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 nearestSeptember 30 each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters.
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, 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 otherSEC filings, including our Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. Except as required by law, we do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
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 from our first product launch through the end of our last completed fiscal year. 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. COVID-19 impacts InDecember 2019 , the novel coronavirus (COVID-19) was reported inChina and subsequently was declared a global pandemic inMarch 2020 by theWorld Health Organization . The impact of the pandemic has led to significant challenges to our global economy. Starting inMarch 2020 , we implemented global travel restrictions and work-from-home policies for employeeswho have the ability to work remotely. As of the date of this report, these policies have not materially adversely affected our operations, financial reporting or internal controls. 25 -------------------------------------------------------------------------------- Customer demand. In our second quarter of fiscal 2020, we saw weakening retail demand and closures of physical retail stores in the majority of our end markets. Our retail partners made significant modifications to the retail experience, such as store closures, placing limits on the number of customers permitted in stores, and shifting from in-store shopping to curbside pickup. Our retail partners reduced orders to adjust inventory levels in response to lower consumer sales resulting from decreased store traffic. During the third quarter of fiscal 2020, most retail stores began reopening, subject to capacity and other restrictions, but we continued to see the ongoing impact on revenue of physical store closures and constrained product availability as demand exceeded our expectations. This impact was offset by strong performance in our direct-to-consumer sales channel, primarily through our website. Revenue from our direct-to-consumer channel increased 299.0% for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . Supply chain. As of the date of this report, there has been no disruption to our existing supply chain and we continue to have the ability to meet our customer demand. Due to government mandated shutdowns resulting from COVID-19, our efforts to diversify our supply chain intoMalaysia have been delayed likely until the middle of 2021. For additional information regarding our plans to diversify our supply chain intoMalaysia , refer to Part II, Item 1A. Risk factors. Liquidity and capital resources. In response to the uncertainty and challenges stemming from COVID-19, in the second quarter of fiscal 2020 we implemented a number of initiatives to maintain our liquidity and rationalize our operating expenses, including reducing the pace of investment in inventory, suspending travel, and suspending most new hiring, employee promotions and merit-based payroll increases. In the third quarter of fiscal 2020, we retained these operating reduction initiatives, except for reinvesting in inventory to meet demand, and initiated the 2020 restructuring plan. We believe our existing cash and cash equivalent balances, cash flow from operations, and committed credit lines are sufficient to meet our long-term working capital and capital expenditure needs. As ofJune 27, 2020 , we had cash and cash equivalents of$329.1 million , long-term debt of$19.9 million , and an undrawn revolving credit facility of$80.0 million . Restructuring plan. OnJune 23, 2020 , we initiated the 2020 restructuring plan in connection with our efforts to reduce operating expenses and preserve liquidity in the face of the COVID-19 pandemic and to more efficiently position our business for our long-term strategy. As a result of these efforts we eliminated approximately 12% of our global headcount and closed ourNew York retail store and six satellite offices. Our restructuring efforts are expected to result in savings of approximately$7.5 million in the fourth quarter positioning us more efficiently to continue delivering sustainable, profitable growth over the long-term. To the extent that disruption to the business continues, we will evaluate additional cost management initiatives, which will be dependent on the severity and duration of the COVID-19 pandemic. While the situation caused by COVID-19 is unprecedented and dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to Part II, Item 1A. Risk factors. 26 -------------------------------------------------------------------------------- Table of contents Key metrics In addition to the measures presented in our condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business and 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 underU.S. GAAP for adjusted EBITDA is net income (loss). In the three months endedJune 27, 2020 andJune 29, 2019 , we had net losses of$57.0 million and$14.0 million , respectively. In the nine months endedJune 27, 2020 andJune 29, 2019 , we had net loss of$38.5 million and net income of$24.8 million , respectively. Three Months Ended Nine Months Ended June 27, June 29, June 27, June 29, 2020 2019 2020 2019 (In thousands, except percentages) Total revenue$ 249,310 $ 260,119 $ 986,491 $ 966,663 Products sold 923 1,345 4,544 4,640 Adjusted EBITDA(1)$ (2,720) $ 6,797 $ 62,115 $ 91,457
Adjusted EBITDA margin(1) (1.1) % 2.6 % 6.3 % 9.5 % (1)For additional information regarding adjusted EBITDA and adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net income (loss), to adjusted EBITDA, see the sections titled "Adjusted EBITDA and adjusted EBITDA margin" and "Non-GAAP financial measures" below.
