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spk03: Ladies and gentlemen, thank you for standing by and welcome to the Sonos Fiscal First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 in your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cameron McLaughlin, Vice President, Investor Relations. Thank you. Please go ahead.
spk01: Thank you. Good afternoon and welcome to Sonos first quarter fiscal 2021 earnings conference call. I am Cameron McLaughlin and with me today are Sonos CEO Patrick Spence and CFO Brittany Bagley. For those of you who joined the call early, today's hold music included highlights from the recently launched artist curated stations by D'Angelo and FKA Twigs on Sonos Radio HD. Before I hand it over to Patrick, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent seat. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption risk factors in our filing for the SEC. During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our first quarter fiscal 2021 results posted to the IR portion of our website.
spk08: as a reminder the press release a supplemental earnings presentation and our conference call transcript will be available on our ir website at investors.sonos.com i will now turn the call over to patrick thanks cameron uh 2020 2021 is off to a great start for sonos i'm so proud and appreciative of all the hard work by our team and our partners these results are incredible in their own right but doubly so in the face of the pandemic and all the challenges it brings While we anticipated delivering a strong first quarter, our results were meaningfully ahead of our expectations. On the heels of this strength, the momentum we continue to see, and our ambitious roadmap, we have even greater confidence in our ability to drive transformational 2021 results. We are increasing our outlook for the year on all of our key metrics. As I highlighted last quarter, we have hit an important inflection point that proves that our unique model delivers for both customers and investors. Our approach from the beginning has been to build a system of premium products and now services that deliver an amazing experience, whether you start with one of them or start with many. This creates a virtuous cycle where customers return to add additional Sonos products and services over time. Our model has two important drivers. The first is attracting new customers, and the second is driving additional purchases from existing customers. We made big gains on both fronts in this quarter. We added a record number of new homes, and we saw our existing customers return to add additional products at a record level. Brittany will cover the financials in detail, but I wanted to highlight one thing. The first quarter illustrates the strong free cash flow and adjusted EBITDA our model delivers as we scale it. We delivered a record 25.8% adjusted EBITDA margin thanks to our innovative products, our ability to expand gross margins, and our continued operating expense leverage. This is a strong proof point to the profitability and sustainability of our model. Revenue during the first quarter increased 15% year over year to a record $645.6 million. As you know, we've been focused on leading with direct to consumer and our DTC performance accelerated in the first quarter. We had a very strong holiday selling period led by growth across all of our product categories. As you know, we limit regular promotions keep our campaigns few and targeted throughout the year, and believe strongly in maintaining our premium position in the marketplace. The biggest driver of new customers continues to be existing customers telling their friends and family members about Sonos. There is no better testament to the power of a brand than that. While our efforts to improve availability proved helpful during the quarter to drive stronger performance than expected, we do remain out of stock on three products. We anticipate being largely in stock by the end of the second quarter. As a result of our strong performance and outlook for the remainder of the year, we are on track to deliver our 16th consecutive year of revenue growth, now expecting to deliver 17% to 21% growth for the year on a comparable 52-week basis compared to our prior outlook of 11% to 15% growth. As we look forward to fiscal 2021, we see tremendous opportunity and remain focused on the following priorities for this year. The first is to continue to deliver innovative new products that both new and existing customers love, plus services that enhance and further differentiate the customer experience. We remain committed to maintaining a relentless focus on innovation in our traditional product segments, and you'll see continued innovation and experimentation in services as we believe there's plenty of opportunity given our highly engaged customer base. We remain committed to launching at least two new products per year and are well on track as we look at our fiscal 2021 product roadmap. We are excited to introduce our newest product next month. Stay tuned for details. We are pleased with the momentum we are seeing around Sonos Radio and Sonos Radio HD. We look forward to developing more direct paid relationships with our customers over time, and we'll be talking more about this at our investor event next month. Second, we will continue to focus on strengthening our direct-to-consumer efforts and engaging even more deeply with consumers. we are increasingly focused on direct distribution and engagement to ensure we are delivering a great end to end experience for our customers. We have seen that consumers are willing to engage and transact with a trusted brand like Sonos and expect that that will only increase over time. Third, we will continue to strengthen and support our incredible partnerships. We've been very pleased with the results of our IKEA partnership and the opportunity it has created to introduce new consumers to the Sonos brand and our platform. We will look to continue to enhance our partnership with IKEA this year and bring additional new partners onto the platform. As far as our longer-term strategic priorities in the future, I look forward to discussing this at our first investor event on March 9th. We're excited to have all of you join for that, and I've never been more excited about the opportunity ahead for Sonos. Let me turn it over to Brittany now.
