Sonos, Inc.

Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to Sono's fourth quarter and fiscal 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, please press star 1 again. Thank you. I will now like to turn the conference over to James Boulanis, Head of Investor Relations. James, you may begin.

Thanks, Krista. Good afternoon and welcome to Sonos' fourth quarter and fiscal 2023 earnings conference call. I'm James Beglonis, 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 hold music is a sampling from our new Sonos Radio HD exclusive station, Lazy Day Country. 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 2023 results posted to the investor relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on our investor relations website, investors.sonos.com. I would like to also note that for convenience, we have separately posted an investor presentation to our investor relations website, which contains certain portions of our supplemental earnings presentation. I will now turn the call over to Patrick.

Thank you, James, and hello, everyone. Earlier today, we announced our Q4 and fiscal 2023 results, which came in roughly in line with the midpoint of our guidance for revenue and adjusted EBITDA. Revenue of $1.66 billion was down 6% year over year or down 3% excluding foreign exchange, and adjusted EBITDA was $154 million. While our business is more resilient than many of our competitors, thanks to our strong brand and loyal customer base, it was a challenging year in the categories in which we play today. The good news is that we've retained strong market share positions in the countries we play, despite our competitors offering deep discounts throughout the year. In fact, we recorded our highest market share in home theater in both the United States and Germany this year since 2019. This is a testament to the strength of our brand, our product portfolio, and the execution of our team. We know we're in a down part of the business cycle when it comes to home audio, and we know that eventually consumers will return. There are strong secular trends that will help drive our business over the long term. Work from home is going to be an enduring phenomenon. So too will be increased home consumption of video content. And as the touring success of Taylor Swift and Beyonce attest, music and the joy it brings remains an essential and thriving part of our culture. Sonos benefits from all of this. In fiscal 2023, we once again proved that we're willing to make necessary changes towards driving sustainable, profitable growth. We made the difficult decision to right-size our expense base in mid-June when we conducted a 7% reduction in force and substantially reduced our real estate footprint. I am confident that we are investing at the right level to achieve our long-term growth objectives, and our plan is to strictly limit any future headcount growth to initiatives that will drive incremental growth. We appointed three highly successful executives to key leadership roles at Sonos. They've hit the ground running, and I have high expectations for the contributions they will make across marketing, sales, and product, both in fiscal 24 and the years to come. Most importantly, we further expanded our lead over the competition by doing what we do best, producing great products. This year's new product introductions were focused primarily on raising the bar in our existing categories to ensure that picking Sonos over the competition is the easiest decision in the world. We already had great products on the market with the One and Move, but these products are often a customer's first Sonos purchase, so it is of critical importance that we continue to innovate and further separate ourselves from the competition. This is why we launched Move 2, our new and improved premium portable all-in-one speaker, which we are confident is the best on the market. And our customers agree. Sales are ahead of expectations, and Move 2 is rated 4.9 out of 5 stars on Sonos.com. driven by the immense benefit of a higher fidelity stereo soundstage, deeper bass, and 24-hour battery life. It is a similar story for the two ERA speakers we launched earlier this year. We have the best in-class all-in-one at an entry-level price point with ERA 100, and the best Dolby Atmos speaker on the market with ERA 300. Time Magazine recently named the ERA 300 one of the best inventions of 2023. The down cycle in consumer discretionary spending put a damper on the revenue growth from these products in fiscal 2023, but they will be best in class for years to come, and they will drive our brand and category strength well into the future. As we start our new fiscal year, I would like to take a moment to reintroduce the key pieces of the Sonos story, why we are different from virtually every other consumer electronics company out there. We have a large and growing installed base of ardent Sonos supporters who consistently purchase additional products to expand their Sonos system. They generate buzz for our new product launches. They eagerly flock to our retail partner stores to test and purchase our new products. They pre-order from our direct-to-consumer channel, Sonos.com. They ask their local custom installers to outfit their homes with our products. And most importantly, they sing our praises to their friends and family as evidenced by word of mouth being one of the top contributors to our household growth. Our installed base is a layer cake of cohorts of new households acquired over the last 18 years. Each year, our business is driven by both the acquisition of new homes that enter our install base and by our loyal customers who continue to make subsequent purchases over time. In recent years, our customers have started with an average of 1.6 products and within a three year window, over one third of those customers have repurchased additional products at a relatively steady clip. As more recent years cohorts continue to age, early indications are that