Q3 2025 Sonos Inc Earnings Call
Good afternoon. My name is Audra, and I will be your conference operator. Today, at this time, I would like to welcome everyone to the Sonos third quarter, fiscal 2025 conference call.
At this time, I would like to turn the conference over to James Iannis, head of Corporate Finance.
Good afternoon, and welcome to Sonos third, quarter fiscal 2025 earnings conference call. I am James maguanas, and with me today are Sono CEO, Tom Conrad, DFO. Sorry. Casey and chief legal, and Business Development, officer Eddie Lazarus. Before I hand it over to Tom, 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, material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements.
The discussion of these risk factors is fully detailed under the caption of risk factors in our filings with the SEC.
During this call, we will also refer to certain non-GAAP financial measures.
For information, regarding our non-gaap financials and a Reconciliation of gaap to non-gaap measures.
Please refer to today's press release regarding our third quarter, results posted to the investor relations portion of our website.
As a reminder, the press release supplemental earnings presentation, including our guidance and conference call, transcript, will be available on our investor relations website investors. Sonos.com I will now turn the call over to Tom
Thank you James and thanks to all of you for joining us. I'm speaking to you today, not just as the new CEO of Sonos, but as someone who deeply believes in, what this company can be
I've devoted my career to building consumer products that people love. And I took this role because I believe Sonos is 1 of the few companies with the ingredients to do that at the highest level.
There's a reason I have a Sonos tattoo on my forearm, I love this company. Its Mission and the possibilities ahead.
Over the past 6 months, I've had the chance to work closely with every part of this business. And I've seen just how much our people care about the quality of our products. Our customers experience, the craft of what we build, and the operational, rigor, we bring to the task every day.
Working with this incredible team has only deepened. My conviction that sonus can be among the most consequential Hardware platform companies in the world.
That's why I'm so honored the board has asked me to lead Sonos into its next chapter and why I'm so optimistic about what comes next?
My appointment is not just a leadership transition. It's a turning point for the company, a return, to our founding principles of obsessive craftsmanship, customer first design and category defining innovation,
We have a lot of work ahead of us to translate our convictions into a return to growth with better profitability, and we're approaching the challenge with urgency.
Now, let me tell you why, I'm so excited about the future. First, the Sonos we're building today is not just a product company, we're a platform company, a platform where our expanding portfolio of Hardware products, compound and value. Thanks to powerful software, upgrades that deliver unique experiences for the home and Beyond.
This ecosystem connects not just our products, but also our partners developers and consumers.
Every new product, every software feature, and every integration ensures that over time, Sonos becomes more powerful, more interconnected, and more irreplaceable in our customers' homes.
Second Sonos has an extraordinary brand as the clear leader in wireless home audio. We have earned that position by delivering consistently great sound, thoughtful industrial design, and a system that works across every room in the home.
That's not marketing spin. It's why we're the number one home theater brand in the U.S. and why our installer and channel partnerships remain so strong.
Third, we're making significant operational progress earlier this year, we reorganized to improve our product Cadence while reducing our annual operating expenses by more than hundred million dollars. This is catalyzed focus on the things that matter, the core experience profitable growth and the kinds of Innovations only Sonos can deliver, for example, this quarter, we delivered new AI, powered voice enhancement features on our Ultra and state-of-the-art.
Adaptive noise cancellation for Sonos Ace. We're keeping this momentum as we build a strong roadmap that stretches through fiscal 2026 and beyond.
Finally, there are many opportunities ahead for growth. Despite our Market leadership, we've only captured a small fraction of the global market. We have room to add new households and grow our installed base in both our existing and key growth markets.
What's more our installed base, is a powerful asset itself and roughly 40 to 45% of annual product. Registrations come from existing households.
And we're leaning into this by delivering experiences that get better as your system expands.
which is just to say, we know, we have more to do
We can reconnect more deeply with artists with culture and with the spirit of invention that has always been part of this company.
This is the Sonos I'm building.
It'll take some time to bring this reinvention to Market, but we will move with conviction and Clarity of purpose and the payoff will be clear over the medium to long term.
