Sonos, Inc.
Q4 2021 Earnings Call Transcript

Published: 17 Nov 2021

[Operator:]

Good afternoon. My name is Emma and I will be your conference Operator today. At this time, I would like to welcome everyone to the Sono's Fourth Quarter and Fiscal 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Question-and-Answer session. , . Thank you. Cammeron McLaughlin. You may begin your conference.

[Cammeron Mclaughlin:]

Thank you. Good afternoon. And welcome to Sonos ', Fourth Quarter and Fiscal 2021 Earnings Conference call. I am Cameroon Mclaughlin, and with me today are Sonos CEO, Patrick Spence, Brittany Bagley, CFO, and Eddie Lazarus, Chief Legal Officer. For those who joined the call early, today's hold music is from Sonos radios collaboration station from Impulse Record and basketball Legend, activist and jazz historian Kareem Abdul-Jabbar. Before I hand it over to Patrick, I'd like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks 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 of 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 fourth quarter and fiscal 2021 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on our Investor Relations website at investors. sonos.com. I will now turn the call over to Patrick.

[Patrick Spence:]

Thank you, Cammeron. And hello, everyone. Our incredible fiscal 2021 financial results underscore the power of our model and our ability to execute despite the uncertainty and challenges throughout the year. I am so proud of what our team delivered, and I'm very confident in our progress toward becoming the world's leading sound experience brand. We have a tremendous opportunity ahead and are well-positioned to see that. To start, we are thrilled to report a fourth quarter that caps off a record fiscal year 2021. We achieved total revenue of $1.717 billion, an increase of 29 % from the prior year, or 32 % when you adjust for the extra week last year. This marks our 16th consecutive year of revenue growth. Our leadership position in premium home audio continued throughout fiscal 2021 as our products continued to rank as the leading products in the wireless speaker and home theater categories in our core geographies. Demand remained very strong through the fourth quarter, driven by the continued strength of our industry-leading products. And we delivered a record $360 million in revenue despite increased supply chain constraints that we like so many others in our industry have been facing. Our fiscal 2021 results are an illustration of just how powerful and profitable our model is as we scale. We achieved record adjusted EBITDA of $279 million, an increase of 157 % representing an adjusted EBITDA margin of 16.2%, up 800 basis points. Our fiscal 2021 results put us significantly ahead of schedule toward achieving the fiscal 2024 targets outlined at our investor event this past March. Our brand is strong. We've been exciting and robust product roadmap ahead, and we are confident in our ability to continue to drive sustainable, profitable growth over the long-term. Brittany will go into more detail on our fiscal 2024 targets shortly. Despite the supply challenges that continue to exist as we enter fiscal 2022, we are confident in our ability to continue to deliver strong growth and expect to deliver up to 16 % revenue growth and 17 % adjusted EBITDA growth at the high end of our range. Our demand is incredibly robust and we're confident we can sell every unit we can make this year. Brittany will also go into more detail on our fiscal 2022 outlook. We attribute our continued success to the fact Sonos is a system for your whole home, not just a single-product solution, and to our consistent approach to delivering innovative new products and services. The real power of Sonos is that you can start with one product and expands more overtime. The core of our model is that we continue to add new homes and that our existing homes keep coming back and adding additional products each and every year. On that note, we ended fiscal 2021 in 12.6 million homes, an increase of 15 % from the prior year. As we look toward our opportunity ahead, we believe that Sonos is just getting started and has barely scratched the surface of our large and growing addressable market and have a tremendous runway to add tens of millions more homes to the Sonos ecosystem long-term. When it comes to existing customers, adding additional products, in fiscal 2021, we saw 46 % of our product registrations coming from our existing households. This is our flywheel in motion. We add lots of new homes and they buy more and more from us overtime. To that end, in fiscal 2021, we saw the number of products per home increased to 3.0 from 2.9 last year, underscoring that the lifetime value of our household continues to increase and is yet to be fully realized. In fact, we see a runway towards 4-6 products per household long-term, driving significant increases in lifetime value over-time. Then as we lay our services on top of this, the lifetime value will increase even further. Our model is a proven one and is a powerful one. In fiscal 2021, we made great progress on our three key strategic initiatives

