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spk03: Thank you for standing by and welcome to the Sonos fourth quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. For the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I'd now like to turn the call over to James Baglanas, head of investor relations and treasury. You may begin.
spk00: Good afternoon, and welcome to Sonos' fourth quarter and fiscal 2024 earnings conference call. I am James Maglanis, and with me today are Sonos CEO Patrick Spence, CFO Sayori Casey, and Chief Legal and Strategy Officer Eddie Lazarus. For those who joined the call early, today's hold music is 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. A 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 2024 results posted to the investor relations portion of our website. As a reminder, the press release, supplemental earnings presentation including our guidance, and conference call transcript will be available on our investor relations website, investors.sonos.com. I will now turn the call over to Patrick.
spk02: Thank you, James, and hello, everyone. While fiscal 2024 didn't play out as we expected, I'm proud of the way we adapted to address the challenges we faced, and I believe we are on the comeback trail. Part of the difficulty this year stemmed from the fact that our categories continue to remain under pressure, something that we've now dealt with for the last three years and something that we continue to believe will improve at some point. And the other part was the way we mishandled the rollout of our new app. Life is all about how you respond to challenges, and the team has risen to the significant challenge we faced, went all in on our app recovery efforts, and made enough progress to enable us to launch our two new products in time for the holidays. And we've put a series of commitments in place to make sure this never happens again. The initial feedback and reviews on Arc Ultra and Sub 4 have been outstanding. When you combine this with Ace, our entry into headphones, a product that was just recognized as one of time's best inventions of the year, and add it to the rest of our industry-leading product portfolio, we now have the strongest lineup we've had in years. We continue to raise the bar with our recent product introductions. And I'd like to thank our customers, as they have stood by us despite the app misstep. We saw another increase in the number of products per home in fiscal 2024, the ultimate testament to the brand and the fact that Sonos remains the best home audio system in the market. I want to start by touching on three important areas of our app recovery efforts. First, of course, is the software. As our Chief Innovation Officer Nick Millington outlined in his blog post two weeks ago, we've made significant progress in bringing the quality of our software experience to a level that we're proud of. In fact, In the most important and impactful areas of the experience, like setting up your system, adding new products, and ensuring reliable connectivity, our metrics are better than they've ever been, including when compared to our old app. And as we've said many times, we're committed to continuing to improve the software experience on an ongoing basis. The ease, reliability, and magic of our products is the most important thing to us all. We've released 16 updates thus far, and we'll continue this momentum in the months to come. Second, to build on all of these efforts and help us stay focused on what matters most going forward, we released a set of commitments that will ensure we continue to deliver the best wireless audio system in the world and our customers always enjoy the quality of which Sonos is known for. These include ensuring we always establish rigorous quality benchmarks at the outset of product development and not launching products before meeting these criteria, increasing the stringency of our pre-launch testing phases, Introducing major changes to the app more gradually, appointing a quality ombudsperson, extending our home speaker warranties, relentlessly improving the app experience with regular software updates, and establishing a customer advisory board. We are confident these will ensure that we never make a misstep like this again. And finally, regaining the trust of our customers. Central to this process is making sure that the Sonos system is once again the easiest and most reliable in the world. That work is well underway and will continue intensely through 2025. We won't rest until that is done. But we are taking other measures as well. We've bolstered our customer service capabilities so that those customers who do experience issues can get the help they need more quickly. As the app improved, we provided a make-good program for the professional installers who have been inhibited from deploying Sonos products on their jobs. We've been deeply gratified by the response from this critically important distribution channel. And once we get through the holiday season, we'll deploy other tactics for restoring trust with impacted existing customers. We continue to believe our planned investment of $20 to $30 million total is the right level required to successfully execute on our app