spk05: Thank you, Patrick. We are thrilled to be starting fiscal 2021 on such a positive note, delivering well in excess of our expectations and further solidifying our ability to deliver a record year. Let me add some color on our strong first quarter results and our increased fiscal 2021 outlook. Starting with the first quarter, we delivered adjusted EBITDA of $166 million. This was a 78% increase compared to our $93 million last year. Excluding tariff duties and refunds in each of the quarters, adjusted EBITDA increased 45% over Q1 of last year. Our adjusted EBITDA represents a 25.8% EBITDA margin compared to 16.6% last year. This is our most profitable quarter ever. We were able to deliver this tremendous result due to strong growth leverage and top-line growth. Revenue in the first quarter increased 15% or 12% on a constant currency basis to nearly 646 million as we continue to experience strong demand for our new and existing products in an overall strong holiday selling season. Revenue exceeded our expectations because we pulled more supply into the quarter through our efforts around air freight and overall shipping and logistics processes globally. The Americas grew 21%, and EMEA grew 13%, or 5% adjusted for the positive currency impact. APAC decreased 17%, primarily because of slower module orders out of IKEA, given the lighter foot traffic in their stores due to COVID-19, and the cyclicality around product launch timing. Sonos speaker revenue was up 13% year-over-year, driven in part by the continued success of ARC and MOVE. Sonos system products revenue increased an impressive 59%, driven by the continued strength of our installer channel and component products. Partner products and other revenue decreased 40%, driven by the lower IKEA revenue noted earlier. Gross margins were also incredibly strong in the quarter and reached a record 46.4%. This was a 590 basis point improvement of which 400 basis points was due to the benefit from tariff refunds compared to tariff expenses in the first quarter last year. We were mostly exempt from tariffs in the first quarter and started receiving refunds for tariffs previously paid. None of the two impacts, we had a $3 million benefit to gross profit during the first quarter. The 190 basis point increase excluding the impact from tariffs was primarily driven by mixed shifts to higher margin products and higher margin channel mix, especially as we continue to see strong DTC performance, as well as product and material cost reduction. These benefits were partially offset by industry-wide increased shipping and logistics costs and additional air freight to meet our demand. Given the incredibly strong demand, both in our products and across the global supply chain, we continue to be out of stock on a number of our products through the beginning of the second quarter. In addition to the shipping and logistics challenges, we also face challenges in our supply chain from ongoing COVID restrictions in Malaysia, as well as component shortages. Our terrific supply chain team continues to ramp to meet this demand, and we are still working to be fully transitioned to Malaysia by the end of the summer. Overall, we are starting to see improved availability for our products, and we expect to be largely back in stock by the end of the quarter. However, ARK, AMP, and MOVE specifically may continue to face supply shortages into the third quarter on the back of continued stronger demand and supply chain constraints. This is included in our fiscal 21 outlook. Turning to operating expenses, we saw strong leverage during the first quarter as we continued to benefit from efficiencies resulting from our restructuring efforts implemented last year and the higher first quarter sales volume. R&D as a percentage of revenue decreased 120 basis points. Sales and marketing as a percentage of revenue decreased 230 basis points. And G&A, excluding IP litigation and transaction-related costs as a percentage of revenue, decreased 70 basis points. Our model continues to generate strong free cash flow, and we saw another significant increase this quarter. We generated cash flow from operating activities of $215 million and free cash flow of $203 million, up 97% from $103 million last year. We are ending the quarter with $678 million in cash, which puts us in a strong position to invest organically in our business, pursue M&A, and return capital to shareholders through our authorized share repurchases. We currently have no debt on our balance sheet as we paid down our outstanding $25 million in short-term debt in January. Given the tight inventory position this quarter, we had particularly strong free cash flow from working capital, which will normalize as we work towards a sustainable inventory position during the rest of the year. We are very proud of the strong quarter we were able to