Now, let me share a few comments about a performance in Q3 and the business environment in which we're operating. We had a solid quarter with revenue and adjusted ibida at or above the top of our guidance. Our results reflect a tight, focus on execution, which yielded dollar share gains and home theater in the US. And on efficiency with drove continued year-over-year declines in our operating expenses.
With respect to our operations like many companies that most significant near-term challenge has been the uncertain tariff environment.
As a reminder, short of a few accessories and our passive speaker partnership with Sonia, we do all of our U.S.-bound manufacturing in Vietnam and Malaysia.
We talked last quarter about the contingency planning. We worked to minimize the effects of terrorism on our business while also doing what we can to limit the downstream impact to our customers.
With last week's news, the Tariff rates. We was subject to going forward appear. To be 20% for Vietnam and 19% for Malaysia.
We continue to work closely with our contract manufacturers and our Channel Partners to share tariff costs, though. It has become clear that we'll need to raise prices on certain products later this year.
As these pricing changes, land will monitor consumer Behavior, closely as well as competitive Trends across our categories and will make adjustments in collaboration with our Channel Partners. When, and if necessary, to ensure we're exploring every opportunity to optimize our respective top and bottom lines.
In conclusion, sonus has the right to lead. We have the brand, the platform, the team, and the permission to Define what great means for audio and entertainment in the home, on the go and into the future.
We lost some momentum in 2024. We're starting to get it back and we're going to accelerate our Pace from here.
Now, let me turn things over to sayori.
Thank you, Tom. Hi everyone. We're pleased to deliver Q3 Financial results that exceeded our expectations.
Revenue of $345 million was above the high end of our guidance range, driven by better-than-expected Portables and component products.
Q3 revenue declined 13% year-over-year, versus our guidance of down 22% to 14%.
Scooting the impact of the launch of Ace last year, when we recognize the revenue of the channel, fill our Revenue was down mid, single digits, in Q3 slightly better than the first half of the year and better than the overall category trends.
This was driven by Arc and Arc Ultra, which grew on a year-over-year basis.
Growth margin was 43.4% near the midpoint of our guidance range. Non-gaap gross margin was 44.7%. We incurred 2.1 million of terrific expenses in Q3, which was a 60 basis point impact to our reported gross margin.
this is consistent with our guidance for under $3 million, in Q3
Q3 gap. Operating expenses were $153 million, down 15% year-over-year.
Expenses of $131 million were down 15% year-over-year and came in about $9 million below the low end of our guidance.
On a normalized basis. Primarily for variable compensation non-gaap operating expenses declined by 23%. As we saw a full quarter benefit of savings from the reduction in force announced last quarter as well as from many other cost optimization efforts we had set out last summer.
As for the year-over-year trends of each non-GAAP operating expense category, research and development expense decreased by 17% due to cost optimization efforts from the prior quarter.
G&A expenses, decreased by 16% driven by headcount and various cost optimization efforts initiated last year.
Sales and marketing expenses decreased by 13% driven by higher marketing Investments. Last year from the launch of ace
Adjusted. I was positive with 36 million at the high end of our guidance range of 12 to 37 million due to higher revenue, and lower operating expenses.
Year-to-date revenue declined by 8%. While GAAP gross margin came in at 43.7% and non-GAAP at 45.2%.
Our Gap in non-gaap operating expenses declined by 8% 11% respectively, on our reported basis and by 16% on a normalized basis.
Adjusted ibida declined, 4% year-over-year better than our Revenue performance due to our expense discipline.
Access cash in short duration, treasury bills.
We also have hundred million dollars, undrawn revolving credit facility at our disposal.
Q3 free cash flow was 33 million, an increase from negative 65 Million last quarter.
CapEx was $5 million, down from $6 million. Last quarter, we paid $3.5 million in cash. Tariffs in Q3 were a bit below the low end of our $5 million to $10 million guidance, due to a lower than planned inventory purchase pool 4.
Our period end inventory balance decreased 17% sequentially to 115 million primarily due to lower finished goods.
On a year-over-year basis. This was a 25% decrease primarily due to lower component balances.
Our inventory consists of 93 million of finished goods and 22 million of components.