recovery plan. Beyond the app rollout, the other challenges we faced in fiscal 2024 was continued pressure on spending on our categories. We have dealt with this unusual environment for the past three years and continue to believe this trend will reverse and get back to normal, though there is uncertainty that makes it difficult to predict exactly when that will be. And while these pressures have led to some of our competitors to take an aggressive approach to promotions, we saw continued market share dollar gains in both U.S. home theater and U.S. streaming audio, which we believe is a validation of our brand and continued competitive differentiation. Fiscal 2024 saw us grow our base of active households to 16.3 million, which is critical to fueling our flywheel. Even in a year as challenging as fiscal 2024, our existing households accounted for 44% of product registrations, consistent with past years, and the average number of products in multi-product households grew to 4.42. We continue to make exceptional products that bring unparalleled experiences to our customers. I've often spoke about our product strategy of raising the bar in our existing categories while entering new categories in innovative ways. Over the last six months, we've done both. Arc Ultra and Sub 4 are great examples of raising the bar in our existing categories, while our Ace headphones represent our high-quality entrance into the exciting new category of premium over-the-ear headphones. After roughly six months in the market, we are starting to be able to assess how Ace is performing. Most importantly, Ace continues to be very well received by customers and reviewers. It's an excellent product that can compete with anyone on comfort, sound, active noise cancellation, and the other qualities that make for a great headphone. This is why Time named Sonos Ace a winner for their 2024 Best Inventions list in the category of Entertainment and Gaming. As an added bonus, Ace offers our existing customers unique connectivity with our home theater products, which is perfect for enjoying your favorite content without disturbing those around you. A great endorsement to the quality of Ace, Best Buy chose eight strategic vendor partners to participate in their Theatre District store layout, which highlights new and unique technologies sold at Best Buy. Sonos Ace will be featured on one of those end caps ahead of the holidays in approximately 171 Best Buy stores, with another 50 stores coming in January 2025. Looking back on the launch of ACE, I'm confident we have proven our ability to play in this category that we have found that building momentum in headphones is taking longer than we had originally anticipated. Some of that stems from the challenges with our rollout, but we've also seen unprecedented discounting and permanent price drops from the established players, which we believe has impacted sales. Overall, I believe there's good long-term opportunity for us in this category. As for the products we just announced, Arc Ultra is our first product to incorporate our revolutionary sound-motion technology. When we acquired MITE in 2022, we knew that their breakthrough transducer technology would be a key differentiator for Sonos. While devices like phones, flat screens, and laptops have become increasingly slim, transducers, especially those responsible for producing bass, haven't scaled with this trend, leading to a reduction in sound quality for those devices, particularly on the lower end of the hearable spectrum. SoundMotion addresses this limitation by making the transducer as much as three times smaller while producing more powerful sound. With SoundMotion technology added to Arc Ultra, the soundbar produces up to double the bass compared to our already impressive sounding Arc. This breakthrough not only improves the bass quality in a slimmer device, but also frees up room for additional transducers to be added to the product. This ability to combine compact design with high-quality, powerful audio is what Sono sees as a fundamental shift in sound innovation, and we've only scratched the surface of its potential. With SUB4, we've managed to improve on a truly iconic product. With revamped audio architecture, we upgraded its already amazing sound enhancement capabilities, and we've changed materials to make it both more premium in feel and better for the planet thanks to more sustainable materials. Arc Ultra is being well-received by the ever-important tech press, with early reviews calling it a significant upgrade, praising its sleek design, broad soundstage, and impressive bass. PC Magazine awarded it the coveted Editor's Choice Award. Reporters have taken a keen interest in the innovation behind sound motion, recognizing our commitment to revolutionize the audio industry, and imagining what comes next. Customers are responding in kind. Arc Ultra is rated 5 out of 5 stars, and Sub 4 is rated 4.8 out of 5 stars on Sonos.com. Another important product we announced in fiscal 2024 is the Aero 100 Pro, which is our first-ever solution optimized for professional installation in light commercial and residential spaces. With the rich sound, elegant design, and versatile control that Sonos is known for, Air 100 Pro