to fixed cost leverage from higher revenue in Q3 and inventory management. Our Q3 performance brings our year-to-date gross margin to 46.4%, up from 43.6% in the comparable period last year. Non-GAP adjusted operating expenses were $155 million in the quarter, down $2 million sequentially.
Patrick Spence: Gross margin increased sequentially from our second quarter due to fixed cost leverage from higher revenue in Q3 and inventory management.
Sayorry: Our Q3 performance brings our year-to-date gross margin to 46.4%, up from 43.6% in the comparable period last year.
Unknown Executive: Non-GAAP adjusted operating expenses were $155 million in the quarter, down $2 million sequentially. This increase was primarily driven by working capital improvements, resulting from a focus on better managing our inventory, through adjustments to our sourcing plans, as well as implementation of newly adopted payment terms with our suppliers. Our period in inventory balance was $155 million, down 48% year-over-year and down 14% from last quarter. This consists of $102 million of finished goods and $53 million of components. We are working hard to keep inventory balances in check.
Sayorry: non-GAAP adjusted operating expenses were $155 million in the quarter, down $2 million sequentially.
Saori Casey: Adjusted EBITDA was $48.9 million, representing a margin of 12.3%, ahead of our guidance driven by higher gross margins and, to a lesser extent, higher revenue. This brings our year-to-date adjusted EBITDA to $130.5 million, representing a margin of 10.3%. We ended the quarter with $277 million of net cash, which included $50 million of marketable securities, as we hold some excess cash in short-duration treasury funds. Free cash flow in Q3 was $40.3 million, bringing our year-to-date free cash flow to $188 million, compared to $38 million in the comparable period last year.
Sayorry: Adjusted EBITDA was $48.9 million, representing a margin of 12.3%, ahead of our guidance driven by higher gross margins and, to a lesser extent, higher revenue.
Speaker Change: this springs are year-totoday adjusted ebitda two hundred and thirty point five million dollars representing a margin of ten point three percent
Sayorry: We ended the quarter with $277 million of net cash, which includes $50 million of marketable securities, as we hold some excess cash in short-duration Treasury bills.
Sayorry: Free cash flow in Q3 was $40.3 million dollars, bringing our year-to-date free cash flow to $188 million dollars, compared to $38 million dollars in the comparable period last year.
Saori Casey: This increase was primarily driven by working capital improvements, resulting from focusing on better managing our inventory through adjustments to our sourcing plans, as well as the implementation of newly adopted payment terms with our suppliers. Our period and inventory balance was $155 million, down 48% year-over-year and down 14% from last quarter. This consists of $102 million of finished goods and $53 million of components. We are working hard to keep inventory balances in check.
Sayorry: This increase was primarily driven by working capital improvements resulting from focus on better managing our inventory through adjustments to our sourcing plans as well as implementation of newly adopted payment terms with our suppliers.
Sayorry: our period and inventory balance with hundred fifty five million dollars down forty eight percent year-over-year and down fourteen percent from last quarter this consists of onehundred two million dollars of finished goods and fifty three million dollars components we are working hard to keep inventory balances in check
Saori Casey: And finally, we returned $52.5 million to our shareholders through stock repurchases in the quarter, representing 2.6% of common shares outstanding as of Q2. We have $71 million remaining under our current $200 million share repurchase authorization.
Unknown Executive: And finally, we returned $52.5 million to our shareholders through stock repurchases in the quarter, representing 2.6% of common shares outstanding as of Q2.
Sayorry: We have $71 million dollars remaining under our current $200 million dollars of share repurchase authorization. We expect to continue to be active in the market purchasing our stock.
Saori Casey: We expect to continue to be active in the market purchasing our, Turning to our guidance, the Q4 outlook we're providing reflects our best estimates as of As previously mentioned, we're reducing our expectations for the fourth quarter of fiscal 2024 as a result of challenges stemming from the rollout of our new, We expect Q4 revenue in the range of $240 to $260 million. Our challenges with our app have had a two-fold impact on our Q4 revenue expectations. Lower sales across our portfolio due to app launch issues. 2.