As we noted last quarter, our near-term priority is navigating this Dynamic and uncertain environment with ample liquidity to preserve operational flexibility.
as a result, we paused our repurchase activities in Q3
Returning Capital to shareholders remains a key pillar of our Capital, allocation framework. And we have 150 million remaining on our current share repurchase authorization available at our disposal.
Turning to our Guidance, the Q4 Outlook, we're providing today, reflects the demand Trends. We have observed quarter today and does not assume any material change in consumer purchasing Behavior as a result of this highly Dynamic global trade environment.
We expect Q4 Revenue to be in the range of 200660, million to 290 million up to 2% to 14% year-over-year.
For non-u on at this time but I would note that due to the launch timing of Arc Ultra and sub 4 in q1 of fiscal 2025, we have a difficult year comparison.
Also, as Tom mentioned earlier, we will be raising prices on certain products later this year.
We have carefully. Formulated our pricing plan in support of our goal to optimize for gross profit dollars. However, it is difficult to accurately predict how our pricing and overall market. Demand may impact unit sales volume in this Dynamic environment.
If not for the uncertainty introduced by our contemplated pricing changes, we had been expecting our year-over-year comparison would improve from Q1 through the balance of fiscal 2026.
We expect our Q4 gaap gross margin to be in the range of 42 to 44% with non-gaap gross, margin in the range of 43.7 to 45.5%.
Our gross margin guidance embeds, our expectation that tariff expenses will be approximately 5 million in Q4, which is around 180 basis points, headwinds to gross margin.
Mostly representing the previous 10% tariff, as well as inventory on hand.
On a cash basis, we expect to pay $8 million to $10 million in Q4, as we build inventory ahead of our holiday quarter.
This estimate is lower than our previous 20 to 30 million estimate, based on new, tariff rates and the timing of the effective dates.
And while we're not guiding you on that at this time, we expect our GAAP and non-GAAP gross margin will be above 40% for the quarter, even with the newly announced tariff rates due to our mitigation actions.
We expect Q4 Gap, operating expenses to be in the range of 150 million to 155 million down, 13% to 10% from 172 million in Q4 last year.
On a normalized basis. Our guidance implies non-gaap operating expenses will decline by 23% to 20% from Q4 of last year.
Bringing it all together. We expect Q4 adjusted ibida to be in the range of -10 million to positive, 14 million representing a margin of approximately minus 4% to plus 5% and an improvement from negative -22.6 million in Q4 of last year.
Please note that the adjustment may be the figures. I just quoted include the 5 million tariff impact. I outlined while discussing gross margin
116 million, 140 million, an increase of 8% to 30% year-over-year from 108 million in fiscal 2024
growing adjusted ibida while Topline declines between 7% to 5% is a direct result of our transformation efforts.
This marks our fourth consecutive quarter of delivering on our top and bottom line guidance, while navigating through a volatile and uncertain macro environment, thanks to the dedication and hard work of our employees.
We continue to work hard, on our transformation efforts to improve operational, efficiency to drive profitability and enable Investments for our future growth. We will provide more updates in future quarters.
Speaking of future growth. Although our growth markets, represent a small share of our Revenue today. We remain encouraged by their growth performance. That will be our key contributor to our growth, in the years to come.
We also continue to see tremendous opportunities to grow within our development markets.
We have been navigating a cyclical dancing in our categories for some time, and we are confident that we are well, positioned. When the cycle rebounds, as we continue to invest in the core experience and build out the Sonos platform.
We're excited to have Tom officially as our CEO as his appointment marks. The beginning of a new chapter to capitalize on our brand and leadership in wireless audio.
With only a small fraction of the global market captured so far, there is a vast opportunity to introduce the compounding value of the Sonos, platform to new customers.
After the call, we will update our earnings slides to reflect our Q4 guidance and our revised tariff exposure expectations with that. I'd like to turn the call over for questions.
Thank you. We will now begin the question and answer session 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 questions, simply press star 1 again.
We'll go first to Steve Franco at rosenblat.
All right, good afternoon. And thank you. Uh, congratulations. Tom, maybe just start with some high-level insights on how you think about, uh, new product. Introductions, uh, you know the the prior prior to your appointment, you know, the company was pretty set on, in introducing a couple of new pieces of Hardware per year, you seem to be emphasizing software. So should we think about
Software Innovation, being as important in terms of new products to drive growth.