brings simplified setup with power over Ethernet for a wired-first connection, versatile orientation via a pro-grade mount, and more customizable control with Zones, a new software tool to manage larger-scale installations. It was unveiled in September at Cedia, where it was met with tremendous excitement from our professional partners. Their excitement has manifested into ERA 100 Pro being nominated to the shortlist of best products in the audio category at the prestigious Innovation Awards. The ERA 100 Pro will be available exclusively through our professional installer partners starting on January 28, 2025. Looking back at the products we've produced since going public six years ago, what becomes clear is not only a long tradition of exceptional quality, but also an effective effort to diversify our business mix to create a stronger foundation for future growth. As we stand here today, nearly all of our most important products have been introduced or upgraded in the last two years. Our investments in innovation have modernized the portfolio and resulted in the strongest lineup that we've ever had. This widens our lead over the competitors and sets a strong foundation to drive our flywheel in the years to come. We will continue to invest in innovation to drive future growth, but with an eye towards increasing our efficiency. In our post-mortem evaluation of our challenges with the app rollout, one of the things that became clear was that we had spread ourselves too thin. Going forward, we will be focusing our efforts on the products and experiences that enable us to reach millions of new customers, while ensuring our existing customers have a great experience and add more Sonos products to their life. Focus is our flywheel, and our transformational cost initiatives are integral to fueling the next phase of our growth. Sayori will talk more about this shortly. To recap, we are making good progress on our app recovery efforts, and there is more work to be done. We're focused on making this right with our customers and partners, and we will not rest until we have customers raving about Sonos again. We announced some incredible products in the last year to add to our already strong product portfolio, all of which will be key to our success in fiscal 2025 and beyond. We are committed to showing the result of our significant investments in innovation. And finally, we are progressing with our transformation work, which will see us emerge as a more efficient, focused, and disciplined company positioned to drive sustainable, profitable growth over the long term. I'll now turn it over to Sayori to take you through our financials.
spk01: Thank you, Patrick. Hi, everyone. Fiscal 2024 was a challenging year for Sonos, but I'm proud of our entry into the premium over-the-year headphones with the launch of ACE and our team's resilience and dedication on our app recovery, which enabled us to launch great new products to further strengthen our portfolio. We also started to make progress on our transformational initiatives. These efforts will help build momentum to drive sustainable, profitable growth over the long term. Turning to the results, fiscal 2024 revenues were $1.52 billion in line with our revised expectations. As referenced in the last earnings call, we estimate the challenges associated with our app launch adversely affected our revenue by at least $100 million. Revenue in Americas and APAC declined 4-7% year-over-year, respectively, whereas EMEA declined 17%. Our EMEA results continue to be significantly impacted by that difficult macroeconomic environment. On a channel basis, retail and other revenue declined 8% and was 55% of our sales combined. DTC was down 12% and was 23% of sales. Installer solutions came in at 22% of sales, declining 4% year-over-year. Gap gross margin was 45.4%, up 210 basis points year-over-year. This significant increase was driven by lower component costs and better inventory management, partly offset by higher promotional activity. Non-GAAP adjusted operating expenses were $634 million in fiscal 2024. There were a number of puts and takes impacting our expense base in the year, including higher marketing spend related to the launch of ACE, offset by lower bonus. This figure also includes approximately $4 million of app recovery investments. Adjusted EBITDA was $107.9 million, representing a margin of 7.1%. The year-over-year decline was driven by lower revenue, higher expenses, partially offset by gross margin expansion. We ended the year with $221 million of net cash, which includes $51 million of marketable securities as we hold some excess cash in short-duration treasury bills. This was flat to FI23 despite lower revenue and net income. Free cash flow was $135 million, an increase of $85 million from fiscal 2023. This result was primarily driven by working capital improvements, resulting from focus on better managing our inventory through adjustments to our sourcing plans, as well as implementation of newly adopted payment terms with our suppliers. Our period and inventory balance increased sequentially to $232 million, consistent with the past seasonality as we build inventory ahead of the holidays. On a year-over-year basis, our inventory balance