Sonos, Inc. — Q1 Fiscal 2022 Form 10-Q
Reporting period: 13 weeks ended January 1, 2022; comparable period ended January 2, 2021. Sonos designs, develops, manufactures and sells audio products and services through retail, e-commerce and direct channels. Financial amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $664.5 million | $645.6 million | +2.9% |
| Gross profit / margin | $317.4 million / 47.8% | $299.4 million / 46.4% | Margin +1.4 percentage points |
| Operating income / margin | $132.6 million / 20.0% | $137.4 million / 21.3% | Income down 3.5% |
| Net income / diluted EPS | $123.5 million / $0.87 | $132.3 million / $1.01 | Income down 6.7% |
| Adjusted EBITDA / margin | $163.1 million / 24.6% | $166.3 million / 25.8% | EBITDA down 1.9% |
| Operating cash flow | $179.9 million | $214.5 million | Down $34.6 million |
Cash and cash equivalents were $754.4 million at January 1, 2022, versus $640.1 million at October 2, 2021. Current assets were $1.16 billion and current liabilities $599.3 million. Sonos had no revolving-credit borrowings; its $100 million secured facility had $2.9 million of letters of credit reducing availability. The company reported covenant compliance and said existing cash, operating cash flows and committed credit lines should meet working-capital and capital-expenditure needs for at least 12 months.
Investing cash outflow was $33.5 million, including $27.1 million paid for two acquisitions and $6.4 million for property, equipment and intangible assets. Financing cash outflow was $30.9 million, including $31.4 million of share repurchases and $11.9 million for shares withheld for employee taxes, partly offset by $13.2 million in option-exercise proceeds. The quarter ended with $57.5 million in non-cancelable inventory purchase commitments expected during the remainder of FY2022.
Material changes versus the prior-year quarter
- Revenue grew despite products sold declining 9.5% to 2.398 million units. Management attributed the difference primarily to lower promotions and a more favorable mix of higher-priced products.
- Sonos speakers revenue fell 4.9% to $501.9 million, while Sonos system products rose 37.8% to $134.7 million and partner and other revenue rose 37.1% to $27.9 million.
- Gross margin improved as promotional activity declined and product mix improved, partly offset by higher shipping and logistics costs and $5.7 million of tariff expense net of refunds.
- Operating expenses rose to $184.8 million from $162.0 million, with increased research and development, sales and marketing, and general and administrative spending. Operating margin and net income declined.
- Other expense shifted to $1.4 million from $4.3 million of other income, primarily reflecting foreign-exchange losses. Operating cash flow declined, with working-capital movements including higher receivables, inventory and accounts payable/accruals.
Outlook, commentary, risks and unusual items
- Supply chain and demand: COVID-related component shortages, shipping and logistics constraints, increased component costs and delayed product availability continued to affect results. Management expected these conditions to persist while industry supply-chain challenges continued; efforts to diversify manufacturing into Malaysia had also been delayed.
- Guidance: The filing provides no specific numerical revenue, earnings or margin guidance. Sonos noted first-quarter seasonality around holiday shopping, and that moderated promotions reflected supply constraints.
- Acquisitions: Two acquisitions closed in the quarter for approximately $27.1 million cash consideration. They added employees and strategic IP; $22.2 million was allocated to goodwill, which is not tax deductible. Pro forma results were not presented because the acquisitions were not material.
- Tariff refunds: Sonos recognized $1.7 million of tariff refunds as a reduction in cost of revenue. Approximately $12.3 million of expected refunds remained outstanding and was not recorded because acceptance timing was uncertain.
- Tax: The quarter’s tax provision included a $3.2 million discrete benefit related to a partial U.S. valuation-allowance release and share-based compensation. Management said a further release within 12 months was possible but uncertain and could materially affect earnings.
- Litigation: On January 6, 2022, the ITC issued an exclusion order and cease-and-desist order concerning certain Google products after finding infringement of Sonos patents. Other Sonos-Google patent disputes and Google claims against Sonos remained in process; potential losses in certain matters were not considered probable or reasonably estimable.
- Other risks: The filing highlights dependence on contract manufacturers, component suppliers and channel partners; competition, product-introduction and seasonal-demand risks; tariff and foreign-exchange exposure; and ongoing IP litigation. A hypothetical adverse 10% currency move would have reduced pretax income by approximately $10.5 million for the quarter. Sonos did not hedge foreign-currency exposures with derivatives.
Important facts for investors to verify
- Whether component availability, freight costs and delayed product deliveries improve, and how those factors affect sales volume and gross margin.
- Whether revenue growth and the higher-priced product mix can offset falling unit volumes and rising operating expenses.
- The collectability and timing of the approximately $12.3 million in unrecorded expected tariff refunds.
- Developments in the ITC order, related appeals and other patent litigation, including any effects on products, costs or business relationships.
- Acquisition integration, future spending and the effect of stock-based compensation; adjusted EBITDA is a non-GAAP measure and excludes recurring stock-based compensation.
- Whether tax valuation-allowance changes, foreign-exchange movements and working-capital requirements materially affect reported earnings or cash generation.