Sonos, Inc. — Q3 Fiscal 2022 Form 10-Q
Reporting period: Three and nine months ended July 2, 2022; filed August 10, 2022. Sonos designs and sells audio products and related services. Financial statement amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Three months ended July 2, 2022 | Prior-year quarter | Nine months ended July 2, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $371.8 | $378.7 | $1,436.0 | $1,357.2 |
| Gross profit / margin | $175.8 / 47.3% | $177.9 / 47.0% | $672.3 / 46.8% | $643.1 / 47.4% |
| Operating income / margin | $7.0 / 1.9% | $16.7 / 4.4% | $149.6 / 10.4% | $166.5 / 12.3% |
| Net income (loss) | $(0.6) | $17.8 | $131.5 | $167.3 |
| Adjusted EBITDA / margin (non-GAAP) | $42.1 / 11.3% | $46.7 / 12.3% | $252.1 / 17.6% | $261.5 / 19.3% |
- Quarterly revenue fell 1.8% year over year, although it rose 2.2% on a constant-currency basis. Products sold fell 9.0%. Nine-month revenue increased 5.8% (7.9% constant currency), while products sold declined 0.5%.
- Quarterly speaker revenue increased 1.3%, supported by Ray, Arc and One; system-products revenue declined 19.4%, primarily because of supply constraints. For the nine months, speaker revenue rose 2.6%, system products 18.7%, and partner and other revenue 24.6%.
- Quarterly gross margin improved 0.3 percentage points, helped by higher selling prices and tariff effects, partly offset by component costs. Nine-month gross margin declined 0.6 points, reflecting higher shipping, logistics, component and tariff costs; reduced promotions and higher prices partly offset the decline.
- Quarterly operating expenses increased 4.8% to $168.9 million. R&D rose 12.5% and G&A 10.6%; sales and marketing fell 4.8%. Nine-month operating expenses increased 9.7% to $522.7 million.
- Quarterly other expense was $9.6 million, including $9.9 million of net foreign-currency expense, versus $2.0 million of other income in the prior-year quarter. This contributed to the quarterly net loss.
Cash, liquidity and capital resources
- Cash and cash equivalents were $439.7 million at July 2, 2022, down from $640.1 million at October 2, 2021. The filing reports no outstanding revolving-credit borrowings; the $100 million secured facility had $2.9 million in letters of credit reducing availability. Sonos was in compliance with its financial covenants.
- Nine-month operating cash flow was $75.7 million, down from $246.7 million. Working-capital changes included a $158.1 million inventory build, partly offset by higher accounts payable and accrued expenses.
- Investing cash outflow was $151.4 million, including $126.4 million of acquisition payments, net of acquired cash. Financing cash outflow was $114.2 million, mainly reflecting $117.1 million of share repurchases and $33.4 million for employee tax withholding, partly offset by $37.3 million from option exercises.
- Inventory rose to $335.7 million from $185.1 million at fiscal year-end. Total liabilities were $600.5 million and total stockholders’ equity was $642.7 million at July 2.
- Management said existing cash, operating cash flows and committed credit lines should cover working-capital and capital-expenditure needs for at least the next 12 months. The company repurchased 4.65 million shares for $117.1 million during the nine months; $32.9 million remained under the $150 million authorization.
Material developments, outlook and risks
- Acquisitions: Sonos acquired Mayht on April 8 for $99.3 million in cash. The purchase allocation included $72.2 million of intangible assets and estimated goodwill; results since acquisition were not material. Two other first-quarter acquisitions cost approximately $27.1 million combined. Mayht’s acquired in-process research and development was largely not yet amortizing.
- Supply and demand: Management cited component shortages, China lockdowns, higher input and freight costs, port congestion, and delayed product availability. It reported some supply recovery but also softer global consumer demand in Q3, and expected supply-chain effects to continue while industry constraints persisted. Supply diversification into Malaysia was delayed.
- Foreign exchange and macroeconomic exposure: A stronger U.S. dollar, particularly against the euro, weighed on reported revenue and created foreign-exchange losses. Sonos does not hedge foreign-currency exposures with derivatives. Management also cited inflation, recession uncertainty and the Russia-Ukraine conflict.
- Tariffs: The company recognized $11.9 million of tariff refunds in the nine months as a reduction to cost of revenue. Approximately $14.3 million of additional expected refunds remained unrecorded pending acceptance and approval.
- Legal matters: Sonos and Google continued extensive patent litigation. The ITC had issued an exclusion order concerning certain Google products; related enforcement and modification requests were contested. The filing also describes subsequent court rulings and new Google claims. Sonos said potential losses in specified disputes were not probable or reasonably estimable as of July 2, 2022.
- Other notable items: Sonos launched its new ERP system in May 2022. Management considered disclosure controls effective, while noting it would continue evaluating control changes associated with the implementation. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key risks include supply-chain concentration, inventory forecasting and possible obsolescence, discretionary consumer demand, seasonality, competition, product launches, tariffs, foreign exchange, reliance on retail and technology partners, cybersecurity, and litigation.
Investor facts to verify
- Whether the inventory build converts to sales without material discounting, write-downs or further pressure on operating cash flow.
- Whether supply constraints, shipping costs and product availability improve, and whether demand stabilizes after Q3’s softness.
- How much of reported growth and future margins are affected by currency movements, tariffs and the timing or approval of remaining tariff refunds.
- The integration and commercial progress of Mayht, including the value and timing of benefits from its acquired technology.
- Developments and potential financial exposure in the Google and other patent disputes, and any effects on product sales or costs.
- The continuing cost, control and reporting effects of the new ERP system, along with the impact of buybacks and stock-based compensation on cash and share dilution.