is down 33%. Our inventory consists of $200 million of finished goods and $32 million of components. We are working hard to keep inventories in check. In fiscal 2024, we returned $129 million to shareholders through repurchases, and we have $71 million remaining under our current $200 million of share repurchase authorization. While executing on our app recovery, which was a prerequisite to launch our delayed product, we paused share repurchases in Q4. Returning capital to shareholders remain a key pillar of our capital allocation framework. I'll quickly recap our Q4 results before turning to guidance. Q4 reported revenues were $255 million, which reflects $3 million of app recovery investments. Excluding this, we ended up close to the high end of our guidance range of $240 to $260 million. Q4 reported GAAP gross margin came in at 40.3%, or 41.1% excluding app recovery investments, which was right at the midpoint of our guidance range of 40 to 42%. Q4 non-GAAP adjusted operating expenses were approximately $143 million, which includes $4 million of app recovery investments in the quarter. The $12 million sequential decline from the last quarter was primarily driven by lower bonus. Key for adjusted EBITDA was negative $22.6 million. Excluding our op recovery investments, which we estimate reduced adjusted EBITDA by $7 million, we ended up close to the high end of our guidance of negative $37 to negative $14 million. Turning to our guidance, I would like to take a moment to discuss the changes we are making to how we provide guidance. Our new approach is reflective of our collective experience and lessons learned over the past few years. We need to be able to nimbly adapt to the uncertain market dynamics of categories, while also focusing on our transformation initiative to optimize our investments to drive long-term sustainable growth. As a result, we will focus on providing quarterly guidance on our earnings calls. We expect Q1 revenue in the range of $480 to $560 million, sequential increase of 88 to 119%. Sequential increase in revenue from Q4 is a bit higher than past seasonality, primarily due to the launch of ARK Ultra and SUB4. On a year-over-year basis, our Q1 guidance call for minus 22% to minus 9% decline in sales. This reflects a number of factors, including headwinds from the market weakness in our categories, ongoing challenges related to our app recovery, and our proactive efforts to end leaner on our channel inventory overall versus last year, which is five to seven points headwinds to our year-over-year growth. These headwinds are partially offset by having ACE and new generation of products in our lineup like Arc Ultra and Sub 4. Excluding the headwinds from channel inventory level adjustments, our midpoint calls for minus 9% year-over-year decline in sales, an improvement from the minus 16% decline in Q4. We expect Q1 GAAP gross margin in the range of 41% to 43%, up sequentially from Q4, driven by operating leverage from higher revenue, partially offset by product mix. Please note that our guidance includes approximately 50 basis points year-over-year gross margin headwinds associated with the amortization of MITE intangible assets now that we have begun selling ARK Ultra using the technology. As a result, we expect our Q1 non-GAAP gross margin to be approximately 80 to 90 bps higher than our Q1 GAAP gross margin. We expect Q1 adjusted EBITDA to be in the range of $35 to $79 million. Please note that our adjusted EBITDA guidance has been reduced by $5 to $10 million of app recovery investments we expect to make in the quarter. Our guidance assumes Q1 non-GAAP adjusted operating expenses to be approximately $182 million, which includes our app recovery investments. As Patrick mentioned, we continue to expect to invest $20 to $30 million in our app recovery efforts. Inclusive of $7 million we incurred in Q4 and $5 to $10 million we outlined in Q1, we expect the remainder to be incurred during the rest of the fiscal 2025. Last quarter, I mentioned we had begun working on a transformational cost initiative. I wanted to outline some progress we made thus far and discuss where we will be focused on the remainder of fiscal 25 and into 2026. As a first step, we have taken multiple actions across various G&A functions to flatten and simplify organizational structures, which should enable us to be more nimble. We're also building our offshore capabilities and will continue our initiative to drive operating efficiency. The 6% reduction in force we announced in August was part of this work. As we make progress on our app recovery and holiday season activities, we will continue to expand our transformation efforts to R&D and sales and marketing to drive operating efficiencies and effectiveness. As an example of something we're already doing in partnering with Sierra AI to lower the cost to serve our customers while improving the quality of service delivered. We will continue to update you on our plans to improve our profitability and growth for the long term as we progress through the year. With that, I'd like to turn the call over for questions.
spk03: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from a line of Steve Frankel from Rosenblatt. Your line is open.