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 module units sold through our partnerships withIKEA and Sonance from our Partner products and other revenue category. Our historical products sold metric has been recast to reflect the change in product revenue categorization and now includes Sonos Boost and module units. Products sold excludes accessories, which have not materially contributed to our revenue historically. Growth rates between products sold and revenue are not perfectly correlated because our revenue is affected by other variables, such as the mix of products sold during the period, promotional discount activity and the introduction of new products that may have higher or lower than average selling prices.
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 (loss) to adjusted EBITDA.
Non-GAAP financial measures To supplement our condensed consolidated financial statements presented in accordance withU.S. GAAP, we monitor and consider adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed byU.S. GAAP and are not necessarily comparable to similarly titled measures presented by other companies. 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 27 -------------------------------------------------------------------------------- Table of contents 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 alternatives to, measures prepared in accordance withU.S. GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearestU.S. GAAP equivalent of adjusted EBITDA, and the use of adjusted EBITDA margin rather than operating margin, which is the nearestU.S. GAAP equivalent of adjusted EBITDA margin. These non-GAAP financial measures have certain limitations which: •exclude depreciation and amortization, and although these are non-cash expenses, the assets being depreciated may be replaced in the future; •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; •do not reflect interest income, primarily resulting from interest income earned on our cash and cash equivalent balances; •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; •do not reflect the effect of foreign currency exchange gains or losses, which is included in other income (expense), net; •do not reflect the provision for or benefit from income tax that may result in payments that reduce cash available to us; •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 •may not be comparable to similar non-GAAP financial measures used by other companies, because 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
The following table presents a reconciliation of net income (loss) to adjusted
EBITDA:
Three Months Ended Nine Months Ended
June 27, June 29, June 27, June 29,
2020 2019 2020 2019
(In thousands, except percentages)
Net income (loss) $ (56,980) $ (14,009) $ (38,526) $ 24,834
Add (deduct):
Depreciation and amortization 8,861 8,439 27,692 27,403
Stock-based compensation expense 15,041 13,408 41,638 33,525
Interest income (81) (1,432) (1,954) (2,933)
Interest expense 360 626 1,187 1,914
Other (income) expense, net (365) (1,068) (3,366) 3,640
Provision for (benefit from) income taxes 152 833 (1) 3,074
Restructuring and related expenses (Note
14) 26,160 - 26,160 -
Legal and transaction related costs (1) 4,132 - 9,285 -
Adjusted EBITDA $ (2,720) $ 6,797 $ 62,115 $ 91,457
Revenue $ 249,310 $ 260,119 $ 986,491 $ 966,663
Adjusted EBITDA margin (1.1) % 2.6 % 6.3 % 9.5 %
(1)Legal and transaction-related costs consist of expenses related to our
intellectual property ("IP") litigation against Alphabet and Google as well as
legal and transaction costs associated with our acquisition activity in the
first quarter of fiscal 2020, which we do not consider representative of our
underlying operating performance.
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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 inside and outside their homes.
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.
Channel strategy. We are focused on reaching and converting prospective
customers through third-party retail stores, e-commerce retailers, custom
installers of home audio systems, and our website sonos.com. We are investing in
our e-commerce capabilities and in-app experience to drive direct sales. We
believe the growth of our own e-commerce channel will be important to supporting
our overall growth and profitability as consumers continue the shift from
physical to online sales channels. Our physical retail distribution primarily
relies on third-party retailers. While we seek to increase sales through our
direct-to-consumer sales channel, we expect that our future sales will continue
to be substantially dependent on our third-party retailers. We will continue to
seek retail partners that can deliver differentiated in-store experiences to
support customer demand for product demonstrations.