As uh, new new hardware products.
Sure. Uh, thanks. And it's great to, uh, be on the call as the CEO for the first time. Um, you know, I continue to think that a Cadence of 2 new products a year is a, is an excellent, uh, outcome for Sonos and its customers. And so there's really no change, um, in our ambition and that regard. Um, I will say though that we are, um, as you know, uh, in the process of, of navigating, tremendous reinvention here at at Sonos and it takes time to drive change, uh, and the beauty of software is that you have shorter lead times and the benefits of upgrades to the software. Platform can appear more quickly Hardware, of course, has much longer Cycles. Um, and so while it's true that today, I think we have the strongest product portfolio in our history across every room of the home and Beyond um, uh, our attention to software reliability and core experience over the last 15 months has created a, a kind of lull and new hardware.
It releases coming over the next couple of quarters. Um, so in the short term you will see us uh work hard to drive differentiation and experience improvements. Um, to support the current portfolio through software upgrades. Having said all of that, we all here at Sonos remain, incredibly excited about our product roadmap, um, with great new product, introductions that will pick up in the second half of 2026. Um, so expect in terms of near-term, execution, continuing to deliver excellence and core experience. Um, uh, driving new customer acquisition and repurchase,
Uh, look to us to sharpen our ability, to tell the Sonos story uh, as sayori described expanding and promising. New geographies. Maturing our relationship with installer channels, um, and and driving success. In the new categories, we've entered recently like headphones,
Thank you, Steve.
Uh, we are still on our journey of our as we're, we've been calling it transformation but really, driving cost structure and cost efficiency to be able to invest for the future. So our work continues and will be will hope to be able to share more in the future quarters.
Great. Thank you. I'll jump back into the queue.
We'll move next to Eric wood ring at Morgan Stanley.
Great. Thank you guys for, uh, for taking my questions and, uh, and and saying, uh, Tom you, uh, clearly deserving of the role. And so, congrats on on becoming the permanent CEO. Um, I would, I would love to maybe Tom. I, I realize that it's early and, and this is maybe a tough question to answer, but, you know, you guys last quarter communicated a strategy of kind of trying to widen your aperture, um, from a pricing and promotion perspective to kind of get new households in the door. Obviously, once they come in, there's a very powerful flywheel, you know. Now, now obviously tariffs are kind of forcing your hand a bit from a pricing perspective.
Uh, C. Can you maybe just give us a little bit more detail, uh, or Direction on exactly how you think about, you know, what products, uh, should be higher price because of tariff, what products you? Maybe you don't want to adjust pricing because of, of some of this pricing strategy, just love to get a little bit more, uh, flavor of how you're thinking about pricing increases versus tariffs. And then I have a, a follow-up please.
I'm not sure that on this call we're going to go into more detail about the specifics of the pricing changes that we're making. Beyond just saying that, of course, we're evaluating each of the products in line, contemplating our sense of elasticity and effect on demand as we make pricing changes.
You know, I think the best way to think about what we're trying to do here strategically is to, uh, craft a pricing plan that supports our goal of optimizing growth profit dollars. Um, we certainly, uh, uh, uh, will be paying close attention to how, uh, our customers respond to these pricing changes, as well as the competitive trends across, uh, the portfolio and, uh, uh, in our categories. Um, and then I'll just say, you know, we really believe that our portfolio of hardware products deliver truly exceptional value that compounds over time. You know, thanks to the kinds of software updates that deliver new experiences. Just this quarter, we shipped AI speech enhancement for Ark Ultra, um, um, multi-user swap for Ace, uh, uh, in home theater.
Uh, new room, tuning capabilities for Ace. Um, so, you know, our, our customers benefit from products that improve over time after their purchase and and we think that that puts us in a good position. As we have to modulate, pricing relative to our competitors, who are so often are delivering commodity experiences.