Saori Casey: Decision to delay the launch of two major new products until our app experience meets the level of quality that we, our customers, and our partners expect from. As a result of the reduction to Q4, we expect revenue in the range of $1.503 to $1.523 billion for this full year. We expect Q4 gap gross margins in the range of 40-42%, down sequentially from Q3, driven by de-leverage resulting from lower revenue. For the full year, we expect GAAP gross profit dollars in the range of $682 to $696 million, representing a gross margin of 45.4% to 45.7%. We expect the non-GAAP gross margins to be approximately 40 bps higher due to approximately $6 million of stock-based compensation and amortization of intangibles included in GAAP cost of revenue.
Sayorry: Turning to our guidance, the Q4 outlook we're providing reflects our best estimates as of today.
Saori Casey: We expect Q4 adjusted EBITDA to be in the range of minus $37 million to minus $14 million, resulting in full-year adjusted EBITDA in the range of $93 to $117 million, representing a margin of 6.2% to 7.7%. The reduction in our expectation for adjusted EBITDA is primarily due to lower... As Patrick mentioned, from now through the holidays, we're investing approximately $20 to $30 million in fixing the app, supporting our customers, and regaining their... We expect that this will come in the form of revenue and gross profit reductions, as well as operating expense increases.
Sayorry: As previously mentioned, we're reducing our expectations for the fourth quarter fiscal 2024 as a result of challenges stemming from the rollout of our new app.
Unknown Executive: We expect Q4 revenue in the range of $240 to $260 million. The challenges with our app have had a two-fold impact on our Q4 revenue expectation. One, lower sales across our portfolio due to app launch issues. Two, the decision to delay the launch of two major new products until our app experience meets the level of quality that we, our customers, and our partners, expect from Sonos. As a result of the reduction to Q4, we expect revenue in the range of $1.503 to $1.523 billion for this full year.
Sayorry: We expect Q4 revenue in the range of $240 to $260 million.
Sayorry: a challenges with our app have had a two old impact to our q four revenue expectations
Sayorry: 1. Lower sales across our portfolio due to app launch issues. 2. Decision to delay the launch of two major new products until our app experience meets the level of quality that we, our customers, and our partners expect from Sonos.
Sayorry: As a result of the reduction to Q4, we expect a revenue in the range of $1.503 to $1.523 billion for this full year.
Sayorry: We expect Q4 gap gross margins in the range of 40-42%, down sequentially from Q3, driven by de-leverage, resulting from lower revenue.
Sayorry: For the full year, we expect GAAP gross profit dollars in the range of 682 to 696 million dollars, representing a gross margin of 45.4% to 45.7%.
Sayorry: We expect non-GAAP gross margins to be approximately 40 bps higher due to approximately $6 million of stock-based compensation and amortization of intangibles included in GAAP cost of revenue.
Unknown Executive: we expect q four adjusted ebitida to be in the range of minus thirty seven million to minus fourteen million dollars resulting in full year adjusted eiidda in the range of ninety three to one hundred and seventeen million dollars representing a margin of six point two percent to seven point seven percent
Unknown Executive: The reduction in our expectation for adjusted EBITDA is primarily due to lower revenue.
Unknown Executive: As Patrick mentioned, from now through the holidays, we're investing approximately $20 to $30 million in fixing the app, supporting our customers, and regaining their trust.
Speaker Change: We expect that this will come in the form of revenue and gross profit reductions as well as operating expense increases.
Saori Casey: A portion of this investment that will be incurred in Q4 has not been factored into our guidance. Despite the reduction in our expectations for Q4, we still expect to show significantly improved free cash flow conversions versus last year due to our efforts to improve work. We have spoken in the past about our focus on expense management driving efficiencies across the organization. In the spring, it became clear that we needed to do more structurally and evolve how we operate.
Patrick Spence: A portion of this investment that will be incurred in Q4 has not been factored into our guidance range.
Unknown Executive: Despite the reduction in our expectations for Q4, we still expect to show significantly improved free cash flow conversions versus last year due to our efforts to improve working capital.
Unknown Executive: We have spoken in the past about our focus of expense management driving efficiencies across the organization.