For additional information regarding factors affecting performance, refer to
Risk factors in Part II, Item 1A. of this Quarterly Report on Form 10-Q, the
Risk factors in Part I, Item 1A. of our Annual Report, and to Part II, Item 7.
"Management's discussion and analysis of financial condition and results of
operations - Factors affecting our performance" in our Annual Report.
Components of results of operations
Revenue
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. This change was 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 ourIKEA partnership, architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services and licensing revenue. We attribute revenue from ourIKEA partnership to our APAC region, as our regional revenue is defined by the shipment location. Our revenue is recognized net of allowances for returns, discounts, sales incentives, and any taxes collected from customers. We also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro and the British pound. The introduction of new products may result in an increase in revenue but may also impact revenue generated from existing products as consumers shift purchases to new products.
Cost of revenue
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 has fluctuated and 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, fluctuations of
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the impacts of our product and material cost saving initiatives, 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 activity for our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel costs, product display expenses and related depreciation, customer experience and technology support tool expenses, 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, patents, 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 theU.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Provision for (benefit from) income taxes
We are subject to income taxes inthe United States and foreign jurisdictions in which we operate. Foreign jurisdictions have statutory tax rates different from those inthe United States . Accordingly, our effective tax rate will vary depending on the relative proportion of foreign toU.S. income, the utilization of foreign tax credits and changes in tax laws. 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 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 ourU.S. and certain foreign net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets. It is possible that within the next 12 months there may be sufficient positive evidence to release a significant portion of theU.S. valuation allowance. Release of theU.S. valuation allowance would result in the establishment of certain deferred tax assets and a benefit to income tax expense for the period the release is recorded which could have a material impact on our net earnings. The exact timing and amount of the valuation allowance release are subject to change based on the level of profitability achieved. 30 -------------------------------------------------------------------------------- Table of contents 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 Nine Months Ended June 27, June 29, June 27, June 29, 2020 2019 2020 2019 (Dollars in thousands) $ % $ % $ % $ % Revenue$ 249,310 100.0 %$ 260,119
100.0 %$ 986,491 100.0 %$ 966,663 100.0 % Cost of revenue (1) 139,519 56.0 142,749 54.9 576,071 58.4 563,591 58.3 Gross profit 109,791 44.0 117,370 45.1 410,420 41.6 403,072 41.7 Operating expenses Research and development (1) 57,770 23.2 44,355 17.1 159,890 16.2 121,530
12.6
Sales and marketing(1) 77,273 31.0 61,482 23.6 205,201 20.8 176,705 18.3 General and administrative (1) 31,662 12.7 26,583 10.2 87,989 8.9 74,308 7.7 Total operating expenses 166,705 66.9 132,420 50.9 453,080 45.9 372,543
38.5
Operating income (loss) (56,914) (22.8) (15,050) (5.8) (42,660) (4.3) 30,529
3.2
Other income (expense), net Interest income 81 - 1,432 0.6 1,954 0.2 2,933 0.3 Interest expense (360) (0.1) (626) (0.2) (1,187) (0.1) (1,914) (0.2) Other income (expense), net 365 0.1 1,068 0.4 3,366 0.3 (3,640) (0.4) Total other income (expense), net 86 - 1,874 0.7 4,133 0.4 (2,621) (0.3) Income (loss) before provision for (benefit from) income taxes (56,828) (22.8) (13,176) (5.1) (38,527) (3.9) 27,908 2.9 Provision for (benefit from) income taxes 152 0.1 833 0.3 (1) - 3,074 0.3 Net income (loss)$ (56,980) (22.9) %$ (14,009) (5.4) %$ (38,526) (3.9) %$ 24,834 2.6 % Adjusted EBITDA (2)$ (2,720) (1.1) %$ 6,797 2.6 %$ 62,115 6.3 %$ 91,457 9.5 %
(1)Amounts include stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
June 27, June 29, June 27, June 29,
2020 2019 2020 2019
In thousands, except
