SONOS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report.
We operate on a 52- week or 53- week fiscal year ending on the Saturday nearest
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements. All
statements other than statements of historical facts contained in this Quarterly
Report on Form 10-Q, including statements regarding future operations are
forward-looking statements. In some cases, forward-looking statements may be
identified by words such as "believe," "may," "will," "estimate," "continue,"
"anticipate," "intend," "could," "would," "expect," "objective," "plan,"
"potential," "seek," "grow," "target," "if," and similar expressions intended to
identify forward-looking statements. We have based these forward-looking
statements largely on our current expectations and projections about future
events and trends that we believe may affect our financial condition, results of
operations, business strategy, short-term and long-term business operations and
objectives and financial needs. These forward-looking statements are subject to
a number of risks, uncertainties and assumptions, including those described in
the section titled "Risk Factors" set forth in Part II, Item 1A of this
Quarterly Report on Form 10-Q and in our other
Overview
Sonos is one of the world's leading sound experience brands. As the inventor of multi-room wireless audio products, Sonos' innovation helps the world listen better by giving people access to the content they love and allowing them to control it however they choose. Known for delivering an unparalleled sound experience, thoughtful design aesthetic, simplicity of use and an open platform, Sonos makes a breadth of audio content available to anyone.
Our innovative products, seamless customer experience and expanding global footprint have driven 14 consecutive years of sustained revenue growth since our first product launch. We sell our products primarily through over 10,000 third-party physical retail stores, including custom installers of home audio systems. We also sell through select e-commerce retailers and our website sonos.com. Our products are distributed in over 50 countries.
Beginning in the first quarter of fiscal 2020, we began reporting our product
revenue under the following new categories: Sonos speakers; Sonos system
products; and Partner products and other revenue to further align revenue
reporting with the evolving nature of our products, customers' engagement across
multiple categories and how we evaluate our business. Sonos speakers currently
include Play:1, Play:5, Sonos One SL, Playbar, Playbase, Sub and our
voice-enabled Sonos One, Sonos Move and Sonos Beam. Sonos system products
currently include Sonos Port, Sonos Amp and Sonos Boost. Partner products and
other revenue currently include module units sold through our
Key metrics
In addition to the measures presented in our condensed consolidated financial statements, we use the following additional key metrics to evaluate our business, measure our performance, identify trends affecting our business and
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assist us in making strategic decisions. Our key metrics are total revenue,
products sold, adjusted EBITDA and adjusted EBITDA margin. The most directly
comparable financial measure calculated under
Three Months Ended
December 28, 2019 December 29, 2018
(in thousands, except percentages)
Total revenue 562,083 496,371
Products sold 2,940 2,408
Adjusted EBITDA $ 93,219 $ 87,418
Adjusted EBITDA margin 16.6 % 17.6 %
Products sold
Products sold represents the number of products that are sold during a period,
net of returns. Products sold has been redefined to align with our new product
revenue categories and includes the sale of products in the Sonos speakers and
Sonos system products categories as well as units sold through our partnerships
with
Adjusted EBITDA and adjusted EBITDA margin
We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of stock-based compensation expense, depreciation, interest, other income (expense), taxes and other items that we do not consider representative of our underlying operating performance.
We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. See "Non-GAAP financial measures" below for information regarding our use of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of net income to adjusted EBITDA.
Non-GAAP financial measures
To supplement our condensed consolidated financial statements presented in
accordance with
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We use these non-GAAP financial measures to evaluate our operating performance
and trends and make planning decisions. We believe that these non-GAAP financial
measures help identify underlying trends in our business that could otherwise be
masked by the effect of the expenses and other items that we exclude in these
non-GAAP financial measures. Accordingly, we believe that these non-GAAP
financial measures provide useful information to investors and others in
understanding and evaluating our operating results, enhance the overall
understanding of our past performance and future prospects and allow for greater
transparency with respect to key financial metrics used by our management in its
financial and operational decision-making. Adjusted EBITDA and adjusted EBITDA
margin are non-GAAP financial measures, and should not be considered in
isolation of, or as an alternative to, measures prepared in accordance with
• these non-GAAP financial measures exclude depreciation and, although these
are non-cash expenses, the assets being depreciated may be replaced in the
future;
• these non-GAAP financial measures exclude stock-based compensation
expense, which has been, and will continue to be, a significant recurring
expense for our business and an important part of our compensation
strategy;
• these non-GAAP financial measures do not reflect interest income,
primarily resulting from interest income earned on our cash and cash
equivalent balances;
• these non-GAAP financial measures do not reflect interest expense, or the
cash requirements necessary to service interest or principal payments on
our debt, which reduces cash available to us;
• these non-GAAP financial measures do not reflect the effect of foreign
currency exchange gains or losses, which is included in other income
(expense), net;
• these non-GAAP financial measures do not reflect the provision for or
benefit from income tax that may result in payments that reduce cash
available to us;
• these non-GAAP financial measures do not reflect non-recurring expenses
and other items that are not considered representative of our underlying
operating performance which reduce cash available to us; and
• the expenses and other items that we exclude in our calculation of these
non-GAAP financial measures may differ from the expenses and other items,
if any, that other companies may exclude from these non-GAAP financial
measures when they report their operating results.