deliver looking across profitability, revenue, and cash flow, and are excited about what is to come. With that, I will turn to our upwardly revised fiscal 2021 outlook. We remain aware of the continued uncertainty in the broader macro environment with COVID-19, and we continue to face challenges in the supply chain. However, we feel confident in our outlook given the continued momentum and the strong first quarter we were able to deliver. Our new products are performing particularly well, and we think the trend of spending more time in your home whether that is listening to audio content or home theater products, will likely endure even as vaccines roll out and life begins to look more normal again. We now expect adjusted EBITDA in the range of 195 to 225 million, up from our prior outlook of 170 million to 205 million. This represents 13% to 14% adjusted EBITDA margins, an expansion of 460 to 610 basis points from the prior year. Growth margin is now expected to be in the range of 46% to 46.5% compared to our prior range of 45.3% to 45.8%. This benefit is due to the strong first quarterly experience, as well as ongoing benefits from channel mix, material cost reduction, and the expected continued benefit from our higher revenue. We also continue to have $29 million of tariff refunds we expect to receive. However, given the timing is uncertain, this is not included in our outlook and will be recognized only when we receive the refund. We do expect to make additional OpEx investments in our marketing operations and incentive compensation to support the revised top line growth and outlook for the year. Total revenue for fiscal 2021 is now expected to be in the range of 1.525 billion to 1.575 billion, representing growth of 15 to 19% as reported. Excluding the 53rd week from fiscal 2020, this represents growth of 17 to 21% for the year. This compares to our prior revenue outlook in the range of $1.44 billion to $1.5 billion, which represented growth of 9% to 13% or 11% to 15%, excluding the extra week. We continued to execute and deliver strong results in the first quarter, positioning us well to deliver an even stronger fiscal 2021 across profitability and revenue growth. We have a strong balance sheet, which will allow us to continue to invest in growth organically and through M&A, and to return capital to our shareholders through share repurchases. We look forward to connecting with you all again at our virtual investor event on March 9th. With that, I would like to turn the call over to questions. Thank you.
spk03: As a reminder, to ask a question, you'll need to press star 1 in your telephone. To withdraw your question, press the pound key. And your first question comes from a line of Adam Tindall from Raymond James. Your line is open.
spk11: Okay. Thanks. Good afternoon. Patrick, I just wanted to start on additional color on the record number of new customers in the quarter. As I think about historically something like the IKEA partnership, for example, a few years ago, that allowed you to reach a new demographic of There's nothing I can really point to this quarter, so I'm just wondering if there's some additional color as to what's driving that this quarter. And I imagine you're going to allude to a network effect, essentially. So why is that reaching an inflection now?
spk08: Yeah, thanks, Adam. The first thing I would say, I think there's really three things. And the first I'd say is obviously there's more people at home. So I do think that has something to do with it. I think the second is around what we've seen in terms of streaming video and really a lot of customers, you know, start a lot of the streaming services now running, you know, first run movies simultaneously in theaters and as well at home and more people spending time there. You know, our home theater results, were fantastic. So I think that is something that is a tailwind for us. And then finally, you know, is the flywheel or network effect, like you mentioned, which, you know, really, as we've seen and hit that inflection point in fiscal Q4, you know, the fact that the number one driver remains people telling their friends and family about Sonos is I think really we see that just building on itself time and time again, and it built to another degree in this quarter. And so I think that bodes well for momentum in the future. But those are the three kind of catalysts we saw this quarter.
spk11: That's helpful. And maybe just as a follow-up, I wanted to ask on the Google litigation, you had the Legrand license win just a couple months ago. If I recall correctly, I think there's some dates approaching for the Google litigation in spring-summer timeframe. So just wondering if this Legrand licensing win gives you some momentum into the Google decision and any color or context you can give us around Google litigation update. Thank you.
