Sonos, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 29, 2018. This is an annual filing, not a standalone Q4 report; quarterly figures below identify the quarter ended September 29, 2018. Sonos designs and sells wireless speakers, home-theater products and components, supported by its software and streaming-service ecosystem. It completed its IPO in August 2018.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,137.0 million | $992.5 million |
| Gross profit / margin | $489.3 million / 43.0% | $456.1 million / 45.9% |
| Operating loss | $(8.9) million | $(15.6) million |
| Net loss | $(15.6) million | $(14.2) million |
| Adjusted EBITDA / margin | $69.1 million / 6.1% | $56.0 million / 5.6% |
| Operating cash flow | $30.6 million | $64.0 million |
- Revenue increased 14.6%; products sold rose 29.0% to 5.1 million. Growth was led by Sonos One and Sonos Beam. Americas revenue grew 21.5%; 51% of FY2018 revenue came from outside the United States.
- Gross margin fell 2.9 percentage points, mainly due to lower launch margins on new products and lower retail prices on older wireless speakers. Management expects product-launch mix to pressure margins in the near to intermediate term, with potential cost efficiencies as production scales.
- Net loss per share was $(0.24), versus $(0.25) in FY2017. Sales and marketing expense was nearly flat, while R&D expense rose 14.2% and G&A rose 10.5%.
- Fourth-quarter FY2018 revenue was $272.9 million and net loss was $1.7 million, compared with revenue of $214.1 million and net loss of $14.9 million in the year-ago quarter. Revenue is highly seasonal: Q1 FY2018 accounted for 41% of full-year revenue.
Liquidity, debt and cash flow
- Cash and cash equivalents were $220.9 million at year-end, up from $130.6 million. Working capital was $201.2 million; total assets were $587.5 million.
- Operating cash flow was $30.6 million, down from $64.0 million. Management attributed the working-capital drag principally to an $80.1 million inventory increase ahead of the holiday season and higher accounts receivable, partly offset by higher payables and accrued expenses.
- Net cash used in investing activities was $35.7 million, mainly for property and equipment. Financing activities provided $94.4 million, primarily including $90.6 million of IPO proceeds.
- Year-end term-loan principal was $40.0 million (carrying debt, net of issuance costs, was $39.8 million), at a 4.8% rate and due in October 2021. The company also had an asset-based revolving facility with capacity of up to $80 million subject to its borrowing base; no revolver borrowings were outstanding at year-end. Management said available cash, operating cash flow and committed credit lines should cover working capital and capital needs for at least 12 months.
Changes, outlook and key risks
- Sonos adopted ASC 606 using the full retrospective method. For certain distributors and retail partners, revenue recognition shifted from sell-through to shipment or delivery, accelerating recognition; the company restated prior periods. The company said adoption did not change reported cash flows.
- The IPO raised $90.6 million net of underwriting discounts and commissions. Preferred stock converted into common stock at the IPO. The company does not intend to pay dividends in the foreseeable future.
- No numerical forward guidance was provided. Management plans to increase product-launch cadence, expand internationally and build direct-to-consumer and partner channels. It expects operating expenses to decline as a share of revenue over time, but notes spending and results may fluctuate.
- Material risks include ongoing net losses and uncertain path to sustained profitability; gross-margin pressure and component-cost inflation, including multilayer ceramic capacitor shortages expected to affect margins through calendar 2019; tariffs on certain China-origin products and potential broader trade measures; and concentrated manufacturing—one vendor supplied about 98% of finished goods purchased in FY2018.
- Sonos depends on third-party retailers, content and voice-assistant partners, and cloud services. Best Buy represented 17% of revenue and ALSO Group 10%. Amazon may disable Alexa integration in Sonos One and Beam on limited notice; Amazon, Apple and Google also compete with Sonos.
- Management identified material weaknesses in internal control over financial reporting and concluded disclosure controls were not effective at September 29, 2018. Remediation, including additional accounting personnel and stronger review controls, was ongoing. Management nevertheless stated the financial statements were fairly presented in accordance with U.S. GAAP.
- Other items to monitor: foreign-exchange exposure (a hypothetical adverse 10% currency move was estimated to reduce pretax income by about $10.8 million); the pending Implicit patent case, for which loss was not considered probable or reasonably estimable; and Denon patent litigation settled in May 2018 for royalty payments. FY2017 included a one-time $4.9 million Dutch tax benefit.
Important facts for investors to verify
- Whether new-product growth can continue while restoring gross margin and converting adjusted EBITDA growth into GAAP profitability.
- Inventory quality and sell-through after the holiday build, and the effect of working capital on operating cash flow.
- Progress remediating the material weaknesses and the results of subsequent internal-control testing.
- Actual exposure to tariffs, component shortages, foreign exchange and dependence on key manufacturers, retailers and technology partners.
- Terms and cash proceeds of Denon royalties, developments in the Implicit litigation, and any material changes to debt availability or covenants.