Sonos, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; six-month comparisons are for the periods ended March 28, 2020 and March 30, 2019. Amounts below are in U.S. dollars.
Business context
Sonos designs, develops, manufactures and sells audio products and services through retail and e-commerce partners and its own website. Its fiscal second quarter coincided with the initial effects of COVID-19 on consumer demand and retail operations. The company acquired voice-technology provider Snips in November 2019.
Financial performance and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $175.1m | $210.2m | $737.2m | $706.5m |
| Gross profit / margin | $73.0m / 41.7% | $90.4m / 43.0% | $300.6m / 40.8% | $285.7m / 40.4% |
| Operating income (loss) | $(53.2)m | $(22.9)m | $14.3m | $45.6m |
| Net income (loss) | $(52.3)m | $(22.8)m | $18.5m | $38.8m |
| Adjusted EBITDA and margin | $(28.4)m / (16.2)% | $(2.8)m / (1.3)% | $64.8m / 8.8% | $84.7m / 12.0% |
- Q2 revenue fell 16.7%; products sold declined 23.2% to 681,000. Sonos speaker revenue fell 27.5%, while system-product revenue rose 22.4%.
- For the six months, revenue grew 4.3%, but net income and adjusted EBITDA declined. Product-category growth came from system products and partner products; Sonos speaker revenue decreased 2.3%.
- Q2 operating expenses were $126.2m, up from $113.4m. Research and development rose 23.7%, partly reflecting higher headcount, Snips, and product-development investment.
- Cash and cash equivalents were $283.3m at March 28, 2020, down from $338.6m at September 28, 2019. Six-month operating cash flow was $35.4m, versus $65.1m a year earlier; investing cash outflow was $62.1m and financing cash outflow was $28.6m.
- Total debt was approximately $29.9m, including $8.3m current and $21.5m long-term. The $80m revolving facility had no borrowings outstanding, but availability is subject to a borrowing base and $4.5m of letters of credit. Sonos reported covenant compliance.
- Current assets were $464.0m and current liabilities $213.2m. Six-month capital spending on property, equipment and intangible assets was $25.8m. Cash paid for the Snips acquisition was $36.3m.
Material changes, outlook and risks
- Management attributed the quarterly sales decline to retail-store closures, weaker demand and retail partners reducing orders to rebalance inventories. Direct-to-consumer revenue increased 31.7% year over year in the quarter, primarily through Sonos.com. Management reported minimal supply-chain disruption as of the filing date.
- Tariffs on China-origin products reduced margins: Sonos cited approximately $6.3m of Q2 tariffs and $25.9m for the six-month period. Excluding tariffs, reported gross margins would have been 45.3% and 44.3%, respectively; these are company-calculated non-GAAP presentations.
- In response to COVID-19, Sonos reduced planned inventory investment and suspended travel, new hiring, promotions and merit-based pay increases. It said cash, operating cash flow and committed credit lines were expected to meet working-capital and capital-expenditure needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Risks include the uncertain duration and severity of the pandemic, retail and channel-partner dependence, supply-chain concentration, tariffs, seasonality, foreign-exchange exposure, competition and execution of new products. The company does not hedge foreign-currency exposures.
- Sonos filed patent-infringement actions against Google and Alphabet; Google denied infringement and challenged patent validity. The ITC opened an investigation, and the district-court case was stayed pending that investigation. Sonos also disclosed an unresolved patent case brought by Implicit, with any loss not considered probable or reasonably estimable.
- Other notable items: the Snips acquisition included $1.4m of one-time acquisition-related costs; the company repurchased $33.2m of shares under its $50m authorization during the six months and had $16.8m remaining at quarter-end. It also had $29.1m of non-cancelable inventory purchase commitments for the remainder of fiscal 2020.
Most important facts for investors to verify
- Whether COVID-related retail closures and reduced partner orders continue, and whether online-channel growth offsets them.
- Whether the Q2 decline in speaker sales, unit volume and adjusted EBITDA is temporary or persists into subsequent quarters.
- The ongoing impact of tariffs, product mix and cost reductions on gross margin.
- Actual availability under the borrowing-base-limited credit facility and cash needs against debt, lease obligations and purchase commitments.
- Developments and potential costs or outcomes in the Google/Alphabet and Implicit patent matters.
- Performance and integration of Snips, and the returns from increased research and development spending.