spk02: Adam, it's Eddie Lazarus, the chief legal officer, to respond to that. Hi, everybody. So in terms of dates, we have two very active cases against Google right now. The first up is in the International Trade Commission, and that will go to trial on February 22nd, so coming right up. And we would expect a preliminary decision out of the ITC in early May. And then in addition to that, that case involves five patents, And then we have a second case in the Western District of Texas that involves five completely different patents. And that case is expected to go to what's called the Markman hearing in July of this year. That's a hearing where certain patent terms are defined. And then that is scheduled for trial in June of 2022. So that's on a quite healthy schedule as well. I wouldn't draw any direct connection between the Legrand agreement and the Google litigation. We'll just say that we have started entering into license agreements with a number of companies. That process is ongoing, and I'd say it reflects the strength and vitality of our IP portfolio, which has been ranked among the most valuable consistently by outside experts.
spk11: Okay, thanks to you both, and congrats on the strong results. Thanks, Adam.
spk03: Our next question comes from the line of Katie Huberty from Morgan Stanley. Your line is open.
spk04: Thank you. Good afternoon. Did the upside in the quarter come mostly from the direct business, or have you started to see retailers ramping inventory levels as foot traffic recovers? I'm just trying to understand whether that restocking catalyst is still in front of you, or you started to see that in the December quarter? And then I have a follow-up.
spk05: Hey, Katie. It's Brittany. So we've not really strengthened our products across the board, but because we were supply constrained for the quarter, I would say that it's safe to say that there is restocking in front of us as we continue to get all those products back in stock.
spk04: Okay, great. And then, you did not flow through the entire EBITDA beat from the first quarter to the full-year guide. And so, just want to get some color as to whether your view of profitability in the coming quarters has changed, and whether because of the strength that you saw in the first quarter, you're looking to step up investments. I know you mentioned higher compensation expense.
spk05: Yeah, so overall we still expect higher profitability for the year and higher growth and EBITDA margins for the year than what we were looking at before. But we do have some additional OPEX investments to make to support that higher revenue. So that's coming for us both in sales and marketing, in our direct channel to support those businesses, and then it is coming in incentive compensation.
spk04: Okay. And then, just one for Patrick. Clearly, you're not going to talk about future products, but in the past, we've seen three categories of launches. One is just upgrades of existing products. The other is price point expansion with an existing TAM. And then the third is real TAM expansion. Any color as to which of those three categories we should expect that you might address over the next year with the two new product launches?
spk08: I think it's fair to say all of them.
spk04: Okay. Thank you. Congrats on the quarter.
spk08: Thanks, Katie.
spk03: Your next question comes from a line of Ron Hall from Goldman Facts. Your line is open.
spk07: Yeah, hi. Thanks for the question. Great quarter. So I wanted to start off with the go back to the litigation and in particular the ITC situation and just ask, you know, we've seen these kind of ITC cases come before, and even though the ITC may rule in one direction or another, you know, let's say they rule for you, there tends to be a delay and many times not an implementation of that ruling. So is there anything that you could say from your point of view that would make us think that, you know, whatever that ruling is will stick, or do you think that there's going to be a kind of a lengthy process of back and forth whereby, you know, nothing gets implemented? And then I have a follow-up.
spk02: I would just say that we have a great deal of confidence in all the cases that we bring. And we believe that Google is infringing a very substantial portion of our patent portfolio and that we're going to continue with this process until we vindicate our IP rights.
spk07: Okay, great. Thank you. And then I wanted to come back to just the supply situation. We continue to hear that there are you know, growing problems in semiconductor supplies globally. And I wonder if you guys could talk a little bit about what you're seeing there and, you know, whether you expect to see, you've talked about the supply constraints already, but do you see a worsening situation there? How does that affect your ability to deliver product the next, you know, couple of quarters? Thanks.
spk08: Yeah, Rod, it's Patrick. I'll take that. That's something we've been dealing with in the quarter as well. It just says everything has ramped back up and demand and those kind of things. And I think Brittany hit it in her comments about the work by... our operations and supply chain team they've just done an incredible job and one of the things we invested in is getting ahead uh to make sure that we have the components that we need as we think about the year and really we've been investing aggressively to try and uh catch up to the demand and so um you know in our uh forward outlook we've factored in um what we can see and what the team's managing at this particular point in time As you well know, this is an ongoing thing that we deal with all the time around different components and different things. And so it's particularly acute. I know for automakers right now, we think we're in good shape in terms of where we are at this particular point in time. That's great. Thanks, Patrick.
