Pandemic Delays Sonos Shift to Malaysia; Stock Down After Q3 Report

Sonos, whose exclusion from the List 4A tariffs was granted in March (see 2005110034), is diversifying its supply chain into Malaysia even amid COVID-19 delays, said Chief Financial Officer Brittany Bagley on a quarterly call Wednesday. The company planned to have “significant” U.S.-bound production from Malaysia ramped up by Dec. 31. Due to pandemic-related government restrictions on manufacturing in Malaysia, reaching scale will take until mid-2021, Bagley said. “Essentially all” Sonos products subject to 7.5% tariffs fall under the exemption, which was retroactive to Sept. 1, but expires Aug. 31. Sonos began the process of seeking refunds. Revenue fell 4% in fiscal Q3 ended June 27 to $249.3 million. Gains were offset by higher freight costs to increase inventory levels and fill back orders to meet “higher-than-expected” demand. Most of Sonos’ physical retail partners were closed for in-store sales during much of Q3, said the shareholder letter. The majority have reopened but with capacity and other restrictions. It’s confident it can continue to scale its direct-to-consumer channel, up 299% in the quarter, “over time.” On the transition to the S2 operating system, which left many legacy product owners angry, CEO Patrick Spence said there's “no churn" and “millions” of homes have converted. The wireless multiroom audio company, which last week settled with Lenbrook over a patent infringement lawsuit (see 2007300059), remains confident about its patent fight with Google at the International Trade Commission, said Chief Legal Officer Eddie Lazarus. There are “quite a few companies” in the multiroom audio space that Sonos believes are infringing its patents, “and we're in touch with many of them.” The stock closed 18.3% lower Thursday at $14.29.