Unknown Executive: In the spring, it became clear that we needed to do more structurally and evolve how we operate. As a result, we began working on a transformational cost initiative that we will provide an update on in November. With that, I'd like to turn the call over to questions.
Speaker Change: In the spring, it became clear that we needed to do more structurally and evolve how we operate. As a result, we began working on a transformational cost initiative that we will provide an update in November . With that, I'd like to turn the call over for questions.
Saori Casey: As a result, we began working on a transformational cost initiative that we will provide an update on in November. With that, I'd like to turn the call over to you. Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening via the loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question.
J.L.: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And again, to join the queue, it's star 1.
J.L.: Thank you. The floor is now open for questions.
J.L.: If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
J.L.: If you would like to withdraw your questions, simply press star 1 again.
Speaker Change: If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question.
Speaker Change: we do request for today's session that you do limit yourself to one question and one follow-up thank you
Operator: We do request for today's session that you limit yourself to one question and one follow-up. Thank you. And again, to join a cue, it's Star One.
Unknown Participant: Got it. Okay.
Unknown Participant: And again, to join the queue, it's star 1.
Speaker Change: Just a moment for your first question.
Speaker Change: Your first question comes from the line of Adam Tindall of Raymond James. Your line is open.
Adam Tindle: I wanted to start, Patrick, on the two products that are being pushed. I appreciate you taking responsibility and I think you have garnered a lot of trust from customers over time. On those two products that are being pushed, can you give us a sense of how far along those products were? And as we think forward to a time when these near-term headwinds are through us and into fiscal 25, would that be, you know, a potential year where you might imagine, you know, if that stuff gets behind us, we'd have, you know, something like four product increases, sorry, introductions, or are those kind of indefinitely pushed? Thanks for the question, Adam. These products were ready to be shipped in Q4.
Unknown Participant: Okay, thanks. Good afternoon. I wanted to start, Patrick, on the two products that are being pushed and appreciate you taking responsibility and I think have garnered a lot of trust from customers over time.
Speaker Change: on those two products that are pushed.
Speaker Change: How can you give us a sense of how far along those products were and as we think forward to a time where, you know, these near-term headwinds are through us and into fiscal 25?
Speaker Change: would that be a potential year where you might envision if that stuff gets behind us we'd have something like four product increases sorry introductions or are those kind of indefinitely pushed
Patrick Spence: But as we've mentioned, we felt like it would be that we had to address the app issues first because, you know, we hold a high bar on the experience we want customers to have. So that is the number one focus at this particular point in time. And so I don't want to get too far into fiscal 25, but I will say these products were ready to ship in Q4. Okay.
Unknown Participant: Thanks for the question, Adam. These products were ready to be shipped in Q4, but as we've mentioned, we felt like it would be, that we had to address the app issues first because, you know, we hold
Speaker Change: a high bar on the experience we want customers to have. So that is the number one focus at this particular point in time. And so I don't want to get too far into fiscal 25. But I will say these products were ready to ship in Q4.
Unknown Participant: And understand, obviously, all the near-term pain that we're enduring on the app. But as you kind of think about the longer-term vision, once we get through this, you talked about being with customers all day long. I wonder if you might just expand on that vision over time, what that could bring from a Sonos perspective. Could there be a time when this app, given the modular development that you're talking about, could introduce new monetization streams? Anything that you could give us from an investor standpoint as help as to what the long-term vision would be as we endure some of the short-term pain?
Adam Tindle: Okay. And understand, obviously, all the near-term pain that we're enduring on the app. But as you kind of think about the longer-term vision, once we get through this, you talked about being with customers all day long. I wonder if you might just expand on that vision over time, what that could bring from a Sonos perspective. Could there be a time when, you know, this app, given the modular development that you're talking about, could introduce new monetization streams?
Speaker Change: Got it, okay.
Unknown Participant: And understand, obviously, all the near-term pain that we're enduring on the app. But as you kind of think about the longer-term vision, once we get through this, you talked about being with customers all day long. I wonder if you might just expand on that vision over time, what that could bring from a Sonos perspective. Could there be a time where this app, given the modular development that you're talking about, could introduce new monetization streams? Anything that you could give us from an investor standpoint as help as to what the long-term vision would be.