spk03: Our next question comes from the line of John Babcock from Bank of America. Your line is open. Thanks for taking my questions.
spk10: Just starting out, I know you watched the Sonos HD back in November. Just want to get a quick sense for how that's performing, you know, relative to your expectations.
spk05: Hey, John, it's a little early for us to really be talking about that. We've only had it in the market a couple of months. But look for us to provide some sort of update on both HD and our ad-supported business at our investor event in March.
spk10: Okay. Thanks. And then I don't recall, you know, any specific kind of numbers provided around kind of DTC growth and how much that was as a percent of revenue. I was wondering if you might be able to provide some color around that. You know, and then, you know, I guess, you know, the other piece, I mean, just overall, you know, with gross margin, I mean, it seemed like that was solidly above your guidance. I was just wondering if you might be able to provide a little bit more color on, you know, where the variance was relative to, you know, where you were expecting last quarter.
spk05: Yeah, I can hit both of those. Patrick had some commentary about how DTC can send you to accelerate and continue to be very strong for us. No sort of change in our guidance relative to what we outlined in Q4 in terms of what we're looking for for the year. And we'll provide an update at the end of the year in terms of where we land on DTC as a percentage of revenue. Stay tuned on that. But I did also talk about how that has been one of the positive drivers for us on gross margins. You think about what I talked about in terms of gross margin improvement, it's really been better product mix relative to what we were expecting, better channel mix relative to what we were expecting. And a lot of that is a benefit from DTC. The supply chain team has done a great job getting down material costs, even through this challenging supply chain time. And so those are some of the benefits, you know, offset a bit by the overall logistics and shipping costs that we and everybody else has been facing in the quarter.
spk10: Okay. And then if you don't mind me just, you know, with one quick follow-up just on EBITDA for the quarter, can you just quantify overall what benefit you had from tariffs? It sounds like you might have, you know, perhaps had some, you know, money that you guys received and some maybe that benefited EBITDA, but just want to kind of clarify that.
spk05: Yeah, sure. So we had pretty minimal tariff expense for the quarter, and then we started receiving refunds in the quarter. And so our net benefit was $3 million, and so that hits gross margin. So there's a net $3 million benefit that you see coming through in gross margin, and then that does flow all the way through to EBITDA.
spk03: Okay. Thanks, Brenda. Our next question comes from the line of Brent Phil from Jefferies. Your line is open.
spk06: Good afternoon. This is James on for Brent. Thank you for taking my questions. Could you talk about the promotional activity that you saw in the holiday quarter and how much you think that impacted your revenue and profitability? And compared to prior holiday quarters, would you say that this year was more or less promotional than prior years? And I can follow up.
spk05: I would say that our promotional activity this year was very consistent with last year's promotional activity. What I would say is probably the difference that you saw from us and really everyone in the industry is that it happened a little bit earlier this year relative to normal. People just got started with that earlier given shipping lead times and some of the logistics around the holiday quarter. What I would say is that that's always a benefit for us in this quarter. It's one of the reasons that the holiday quarter is you know, our seasonally biggest quarter for the year. And then you see that, I think, reflected all the way through our P&L. As you see, we outperformed on, you know, gross margin and EBITDA. So no negative impact from, you know, typical promotional activity.
spk06: Great. And digging a little bit deeper into your geographic performance, What are your expectations for APAC this year, given the work you've done on IKEA? I'm just curious if you're starting to see any evidence of a rebound following a pretty aggressive, you know, physical store closures in that region. And curious if your guidance assumes any material snapback in that particular region. Thanks.
spk05: Yeah, so I would remind you that inside of APAC, we report both APAC and we report IKEA. And so what we're really calling out for the APAC region is that those numbers are getting hit right now because of IKEA. So IKEA has had, you know, store closures, you know, across their stores. And, you know, that will really depend on COVID and when they get to reopen. And then as Patrick has talked about, you know, we are expecting new product launches with them coming up. And so, you know, the timing of when the product launches happen and how they transition to those new products obviously gets factored into, you know, their outlook and their revenue as well.