their behavior is consistent to that of the pre-COVID cohorts, which we have illustrated on page 31 of the earnings deck and page 15 of the investor presentation. We see tremendous opportunity to drive repurchase participation even higher via marketing efforts and new product introductions. This steady, consistent behavior across our install base is why we saw average products per household grow to 3.05 at the end of fiscal 2023, which is up from 2.98 in the prior year. Simultaneously through price optimization and favorable product mix, we've increased the revenue we generate per product sold. We expect this trend of driving greater lifetime value across our cohorts to continue. As we've noted in the past, 40% of our households are single product households today. Whereas our average multi-product household has 4.4 products. we're starting to get into the range we have previously discussed of four to six products for every Sonos household. We estimate that converting our single product households to the average multi-product household install size represents a $6 billion revenue opportunity now. This highlights the long runway we have to further monetize our install base and gives confidence in our ability to eventually deliver on our long-term financial targets. Today, we have just 2% of the $100 billion global audio market and a 9% share of the households in our core markets. To be prudent, we have built our fiscal 2024 plan with the assumption that the weak consumer demand we saw in this quarter will persist. Obviously, we cannot control the conditions affecting our categories, but we can control the products we will bring to market, so that's what we have concentrated our efforts on. As I said, fiscal 2023 was a year of raising the bar in our existing categories. Fiscal 2024 will be different. This year marks the beginning of a multi-year product cycle, which will demonstrate the payoff of the investments we've made in research and development over the past few years. In the second half of the year, we will be launching a major product in a new multi-billion dollar category that will compliment our current offerings, excite customers, and drive immediate revenue. All told, we expect to generate over $100 million from new product introductions this year, with this exciting new product accounting for a large portion of this revenue in the second half. Our expectation of revenue between $1.6 billion and $1.7 billion is effectively flat to fiscal 2023 at the midpoint. This is far short of what we believe the growth rate for our company can be in normal times, but we believe this is prudent given that we have been in a post-pandemic downswing in the cycle for our categories that may not yet be at its end. As I've lived through multiple times in my 25 years in tech, we fully expect that consumer behavior will normalize in time and our relentless focus on innovation, execution, and an exciting product roadmap will result in us returning to low double-digit revenue growth. We also expect to return to our annual target range gap gross margin in fiscal 2024 and are setting our guidance midpoint at 45.5%. We fell short of where we wanted to be in fiscal 2023, but we have line of sight to improvement in fiscal 2024, which Eddie will discuss shortly. We will be monitoring and adjusting expenses as necessary to drive some merchant expansion this year. We have already taken the extraordinary step of holding salaries flat this year, except for a small number of employees receiving promotions. We have been and will continue to work the balance between constraining costs in a down environment with prioritizing investments to deliver the new products and services that will yield significant revenue and margin expansion this year and the following years. Bringing it all together, we are targeting $165 million of adjusted EBITDA at the midpoint of guidance, which is a margin of 10%, up 70 basis points from fiscal 2023, despite our guidance for revenue to be flat at the midpoint. Once we return to a normalized demand environment, we will make more swift progress towards our target of 15 to 18% adjusted EBITDA margins. As we navigate this challenging environment, we do so with a strong balance sheet, more than $200 million of cash and no debt. And that is after repurchasing $55 million of stock in Q4, more than we've ever done in a single quarter. We recognize the importance of returning capital to shareholders and mitigating dilution to our share count. To that end, I am pleased to announce that our board of directors has authorized a new $200 million share repurchase program. We have an exciting few years ahead of us and believe that repurchasing stock at these levels is a great use of capital. We improved our cash generation in fiscal 2023 and expect to continue to do so in fiscal 2024. We will continue to pursue a balanced capital allocation strategy between organic investment returning capital to shareholders, and opportunistic M&A to accelerate our roadmap and drive profitable growth. In closing, I want to reiterate that we are laser-focused on what we can control, and our long-term commitment is to drive both top and bottom line growth. We are positioning the company and our capital allocation to accelerate our growth as our categories regain their footing, and we are excited to enter new categories, as you will see later this year. Our investments in R&D over the last several years will begin to pay off more significantly this year and should drive accelerating growth in fiscal 25 and fiscal 26 as economic conditions normalize. The opportunity ahead remains large and our ability to capture a disproportionate share only improves with the proactive measures we have and will continue to take. While it's certainly turbulent in the short term, I have great confidence that our plans will drive value for our shareholders over the long term. Now I'll turn the call over to Eddie to provide more details on our results and our outlook.