Sonos, Inc. — Q3 fiscal 2023 Form 10-Q
Reporting period: Third quarter ended July 1, 2023; comparisons are with the quarter ended July 2, 2022. Year-to-date figures cover the nine months ended on those dates. Filing signed August 9, 2023. Sonos designs and sells audio products and related services.
Financial highlights
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $373.4 million | $371.8 million | $1,350.1 million | $1,436.0 million |
| Gross profit / margin | $171.8 million / 46.0% | $175.8 million / 47.3% | $588.4 million / 43.6% | $672.3 million / 46.8% |
| Operating income (loss) | $(21.3) million | $7.0 million | $7.8 million | $149.6 million |
| Net income (loss) | $(23.6) million | $(0.6) million | $21.0 million | $131.5 million |
| Adjusted EBITDA and margin (non-GAAP) | $34.3 million / 9.2% | $42.1 million / 11.3% | $147.6 million / 10.9% | $252.1 million / 17.6% |
Q3 diluted loss per share was $0.18; nine-month diluted earnings per share were $0.16, versus $0.94 a year earlier. Q3 products sold fell 11% to 1.208 million, despite slightly higher revenue.
Cash flow: For the nine months, operating activities provided $78.2 million, investing activities used $40.1 million, and financing activities used $48.9 million. Cash declined $6.6 million to $268.3 million. Operating cash flow benefited from a $141.1 million inventory reduction, partly offset by lower accounts payable and accrued expenses.
Liquidity and debt: At July 1, cash and cash equivalents were $268.3 million; current assets were $708.1 million and current liabilities $344.5 million. No revolver borrowings were outstanding. The $100 million secured revolving facility had $1.8 million of letters of credit reducing availability. Sonos reported compliance with its financial covenants and said existing cash, operating cash flow and credit lines should meet needs for at least 12 months. The company had no outstanding borrowings identified in the filing.
Changes and management commentary
- Quarterly revenue was up 0.4%, with Americas growth (+8.3%) offset by declines in EMEA (-6.5%) and APAC (-38.4%). Sonos speakers revenue declined 7.8%; system products rose 67.4%, partly reflecting comparison with prior-year supply constraints.
- Nine-month revenue fell 6.0% (2.9% in constant currency), and products sold declined 9.1%. Management attributed the revenue decline mainly to weaker second-quarter sales, a tough comparison with prior-year backorder fulfillment, and unfavorable foreign exchange.
- Q3 gross margin fell 130 basis points; nine-month margin fell 320 basis points. Management cited promotions, component inventory write-downs, foreign exchange and earlier higher component costs; lower logistics costs and tariff relief partly offset pressure.
- Research and development expense increased 24.7% year to date, primarily from higher personnel costs and stock-based compensation, as well as restructuring charges. Legal fees tied to intellectual-property litigation also contributed to higher general and administrative expense.
- Management reported continued supply-chain improvement, including lower spot-market component and shipping costs, and increased production in Malaysia and Vietnam. Sonos expected to complete its exit from a contract-manufacturer partnership with minimal disruption by September 2023.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or margin guidance. Management cited softening demand amid macroeconomic pressures and initiated a cost-reduction plan covering approximately 7% of employees, a smaller real-estate footprint and reassessment of some program spending.
- The restructuring note reports $15.2 million of total restructuring and abandonment costs for the nine months, including $4.8 million of March lease-abandonment charges; the June plan was described as involving $11.4 million of costs, substantially incurred in Q3. Most remaining plan costs were expected through Q1 FY2024.
- Inventory was $298.1 million, down from $454.3 million at fiscal year-end; inventory write-downs were $24.2 million versus $8.8 million at October 1, 2022. Supplier commitments were approximately $129 million, mostly expected to be paid within 12 months.
- A jury awarded Sonos $32.5 million in May 2023 in a patent case against Google. The award was subject to post-trial motions and was not recorded as of July 1. Other Sonos-Google patent proceedings and appeals remain unresolved.
- Sonos recognized $9.5 million of tariff refunds in the nine-month period as a reduction to cost of revenue; approximately $1.1 million of expected refunds remained unrecorded pending approval. The exclusion for certain core speakers was extended through September 30, 2023.
- Other notable risks include discretionary consumer demand, seasonality, competition and product-launch execution, inventory forecasting, reliance on manufacturers and channel partners, foreign exchange exposure without hedging, tariffs, and intellectual-property litigation. A new approximately 50,000-square-foot Goleta headquarters lease was signed July 13, expiring May 2031; relocation was planned for fiscal 2024.
Key facts for investors to verify
- Whether demand and product volumes stabilize, and whether new products offset declines in established speaker lines.
- Whether gross margins recover as promotions, inventory write-downs, currency effects and supply-chain costs change.
- Actual restructuring savings, remaining costs, and the effect of the manufacturer transition and headquarters lease.
- Cash conversion and inventory quality, including the $129 million supplier commitments and future purchasing needs.
- Outcomes and timing of the Google patent litigation, the unrecorded jury award, and pending tariff refunds.
- How much of reported adjusted EBITDA depends on exclusions: Q3 included $14.7 million of legal and transaction costs and $10.3 million of restructuring and abandonment costs. Adjusted EBITDA is non-GAAP and should be considered alongside GAAP results.