spk06: Great. Thanks so much.
spk03: Your next question comes from the line of Tevis Robinson from BA Davidson. Your line is open.
spk00: Thanks so much and congrats on a fantastic quarter. I was just wanting to get a better understanding of where we stand on inventory, including your ability to maintain supply of your top-selling products. I know you mentioned that you're still out of stock on three products and expected to become back in stock in the second quarter. But for those SKUs where you're not able to maintain supply, do you think those are lost sales, or do you think that the consumers are waiting for them to become once again in stock? Thank you.
spk05: Sure, happy to answer that. So what we said specifically is that You know, as expected, we are getting back into a better in-stock position on the majority of our products in Q2. But there are three products, ARK, AMP, and MOVE, which, you know, will likely continue to be out of stock into Q3. That's because we continue to see really excellent demand for those products and are working, you know, to keep up there. That is really sort of a challenge that we've had ongoing for the last couple of quarters as we've been chasing supply. And we have and continue to be very pleasantly surprised by how willing our customers are. have been to wait for their products to come in i think you can probably see it you were getting back in stock now so it's a little bit less obvious but you know the the shipping times and the lead times on some of those products and then the fact that we are still you know absolutely beating revenue forecasts they can combine to paint a picture of you know just how willing people have been to wait for our products and you know that's really because they are Fantastic product. And when you are part of the Sonos system, it's worth waiting for a product that works inside your Sonos system. So you're seeing the loyalty of our customers and the benefit of that system that Patrick talks about.
spk03: Thank you. Your next question comes from a line of Matt Shear from Steeple. Your line is open.
spk09: Yes, thank you very much. I wanted to ask just about your guidance, top-line guidance for the year, which you're basically raising it by roughly $75 million. You just came off of a quarter that beat consensus by roughly $55 million. So just trying to get a sense of, is that a conservative view? reflecting what you just talked about, the product constraints in those issues? Are you being conservative? And what should we think about sort of the cadence of the quarters through the year? Typical seasonality or less than seasonal because there's not as much inventory in the channels as you talked about as it typically is going into Q2?
spk05: yeah you know look i would say we do our best to share what we know right now i think you know as as we called out when we gave the guidance we continue to have you know supply chain challenges and of course there's questions about what will the world look like as we get all of the vaccines rolled out and stuff like that. We continue to be pretty confident in our ability to manage through those supply chain challenges and in our ability to maintain a really relevant and wonderful product for people in their homes. Even as vaccines potentially roll out, I think we know that the world isn't going back to normal overnight. It doesn't look like work is necessarily going to go back to normal. So I think some of these trends of people staying in their homes, consuming content in their homes, continuing to watch movies at home rather than in movie theaters is really here to stay, which is why you see us carrying more than just the beat from Q1 through to the quarter, even with all of that going on. So that's really what we're looking at when we look out at the rest of the year. In terms of seasonality, nothing to call out for the rest of the year. Really, we're not providing any kind of quarterly guidance other than sort of the color around when we expect to be back in stock on some of our products.
spk09: Okay. Thank you for that. In your gross margin guidance over the year, they're pretty robust. And how should we think about any impact from a higher percentage of sales through the channel as some of those channel partners like Best Buy and IKEA come back? Is that going to be just offset by the continued strength in direct-to-consumer as well as improving product mix with new products?
spk05: I would say we've sort of factored in everything we know about both product mix and what's coming from a new product standpoint and channel mix to the best that we can predict it into that gross margin forecast that we provided.
spk09: Okay, thanks very much.
spk03: Thank you. And there are no further questions at this time. Patrick Spence, I turn the call back over to you for some closing remarks.
spk08: Great. Thanks, Rob. And thanks to all of you for joining us. It was a fantastic quarter. We're off to a great start for the year. I've never been more excited about the future of Sonos. I think we've got some great momentum. We've got a great brand and we have an amazing roadmap. So we look forward to seeing everybody on March 9th for our very first investor event and sharing some more details of the future then. Take care, everybody.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
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