percentages) $ % $ % $ % $ %
Cost of revenue $ 306 0.1 % $ 298 0.1 % $ 866 0.1 % $ 701 0.1 %
Research and development 6,154 2.5 4,904 1.9 16,697 1.7 12,792 1.3
Sales and marketing 3,710 1.5 3,608 1.4 10,658 1.1 9,416 1.0 General and administrative 4,871 2.0 4,598 1.8 13,417 1.4 10,616 1.1 Total stock-based compensation expense$ 15,041 6.0 %$ 13,408 5.2 %$ 41,638 4.2 %$ 33,525 3.5 % (2) Adjusted EBITDA is a financial measure that is not calculated in accordance withU.S. GAAP. See the sections titled "Adjusted EBITDA and adjusted EBITDA margin" and "Non-GAAP financial measures" above. 31
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Comparison of the three and nine months ended
Revenue
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Sonos speakers $ 196,895 $ 194,285 $ 2,610 1.3 %
Sonos system products 42,164 46,488 (4,324) (9.3) %
Partner products and other revenue 10,251 19,346 (9,095) (47.0) %
Total revenue $ 249,310 $ 260,119 $ (10,809) (4.2) %
Total revenue decreased 4.2% for the three months ended June 27, 2020 compared
to the three months ended June 29, 2019 . During the three months ended June 27,
2020 , our revenue was negatively impacted as a result of the ongoing effects of
physical retail store closures stemming from COVID-19 and constrained product
availability as demand exceeded our expectations. This impact was offset by our
strong performance across a number of our new products and growth in revenue
from our direct-to-consumer sales channel which increased 299.0% for the three
months ended June 27, 2020 compared to the three months ended June 29, 2019 .
Sonos speakers revenue represented 79.0% of total revenue for the three months
ended June 27, 2020 , and increased 1.3% compared to the three months ended
June 29, 2019 , driven by the success of the At Home with Sonos promotion and the
launch of new products in the category including Arc, Sonos Five, and Sub G3
which launched in the third quarter of fiscal 2020, and Move and One SL which
launched in the fourth quarter of fiscal 2019. Sonos system products represented
16.9% of total revenue in the three months ended June 27, 2020 and decreased
9.3% compared to the three months ended June 29, 2019 . In both categories, as
demand outpaced expectations, we saw some inventory shortages across a range of
products. Partner products and other revenue represented 4.1% of total revenue
in the three months ended June 27, 2020 , and decreased by 47.0% compared to the
three months ended June 29, 2019 , driven by lower IKEA orders as the retailer
paused ordering modules due to their store closures as a result of COVID-19 and
their smaller online presence, as well as annualizing the launch of our
partnership.
Revenue for the three months ended June 27, 2020 compared to the three months
ended June 29, 2019 increased 3.8% in Americas , decreased 4.9% in EMEA, and
decreased 45.6% in APAC. The decrease in APAC was primarily due to lower IKEA
orders caused by their store closures as a result of COVID-19.
In constant currency U.S. dollars, total revenue decreased by 3.1% for the three
months ended June 27, 2020 compared to the three months ended June 29, 2019 . We
calculate constant currency growth percentages by translating our prior-period
financial results using the current period average currency exchange rates and
comparing these amounts to our current period reported results.
Three Months Ended
June 27, 2020 June 29, 2019 Change
(products sold units in thousands)
Total products sold 923 1,345 $ (422) (31.4) %
Volume of products sold decreased for the three months ended June 27, 2020
compared to the three months ended June 29, 2019 driven by unit decreases across
all categories. The rate of decrease between products sold and revenue differed
for the three months ended June 27, 2020 compared to the three months ended June
29, 2019 , primarily due to product mix on revenue as there was a shift to
higher-priced products.
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Comparison of the nine months ended June 27, 2020 and June 29, 2019
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Sonos speakers $ 779,939 $ 790,896 $ (10,957) (1.4) %
Sonos system products 150,887 137,486 13,401 9.7 %
Partner products and other revenue 55,665 38,281 17,384 45.4 %
Total revenue $ 986,491 $ 966,663 $ 19,828 2.1 %
Total revenue increased for the nine months ended June 27, 2020 compared to the
nine months ended June 29, 2019 due to the success of several new product
launches and partnerships, which was partially offset by the ongoing effects of
COVID-19 on the retail landscape including temporary closures of physical retail
stores.