Patrick Spence: Yeah, thanks, Adam. I think that's a good one.
Patrick Spence: as we endure some of the short-term pain.
Patrick Spence: Yeah, thanks, Adam. I think that's a good one.
Patrick Spence: You know, we remain confident that over the long term, we can take more and more of that hundred billion dollar audio market. We're only 2%, less than 2% of it today. And definitely, the work that we've done on the app was the right work as we position ourselves for the future and build, you know, kind of build what we need from a future proofing and allowing us to be outside the home in all of those areas.
Patrick Spence: You know, we.
Patrick Spence: remain, you know, confident that over the long term, we can take more and more of that $100 billion audio market. We're only 2%, less than 2% of it today.
Patrick Spence: And definitely, the work that we've done on the app was the right work as we position ourselves for the future and build, you know, kind of build what we need from a future proofing and allowing us to be outside the home in all of those areas. And so we feel we have a lot of opportunity ahead in new categories. But also right now, the number one thing for our customers is to make sure that we address the app and earn back that trust so we can extend into all of those new categories we have plans for. Your next question comes from Steve Frankel of Rosenblatt. Your line is open.
Patrick Spence: And definitely the work that we've done on the app was the right work as we position ourselves for the future and build.
Patrick Spence: you know, kind of build what we need from a future proofing and allowing us to be outside the home in all of those areas. And so we feel we have a lot of opportunity ahead in new categories. But also right now, the number one thing for our customers is to make sure that we address the app.
Patrick Spence: And so we feel we have a lot of opportunity ahead in new categories. But also, right now, the number one thing for our customers is to make sure that we fix the app and earn back that trust so we can extend into all of those new categories we have plans for.
Patrick Spence: and earn back that trust so we can extend into all of those new categories we have plans for.
Speaker Change: Your next question comes from the line of Steve Frankel of Rosenblatt. Your line is open. Thank you.
Steven Frankel: Good afternoon, Patrick. Obviously, we have a lot to work through here. When we look at the magnitude of the revenue reduction in Q4, maybe you can help us parse through how much of that is due to new products that aren't going into the channel and how much is the app issues causing a significant slowdown in sell-through. If to the extent that's the case, where are the channel inventories relative to where you want them to be for QCL? Hi Steve, this is Saori. I can take that.
Patrick Spence: Good afternoon Patrick, obviously a lot to
Patrick Spence: work through here.
Speaker Change: And when we look at the magnitude of the revenue reduction in Q4, maybe give us some help parsing through.
Speaker Change: How much of that is to the products that aren't going into the channel?
Speaker Change: and how much is the app issues causing a significant slowdown in sell-through and, to the extent that's the case, where are channel inventories relative to where you want them to be for QCOR?
Saori Casey: And so the way we characterize the impact, the Q4 reduction to our expectation in two ways: the first, and the larger of the two is lower sales across our portfolio due to the app issue. And second, material enough to mention, and certainly is the delay in the launch of our two major new products that we're ready to go as petri- And so those are sort of in order of magnitude to the impact of the guidance reduction as far as channel inventory for Q at the end of Q3.
Patrick Spence: Hi Steve, this is Saori, I can take that. And so the way we characterize the impact the Q4 reduction to our expectation in two folds, one first in the larger of the two is the lower sales across our portfolio due to the app.
Patrick Spence: issues. And second, material enough to mention, and certainly it's the delay in the launch of our two major new products that we're ready to go, as Patrick just mentioned.
Patrick Spence: And so those are sort of in order of magnitude.
Speaker Change: to the impact of the guidance reduction. As far as channel inventory for Q, at the end of Q3, knowing our Q4 revenue now, that we're continuing to monitor very...
Saori Casey: Knowing our Q4 revenue now, which we're continuing to monitor very carefully, you know, that would put us a little bit higher than we would like now, knowing our trend currently. But certainly, that impact is comprehended in our Q4 guidance that we gave today, as best we know as of today. Okay, and then on the 20 to $30 million number, if a portion of that is price protection in the channel, is that already reflected in gross margins, or might gross margins end up lower if you end up at the end of the end of the end of the end of the end of the end of the end of the end, putting more price protection into, or discounts into effect.