[Eddie Lazarus:]

Thank you, Patrick. Since our last earnings call, the Administrative Law Judge at the International Trade Commission issued his initial decision in our case against Google. We were very gratified that the judge upheld the validity of all 5 of our patents at issue. And further ruled that Google infringes all 5 patents. As I said, on the last call, validity and infringement were our benchmarks for success because they measure the strength of our portfolio and have our theories of infringement, and thus our eventual prospects for success. In this regard, we achieved an absolutely outstanding result. At the same time, aspects of the ALJ's ruling leave uncertain the scope of the remedy we will eventually obtain at the ITC. Later this week, the Commission is expected to announce whether and to what extent it will review the ALJ's rule. And we look forward to continuing to advance our arguments before the ITC, as well as in the federal court cases we have been. The bottom, we remain confident in the strength of our cases against Google and that in the end, we will obtain a strong return on the investments we're making in holding them accountable for their widespread infringement. Now let me turn the call over to Brittany to provide more details on our results and our outlook.

[Brittany Bagler:]

Thank you, Eddie. There has certainly been a lot going on in Fiscal 2021 and as I reflect, I am truly impressed by what an outstanding year we had as a Company. Eddie and the team made great progress and further establishing our IP, we experienced incredible demand for our products, we executed in what was a dynamic and challenging supply environment, and we beat every expectation we had going into the year. We added almost $400 million of revenue to grow 29 % year-over-year, expanded our gross margins despite the global headwinds in the supply chain, and almost doubled our adjusted EBITDA margins from 8.2% to 16.2%, while generating over $200 million of free cash flow. I am very proud of what the whole Company was able to deliver in fiscal year '21. To put some more detail behind that, fiscal '21 was our 16th consecutive year of revenue growth. We generated total revenue of $1.717 billion, which was 29 % year-over-year growth, or 32 % excluding the 53rd week last year. The increase was driven by strong overall demand across all our product categories and geographies, somewhat offset by the impact of constrained product availability. Gross margin for the year increased 410 basis points to 47.2%. We received approximately $18 million in tariff refunds out of our approximately $34 million in expected refunds, and recognized approximately $14 million in tariff expense in Fiscal '21, resulting in a minimal net impact. If you excluded the effective tariffs from both fiscal '20 and fiscal '21, gross margin increased 130 basis points to a record 46.9%, driven by a shift in product mix into higher-margin products and lower promotional discounts compared to the prior year. Direct-to-consumer revenue increased 47 % and represented 24 % of total revenue compared to 21 % last year. sonos.com, our retail channel and our install-solutions channel are all important parts of our go-forward strategy. Gross margin was negatively impacted by component material costs, and shipping and logistics call, which are part of the broader industry-wide supply chain challenge we're facing. Adjusted EBITDA increased a 157 % to a record $279 million and adjusted EBITDA margin increased 800 basis points to a record 16.2%. Given the strong growth in revenue, we experienced strong OpEx leverage during the year, allowing us to scale profitability faster than expected. R&D increased 10 % excluding restructuring and severance costs last year, driven by higher personnel-related expenses due to increased headcount and higher bonus stock-based compensation and related payroll taxes, as well as an increase in product development costs in professional fees. Our software and consumer experience continues to differentiate our products. Sales and marketing increased 13 %, excluding restructuring and severance costs last year. This is primarily due to higher marketing expenses to support new product launches, higher revenue-related sales fees, and higher personnel-related expenses. G&A, excluding restructuring, severance, transaction costs, and IP litigation increased 18 % driven by higher personnel-related expenses, as well as professional fees related to our investments in information technology. Our model continues to generate strong free cash flow and we saw another significant increase this year. We generated cash flows from operating activities of $253 million and free cash flow of $208 million. We have an incredibly strong balance sheet from which we will deploy capital back into the business to drive future growth, including through M&A, as well as returning capital to our shareholders. In fiscal '22, you will see us continuing to allocate additional capital towards our long-term growth. We will also continue