Sonos speakers represented 79.1% of total revenue in the nine months ended
June 27, 2020 and decreased 1.4% compared to the nine months ended June 29, 2019
as this category was more significantly impacted by reduced orders from our
retail partners affected by COVID-19. Sonos system products represented 15.3% of
total revenue in the nine months ended June 27, 2020 and increased 9.7%, driven
by the continued success of Sonos Amp and the launch of Sonos Port in late
fiscal 2019. Partner products and other revenue represented 5.6% of total
revenue and increased by 45.4%, driven by our IKEA and Sonance partnerships
launched in the second quarter of fiscal 2019.
Revenue for the nine months ended
In constant currencyU.S. dollars, total revenue increased by 3.1% for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 . We calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results. Nine Months Ended June 27, 2020 June 29, 2019 Change
(products sold units in thousands)
Total products sold 4,544 4,640 (96) (2.1) % Volume of products sold decreased for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 driven by a decrease in Sonos speakers products. Volume of products sold decreased while revenue increased primarily due to the effect of product mix on revenue for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 . 33 -------------------------------------------------------------------------------- Table of contents Cost of revenue and gross profit
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Cost of revenue $ 139,519 $ 142,749 $ (3,230) (2.3) %
Gross profit $ 109,791 $ 117,370 $ (7,579) (6.5) %
Gross margin 44.0 % 45.1 %
The decrease in cost of revenue for the three months ended
Gross margin decreased 110 basis points for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . The decrease was driven by the introduction of tariffs inSeptember 2019 . This decrease was partially offset by volume and mix shifts into higher margin products and channels, as well as product and material cost reductions associated with the consolidation of our supplier base and successful cost negotiations. This revenue was offset by expedited freight and other expenses to increase inventory levels and fill backorders to meet the higher than expected demand. Excluding the effects of tariffs, gross margin would have been 45.7%, an increase of 60 basis points, for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . We calculate gross margin excluding the effects of tariffs by removing the impact of tariffs imposed on goods imported fromChina to theU.S. from gross profit divided by total revenue.
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Cost of revenue $ 576,071 $ 563,591 $ 12,480 2.2 %
Gross profit $ 410,420 $ 403,072 $ 7,348 1.8 %
Gross margin 41.6 % 41.7 %
The increase in cost of revenue for the nine months ended June 27, 2020 compared
to the nine months ended June 29, 2019 was driven by the increase in revenue and
approximately $29.9 million for tariffs on products imported from China to the
U.S.
Gross margin decreased 10 basis points for the nine months ended June 27, 2020
compared to the nine months ended June 29, 2019 . The decrease was driven by the
introduction of tariffs in September 2019 . This decrease was partially offset by
volume and mix shifts into higher margin products and channels, as well as
product and material cost reductions associated with the consolidation of our
supplier base. Excluding the effects of tariffs, gross margin would have been
44.6%, an increase of 290 basis points, for the nine months ended June 27, 2020
compared to the nine months ended June 29, 2019 . We calculate gross margin
excluding the effects of tariffs by removing the impact of tariffs imposed on
goods imported to the U.S. from China from gross profit divided by total
revenue.
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Research and development
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Research and development $ 52,821 $ 44,355 $ 8,466 19.1 %
Restructuring and related expenses 4,949 - 4,949 *
Total research and development
$ 13,415 30.2 % Percentage of revenue 23.2 % 17.1 % * not meaningful Research and development expenses increased$13.4 million , or 30.2%, for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . Excluding the impact of$4.9 million of restructuring and related expenses for employee severance and benefit costs, site closures, and other costs related to the 2020 restructuring plan, research and development expenses for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 increased by 19.1%. This increase was due to an increase of$9.4 million in personnel-related expenses primarily due to increased headcount, as well as higher stock-based compensation, offset by approximately$1.0 million of other research and development costs.