Speaker Change: Carefully, you know, that would put us a little bit higher than we would like now knowing our trend currently, but certainly that impact is comprehended in our Q4 guidance that we gave today, best we know as of today.
Unknown Executive: Okay, and then on to putting more price protection or discounts into effect to boost sales.
Unknown Executive: Okay, and then on the...
Unknown Executive: The $20 to $30 million number of
Speaker Change: If a portion of that is price protection in the channel, is that already reflected in gross margins or might gross margins end up lower if you end up...
Unknown Executive: putting more price protection into or discounts into effect to boost sales.
Unknown Executive: Yeah, the Q4 guidance that we gave out does not fully comprehend the twenty to thirty million dollars that we mentioned today. You know that that has an impact, as I mentioned, on multiple line items of the P&L revenue, gross profit, and operating expenses, and also the timing in which it would hit between Q4 and Q1. And so some actions are already underway, but there are others that are a little bit more in progress in determining exactly how to position that. To your point about whether that's a price protection type of activity that we would hit in Q4 versus Q1, we believe more will hit in Q1 than Q4 at this point, as best we know.
Saori Casey: Yeah, the Q4 guidance that we gave out does not fully comprehend the $20 to $30 million that we mentioned today. You know, that has an impact, as I mentioned, on multiple line items of the P&L, revenue, gross profit, and operating expenses, and also the timing in which it would hit between Q4 and Q1. And so some actions are already underway, but there are others that are a little bit more in progress in determining exactly how to position that, to your point about whether that's a price protection type of activity that we would hit in Q4 versus Q1.
Unknown Executive: yeah the q four guidance that we gave out does not fully comprehend the twenty thirty to thirty million dollars that we may mentioned today
Unknown Participant: and then I have a follow-up. Thanks.
Unknown Participant: That has impact, as I mentioned, to multiple line items of the P&L, revenue, gross profit, and operating expenses.
Unknown Participant: and also the timing in which it would hit between Q4 and Q1.
Unknown Participant: And so some actions are already underway.
Unknown Participant: But there are others that are a little bit more in progress.
Unknown Participant: and determining exactly how to position that, to your point about whether that's a...
Unknown Participant: That's a price protection type of activity that we would hit in Q4 versus Q1. We believe more will hit in Q1 than Q4 at this point, best we know.
Saori Casey: We believe more will hit in Q1 than Q4 at this point, as best we can tell. Thank you. Your next question comes from the line of Brent Thill of Jeffries. Your line is open. Hi, this is Rayyana Matraji on behalf of Brent Thill.
Speaker Change: Thank you. Your next question comes from the line of Brent Thill of Jeffreys. Your line is open.
Rayyana Matraji: Thanks for the question. Could you speak a bit more about the issues with the app rollout and the impact it could have on purchase intent for hardware going forward? Yeah, thanks, Rayyana.
Rayana Matraji: Hi, this is Rayana Matraji on for Brent Thill. Thanks for the question. Could you speak a bit more to the issues from the app rollout and the impact it could have on purchase intent for hardware going forward?
Patrick Spence: So, you know, a few years ago, we embarked on a complete rewrite of the app. We wanted to address the performance and reliability issues, and we also wanted to create something that would allow us to expand into new categories and bring a lot of new features to the system. So, you know, redesigning the app was definitely the right move for Sonos, but we, you know, fell short on our execution of this one.
Speaker Change: yeah thanks honest so you know we a few years ago we embarked on a complete round up rewrite of the app we wanted to address the performance and reliability issues and we also wanted to create something that would allow us to expand into new categories and bring
Speaker Change: a lot of new features to the system. So, you know, redesigning the app was definitely the right move for Sonos. But we, you know, we fell short on our execution of this one.
Patrick Spence: And, you know, I think we're seeing the short-term pain that we're having right now in that rollout. But it's our number one priority right now to address this. And so I believe we will be able to address this determined that we will address it in the short term and be able to make sure that we keep our flywheel intact for the future. Okay, cool. And then what are you seeing in the demand environment in general? Has a weaker macro further impacted consumer spend?
