Sonos, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 30, 2019. Sonos designs and sells wireless multi-room audio products, primarily through retail and e-commerce channels. Fiscal quarters follow a 4-4-5 calendar.
Financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $210.2 million | $186.7 million | $706.5 million | $655.7 million |
| Gross profit / margin | $90.4 million / 43.0% | $81.3 million / 43.6% | $285.7 million / 40.4% | $277.5 million / 42.3% |
| Operating income (loss) | $(22.9) million | $(33.7) million | $45.6 million | $12.6 million |
| Net income (loss) | $(22.8) million | $(32.6) million | $38.8 million | $13.1 million |
| Adjusted EBITDA / margin | $(2.8) million / (1.3)% | $(14.8) million / (8.0)% | $84.7 million / 12.0% | $50.5 million / 7.7% |
| Operating cash flow | Not presented separately | Not presented separately | $65.1 million | $4.6 million |
Q2 revenue rose 12.6% year over year (17.1% in constant currency); products sold increased 0.9%. For the six months, revenue grew 7.8% (10.3% in constant currency) and products sold rose 3.2%. Q2 basic and diluted loss per share was $0.22, compared with $0.55 in the prior-year quarter. Adjusted EBITDA is a non-GAAP measure.
Performance and material changes
- Home theater and component products drove growth, notably Sonos Beam, Sub and Sonos Amp. Wireless-speaker revenue declined, reflecting lower Play:1 and Play:3 sales and product-mix shifts toward Sonos One. APAC growth was partly attributable to the IKEA partnership; EMEA revenue declined in both comparisons.
- Gross margin fell year over year in Q2 and the six-month period. Management attributed the decline principally to lower initial margins and mix associated with the Sonos Beam launch.
- Q2 sales and marketing expense declined 16.6%, and six-month expense declined 24.8%, largely from lower advertising and marketing costs and lower personnel-related costs. Research and development and general and administrative expenses increased, including from additional software staffing and public-company infrastructure.
- Six-month operating cash flow improved to $65.1 million from $4.6 million. Cash from operations benefited from seasonal inventory and receivables reductions; the company also reported a substantial reduction in accounts payable and accrued expenses.
Balance sheet, debt and liquidity
- At March 30, 2019, cash and cash equivalents were $295.3 million; total current assets were $478.8 million and current liabilities $185.8 million. Cash, cash equivalents and restricted cash totaled $295.5 million.
- Debt carrying value was $39.8 million, comprising $10.0 million short-term and $29.8 million long-term. The $40 million secured term loan bears a variable rate (5.1% at period end), matures in October 2021, and quarterly principal payments were to begin in July 2019. No credit-facility borrowings were outstanding; $4.5 million of letters of credit reduced availability.
- Management said existing cash, operating cash flow and committed credit lines were expected to fund working capital and capital expenditures for the next 12 months. The company was compliant with financial covenants. Inventory purchase commitments for the remainder of FY2019 were $45.4 million.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects to continue investing in research and development and describes new product launches as a source of revenue variability and near-to-intermediate-term gross-margin pressure.
- Management warned that an industry-wide shortage of multilayer ceramic capacitors and related cost increases could pressure gross margin through calendar 2019. Other significant exposures include foreign-exchange movements, tariffs and trade measures, seasonal demand, and dependence on a key contract manufacturer and limited component suppliers.
- Sonos reported a $4.7 million foreign-currency loss for the six months, compared with a $3.4 million gain in the prior-year period. A hypothetical adverse 10% currency move would have reduced pretax income by an estimated $7.3 million for the six-month period.
- The company maintains a full valuation allowance on U.S. deferred tax assets and said a significant release could be possible within 12 months, depending on profitability; timing and amount are uncertain.
- Sonos denies allegations in an ongoing patent-infringement action brought by Implicit, LLC. Any potential loss was not considered probable or reasonably estimable at period end.
- Management concluded disclosure controls and procedures were not effective at March 30, 2019 because previously identified material weaknesses in financial reporting controls remained under remediation.
Important facts for investors to verify
- Whether product launches, especially Beam and newer products, sustain revenue growth while margins recover; monitor wireless-speaker trends and regional performance.
- Whether component shortages, tariffs, foreign exchange and supplier concentration affect costs, product availability and gross margin.
- Cash-flow quality and seasonality, including working-capital movements, purchase commitments and scheduled term-loan amortization.
- Progress in remediating internal-control weaknesses and the status and potential exposure of the Implicit patent litigation.
- Potential dilution: the filing reports significant outstanding options and RSUs; common shares outstanding on May 3, 2019 were 105,004,158.