Sonos Maintains Revenue Guidance, Narrows Gross Margin on Supply Challenges

Product backlogs persist at Sonos “and will cost us a little more than we had previously expected,” said CEO Patrick Spence on the company’s Wednesday Q2 FY 2022 earnings call, citing increased component and logistics costs.

Demand remains strong, and Sonos repeated its 2022 revenue outlook for the fiscal year of $1.95 billion-$2 billion, said Chief Financial Officer Brittany Bagley. The company is confident it can reach “the bottom end of our range” based on demand, new product introductions [see story, this issue] and price increases it instituted in September, but Bagley noted that since the fiscal Q1 call, war broke out in Ukraine, inflation accelerated, the dollar strengthened against the euro and China “experienced major additional lockdowns” due to COVID-19. The company narrowed the FY ’22 gross margin outlook to 45.5%-46% -- from 45%-47% -- due to higher manufacturing costs and supply constraints, she said.

Q3 will be particularly challenging, Bagley said, saying product backlogs, led by the Amp, are expected to continue through the rest of the fiscal year, ending Oct. 1. “The cost of supplying our revenue has increased across components, as well as shipping and logistics, impacting our margin, not just in Q2 but for the rest of the year,” she said. The company will need “a material amount of spot buys” to offset component shortages, along with China lockdowns “to continue lifting.”

Moving some manufacturing capabilities to Malaysia has been helpful, but Sonos still has supply chain dependencies on China, Bagley said. Components that go into products had manufacturing shutdowns “and/or we couldn’t get them out of the ports in China,” Bagley said. The situation is improving, and Sonos is monitoring it closely “as are many other companies who are working to get their products out.” The company is diversifying manufacturing further, into Vietnam, where it expects to be operational next year, Bagley said.

For the second half, Bagley projected 44%-45% gross margin, “but there may be some volatility in each of these quarters depending on the timing of spot buys.” The company is “closely watching” the Europe, Middle East and Africa region due to war in Ukraine, impact from inflation on the consumer, the supply chain and foreign exchange, she said.

Responding to a question on Sonos’ confidence that demand will continue, Spence said Sonos has “better insight … than most companies in terms of understanding what’s actually lighting up.” He cited the company’s direct-to-consumer business that’s “twice as big as it was pre-pandemic” and gives “great visibility” into what consumers are buying on a “very real-time basis.” He referenced the “strength of the affluent customer.”

On the product backlog, Bagley said, “We’re not perfectly in stock, but we’re looking a lot better.” Supply will continue to be “pretty challenging” through the back half of the year, so the company will “try and stay as much in stock as we can for as many products as we can stay in stock on.” Though back orders can be canceled, Bagley said cancellation rates are low. In-stock items at Sonos.com Thursday were the Move, One and One SL, Gen 2 Beam, Five, Sub and Roam. Back-ordered products were the Arc sound bar, estimated to ship Monday, and the Amp, due to ship June 24.

On patent litigation against Google, Spence said Sonos was "encouraged to see the [International Trade Commission's] importation ban go in effect in March, marking the most recent development and our victory against Google." Both sides appealed aspects of the ITC decision to the Federal Circuit, he said: "While that plays out, we are actively litigating our second case against Google in federal court in Northern California."

Revenue for the quarter ended April 2 grew 10.1% to $399.8 million. Net income was $8.6 million vs. $17.2 million in the prior-year quarter, said the company. Gross margin slipped by 500 basis points year on year to 44.8%. Sonos shares closed 14.3% higher Thursday at $21.72.