Sonos Cuts 2022 Guidance, 2024 Goals on 'Challenging' Conditions

Sonos’ fiscal Q3 revenue slipped 1.8% year on year to $371.8 million for the quarter ended July 2, the company said Wednesday. It swung to a net loss of $600,000 vs. net income of $17.8 million in the year-earlier quarter.

The audio company lowered fiscal 2022 guidance to $1.73 billion-$1.75 billion from the $1.95 billion-$2 billion it gave in May. Citing the “slowing macro environment, softening run rates in our business and caution from some of our retail channel partners -- along with [foreign exchange rate] headwinds and continued supply constraints--we expect a challenging Q4,” said outgoing Chief Financial Officer Brittany Bagley on the company’s Wednesday earnings call. Shares plunged 24.95% Thursday, closing at $17.09, after hitting a 52-week low of $16.09.

“Since we reported Q2 earnings, we have seen the macroeconomic backdrop become significantly more challenging," said CEO Patrick Spence. Spence cited a “softening of consumer demand in our product categories starting in June,” due to the shift in spending from goods to services and travel. The company also remained “supply constrained” on key products including Amp and Beam, he said.

Lower demand had an “outsized impact on Roam,” which lapped a successful Q2 2021 launch, and the Ray $299 compact sound bar Sonos launched in June. Slow demand for the Ray was compounded by a “substantial drop in TV sales versus last year,” Spence said: “As a result, Ray is significantly missing our expectations for the year.”

Sonos delayed a planned product release from the current quarter to the holiday quarter due to market challenges. Bagley noted “caution from some of our retail channel partners,” plus foreign exchange rate headwinds and continued supply constraints. Delaying the launch from Q4 into Q1 of '23 "should lead to better launch timing, but ... further impacts our Q4 expectations,” she said.

Changing consumer spending patterns “influenced our retail partners' outlook,” and they’re taking a “cautious approach to their inventory position,” Spence said. Heading into the holiday quarter, Sonos typically has a “seasonal build of inventory,” Bagley said, “but given the softer demand we're seeing, our inventory levels are higher than we would like them to be.” The company adjusted its inventory build and component buys and believes it will get to a better inventory position "after the holiday quarter,” she said.

Sonos' lower fiscal 2022 revenue guidance implies Q4 revenue of $306 million, down 15% year on year, Bagley said. The company trimmed gross margin guidance to 45.7%-45.9% for FY ’22 on “elevated component costs” and foreign exchange rate headwinds. It also delayed its timeline for hitting long-term targets of $2.5 billion revenue, 45%-47% gross margin and 15%-18% adjusted earnings before interest, taxes, depreciation, and amortization, which it projected by fiscal ’24. No new target date was given.

War in Ukraine affected revenue in Europe, the Middle East and Africa, Bagley said. EMEA was 30% of Sonos’ revenue in the quarter. Foreign exchange rates affected business in EMEA and Asia-Pacific; APAC was down 7% vs. the year-ago quarter, and year-on-year comparisons “got significantly harder from Q2 as we grew over 100% since last Q3,” she said.

Sonos speaker revenue advanced 1% year on year, due to the introduction of the Ray and ongoing strength in the Arc sound bar and One speaker, Bagley said. Sonos system products revenue dropped 19% on supply constraints. Partner products and other revenue declined 8%, due to lower accessory sales.

The company is “resetting our expectations” on the Ray sound bar. “Registrations are our best proxy for sell-through and our closest sense for real-time demand along with our [direct-to-consumer] channel, and we are watching these closely as we forecast,” Bagley said. Sonos expects “softer ordering from our retail partners,” she said, saying channel inventory “remains healthy ahead of holiday selling, but we are seeing extra caution as partners evaluate their inventory positions and decide how many weeks of inventory they will stock.”

Bagley noted an “easing in the demand for critical components” and shipping and logistics costs, but benefits won’t be seen until fiscal 2023, given lead times. “We continue to believe our supply chain strategy and continued diversification with Malaysia, and now Vietnam, will serve us well,” she said.

In an update on patent infringement litigation against Google in U.S. District Court in San Francisco, Chief Financial Officer Eddie Lazarus said the judge rendered a split decision on two representative claims at issue, ruling in favor of Sonos on its zone scenes patent but for Google on the other patent. “We respectfully disagree with the adverse ruling,” Lazarus said.

Google filed two new cases against Sonos in Northern California, alleging infringement of seven patents and two mirror image cases at the International Trade Commission based on the same patents (see 2208100003), Lazarus said. “We will defend vigorously against this attempt to dissuade us from pursuing our patent rights,” he said. "Our track record in defending against Google is strong,” he said, citing a ruling in which a Canadian court found Sonos didn't infringe the patent at issue.

“This follows our successful defenses in Germany, the Netherlands, and France,” Lazarus said. “Overall, our litigation results have continued to affirm the strength of our portfolio and our prospects for attaining damages and a fair royalty. We look forward to our day in court for the patent showdown trial scheduled to commence later this year in October.”

Spence announced that Bagley is leaving Sonos and Lazarus will assume her duties as interim CFO. Lazarus said his additional responsibilities as interim CFO won’t affect Sonos’ ability to “defend our intellectual property and hold Google accountable for their infringements.”