Speaker Change: And, you know, I think we're seeing the short-term pain that we're having right now in that rollout, but it's our number one priority right now to address this. And so...
Speaker Change: I believe we will be able to address this, determined that we will address it in the short term and be able to make sure that we keep our flywheel intact for the future.
Patrick Spence: Or is that hard to tell with the app problems as well? You know, our categories have really been under pressure for the last two years. So we continue to believe that they will recover at some point. But what we are focused on is the best possible positioning for what we see today. Right now, part of this is also why we are undergoing the cost transformation initiative that Saori mentioned and also why it's so important that we entered the premium over-the-ear headphone category, as that is a five billion dollar market and growing double digits. Thank you. Your next question comes from the line of Erik Woodring of Morgan Stanley. Your line is open.
Speaker Change: Okay, cool. And then, what are you seeing in the demand environment in general? Has a weaker macro further impacted consumer spend, or is that hard to tell with the app problems as well?
Speaker Change: You know, our categories have really been under pressure for the last two years, so we continue to believe that they will recover at some point, but what we are focused on is best positioning for what we see today, right now.
Unknown Participant: Part of this is also why we are undergoing the cost transformation initiative that Saori had mentioned and also why it's so important that we entered the premium over the ear headphone category as that is a $5 billion market and growing double digits.
Speaker Change: Thank you. Your next question comes from the line of Erik Woodring of Morgan Stanley . Your line is open.
Erik Woodring: Hey guys, thanks so much for taking my questions. Patrick, I know you guys are alluding to, you know, the 20 to 30 million costs in the near term. I'm just wondering if you take a step back and think about, you know, the potential reputational damage that you could have from this app update. You know, could that be longer lasting and more kind of, and then I have a follow-up.
Speaker Change: Hey guys, thanks so much for taking my questions. Patrick, I know you guys are alluding to
Unknown Participant: You know, the 20 to 30 million of cost.
Speaker Change: in the near term.
Speaker Change: I'm just wondering if you'd take a step back and think about...
Speaker Change: you know the potential reputational damage that you could have from this atatch app update you know could that a longer last thing and more kind of
Speaker Change: cost intensity than just twenty to thirty million i mean if you go through i'm sure you have a number of message boards
Speaker Change: There's a lot of backlash. And so I'm just wondering if there's a longer term plan here in place outside of
Speaker Change: You know, fixing the app.
Speaker Change: And promoting, you know, what else you have in store to try to get those customers that have either been loyal customers or new customers that were potentially considering Sonos products to actually come back after this. And then I have a follow-up thing.
Patrick Spence: Yeah, thanks, Eric. So I think the key is to address the pain points that we have right now and those customers that are having issues with the new app, for sure. But remember, we're not standing still on the innovation front. So we have two major new products that we're pushing out again to make sure that we're in a position where the app issues are behind us. As we do that, and as we, you know, launch those, we launch other products we have planned, we do our, you know, day to day execution in the channels and in marketing and all our other areas, people will, you know, be able to see the products; they'll experience our products.
Speaker Change: Yeah, thanks, Eric. So I think the I think the the key is to address the pain points that we have right now and those customers that are having issues with the new app.
Speaker Change: For sure, but...
Speaker Change: Remember, we're not standing still on the innovation front. So we have two major new products that we're pushing out again to get make sure that we're in a position where the app issues are behind us.
Speaker Change: As we do that, and as we, you know, launch those, we launch other products we have planned, we do our, you know, day-to-day execution in the channels, and in marketing, and all our other areas,
Patrick Spence: And I'm confident that, with the roadmap we have, with the innovation we have coming, this will be, you know, just one chapter in our long history. And so we do feel like the 20 to 30 million is what it takes to, you know, address the short-term pain and that with everything we have coming, we'll be able to ultimately address that pain and then get back to a place where customers are raving about. Okay, I understand. And then, just maybe, as my follow-up, I wanted to make sure I was fully understanding some of your comments, Saori.
Speaker Change: people will be able to see the products will experience our products and i 'mconfident that
Speaker Change: with the roadmap we have, with the innovation we have coming, that this will be just one chapter in our long history. And so we do feel like the 20 to 30 million is what it takes to
Speaker Change: address the short-term pain and that with everything we have coming we'll be able to ultimately address that pain and then get back to a place of customers raving about Sonos.