to return capital to shareholders and offset future dilution through our share repurchase program. As you can see, today our board has authorized a new $150 million share repurchase program. In the fourth quarter, we completed our most recent $50 million share repurchase program. Since early 2020, we have $100 million in share repurchases representing over 5 million shares at an average price of approximately $19.30. Now turning to our fourth quarter results. Revenue increased 6 % or 14 % excluding the 14th week last year, to $359.5 million. Growth was driven by strong overall demand, partially offset by the impact of continued constrained product availability due to industry-wide supply chain challenges. This was primarily related to limitations on component supplies due to the global shortage of semiconductors. We have been so short on some components that we have had manufacturing shutdowns and these may continue impact us into fiscal '22. As we've noted, we continue to see strong demand and are thankful that our customers continue to wait for our products. Gross margin decreased 110 basis points to 46.4%. We received approximately $7 million in tariff refunds and recognized approximately $4 million in tariff expense during the quarter. Excluding the impact of tariffs from both quarters, gross margin decreased 260 basis points to 45.7%. The decrease was primarily due to increased component costs and shipping and logistics costs related to broader industry-wide supply chain challenges. Adjusted EBITDA was $17.1 million and adjusted EBITDA margin declined to approximately 5 %. As we stated last quarter, we planned to make additional OpEx investments to support our long-term growth, which resulted in deleverage across all OpEx line items in the fourth quarter. Now turning to our record fiscal '22 outlook. In fiscal '22, we will remain focused on continuing to meet our strong demand and demonstrating our ability to execute in the face of global supply challenges. We expect to be able to deliver revenue in the range of $1.925 billion to $2 billion, which represents growth of 12 % to 16 % off a record, fiscal '21. While our demand trends remained strong, the global supply situation has only continued to get more challenging. As a result, we are anticipating that our first-quarter revenue could be lower than the first quarter last year. We expect to see some improvements in the global supply chain in the back half of fiscal '22, and are also continuing to work to mitigate the biggest impact of the shortages where we can. Gross margin is expected to be in the range of 46 % to 47 % in fiscal '22. Given the global supply challenges, we are pleased to be able to give guidance at the top of our long-term range of 45 % to 47 %. As you are aware, we could take price increases on various products in September, and these help to offset some of the gross margin impact of the rising component and logistics costs we're seeing. In addition given the supply constraints, our promotional activity will be moderated, especially as we head into the first quarter which is the quarter we are typically most promotional. We continue to invest in incremental airfreight, particularly in the first quarter, to fulfill as much of the strong demand as possible. We also expect to see a smaller benefit from both product and channel mix in fiscal '22 and are assuming a minimal net benefit from tariffs. Adjusted EBITDA is expected to be in the range of $280 million to $325 million up 9 % from fiscal '21 at the midpoint. This reflects an adjusted EBITDA margin in the range of 14.5% to 16.2%, reflecting the gross margin investments noted previously, as well as continued OpEx investments to support our long-term growth and roadmap. We are ahead of schedule toward achieving the fiscal '24 targets, we outlined at our investor event last March. Given how much we exceeded our expectations in fiscal '21, we are pleased to say we still expect to deliver an approximately 13 % revenue CAGR as we look forward. This is consistent with the revenue growth CAGR and bind at our investor event in March. But also a much larger base of revenue in fiscal '21, than previously contemplated. We remain confident in our ability to deliver industry leading gross margins in the range of 45 % to 47 %, and adjusted EBITDA margins in the range of 15 % to 18 % through fiscal '24. Overall, we had a tremendous fiscal '21. It underscores the strength of our model and our ability to deliver operational excellence in light of a challenging environment. Demand remains strong and our customers have proven they will wait for our products despite supply constraints. We are confident in our outlook for fiscal '22 and beyond. Our P&L and Balance Sheet are stronger than ever, and this enables us to invest in the business and return capital to shareholders to continue driving long-term value. We are excited about the opportunity ahead and look forward to sharing our continued progress with you. With that I'd like to turn the call over to questions.

