Sonos, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Sonos fourth quarter and fiscal 2022 earnings call. All lines have been placed on listen only to prevent any background noise. I will now turn the floor over to Mr. James Baguanas, Senior Director of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Sonos' fourth quarter and fiscal 2022 earnings conference call. I am James Beglones, and with me today are Sonos CEO, Patrick Spence, and CFO and Chief Legal Officer, Eddie Lazarus. For those who joined the call early, today's whole music is a sampling from our holiday-inspired Sonos radio station, Thankful. 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 date. 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. The discussion of these risk factors is fully detailed under the caption, Risk Factors, in our filings with 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 fourth quarter and fiscal 2022 results posted to the investor relations portion of our website. As a result... As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on today's investor relations website, investors.sonos.com. I will now turn the call over to Patrick.

Thank you, James, and hello, everyone. Earlier today, we announced that Eddie Lazarus, our interim CFO and chief legal officer, has been appointed as chief financial officer. Eddie has long played an active role in our strategic planning, and he knows the team and the intricacies of our business. His unique background brings a fresh perspective to the table, and he has already made tremendous contributions to our fiscal 2023 plan. I'm confident that we're in good hands with Eddie in the role. We will commence a search for a general counsel who will assume the day-to-day responsibilities of the legal organization, reporting to Eddie. Now, turning to the state of our business, I would like to begin by sharing how proud I am of our team's tremendous efforts to navigate an increasingly challenging macroeconomic backdrop and deliver our 17th consecutive year of revenue growth. Though fiscal 2022 came in below our initial expectations, we were pleased to see trends stabilize in Q4, ending the year as planned. In challenging macroeconomic times, it is especially important to re-emphasize the resilience of our business model and the economic foundation it provides. The unique Sonos Flywheel consists of acquiring new customers, which we refer to as households. These households do two things. First, our households add more products to their home over time. And second, the members of these households become advocates who help us acquire additional new customers. Existing customers telling their friends and family to buy Sonos remains the leading driver of new customers. Our flywheel is proven and remarkably consistent over the past 17 years. Even in the midst of last year's many challenges, it continued to drive growth. We added 1.4 million households in fiscal 2022, bringing the total install base of Sonos households to 14 million. And we managed this despite supply challenges crimping our ability to attract new households through both product availability and an inability to run promotions. We are still in the early innings of our growth as our 14 million households represent just 9% of the 158 million affluent households in our core markets. As has been true year in and year out, our customers added new products to their Sonos systems. Average products per household increased to 2.98 from 2.95 in fiscal 21, underscoring how the lifetime value of our customers continues to grow. And there's a lot more room for additional growth. 40% of our households are single product households, whereas our average multi-product household has 4.3 products. In other words, we are starting to get into the range we talked about at our investor day of four to six products for every mature Sonos household. We estimate that converting our single product households to the average multi-product household install size represents a $5 billion revenue opportunity alone. Of course, this will not happen overnight, but it does highlight the long runway we have to further monetize our install base. We are investing in the systems and programs to more aggressively go after this opportunity in fiscal 2023 and beyond. Now, to recap our financial performance, in fiscal 2022, we grew revenues 5% constant currency or 2% reported to $1.752 billion. Gross profit was $796.4 million, down 2%, representing a gross margin of 45.4%, down 180 basis points. This was within our annual target range of 45 to 47%, but slightly below our fiscal 22 guidance due to lower than expected gross margins in Q4. Adjusted EBITDA was 226.5 million, representing a margin of 12.9%. From a product standpoint, 2022 was an exciting year. We launched five products and services and completed three acquisitions. We have seen strong adoption of Sonos voice control since it launched in May. And Sonos Radio has become the number one most listened to service on Sonos and accounted for nearly 30% of all listening. Our products are resonating with consumers. In Q4, we saw both sequential and year-over-year improvements in our home theater market share in the U.S., U.K., Germany, and the Nordics, reaching our highest level of unit and dollar share in almost two years. The fact we are outperforming competitors and