Because of these limitations, these non-GAAP financial measures should be
considered along with other operating and financial performance measures
presented in accordance with
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The following table presents a reconciliation of net income to adjusted EBITDA:
Three Months Ended
December 28, December 29,
2019 2018
(in thousands, except percentages)
Net income $ 70,775 $ 61,667
Add (deduct):
Depreciation 9,105 9,867
Stock-based compensation expense 13,204 9,032
Interest income (998 ) (273 )
Interest expense 453 671
Other (income) expense, net (4,424 ) 3,999
Provision for income taxes 1,656 2,455
Legal and transaction related costs (1) 3,448 -
Adjusted EBITDA $ 93,219 $ 87,418
Revenue $ 562,083 $ 496,371
Adjusted EBITDA margin 16.6 % 17.6 %
(1) Legal and transaction related costs consist of expenses related to our IP
litigation against Alphabet Inc. and Google LLC as well as legal and
transaction costs associated with our recent acquisition activity which we
do not consider representative of our underlying operating performance.
Factors affecting performance
New product introductions. Since 2005, we have released a number of products in multiple audio categories. We intend to introduce new products that appeal to a broad set of consumers, as well as bring our differentiated listening platform and experience to all the places and spaces where our customers listen to the breadth of audio content available, including outside of the home.
Seasonality. Historically, we have experienced the highest levels of revenue in the first fiscal quarter of the year coinciding with the holiday shopping season and our promotional activities.
Components of results of operations
Revenue
Beginning in the first quarter of fiscal 2020, we began reporting our product
revenue under the following new categories: Sonos speakers, Sonos system
products and Partner products and other revenue to further align revenue
reporting with the evolving nature of our products, how customers purchase
across multiple categories and how we evaluate our business. We generate
substantially all of our revenue from the sale of Sonos speakers and Sonos
system products. We also generate a portion of revenue from Partner products and
other revenue sources, such as module revenue from our
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Cost of revenue consists of product costs, including costs of our contract manufacturers for production, component product costs, shipping and handling costs, tariffs, duty costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs and excess and obsolete inventory write-downs. In addition, we allocate certain costs related to management and facilities, personnel-related expenses and other expenses associated with supply chain logistics. Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation expenses.
Gross profit and gross margin
Our gross margin may, in the future, fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel mix through which we sell our products, the foreign currency in which our products are sold and tariffs and duty costs implemented by governmental authorities.
Operating expenses
Operating expenses consist of research and development, sales and marketing and general and administrative expenses.
Research and development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment, prototype materials and related overhead costs. To date, software development costs have been expensed as incurred, because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant.
Sales and marketing. Sales and marketing expenses consist primarily of advertising and marketing promotions of our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel, product display expenses and related depreciation, customer care costs and overhead costs.
General and administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, as well as the costs of professional services, information technology, litigation expenses, patent costs, related overhead and other administrative expenses.
Other income (expense), net
Interest income. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.
Interest expense. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.
Other income (expense), net. Other income (expense), net consists primarily of
our foreign currency exchange gains and losses relating to transactions and
remeasurement of asset and liability balances denominated in currencies other
than the
Provision for income taxes
We are subject to income taxes in
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance
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is provided when it is more likely than not that the deferred tax assets will
not be realized. We have established a full valuation allowance to offset our
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Results of operations
The following table sets forth our condensed consolidated results of operations
for the periods indicated. The period-to-period comparison of financial results
is not necessarily indicative of financial results to be achieved in future
periods.
Three Months Ended
December 28, December 29,
2019 2018
(Dollars in thousands) $ % $ %
Revenue $ 562,083 100.0 % $ 496,371 100.0 %
Cost of revenue (1) 334,463 59.5 301,082 60.7
Gross profit 227,620 40.5 195,289 39.3
Operating expenses
Research and development (1) 52,526 9.3 37,095 7.5
Sales and marketing (1) 77,423 13.8 65,852 13.3
General and administrative (1) 30,209 5.4 23,823 4.8
Total operating expenses 160,158 28.5 126,770 25.5
Operating income 67,462 12.0 68,519 13.8
Other income (expense), net
Interest income 998 0.2 273 0.1
Interest expense (453 ) (0.1 ) (671 ) (0.1 )
Other income (expense), net 4,424 0.8 (3,999 ) (0.8 )
Total other income (expense), net 4,969 0.9 (4,397 ) (0.9 )
Income before provision for income taxes 72,431 12.9 64,122 12.9
Provision for income taxes 1,656 0.3 2,455 0.5
Net income $ 70,775 12.6 % $ 61,667 12.4 %
Adjusted EBITDA (2) $ 93,219 16.6 % $ 87,418 17.6 %
(1) Amounts include stock-based compensation expense as follows:
Three Months Ended
December 28, December 29,
2019 2018
$ % $ %
Cost of revenue $ 282 0.1 % $ 184 - %
Research and development 5,116 0.9 3,604 0.7
Sales and marketing 3,541 0.6 2,681 0.5
General and administrative 4,265 0.8 2,563 0.5
Total stock-based compensation expense
(2) Adjusted EBITDA is a financial measure that is not calculated in
accordance with U.S. GAAP. See the section titled "Non-GAAP financial
measures" above.
