Sonos, Inc. — Q2 fiscal 2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended April 3, 2021; comparisons are with the periods ended March 28, 2020. Sonos designs and sells audio products and services through retail, e-commerce and direct-to-consumer channels.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $332.9 million; up 90.2% year over year | $978.5 million; up 32.7% |
| Gross profit / margin | $165.8 million / 49.8%, versus 41.7% | $465.2 million / 47.5%, versus 40.8% |
| Operating income | $12.4 million, versus a $53.2 million loss | $149.8 million, versus $14.3 million |
| Net income (loss) | $17.2 million, versus a $52.3 million loss; diluted EPS $0.12 | $149.5 million, versus $18.5 million; diluted EPS $1.09 |
| Adjusted EBITDA and margin | $48.5 million / 14.6%, versus $(28.4) million / (16.2)% | $214.8 million / 21.9%, versus $64.8 million / 8.8% |
| Operating cash flow | Not separately presented in the supplied filing text | $176.0 million, versus $35.4 million |
Dollar amounts are rounded. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures; Sonos cautions they are not substitutes for GAAP results and exclude, among other items, recurring stock-based compensation.
Financial position and liquidity
- At April 3, cash and cash equivalents were $638.9 million, versus $407.1 million at October 3, 2020; restricted cash was $0.2 million. Six-month cash, cash equivalents and restricted cash increased by $231.8 million.
- Total assets were $1.048 billion and stockholders’ equity was $579.3 million. Current assets were $880.2 million and current liabilities $371.1 million.
- Sonos repaid its $24.9 million term loan in January 2021 and reported no short- or long-term debt at quarter-end. Its revolving credit facility allows borrowing up to $80 million subject to the borrowing base, matures in October 2021, and had no borrowings outstanding. The company was in compliance with financial covenants.
- Operating cash flow for the six months benefited from net income, partly offset by working-capital movements. Investing cash use was $19.9 million; financing provided $74.7 million, including $119.2 million from stock-option exercises and offset by debt repayment and equity-related payments.
Changes, drivers and management commentary
- Q2 revenue growth reflected strong demand across product categories and a less challenging comparison with the prior-year quarter, when retail partners rebalanced inventory and COVID-19 disrupted replenishment. Sonos speakers revenue rose 129.9%; products sold rose 52.6%.
- For the six months, revenue increased 32.7% while products sold increased only 1.9%, with management attributing the difference primarily to product mix and a continued shift toward higher-priced products. Sonos speakers and system products grew; partner products and other revenue declined 25.9%, primarily due to slower IKEA module orders.
- Gross-margin expansion reflected product and channel mix, lower promotional activity, tariff reductions and refunds, cost savings and higher-volume fixed-cost leverage. These benefits were partly offset by higher component, shipping and logistics costs and supply constraints. Sonos reported $6.2 million of tariff refunds recognized in the first six months; approximately $27.5 million of expected additional refunds remained unrecognized pending acceptance.
- Operating expenses rose, including general and administrative expense, which increased 52.4% in Q2 and 33.2% for the six months. Sonos attributed much of the increase to intellectual-property litigation costs; its adjusted EBITDA reconciliation excludes $11.0 million of Q2 and $19.7 million of six-month legal and transaction-related costs.
- Management said cash, operating cash flow and committed credit lines should cover working-capital and capital-expenditure needs for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- COVID-19-related supply-chain constraints, component shortages, port congestion and higher freight costs continued to delay product availability and delayed full supply-chain diversification into Malaysia until fiscal 2022. Sonos also cited risks of unmet demand, customer dissatisfaction and added costs.
- Sonos had $57.5 million of non-cancelable inventory purchase commitments expected in the remainder of fiscal 2021. Its business is seasonal, with historically highest revenue in fiscal Q1 holiday season.
- Sonos and Google/Alphabet are involved in multiple patent disputes in the U.S. and Europe. As of April 3, potential losses were not considered probable or reasonably estimable. Subsequent to quarter-end, a Hamburg court issued a preliminary injunction against Google Ireland Ltd. concerning Cast technology in Germany.
- The quarter’s $6.5 million income-tax benefit included a discrete benefit related to U.S. share-based compensation. Sonos maintained a full valuation allowance on U.S. and Netherlands deferred tax assets, and said a future release could materially affect earnings but depends on prospective results and management judgment.
- Foreign-currency movements are unhedged. Sonos estimated that a hypothetical adverse 10% currency move would have reduced pre-tax income by approximately $5.2 million for Q2 or $14.2 million for the six-month period.
- The board authorized a $50 million share-repurchase program; $0.7 million had been used by April 3, leaving $49.3 million available. Six-month financing cash flow also included substantial proceeds from stock-option exercises, and outstanding awards may dilute shareholders.
Important facts for investors to verify
- Whether supply constraints, shipping costs and delayed Malaysia diversification affect product availability, sales and gross margins.
- How much of reported growth reflects sustainable demand versus the prior-year COVID-19 and retailer-inventory comparison, and how product mix affects unit growth versus revenue.
- The timing and approval of the approximately $27.5 million of unrecognized tariff refunds.
- Developments and potential financial or operating consequences of the Sonos–Google patent litigation and the German preliminary injunction.
- The October 2021 credit-facility maturity, borrowing-base availability and the company’s liquidity needs beyond management’s stated 12-month expectation.