[Operator:]

. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tom Forte with Davidson. Your line is now open.

[Tom Forte:]

Thanks for taking my question. I have 1 question and 1 follow-up question. So 1 of the things that's been so impressive about Sonos, is that your customers have been willing to wait for your products, even before really some of the supply chain crunches we've had. Do you have any internal survey work or things of that nature that shows that their willingness to wait continues to hold steady even as the supply chain worsens?

[Patrick Spence:]

Yes. Hey, Tom, it's Patrick here. We watch, so carefully, and we have a good handle obviously with almost 25 % of our business being direct-to-consumer on order cancellation rates. And then as well, we watch what's happening in the general marketplace and get channel feedback. We've been dealing with some supply chain issues throughout the year, so we've seen on particular products how the behavior has been, and we continue to see very low cancellation rates on those orders. We haven't seen anything in the market that makes us believe that people are moving to some other products that's out there. And I think it goes back to the fact that we are a considered purchase. You've seen the way that we continue to increase the number of products per home as well and it is that system, and we have no reason to believe at this point that any of that will change. We're very grateful for it. But we work hard to make sure that it is something that is going to continue to be above and beyond anything else they can buy. But all indications right now are that we'll continue and we really faced that throughout fiscal 2021 as well.

[Tom Forte:]

Great. And then for my follow-up question, on the new share buyback program, how should we think about your capital allocation decisions between investing in the business M&A and buying back stock?

[Brittany Bagler:]

I think we have stated that all 3 of those are really an important part of our plan. So we will execute on M&A, we will continue to repurchase shares through our new share repurchase program, and we are talking about really investing in the business for fiscal year '22, as well. So I don't think it's an either or, it's really all of the above.

[Tom Forte:]

Wonderful. Thanks for taking my questions.

[Brittany Bagler:]

Thank you.

[Operator:]

Your next question comes from the line of Katy Huberty with Morgan Stanley. Your line is now open.

[Katy Huberty:]

Thank you. Congratulations on the strong execution in 2022 outlook. I have a couple of questions. First for Brittany. You mentioned 1Q revenue could be down year-on-year. If you were to isolate just demand, where would you expect 1Q growth to be before considering the supply issues? And just as a follow-up to that, given cost inflation, should we expect that the gross margin in 1Q is likely to be the low point for the year?

[Brittany Bagler:]

Yeah. Thanks, Katy. It's really hard to quantify what it would look like without supply constraints, lot of unknown factors, and then -- so we're not putting a number on that, but I would say, when we think about how it might be challenging to grow in Q1, that really is all about supply and our ability to get supply into the quarter. We think that most of that demand rolls over, and is part of what gives us comfort and support for the growth outlook that we're looking at for the rest of the year. From a gross margin standpoint, Q1 is typically a challenging or a lower gross margin quarter for us because we run our promotional and more typically in Q1. Because of the supply constraints we won't be running typical promotional environments in Q1 either and so that's a bit of a balance to the significantly higher component and logistics costs that we're seeing come through in Q1

[Katy Huberty:]

Okay. Understood. And then Patrick, you commit to product launches a year which helps deliver the double-digit revenue growth. Just at a high level, how should we think about the product portfolio and partnerships expanding to drive that 12 % to 16 % revenue growth outlook?

[Patrick Spence:]

That -- we see a ton of opportunity in new homes, right? So we're somewhere under 10 % penetrated into the homes. We believe we can just in the markets we're in today. So that is a huge opportunity and something that we think we seize before we even get to the new products that are coming. And then as you've seen, we strike a balance between products that go into the existing categories that we're in

[Katy Huberty:]

Congratulations again, thank you.

[Patrick Spence:]

Thanks, Katy.

[Operator:]

Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.