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Research and development $ 154,941 $ 121,530 $ 33,411 27.5 %
Restructuring and related expenses 4,949 - 4,949 *
Total research and development
$ 38,360 31.6 % Percentage of revenue 16.2 % 12.6 % * not meaningful Research and development expenses increased$38.4 million , or 31.6%, for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 . Excluding the impact of$4.9 million of restructuring and related expenses for employee severance and benefit costs, site closures, and other costs related to the 2020 restructuring plan, research and development expenses for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 increased 27.5%. This increase was due to an increase of$25.3 million in personnel-related expenses primarily due to increased headcount, as well as higher stock-based compensation, and an increase of$8.7 million in product development costs related to our continued investment in new products and features, slightly offset by a decrease in other research and development costs. 35 --------------------------------------------------------------------------------
Sales and marketing
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Sales and marketing $ 57,485 $ 61,482 $ (3,997) (6.5) %
Restructuring and related expenses 19,788 - 19,788 *
Total sales and marketing $ 77,273 $ 61,482 $ 15,791 25.7 %
Percentage of revenue 31.0 % 23.6 %
* not meaningful
Sales and marketing expenses increased $15.8 million , or 25.7%, for the three
months ended June 27, 2020 compared to the three months ended June 29, 2019 .
Excluding the impact of $19.8 million restructuring and related expenses for
employee severance and benefit costs, site closures, and other costs related to
the 2020 restructuring plan, sales and marketing expenses for the three months
ended June 27, 2020 compared to June 29, 2019 decreased 6.5%. This decrease was
related to $5.1 million in lower marketing and advertising expenses, offset by
an increase of $1.3 million in revenue-related sales fees resulting from higher
sales in our direct-to-consumer business.
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Sales and marketing $ 185,413 $ 176,705 $ 8,708 4.9 %
Restructuring and related expenses 19,788 - 19,788 *
Total sales and marketing $ 205,201 $ 176,705 $ 28,496 16.1 %
Percentage of revenue 20.8 % 18.3 %
* not meaningful
Sales and marketing expenses increased $28.5 million , or 16.1% for the nine
months ended June 27, 2020 compared to the nine months ended June 29, 2019 .
Excluding the impact of $19.8 million in restructuring and related expenses for
employee severance and benefit costs, site closures, and other costs related to
the 2020 restructuring plan, sales and marketing expenses for the nine months
ended June 27, 2020 compared to the nine months ended June 29, 2019 increased
4.9%. This increase was due to an increase of $5.3 million in marketing and
advertising expenses, $3.1 million in personnel-related expenses due to
increased headcount and increased stock-based compensation expenses, and an
increase in of $2.3 million primarily from revenue-related sales fees resulting
from higher sales in our direct-to-consumer business, offset by a decrease of
$2.0 million in overhead costs.
36
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Table of contents
General and administrative
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
General and administrative$ 30,239 $ 26,583
Restructuring and related expenses 1,423 - 1,423 *
Total general and administrative
$ 5,079 19.1 % Percentage of revenue 12.7 % 10.2 % * not meaningful General and administrative expenses increased$5.1 million , or 19.1%, for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . Excluding the impact of$1.4 million of restructuring and related expenses for employee severance and benefit costs, site closures, and other costs related to the 2020 restructuring plan, general and administrative expenses for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 increased 13.8%. This increase was primarily due to$4.1 million in legal fees paid in connection with our IP litigation, offset by decreases in other costs resulting from our initiatives to reduce our operating expenses.
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
General and administrative $ 86,566 $ 74,308 $ 12,258 16.5 %
Restructuring and related expenses 1,423 - 1,423 *
Total general and administrative
$ 13,681 18.4 % Percentage of revenue 8.9 % 7.7 % * not meaningful General and administrative expenses increased$13.7 million , or 18.4%, for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 . Excluding the impact of$1.4 million of restructuring and related expenses for employee severance and benefit costs, site closures, and other costs related to the 2020 restructuring plan, general and administrative expenses for the nine months endedJune 27, 2020 compared toJune 29, 2019 increased 16.5%. This increase was due to$7.9 million in legal fees paid in connection with IP litigation and$3.7 million in personnel-related costs due to increased headcount, as well as increased stock-based compensation expenses.
