Sonos, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; year-to-date figures cover the nine months ended June 29, 2019. Comparisons are with the corresponding 2018 periods. Sonos designs, develops, manufactures and sells wireless multi-room audio products.
Financial performance
| Metric | Three months ended June 29, 2019 | Year to date |
|---|---|---|
| Revenue | $260.1 million, up 24.8% | $966.7 million, up 11.9% |
| Gross profit / margin | $117.4 million / 45.1% | $403.1 million / 41.7% |
| Operating income (loss) | $(15.1) million | $30.5 million |
| Net income (loss) | $(14.0) million; $(0.13) per diluted share | $24.8 million; $0.22 per diluted share |
| Adjusted EBITDA / margin (non-GAAP) | $6.8 million / 2.6% | $91.5 million / 9.5% |
| Products sold | 1.083 million, up 22.1% | 4.253 million, up 7.5% |
Quarterly revenue growth reflected gains across regions and product categories. Sonos Beam, Sonos One and Sonos Amp were important drivers. For the nine-month period, home theater, components and module revenue grew, while wireless speaker revenue declined year over year. Americas revenue rose 16.3%, EMEA 2.3% and APAC 50.2% year to date.
Gross margin fell from 45.8% to 45.1% for the quarter and from 43.2% to 41.7% year to date. Management cited product mix, lower licensing revenue for the quarter and unfavorable foreign-exchange effects. The filing says newer products typically have lower margins at launch.
Cash, debt and liquidity
- Cash and cash equivalents were $338.3 million at June 29, 2019, versus $220.9 million at September 29, 2018. Cash, cash equivalents and restricted cash increased $117.4 million over the nine months.
- Operating cash flow was $110.9 million, compared with $15.8 million in the prior-year period. Investing cash outflow was $14.1 million, mainly capital expenditures; financing cash inflow was $20.6 million, primarily from stock-option exercises. Operating cash flow less property and equipment purchases was approximately $96.8 million.
- Total debt was $39.8 million, comprising a $40.0 million term loan net of issuance costs; $11.7 million was current and $28.2 million long-term. The $80.0 million credit facility had no borrowings outstanding, with $4.5 million of letters of credit reducing availability. The term loan bears variable interest and matures in October 2021.
- Sonos reported compliance with debt covenants and stated that cash, operating cash flow and committed credit lines should cover working-capital and capital-expenditure needs for the next 12 months. Access to foreign-subsidiary cash may involve additional U.S. taxes if repatriated.
Material changes, outlook and risks
- Research and development expense increased 25.1% in the quarter, largely from higher personnel costs and software investment. Year-to-date sales and marketing expense declined 17.5%, reflecting reduced traditional advertising and lower headcount; general and administrative expense increased 16.4% year to date.
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects gross margin pressure in the near to intermediate term as new products become a larger share of sales, and identifies seasonality, product launches, product mix and foreign exchange as drivers of performance variability.
- Component shortages and price increases—particularly for multilayer ceramic capacitors—were expected to pressure gross margin through calendar 2019. The filing also discusses U.S.-China tariffs and a proposed additional tariff announced August 1, 2019, after the reporting-period end, which could affect products and costs.
- Material weaknesses in internal control over financial reporting remained unremediated as of June 29, 2019; management concluded disclosure controls and procedures were not effective. Remediation was ongoing. Management nevertheless stated the interim financial statements fairly present the company’s financial position, results and cash flows in accordance with GAAP.
- Sonos disclosed a patent-infringement case brought by Implicit, LLC; the company denies the allegations, and any potential loss was not considered probable or reasonably estimable. It also had $56.3 million in non-cancelable inventory purchase commitments for the remainder of fiscal 2019.
- Other key risks include reliance on a primary contract manufacturer and limited suppliers, competition from larger consumer-electronics and voice-assistant companies, dependence on third-party voice and streaming services, seasonal demand, foreign-currency exposure without hedging, and cybersecurity and privacy risks.
Important facts for investors to verify
- Whether revenue growth and product volumes remain strong while older wireless-speaker products decline.
- Whether gross margins stabilize despite launch mix, component-cost pressures, tariffs and currency movements.
- Whether operating cash generation is repeatable and how the term-loan repayments affect liquidity.
- Progress in remediating internal-control weaknesses and whether controls become effective.
- Developments in the Implicit patent litigation, supplier diversification and tariff exposure.