[Brent Thill:]

Thanks. Patrick, how would you characterize the supply chain constraints now versus a few months ago? What's your sense as you look forward into early next year? I know it's hard to maybe answer, but is there any color you can give us just as it relates to when you think we'd get back to more normal?

[Patrick Spence:]

I think it will get better as we go throughout fiscal 2022. So I think it will improve as we progress through the year. We have been dealing with it for over a year at this particular point in time, so there's always some ups and downs in that. As Brittany has talked about, it's particularly acute in our fiscal Q1, but all indications are -- as fabs come up -- new fabs come online. People catch up with the demand that's out there. We qualify new parts in our products as well, the government and some of the infrastructure players take care of the port congestion and other issues that are there, as we get the pandemic under control. There are so many factors that go into it, but fundamentally, we believe it's something that eases as we progress through 2022. And so we'll be monitoring it very closely. I think it's -- I don't think anybody has the crystal ball to call when it will be completely open again. So I want to be a little bit careful about that, but gets better as we progress through 2022.

[Brent Thill:]

Great. Thank you.

[Patrick Spence:]

Thanks, Brent.

[Operator:]

Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.

[Rk Rajagopal:]

Hi, this is RK on behalf of Rod. Thanks for taking my question. I wanted to ask about your fiscal '22 guidance. Could you talk about how much visibility you have at this stage, and what are the assumptions underpinning that guide in terms of both demand and supply constraints? Thank you. And I have a follow-up.

[Brittany Bagler:]

It's obviously a very difficult time to come out with guidance and there are certainly Company, who are guiding at all at this point. But our general guidance philosophy is to always try and share to the best of what we know, what we're seeing out there. And so we are looking at everything that we see in the supply chain environment and to Patrick 's point, we expect that that starts to get better in the second-half of the year. And then we're looking at everything we can see from a demand standpoint and rolling that together to come up with our fiscal year '22 guidance. So that's what gives us comfort behind the 12 % to 16 % on revenue, the 46 % to 47 % on gross margin, and the 280 to 325 on adjusted EBITDA.

[Rk Rajagopal:]

Thanks Brittany. Could you also talk about your recent price increase from effect on the financials. And has it had any effect on demand so far? Thank you.

[Brittany Bagler:]

in September and so you will see the full impact of that as we go through fiscal year '22. And our view on how that impacts demand is fully factored in as we look at that fiscal year '22 guidance. And obviously we're in a supply constrained environment right now. So we have to factor that in, as we think about the impact.

[Rk Rajagopal:]

Great. Thank you.

[Operator:]

Your next question comes from the line of John Babcock, with Bank of America. Your line is now open.

[John Babcock:]

My first question is actually just on the gross margin front. Can you talk about, generally, what panned out better for you in the fourth quarter than you expected because it seems like you've been a little bit better than, I think most anticipate? I'm just curious what went on there. I don't know if there was maybe a little bit of price increase in there -- price increase that went in or if that was during the quarter, if there were any other factors. But any color there would be helpful.

[Brittany Bagler:]

Yeah, there is such a mix of factors. We have continued to see benefit from product mix and channel mix. And those have been offset by supply chain, component costs, logistics, airfreight, all of that. And so it's really just a balance of how those played out.

[John Babcock:]

Fair enough. And then just like 2 more quick questions, if you don't mind. I guess, just quickly, just on the supply chain impact and how that's impacted, I guess overall manufacturing, do you have a sense of like how much production you lost during the quarter from that?

[Brittany Bagler:]

Not in any way we would quantify. Obviously, we work hard to manage through that. But of course, when you're struggling to get component costs, as I called out in my remarks, that it has caused us to have some delays in our total manufacturing capacity. So that's certainly 1 of the factors limiting our supply outlook right now.

[John Babcock:]

And I guess just next question Eddie or someone else wants to take it, but just on the update that we are going to get on Friday from USITC. Could you just provide a little bit more color on what you expect from them? I know you obviously can't like mention in any way which way it might lean, but just curious overall on any kind of additional points you might be able to provide. And also if there is any update on the case in California, and when we should expect a ruling there, and that'll be useful?