picking up share is a validation of our brand strength and category leadership. Last quarter, we discussed how Ray, our entry-level soundbar, underperformed our internal expectations upon launch. We are pleased to see that it is gaining momentum, and in the UK and Germany in Q4, it has become the top product in the entry-level home theater category by DollarShare. Our newest product, the Sub Mini, is strong out of the gate. Since launching in October, it has garnered outstanding media reviews and is already a hit with customers as we are exceeding our initial sales forecasts. We expect this momentum to continue through the fall and into the holiday season as households build out their home theater system to enjoy sports, movies, and music at home. As you know, we've been committed to and executed upon delivering at least two new products every year since 2017. Fiscal 2023 will be no different. We've already launched Submini, and we plan to launch at least two additional products on top of that in the remainder of fiscal 2023. We have built a prudent plan, balancing our commitment to profitability with an imperative to invest in the future in light of the exceptional opportunities we see ahead of us in the next few years. On the revenue side, I'd emphasize a few of the building blocks for our approach. First, we've taken a sober view of the macroeconomic conditions using the stabilized run rates we've been seeing over the past four months as a baseline. At the same time, we enjoy the benefit of the steady repurchase behavior we have observed in our customer cohorts. As I have said before, the buying patterns and repurchase rates of our 2020 through 2022 customer cohorts continue to behave like our pre-COVID cohorts. Based on past cohort repurchase behavior, we start each year with a line of sight to achieving 40% to 45% of our annual registrations target. This sticky, predictable revenue stream from our install base is something that many other consumer electronic brands do not have. Based on these considerations, the improvement of our in-stock position, our return to normal levels of promotional activity, and the exciting new products we have planned for this year, in fiscal 2023, we expect to grow revenues between 1% to 7% constant currency at a 45% to 46% gross margin and deliver adjusted EBITDA of $145 to $180 million, representing a margin of 8.5% at the low end and 10% at the high end. Eddie will give you more details about our assumptions, but I would just remind everyone that a very significant portion of the $79 million foreign exchange revenue headwind we expect in fiscal 23 flows through to detract from both gross profit and adjusted EBITDA. We are making thoughtful and targeted investments to drive our medium and long-term growth, while being mindful of the continued importance of delivering profitability. We will grow our team at a significantly slower pace in fiscal 23 than we did in fiscal 22, as we have a lot of people in place to support the new categories we are pursuing. We know this runs against the grain when it comes to recent headlines, but it's important to keep in mind that we've been profitable the last four years and have not chased growth at all costs the way many of the companies you now hear about doing layoffs have. We have been and will continue to be profitable. The investments we are making are laying the foundation for Sonos to meet and exceed our long-term targets of $2.5 billion in revenue and $375 to $450 million in EBITDA. While we are always cautious when talking about our product roadmap, we are investing in products that will allow us to enter four new categories, one of which we expect to announce in fiscal 23. We have a proven track record of gaining share when entering a new category, which underpins our conviction that we will gain a larger share of the $96 billion global audio market over time. And importantly, entering new categories will further diversify our business. Our investments are focused on driving our flywheel of new household acquisition and existing customer repurchases. Though our headcount is growing, we are tightening our belts, reducing discretionary spend, and doing some restructuring to make our teams more efficient. If we start following short of our targets in fiscal 23, we won't hesitate to adapt to the environment, prioritize our key initiatives, and protect the profitability of our business. I am confident that we will emerge from this period of uncertainty stronger. Our flywheel of new household generation and household repurchase is working. And in the next few years, we will spin it even faster. We expect to accomplish this by focusing on three things. First, we will reset the bar in our existing product categories, further differentiating Sonos as the choice for premium home audio. Second, we will enter new, naturally adjacent product categories, as you have seen us do with portables. And third, we will expand our geographic reach, building out the beachheads we have already established in markets such as Japan, India, and Latin America. Executing on these strategies will accelerate our annual revenue growth to our previously achieved levels of low double digits with adjusted EBITDA in the 15% to 18% margin range. Now I'll turn the call over to Eddie to provide more details on our results and outlook.