spk06: Good afternoon. Patrick, maybe we'll start with the fact that you added a million new households, which was a lower number than the last several years. How should we think about that relative to how much was tied to the app? versus overall market environment or other factors.
spk02: Yeah, thanks, Steve. I think you nailed it, which is, I think we saw slower pace this year, which is really, you know, more of the cyclical downswing, but there would be some of the op challenges in there. But I would lean it towards the cyclical based on kind of what we've seen and what we've seen really over the past three years as we've gone through this. And, you know, one of the important things in that is I was pleased to see that existing households as a percentage of registrations was at 44%. So that's consistent with past years and we saw continued expansion of products per household. So I think the important thing. to note is, you know, we're in one of those more kind of challenge cyclical environments. And I think that'll change at some point. And we continue to see a good loyalty and repurchase from our existing customers.
spk06: And I know it's still early on ACE and obviously the app kind of kneecapped the launch, but what can you tell us about whether ACE was bringing in new households or as it turned out so far to be primarily an installed base
spk02: Yeah, so, you know, I think so far Ace continues to be well-received by customers and reviewers, so we're feeling good about the product and where it is. As I mentioned, you know, Best Buy chose it for, along with seven others, to be featured in its theater district this holiday season, which I think is exciting. And, you know, I think at this point we're seeing, you know, a mix between new and existing as we go through it, and I think we have a lot of opportunity now with our existing as we kind of go through this app recovery to push even harder on the tv audio swap especially now that we've brought it to uh beam and ray uh along with arc and arc ultra so uh it'll take some time but i think with all of our products we've seen that when you make a great product um and this is another one from everything we see from the reviews um is that over time we'll see it build momentum and is an important part of our portfolio
spk06: But again, so you would say today the majority of purchasers are not some of those customers to date?
spk02: Today it's a mix. You know, it's a kind of typical mix in terms of what we're seeing with the product. And, you know, I want to be mindful that we're early in the cycle with it. And I think holiday will be an important period to see how people turn out because that's a big, big headphone purchasing period.
spk06: Okay, and one more quick question. Any more detail on this MakeGood program for installers? Kind of what's involved there and how do you think your relationship is now with that channel?
spk02: Yeah, so myself and the entire leadership team were at Cedia this year, which is the big event for our installed solutions partners. We got a ton of support there, and I think that we're very excited by the introduction of The Air 100 Pro and as well as some of the APIs that we did there. And so we wanted to support them. And so what we have done is basically put a program in place that helps them in terms of the amount of time it was taking to install, given some of the challenges we had with app setup around that. And so we've put a program in place to support them through that. I think it was successful in going through it, and I think we are on the comeback trail with our dealers, and they're standing by and supporting us.
spk06: Great. Thank you. I'll hop back into the queue.
spk02: Thanks, Steve.
spk03: Your next question comes from the line of Brent Sill from Jefferies. Your line is open.
spk05: Thanks, Patrick. Maybe you can just give everyone a sense of the software technology changes you've made to put a safety net around ensuring this doesn't happen again. And I'll follow up with another question.
spk02: Yeah. So, you know, as I mentioned, we put we won. We made this our number one priority, you know, for the quarter. And I'm pleased with the progress that we've made. So on the software itself, you know, our metrics are now better than they've been, even when compared to our old app. When you think about things like setting up your system, adding new products and ensuring reliable connectivity. So, you know, we continue to work on that. We've had 16 updates so far. I think the team has really rallied around it. So part of it is the focus. And then the second is the commitments, you know, that I had outlined as well. And I think making sure that we have, you know, rigorous, we have rigorous quality metrics that we're setting up. We're gradually introducing big changes as well is pretty key. We're also making sure that we have catches in the system to some degree in terms of making sure that we have a quality ombudsperson, making sure people can speak up if they see something going awry. But I feel good about the progress that we've made so far. And I think the ultimate test comes down to what our customers are doing, and we are seeing progress. our existing customers add more products and have through the year and existing customers continue to buy. And so I think there are green shoots there.