[Eddie Lazarus:]

Sure with respect to the ITC, just to be clear, we don't expect this week to receive any kind of substantive decision. What we're going to get is an indication of whether, and to what extent, the full commission is going to review the ruling of the administrative law judge. So there could be indications where you could read the on things or there could not be, and so we're just going to have to see. There is no specific formula for what they are going to say on this date and it's also possible they could give themselves another extension of time as they did once before on this particular benchmark. So where -- like you were waiting to see what happens and looking forward to continuing to present our arguments in front of the ITC. We feel very good about where that case is, and we'll just keep playing that out. As for the case out in California, the case that was transferred from Texas, the judge in California has a somewhat unusual procedural style for handling patent cases called The Showdown. And so, the parties move forward with a small number of claims on a fast pace, looking towards hearings in the spring of '22, with the remainder of the case being set for trial in May of '23. In that way the parties can get a sense of the strength of their case early. And then the full-blown trial is, as I said, in May of '23. So we again, look forward to moving forward aggressively in that case and feel good about our prospects.

[John Babcock:]

Okay. Great. That all I have. Thanks.

[Operator:]

Your next question comes from the line of Matt Sheerin with Stifle. Your line is now open.

[Matt Sheerin:]

Yes. Thank you. And good afternoon. I wanted to ask about your EBITDA growth target ranges for next year, which are much, much wider than your revenue growth I think you're guiding 1 % to 17 % versus in mid-teens for revenue growth. So could you give us the reasons for that? Is it just because of the unknown variable costs relative to gross margin, input costs or OpEx. Could you just give us reasons for that?

[Brittany Bagler:]

No, I would say it's really -- it's 2 pieces. 1. It's the variability in gross margin, so 46 % to 47 % gives you a point there. And then beyond that, it really is about the investments that we're looking to make. And when and timing and how those come in, and what that OpEx forecast looks like for us as we go throughout the year. So those are the 2 pieces worth factoring in when we think about our EBITDA ranges.

[Matt Sheerin:]

Okay. And I'd like to throw in another supply chain question if I can, it sounds like you have some optimism, Patrick, about the supply constraints easing. But if you talk to a lot of other companies, they really have no idea when that supply is going to come online. So I'm just trying to figure out, do you have any tangible support in terms of when you're going to get that supplier. I mean, already some of your contract manufacturing partners for instance; building inventory, have you talked to suppliers? How should we get a sense of how this plays out?

[Patrick Spence:]

Yes. Hey Matt. I think the -- given the way we've been able and our team has done an amazing job this year working with everybody in the value chain to -- really in fiscal 2021, if you look at the challenges that we had that were throughout all four-quarter s. And the way the team has handled those, and dealt with those, and understood the situation, work through all of those. And then with what we know about what happens or what is planned to happen in 2022 at this point, fabs coming online are important. And some of the plans that we have around components and having multiple sources and those kind of things put us in what we feel should be a better situation as we work through it. And to your point, nobody forecast the pandemic. And some of the challenges that arise in those kind of situations, it has been an up and down year of challenges. But we go into the year with confidence in our outlook because of the way our team has really managed fiscal 2021 and all the challenges they brought. So, it's all obviously been built into the way that we at the year ahead. And what we have planned. So hopefully that gives you some more color.

[Matt Sheerin:]

Okay. Fair enough. Thanks so much.

[Patrick Spence:]

Thanks, Matt.

[Operator:]

There are no further questions at this time. Patrick Spence, I turn the call back over to you.

[Patrick Spence:]

Thanks a lot Emma. And thanks to everybody for joining. I'm so proud of the way the team delivered in fiscal 2021. I am so appreciative of our customers continuing to stick with us and all of our channel partners are installed solutions partners. It's been a tremendous year and we're so excited about fiscal 2022. We feel very excited about being ahead of our plans, for reaching those fiscal 2024 targets. And we're getting back to work. So I will see you next quarter. Thanks, everybody.

[Operator:]

This concludes today's conference call. You may now disconnect.