Okay. Okay, totally. I understood. Um, and then I'd love as a follow-up, maybe just, you know, if, if you could, uh, kind of touch on the, the high level, uh, kind kind of Market backdrop, as you see it today and, and maybe where you see it going again, realize there's a lot of variables that go into the forward look. But do you see? You know, the, the environment getting better? Is it is it deteriorating, um, anything by geography that you would call out? Would just love to know kind of what's, what's going on behind the scenes, um, kind of outside of what you guys can actually control. Thanks so much.
sure, you know um it is uh you know, continues to be the case that the the category remains particularly challenged, you know, coming off of Co pulling and weak housing data, um, as just to, uh, headwinds um,
On the other hand, you know, more people are consuming content and home than ever before more people are subscribing to digital music and video streaming services than ever before. More people are interacting with technology through voice and conversational AI than ever before. And I really think that in time, all of these Trends are going to drive a return to growth, um, for the category and
And I think we're uniquely positioned to capture that growth when it returns. Um so you know, we're working hard in this this this sort of cyclical downturn to um Drive share through strong execution and Innovation. Um you know, you see that with Arc Ultra uh driving year-over-year gains in home theater. Uh, in the US this quarter on on, on the backs of the the sound motion technology that that we brought to Market, um and you'll continue to see us um uh work hard in that lane. Um while we wait for, what we think is the inevitable return of of of uh category demand.
Super. Thanks and maybe
Is, you know, last quarter you guys talked about 580 million to 600 million of non-gaap off-axis kind of your target annualized, run rate. I I think you are actually already below that, um, right now, if we, if we kind of take fiscal fiscal 25 in totality and so I I know you're not going to necessarily guide for fiscal 26 but is 580 to 600 still the target run rate. Is it below that? I'd love if you could just share a bit more um context about um kind of what that Target is if it has changed at all. Thanks.
Thanks, Eric, um yeah we um, we're still, we continue to still work on our um efforts to optimize our cost structure part of it. We obviously want to reinvest into the business for the future growth. And so we're we're uh, we're not guiding to a fee 2026 Opex today. However, I do want to call out, um, part of what I mentioned on, on the preferred remarks, um, that the, the resulting impact to even the fi25 adjusted ibida. We expect to grow 8 to 30% year-over-year on our bottom line for this year. And as you recall, we had our, um, re reduction in force, um, both last August, as well as a even a larger 1 in February. So we're not seeing a full year impact of those uh activities.
So we've taken place to improve our cost structure this year and if I 25 and we expect that to fully materialize into Phi 26 as well. Um, but again, we're a balancing with, you know, where we want to invest for our future as well as following it through to the bottom line. But we expect to continue to improve our profitability. And we we believe this business can expand both top and bottom line.
Thank you.
Awesome. Thank you guys for all the color. Good luck.
And as a reminder, if you would like to ask a question, please press star 1.
We'll go next to brentfield at Jefferies.
Hi. This is Rihanna maytree on for brentville. Thanks for the question and congrats. Tom. Um, can you speak to how Sonos is leveraging AI to enhance the product or app experience? And do you think this could be a meaningful differentiator or monetization driver over time? Thank you.
Let me start by.
I think of as the sort of the fundamental strengths of the the Sonos capability, you know, we have best-in-class sound quality and Industrial design we you know invented the multi-room architecture, that's defined the standard for, you know for customers. Um uh everywhere we have this incredibly broad portfolio of Premium form factors for every room and Beyond
And the power of this uh, ecosystem is really the software platform that connects all of those products, uh, with our partners and developers, and our customers, um, in truly unique and differentiated ways. And I think what you're touching on is, is why I'm so excited about where this platform can go from here. I think our hardware and software is incredibly, well, positioned to deliver the next generation of conversational AI experiences in the home.
But I think the way to think about it is is that Sonos isn't and has never been a company that sells a loose collection of speakers.
Today, we're we're building a Next Generation platform that we think will Define how people experience, sound and interaction in the home for the next decade and Beyond. Um, and of course, as a footnote, I should say the the the company operationally is being transformed um by the use of of AI technology across all of our departments from you know engineering certainly through marketing and legal and customer experience. Um so uh we have a really big vision for AI. Both in terms of uh increasing our operation agility, as well as delivering Incredible 1 of A Kind experiences in our customers homes.
Great. Thank you.
And that will complete our question and answer session.
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