Speaker Change: Okay, understood. And then just maybe as my follow-up, I wanted to make sure I.
Erik Woodring: So, the 4Q guide does not incorporate those $20 to $30 million of costs? I'm just trying to understand if you flagged them for us, but then you're not including them in the guide, does that mean we need to include $20 to $30 million of costs in 4Q, or are you saying that those are likely to come in fiscal year 25? Thanks. You're correct that the 20 to 30 is not comprehended in our Q4 guidance. Part of it is because 20 to 30 million dollars will be incurred over Q4 and Q1.
Speaker Change: was fully understanding, Saori, some of your comments. So the 4Q guide does not incorporate those $20 to $30 million of costs. Is that, I'm just trying to understand if you flagged them for us, but then you're not including it in the guide. Does that mean we need to include $20 to $30 million of costs?
Speaker Change: In 4Q, are you saying that those are likely to come in fiscal year 25? Thanks.
Unknown Participant: You're correct that the 20 to 30 does not is not comprehended in our Q4 guidance. Part of it is because the 20 to 30 million dollars will be incurred over Q4 and Q1 and majority of it will we expect it to be incurred in Q1.
Saori Casey: And the majority of it, we expect it to be incurred in Q1. There are some activities that are already in progress, but there are others that we're still vetting through the details, and so we did not want to detail that out in our guidance until we have better clarity for Q4 specifically. Thank you. There are no further questions at this time. This concludes our Q&A session. I will now turn the conference back over to CEO Patrick Spence for closing remarks. Thanks, Jael. And thanks to all of you for your time today. There are just three things I want to hit in closing.
Unknown Participant: There are some activities that are already in progress but there are others that we're still vetting through the details and so we did not want to detail that out in our guidance until we have a better clarity for Q4 specifically.
Unknown Participant: Thank you. There are no further questions at this time, thus concluding our Q&A session. I will now turn the conference back over to CEO Patrick Spence for closing remarks.
Patrick Spence: First, building a new software foundation was the right investment for the future of Sonos, but our rollout in May has fallen short of the mark. We will not rest until we've addressed the issues with our ops and have delivered new versions that materially improve our customers' experience. Second, while our app setback is regrettable, it is one chapter in our over 20 years of delighting customers. I speak for everyone at Sonos when I say that our number one priority is to make this right and ensure that the next chapter is even better than the previous one.
Speaker Change: Thanks, Jael. And thanks to all of you for your time today. Just three things I want to hit in closing. First, building a new software foundation was the right investment for the future of Sonos, but our rollout in May has fallen short of the mark. We will not rest until we've addressed the issues with our app and have delivered new versions that materially improve our customers' experiences.
Speaker Change: Second, while our app setback is regrettable, it is one chapter in our over 20 years of delighting customers. I speak for everyone at Sonos when I say that our number one priority is to make this right and ensure that the next chapter is even better than the previous ones.
Patrick Spence: And finally, our entry into headphones, ACE, is off to a good start and presents a great opportunity for us in a new, large, and growing category. Thank you, and we'll talk to you again next quarter.
Speaker Change: And finally, our entry into headphones, ACE, is off to a good start and presents a great opportunity for us in a new, large, and growing category.
J.L.: Thank you, and we'll talk to you again next quarter. This concludes today's conference call. You may now disconnect.
Speaker Change: Thank you, and we'll talk to you again next quarter.
Speaker Change: this concluded is conference call you may know dis the long night work on number when living day the day some got a making
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Operator: I'm going to invite you to join us. Just a moment for your first question. Your first question comes from the line of Adam Tindle of Raymond James. Your line is open. Okay, thanks. Good afternoon.
Adam Tindle: Just, you know, anything that you could give us from an investor standpoint as, you know, help as to what the long-term vision would be as we endure some of the short-term pain. Yeah, thanks, Adam. I think that's a good one. We remain confident that over the long term, we can take more and more of that hundred billion dollar audio market. We're only 2%, less than 2% of it today.