Sonos, Inc. — Fiscal 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 27, 2020; comparisons are with the periods ended June 29, 2019. Amounts are in U.S. dollars. Sonos designs and sells audio products and services through third-party retail, e-commerce partners and its own website.
Financial performance
| Metric | Three months ended June 27, 2020 | Year-over-year change | Nine months ended June 27, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $249.3 million | Down 4.2% | $986.5 million | Up 2.1% |
| Gross profit / margin | $109.8 million / 44.0% | Margin down 1.1 percentage points | $410.4 million / 41.6% | Margin down 0.1 percentage points |
| Operating income (loss) | $(56.9) million | Prior-year loss: $(15.1) million | $(42.7) million | Prior-year income: $30.5 million |
| Net income (loss) | $(57.0) million; $(0.52) per diluted share | Prior-year loss: $(14.0) million; $(0.13) per share | $(38.5) million; $(0.35) per diluted share | Prior-year income: $24.8 million; $0.22 per diluted share |
| Adjusted EBITDA and margin | $(2.7) million / (1.1)% | Prior year: $6.8 million / 2.6% | $62.1 million / 6.3% | Prior year: $91.5 million / 9.5% |
Third-quarter revenue fell despite a 299% increase in direct-to-consumer revenue. Product units sold declined 31.4%, while management attributed the smaller revenue decline partly to a shift toward higher-priced products. Sonos speakers revenue rose 1.3%; system products fell 9.3%; partner products and other revenue fell 47.0%. For the nine-month period, Americas revenue grew 6.8%, EMEA declined 7.8%, and APAC grew 22.3%.
Tariffs on China-origin products weighed on gross margin: management estimated third-quarter margin would have been 45.7% excluding tariffs, versus 44.0% reported. Nine-month margin would have been 44.6% excluding tariffs, versus 41.6% reported. Operating results also included $26.2 million of third-quarter restructuring and related costs and $4.1 million of legal costs relating to intellectual-property litigation. Adjusted EBITDA excludes restructuring and legal/transaction costs, among other items.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $329.1 million at June 27, 2020, compared with $338.6 million at September 28, 2019. Total debt was $28.2 million, including $8.3 million current and $19.9 million long-term; no revolving-credit-facility borrowings were outstanding.
- The revolving credit facility permits borrowing up to $80 million, subject to the borrowing base; $0.5 million of letters of credit reduced availability. The company reported compliance with debt covenants.
- For the nine months, operating cash flow was $83.2 million, investing cash outflow was $66.2 million, and financing cash outflow was $27.1 million. Cash, cash equivalents and restricted cash decreased $9.5 million to $329.3 million.
- Operating cash flow benefited from lower inventory and receivables, while accounts payable and accrued expenses decreased $162.1 million. Investing outflows included $36.3 million for the Snips acquisition and $29.9 million for property, equipment and intangible assets.
- Inventories were $88.4 million, down from $219.8 million at fiscal year-end. The company had $46.7 million in non-cancelable inventory purchase commitments for the remainder of fiscal 2020.
- Sonos reported $64.6 million of operating lease liabilities and $60.4 million of deferred revenue at quarter-end.
Material changes, outlook and risks
- COVID-19 and demand: Store closures and restrictions reduced retail activity, while demand exceeded expectations and caused product shortages and backorders. Direct-to-consumer sales partially offset the impact. Management said the supply chain had not been disrupted as of the filing, but diversification into Malaysia was delayed, likely until mid-2021.
- Restructuring: Initiated June 23, the plan eliminated approximately 12% of global headcount and closed the New York retail store and six satellite offices. Total pre-tax costs were $26.4 million, most recognized in the quarter. Management expected approximately $7.5 million of savings in fiscal Q4 and substantial completion in fiscal Q1 2021; further cost actions would depend on the pandemic’s severity and duration.
- Tariff development after quarter-end: Temporary exclusions from Section 301 tariffs applied to component and core speaker products through August 31, 2020, with an estimated $30 million refund for tariffs paid since September 2019. The refund was not recorded at quarter-end, receipt timing was uncertain, and extensions were needed to avoid reinstatement.
- Management outlook: No formal revenue or earnings guidance is provided in the supplied filing text. 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, while noting that requirements depend on demand, spending and economic conditions.
- Legal and other risks: Sonos’s patent-infringement action against Google was under ITC investigation, with trial set for February 2021; Google separately sued Sonos in June 2020. The company said potential losses in the Google countersuit were not probable or reasonably estimable. Other prominent risks include pandemic-related demand uncertainty, tariffs, dependence on key manufacturers and channel partners, product availability, competition, foreign-exchange exposure and litigation.
- Other: Sonos acquired voice-technology company Snips in November 2019 for $36.3 million. Its U.S. deferred-tax-asset valuation allowance remained in place; management said a release within 12 months was possible if profitability provided sufficient positive evidence.
Important facts for investors to verify
- Whether the temporary tariff exclusions were extended and whether the estimated $30 million refund was received.
- Whether supply shortages eased and direct-to-consumer growth offset continued weakness in retail and partner channels.
- Whether restructuring delivered the expected Q4 savings and what continuing costs or further actions followed.
- Whether margins and profitability improved after tariffs, expedited freight, litigation costs and restructuring charges.
- Developments in the ITC case and Google’s countersuit, as well as any resulting expense, liability or business restrictions.
- Cash-flow sustainability, borrowing-base availability, covenant compliance and the impact of working-capital movements.