Interest income, interest expense and other income (expense), net
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Interest income$ 81 $ 1,432
Interest expense$ 360 $ 626
Other income (expense), net$ 365 $ 1,068
Interest income for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 decreased due to lower balances and yields in our cash and cash equivalents. Interest expense for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 decreased primarily due to lower 37 -------------------------------------------------------------------------------- Table of contents principal balance. The decrease in other income (expense), net for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 was due to foreign currency exchange losses.
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Interest income$ 1,954 $ 2,933 $ (979) (33.4) % Interest expense$ 1,187 $ 1,914 $ (727) (38.0) % Other income (expense), net$ 3,366 $ (3,640) $ 7,006 * * not meaningful Interest income for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 decreased due to lower balances and yields in our cash and cash equivalents. The decrease in interest expense for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 was primarily driven by a lower principal balance. The increase in other income (expense), net for the nine months endedJune 27, 2020 compared to the nine months endedJune 29, 2019 was due to foreign currency exchange gains.
Provision for (benefit from) income taxes
Comparison of the three months ended
Three Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Provision for income taxes $ 152 $ 833 $ (681) (81.8)%
The provision for income taxes decreased from
For the three months endedJune 27, 2020 , we recorded a provision for incomes taxes of$0.1 million for certain profitable foreign entities and less than$0.1 million forU.S. federal and state income for a total provision of$0.2 million . For the three months endedJune 29, 2019 , we recorded a provision for income taxes of$0.6 million for certain profitable foreign entities and a provision for income taxes of$0.2 million forU.S. federal and state income taxes for a total provision of$0.8 million .
Comparison of the nine months ended
Nine Months Ended Change
June 27, 2020 June 29, 2019 $ %
(In thousands, except percentages)
Provision for (benefit from) income taxes $ (1) $ 3,074 $ (3,075) (100.0)%
Provision for (benefit from) income taxes changed from a provision of
For the nine months endedJune 27, 2020 , we recorded a provision for income taxes of$0.5 million for certain profitable foreign entities and a benefit from income taxes of$0.5 million forU.S federal and state incomes taxes which includes a favorable release of uncertain tax positions in theU.S. coinciding with the issuance of the BEAT Regulations. For the nine months endedJune 29, 2019 , we recorded a provision for income taxes of$1.2 million for certain profitable foreign entities and a provision of$1.9 million forU.S. federal and state income taxes for a total provision of$3.1 million . 38 -------------------------------------------------------------------------------- Table of contents Liquidity and capital resources Our operations are financed primarily through cash flows from operating activities, net proceeds from the sale of our equity securities and borrowings under our Term Loan and Credit Facility. As ofJune 27, 2020 , our principal sources of liquidity consisted of cash flows from operating activities, cash and cash equivalents of$329.1 million , including$64.9 million held by our foreign subsidiaries, proceeds from the exercise of stock options and borrowing capacity under the Credit Facility. In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested outside ofthe United States as ofJune 27, 2020 , as they are required to fund needs outside ofthe United States . In the event funds from foreign operations are needed to fund operations inthe United States and ifU.S. tax has not already been previously provided, we may be required to accrue and pay additionalU.S. taxes to repatriate these funds. In response to the impacts of COVID-19, inMarch 2020 we implemented a number of initiatives to maintain our liquidity and rationalize our operating expenses, including reducing the pace of investment in inventory, as well as suspending travel, new hiring, employee promotions and merit-based payroll increases. In the third quarter of fiscal 2020, we sustained these operating reduction initiatives and initiated the 2020 restructuring plan. We experienced shortages across a range of products because demand outpaced our expectations, which resulted in backorders for many of our products. In connection with our efforts to reduce operating expenses and preserve liquidity, onJune 23, 2020 we initiated the 2020 restructuring plan in connection with our efforts to reduce operating expenses and preserve liquidity in the face of the COVID-19 pandemic, and to more efficiently position our business for our long-term strategy. As a result of these efforts we eliminated approximately 12% of our global headcount and closed ourNew York retail store and six satellite offices. Our restructuring efforts are expected to result in savings of approximately$7.5 million in the fourth quarter, positioning us more efficiently to continue delivering sustainable, profitable growth over the long-term. We believe our existing cash and cash equivalent balances, cash flows from operations and committed credit lines will be sufficient to meet our long-term working capital and capital expenditure needs for at least 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 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 increased 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. Our short- and long-term debt obligations