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Comparison of the three and three months ended
Revenue
Comparison of the three months ended
Three Months Ended Change
December 28, December 29,
2019 2018 $ %
(dollars in thousands)
Sonos speakers $ 466,677 $ 436,105 $ 30,572 7.0 %
Sonos system products 61,521 52,434 9,087 17.3 %
Partner products and other revenue 33,885 7,832 26,053 332.6 %
Total revenue $ 562,083 $ 496,371 $ 65,712 13.2 %
Total revenue grew for the three months ended
Sonos speakers revenue growth was driven by the introduction of Sonos One SL and
Sonos Move in
Revenue for the three months ended
In constant currency
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(products sold units in thousands)
Total products sold 2,940 2,408 532 22.1 %
Volume growth of products sold for the three months ended
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Cost of revenue and gross profit
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
Cost of revenue $ 334,463 $ 301,082 $ 33,381 11.1 %
Gross profit $ 227,620 $ 195,289 $ 32,331 16.6 %
Gross margin 40.5 % 39.3 %
The increase in cost of revenue for the three months ended
Gross margin increased 120 basis points for the three months ended
Research and development
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
Research and development $ 52,526 $ 37,095 $ 15,431 41.6 %
Percentage of revenue 9.3 % 7.5 %
The increase in research and development expenses for the three months ended
Sales and marketing
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
Sales and marketing $ 77,423 $ 65,852 $ 11,571 17.6 %
Percentage of revenue 13.8 % 13.3 %
The increase in sales and marketing expenses for the three months ended
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higher wages and incentive compensation as well as customer care support and an
increase in marketing and advertising and other costs of
General and administrative
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
General and administrative $ 30,209 $ 23,823 $ 6,386 26.8 %
Percentage of revenue 5.4 % 4.8 %
The increase in general and administrative expenses for the three months ended
Interest income, interest expense and other income (expense), net
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
Interest income $ 998 $ 273 $ 725 *
Interest expense $ (453 ) $ (671 ) $ 218 (32.5 )%
Other income (expense), net $ 4,424 $ (3,999 ) $ 8,423 *
* not meaningful
The increase in interest income for the three months ended
Provision for income taxes
Comparison of the three months ended
Three Months Ended Change
December 28, 2019 December 29, 2018 $ %
(dollars in thousands)
Provision for income taxes $ 1,656 $ 2,455 $ (799 ) (32.5)%
Provision for income taxes decreased from
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the issuance of the Base Erosion and Anti-Abuse Tax ("BEAT") Regulations. For
the three months ended
We recorded a provision for income taxes of
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Liquidity and capital resources
Our operations are financed primarily through cash flow from operating
activities, net proceeds from the sale of our equity securities, including net
proceeds of
We believe our existing cash and cash equivalent balances, cash flow from operations and committed credit lines will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, our planned sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt financing would result in increased debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
Debt obligations
Our debt obligations consist of the Credit Facility, the Term Loan and debt
acquired in our acquisition of Snips SAS. Our short- and long-term debt
obligations as of
As of
December 28, 2019 September 28, 2019
Rate Balance Rate Balance
(dollars in thousands)
Term Loan (1) 4.2 % $ 31,666 4.6 % $ 33,333
Other debt (2) 1,106 -
Unamortized debt issuance costs (3) (141 ) (160 )
Total indebtedness 32,631 33,173
Less short-term portion (9,439 ) (8,333 )
Long-term debt $ 23,192 $ 24,840
(1) Due in October 2021, bears interest at a variable rate equal to an
adjusted LIBOR plus 2.25% and is payable quarterly.
(2) Other debt consists of debt acquired through recent acquisition activity
and was settled subsequent to the period of this report in January 2020 .
(3) Debt issuance costs are recorded as a debt discount and recorded as
interest expense over the term of the agreement.
The Credit Facility allows us to borrow up to
Debt obligations under the Credit Facility and the Term Loan require that we maintain a consolidated fixed charge ratio of at least 1.0, restrict distribution of dividends unless certain conditions are met, such as having a fixed
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charge ratio of at least 1.15, and require financial statement reporting and
delivery of borrowing base certificates. As of
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
December 28, 2019 December 29, 2018
(In thousands)
Net cash provided by (used in):
Operating activities $ 118,840 $ 92,050
Investing activities (51,536 ) (5,372 )
Financing activities 1,224 (105 )
Effect of exchange rate changes 1,254 (133 )
Net change in cash, cash equivalents and restricted cash $ 69,782 $ 86,440
Cash flows from operating activities
Net cash provided by operating activities of
Cash flows from investing activities
Cash used in investing activities for the three months ended
Cash flows from financing activities
Cash provided by financing activities for the three months ended
Commitments and contingencies
At
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements, except as described above, and do not have any holdings in variable interest entities.
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Critical accounting policies and estimates
Our unaudited condensed consolidated financial statements are prepared in
accordance with
Other than items discussed in Note 2 of our condensed consolidated financial statements, there have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report.
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