spk05: Okay. And then the commitment to the bottom line EBITDA guide was decent. I guess when you think about continuation of the bottom line focus, maybe speak to what the levers are and ultimately where you're getting the most leverage to continue to push on the EBITDA line.
spk01: Hi, Brent. This is Sayori. I can answer that question. That's part of the discussion I had put in at the end of earnings narratives around transformation. We had started talking about that at the last earnings call, and I was able to share a little bit more this time. That biggest focus that we feel we can control right now is the operating efficiency through the transformation. There's a number of initiatives that are underway. And for GNA, we have taken some actions that partially culminated in the August announcement of the restructuring reduction in force. But there's a lot of other examples underway as, for example, the AI adoption that we talked about in improving our customer service and the efficiencies of that. And as we get through our focus on app recovery efforts, as well as the holidays, we intend to expand the effort into the R&D and the sales and marketing to make sure that we can be as efficient and effective as possible and getting the best ROI of our dollars to flow through more profit to the bottom line. So that's what we're able to share today, but we're definitely focused on this as one of our top initiatives as soon as we get through the app recovery efforts.
spk05: Great, thanks.
spk03: Your next question comes from a line of Eric Woodring from Morgan Stanley. Your line is open.
spk04: Thanks so much for taking my question to that, guys. Maybe Patrick, can you just elaborate a bit on the efficiency measures you're alluding to? Not necessarily in the near term, but just like if we step back, what is changing internally and how do you believe that will translate to better long-term financial performance? And embedded in there, can you just maybe touch on, do you still expect to launch at least two new products per year with this focus on efficiency or does that change at all? And then I have a few follow-ups. Thank you.
spk02: Yeah, Eric, thanks. I do think we'll continue to launch at least two new products every year. And I think it means looking at the opportunities and the impact of the products that we're choosing to build, looking at the trends in the marketplace, and just probably making sure that we're doing things that are going to have the biggest impact possible and doing them in the smartest ways. And so I think Sayori has already given you a few examples of the ways we've been able to do that in other areas of the company. And we're doing all the work now to make sure that we can do this in a more effective way going forward as well. And I think we learn with every product launch, we kind of learn what it's going to take in terms of what's resonating with customers, what, where we get the best return, where the best opportunities are and kind of building on the strengths that we have. So I think all of those things, you know, come together to allow us to have a, you know, a hypothesis in terms of how we go and be more effective in terms of the investments that we're making, but more to come on that front. We'll update you as we go through that. So lots more to come on that front.
spk04: Okay, that's super, super fair. Thank you for that. And then, you know, I realize you're still in a very tough kind of macro demand backdrop. Can you maybe just elaborate to the extent you have the data on, you know, the linearity of demand through the quarter and into November? you know, how you're able to work down channel inventory, what you're hearing from retailers about holiday season demand expectations, just kind of like if you could put that broad mosaic together, just in terms of how things might be changing, maybe a little more incrementally in the near term and how that shifted over the quarter, that would be super helpful. And then I just have one after that. Thanks.
spk02: Yeah, I think I had the chance to be at one of the Best Buy events and kind of work through that, have had a lot of conversations with people about the retail environment. And I'd say, as we said in the prepared remarks, remains challenged when it comes to audio in terms of where we are right now. And you won't be surprised, Eric, you know this well, is that Black Friday, Cyber Monday is a huge part of the quarter as well. And I think that As we've seen throughout the year, promotional periods have been important. And the consumer right now is looking for promotions and discounts. And so ultimately, as we go through this, it's a matter of how we perform over that period. We've got ourselves very well positioned. One of the other things that we've done is ambassadors that will be in Best Buy and Costco, you know, being able to help people experience and understand Sonos and the current experience, the current product lineup. So we've got a lot underway to do everything we can to make sure it's a successful holiday season and Of course, there's a shorter period before, between Black Friday, Cyber Monday and Christmas this year, which kind of adds to the pressure in that period. But I think even last year, we saw people shopping later than usual as an industry, not specific to Sonos. But I think we can expect that going through. And I think this will be a, you know, kind of more of the same in terms of promotions and, you know, discount oriented holiday season.