as of
As of
June 27, 2020 September 28, 2019
(In thousands, except percentages)
Term Loan (1) 2.4 % $ 28,333 4.6 % $ 33,333
Unamortized debt issuance costs (2) (103) (160)
Total indebtedness 28,230 33,173
Less short-term portion (8,333) (8,333)
Long-term debt $ 19,897 $ 24,840
39-------------------------------------------------------------------------------- Table of contents (1)Due inOctober 2021 , bears interest at a variable rate equal to an adjusted LIBOR plus 2.25%, payable quarterly. (2)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$80.0 million restricted to the value of the borrowing base which is based on the value of our inventory and accounts receivable and is subject to monthly redetermination. The Credit Facility matures inOctober 2021 and may be drawn as Commercial Bank Floating Rate Loans (at the higher of prime rate or adjusted LIBOR plus 2.50%) or Eurocurrency Loans (at LIBOR plus an applicable margin). As of bothJune 27, 2020 andSeptember 28, 2019 , we did not have any outstanding borrowings and had$0.5 million in undrawn letters of credit that reduce the availability under the Credit Facility. 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 charge ratio of at least 1.15, and require financial statement reporting and delivery of borrowing base certificates. As ofJune 27, 2020 andSeptember 28, 2019 , we were in compliance with all financial covenants. The Credit Facility and the Term Loan are collateralized by eligible inventory and accounts receivable, as well as our intellectual property including patents and trademarks. Cash flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
June 27, 2020 June 29, 2019
(In thousands)
Net cash provided by (used in):
Operating activities $ 83,151 $ 110,936
Investing activities (66,194) (14,092)
Financing activities (27,111) 20,617
Effect of exchange rate changes 639 (103)
Net increase (decrease) in cash, cash equivalents and restricted
cash $ (9,515) $ 117,358 Cash flows from operating activities
Net cash provided by operating activities of$83.2 million for the nine months endedJune 27, 2020 consisted of net loss of$38.5 million , non-cash adjustments of$86.1 million and a net increase in cash related to changes in operating assets and liabilities of$35.6 million . Non-cash adjustments primarily consisted of stock-based compensation expense of$41.6 million , depreciation and amortization of$27.7 million , and$14.0 million primarily for impairment and abandonment charges related to our 2020 restructuring plan. The increase in operating assets and liabilities was primarily due to a decrease in inventory of$129.6 million due to seasonality and tighter inventory management, a decrease in accounts receivable of$53.4 million due to the shift in our channel mix to higher direct-to-consumer sales, as well as seasonality, an increase in accrued compensation of$8.0 million primarily due to restructuring expenses for employee severance and benefit costs, an increase in other liabilities of$7.5 million , and an increase in deferred revenue of$3.5 million . The increase in operating assets and liabilities was partially offset by a decrease in accounts payable and accrued expenses of$162.1 million primarily due to the decrease in inventory, as well as an increase in other assets of$4.4 million .
Cash flows from investing activities
Cash used in investing activities for the nine months endedJune 27, 2020 of$66.2 million was primarily due to net cash paid for acquisition activity of$36.3 million , as well as payments for property, equipment and intangible assets of$29.9 million . Payments for property, equipment, and intangible assets were primarily 40 -------------------------------------------------------------------------------- Table of contents comprised of manufacturing-related tooling and test equipment to support the launch of new products, leasehold improvements, marketing-related product displays, and acquired intellectual property.
Cash flows from financing activities
Cash used in financing activities for the nine months endedJune 27, 2020 of$27.1 million was primarily for$39.8 million for payments for repurchases of common stock, as well as for shares withheld for taxes associated with vesting of RSUs, as well as repayments for borrowings of$5.0 million , partially offset by proceeds from the exercise of stock options of$17.7 million .
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.
Critical accounting policies and estimates
Our unaudited condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.
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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