Sonos, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 28, 2019 (52 weeks). This is an annual report, not a quarterly filing; it also reports fourth-quarter results. Sonos designs and sells connected wireless speakers, home-theater products and components through retail, e-commerce and direct channels. Products were sold in more than 50 countries, and 50% of FY2019 revenue came from outside the U.S.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,260.8 million | $1,137.0 million | +10.9% |
| Products sold | 6.13 million | 5.08 million | +20.8% |
| Gross profit / margin | $527.3 million / 41.8% | $489.3 million / 43.0% | Margin down 1.2 percentage points |
| Operating income (loss) | $5.7 million | ($8.9 million) | Improved |
| Net loss | ($4.8 million) | ($15.6 million) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $88.7 million; 7.0% margin | $69.1 million; 6.1% margin | Improved |
| Cash from operating activities | $120.6 million | $30.6 million | Increased |
Revenue growth was attributed mainly to Sonos Beam, Sonos Amp and the IKEA partnership. Home-theater revenue rose to $489.6 million from $418.4 million; component revenue rose to $188.9 million from $150.4 million. Wireless-speaker revenue declined to $518.8 million from $546.6 million. APAC revenue grew 77.7%, largely from IKEA-related module sales, while EMEA grew 1.3%.
Gross margin fell primarily because of product mix, unfavorable currency effects and a new distribution channel, partly offset by product and material cost reductions. Operating expenses rose 4.7% overall: R&D increased 20.5% and G&A increased 20.7%, while sales and marketing fell 8.6% as the company cited improved operating leverage and more efficient digital and direct marketing. Foreign-currency losses increased to $8.6 million from $1.2 million and contributed to the net loss despite positive operating income.
Cash and cash equivalents were $338.6 million at year-end, compared with $220.9 million a year earlier; working capital was $276.6 million. Gross Term Loan principal was $33.3 million, with a $24.8 million long-term carrying balance after the current portion and debt costs. The $80 million borrowing-base Credit Facility had no borrowings outstanding; $4.5 million of letters of credit reduced availability. The company reported compliance with debt covenants. It said cash, operating cash flow and committed credit lines should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes and notable items
- Revenue increased 10.9%, while product volume grew 20.8%; the difference reflects product mix, pricing and promotions.
- Operating results improved to $5.7 million of operating income from an $8.9 million operating loss, but FY2019 remained loss-making after other expenses and taxes.
- Operating cash flow rose to $120.6 million. The filing attributes the result partly to noncash expenses and increases in accounts payable and accrued expenses; receivables and inventory also increased.
- New FY2019 products included Sonos Move, Sonos One SL and Sonos Port. The company also expanded partnerships with IKEA and Sonance and added Google Assistant to many products.
- After year-end, Sonos acquired Snips SAS for approximately $37.5 million in cash, subject to adjustments and holdbacks. The acquisition was expected to be consolidated beginning in FY2020; purchase accounting was not finalized.
- Management said it remediated previously reported internal-control material weaknesses and concluded controls were effective at year-end; the auditor also opined that internal control was effective. Revenue-recognition estimates for standalone selling prices and service periods were identified as a critical audit matter.
Outlook, risks and contingencies
The filing gives no numerical revenue or earnings guidance. Management plans continued investment in product and software development, international expansion, brand marketing, direct-to-consumer sales and partnerships. It expects R&D and public-company-related G&A expenses to increase in absolute dollars. Sonos stated that its results are seasonal, with the holiday-season first fiscal quarter historically the largest; FY2019 Q1 represented 39.4% of annual revenue. It also cautioned that new-product launches may pressure margins.
- Supply chain and trade: Inventec remained the principal manufacturer; approximately 83% of finished goods purchased in FY2019 came from one vendor. Production was concentrated in China, and tariffs on Chinese imports affected products. Diversifying manufacturing to Malaysia may involve cost and execution risks.
- Competition and partners: Sonos competes with larger consumer-electronics and technology companies, including Amazon, Apple and Google. Some are also content, distribution or voice-technology partners and could favor their own products or change access or terms.
- Sales concentration: Best Buy represented 16% of FY2019 revenue and the ALSO Group 10%; the company also depends substantially on third-party retailers. Sonos.com generated 12.2% of revenue.
- Other risks: Product-launch execution, inventory forecasting, foreign exchange (the company does not hedge currency exposures), cybersecurity and privacy, intellectual property litigation, and continued customer support for older products. A 10% adverse currency move was estimated to affect FY2019 pretax loss by about $10.3 million.
- Legal matter: Sonos disclosed a patent-infringement case brought by Implicit, LLC. The company denied the allegations and said any potential loss was not probable or reasonably estimable; management said no pending proceedings were expected to have a material adverse effect.
- Tax: A full valuation allowance remained against U.S. and certain foreign deferred tax assets. Management said a release of some allowance could be possible within 12 months, depending on profitability, but timing and amount were uncertain.
Most important facts for investors to verify
- Whether revenue growth and product-volume gains continue, particularly in wireless speakers and slower-growth EMEA.
- Whether gross margin stabilizes or recovers after the FY2019 decline, including the impact of tariffs, product mix, new launches and currency.
- Whether operating cash flow remains strong without relying on rising payables, and how inventory and receivables develop.
- Progress in diversifying manufacturing away from China and reducing reliance on Inventec, while maintaining product supply and margins.
- Any material developments in the Implicit patent case, Snips integration and acquisition costs, and the deferred-tax-asset valuation allowance.