spk04: Okay, very helpful. And then last one, just Sayuri, totally understand the shift in guidance and I realize you aren't guiding annually, but can you maybe just elaborate a bit on how seasonality might look different than this year than past years, obviously, given some of the ongoing app efforts, given some of the macro backdrop, any high level comments that you could make for us to help us think about the remainder of the year? And then, obviously, for the December quarter, the guidance ranges for both revenue and adjusted EBITDA are fairly wide. Maybe just help us understand what gets you to the low end of those ranges versus the high end of those ranges. And that's it for me. Thank you so much, guys.
spk01: Thanks, Eric. Yeah, so, you know, part of the reason why we wanted to move to a one-quarter cycle is there's a lot of dynamics going on, as Patrick also mentioned about the the overall category decline that hasn't quite stabilized yet. So we wanted to be able to be nimble, to be able to adapt to that, you know, to that point. We did guide wider this quarter because it is Black Friday, Cyber Monday quarter, holiday quarter, and we have ACE. as a new lineup in our product. That hopefully will be a good outcome, but we'll have to see and assess how that goes. And that's part of the reason why we had widened the guidance range, then wider than our normal holiday quarter. As a result of that, we also have just launched Arc Ultra and Sub 4. So that's another reason why there could be a wider range of outcome. And we're certainly watching to see how we through Black Friday, Cyber Monday to see where this turns out for the rest of the year as Q1 being one of our most important quarter. We do expect a headwind to continue in this quarter from the app recovery efforts. And we are also seeing the category decline. But the other factor that we also mentioned on the call is we are trying to proactively be lean coming out of the quarter. in Q1 and reducing general inventory to a place where we feel really good about setting ourselves up for the rest of the year. And so that's another factor that is comprehended in our guidance that we provided today.
spk03: Your next question comes from a line of Alex Furman from Craig Hellam Capital Group. Your line is open.
spk08: Hey, guys. Thanks very much for taking my question. It looks like from some of the full-year metrics that you provide on the Q4 release, it looks like you guys added about 1 million new households in fiscal 24, which is an impressive number, but it's lower than what you've been adding the last year. five or 10 years or so. Can you give us a sense of what that number was tracking to before you started to have issues with the app? I'm curious if that would have been in track to be in line with prior years before that.
spk02: Yeah, we don't give any more color around that throughout the year. We always update at the end of the year. And what I would say, Alex, is we believe that, and you've seen it in the last couple of years, right, is that the cyclical challenges in the category have put pressure on that number. And certainly in this year as well, some of that would have been attributed as well to the misstep with the app. But it's consistent with kind of what we've seen from a challenge category overall. So that's what I would kind of give you as a perspective on that number right now.
spk08: Okay, that's really helpful. And then if I could ask one more, Patrick, I think you mentioned you're bolstering customer service here, you know, to help with customers that are working through the app issues. Just curious as you, you know, look towards long-term growth, I mean, is this something that you think of as a temporary measure, or is this going to be something that's beefed up going forward?
spk02: A little of both, Alex. So, you know, we've been beefing it up in terms of making sure we have things like weekend support, which is something that you'll see us continue. And we've been, as Sayori called out, we've been working closely with Sierra AI and really on kind of, I would say, the future of customer support and how we are able to do that leveraging AI in a unique way. And so I think that puts us in a position where we'll be able to figure out how to do it more effectively and more efficiently over time as well. So I'm pretty excited about delivering even better customer service and doing it in an efficient way. So I think this has been a great example of innovation to help drive more efficiency and better service, which is kind of the best of both worlds.
spk08: Okay, that's really helpful. Thank you, Patrick.
spk03: Your next question comes from a line of Mark Cash from Raymond James. Your line is open.
spk07: Yes, thank you. This is Mark on for Adam. Good afternoon. So Patrick, in your prepared remarks, You mentioned competitors discounting and permanently lowering prices in the hedge fund market, but you sound pretty upbeat coming out of the A spots. So I just kind of want to wonder if you can dig into what's driving confidence in the hedge fund market longer term.
spk02: Yeah, Mark, ultimately, I think it's the reception to the product from the people who have bought it, from the people that have reviewed it, from my own network of people that have bought it. I'm not sure there's been another product that I've had so many proactive texts and emails about once people have actually used it. And we've seen with our products over time that when we have a good product, You know, it does well over time. And so, you know, I think I think it's a very competitive environment right now. But I also like the fact that, you know, Best Buy has seen it as something they want to help feature over the holiday period as part of. the theater district. Right. So I think that puts us in a good position. Um, and with the tie-ins to our system through audio swap, I think we have a unique way to, uh, drive more with our existing customers, which is, you know, a really important part of our flywheel. So those are the things that, um, you know, give me, uh, you know, confidence and optimism around what we've done.
spk07: Okay. Maybe follow up on that. Um, If we look at the $100 million impact from the app in the year, could you say how much that $100 million would be attributable to selling fewer headphones in the period?
spk02: No, we had commented a bit in terms of the $100 million being the app impact, but we're not breaking that down by product market.
spk07: Okay. And then just one more. You highlighted ARR 100 Pro earlier. Really interesting. So I just wanted to ask about diversification efforts. You know, you have Sonos Pro, you've got Sonos Radio. So could you talk about how those are tracking and when they might start to get incremental disclosures on those?
spk02: Those are pretty nascent in terms of what's there. Like we've talked about before, we're going to experiment with a lot of things and kind of see what makes sense. And so I think Aira Pro ERA 100 Pro is a little bit different in terms of thinking about a product that we've made successful and now we have a Power Internet version of that will be, you know, sold through the professional channel in a little bit more of a traditional product and hardware sense. And so this one is one that we have a good understanding of the demand, you know, I think from customers there. There was a lot of excitement at Cedia around it. um but the other ones you you referenced are uh you know ones that are still nascent efforts to understand and learn a lot about uh services businesses as well all right very good thank you again if you'd like to ask a question press star 1 in your telephone keypad your next question comes from a line of brent phil from jeffries your line is open
spk05: Just a question on the buyback. You know, typically when things get tough, I understand why you'd want to shy from the buyback, but typically it's sometimes the best opportunity and capital allocation to lean in. Why not lean in harder if you really believe that these are temporary issues and that they'll be flushed out quick? Maybe just give us your perspective. I do believe you still have authorization left on the buyback program. Is this just temporary or how should we think about this?
spk01: Thank you, Brent. Yes, we still do have $71 million left in our authorization of the $200 million last approved by the board. So we still have some left and we definitely are planning on that. That is ongoing capital allocation. framework that we have that we plan on exercising. We specifically paused for Q4 given the app recovery efforts that were underway, which led to dependency in our ability to launch Arc Ultra and Sub 4 that we were able to subsequently do. But while app recovery was underway, that was not certain. That was part of the reason why we had to push out those launches from Q4 quarter into Q1. And that was not certain at the beginning of the quarter. And we thought it was prudent to pause it while that was still a volatility to our quarter. And, you know, now that that's behind us, we plan to continue to stick to our capital allocation process.
spk05: Okay, great. Thanks.
spk03: And that concludes our question and answer session. I will now turn the call back over to Patrick Spence, Chief Executive Officer, for some final closing remarks.
spk02: Thanks, Rob. To close, I'd highlight three things. First, we've made good progress on our app recovery efforts and our on-the-comeback trail. Our customers have stuck with us, as evidenced by the fact that the products per home increased in fiscal year 2024. Secondly, we continue to deliver new products that customers love and rate highly, most recently with Arc Ultra and Sub4, and before that with Ace. These are a direct result of the investments we've made in innovation over the past two years, and we now have the strongest product lineup we've ever had. And finally, we're committed to driving EBITDA growth. As you heard from Sayori, we've begun transforming the way we do things to be more effective and efficient. We will continue to update you on our plans to improve profitability and growth for the long term as we progress through the year. Thank you for joining us today, and I look forward to talking to you again next quarter.
spk03: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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