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Sonos Reports Record Fourth Quarter and Fiscal 2020 Results

·20 min read

Sonos reaches inflection point demonstrating the power and profitability of its business model

Sonos, Inc. (Nasdaq: SONO) today reported record fourth quarter and fiscal 2020 results.

Fourth Quarter 2020 Financial Highlights (unaudited)

  • GAAP net income increased to $18.4 million from ($29.6) million last year; non-GAAP net income excluding stock-based compensation, restructuring and legal and transaction related fees increased to $40.7 million from ($16.6) million last year

  • GAAP diluted earnings per share (EPS) increased to $0.15 from ($0.28) last year; non-GAAP diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees increased to $0.33 from ($0.15) last year

  • Adjusted EBITDA increased to $46.4 million from ($2.8) million last year; excluding the effect of tariffs, adjusted EBITDA increased to $48.9 million

  • Adjusted EBITDA margin increased to 13.7% from (0.9%) last year; excluding the effect of tariffs, adjusted EBITDA margin increased to 14.4%

  • Gross margin increased 530 basis points to 47.5%; excluding the effect of tariffs, gross margin increased 560 basis points to 48.3%

  • Revenue increased 16% year-over-year to $339.8 million; excluding the impact of the 14th week, revenue increased approximately 7% year-over-year

  • Direct-to-consumer revenue increased 67% year-over-year

Fiscal 2020 Financial Highlights (unaudited)

  • GAAP net loss increased to ($20.1) million from ($4.8) million last year; non-GAAP net income excluding stock-based compensation, restructuring, and legal and transaction related fees increased to $79.2 million from $41.8 million last year

  • GAAP diluted loss per share increased to ($0.18) from ($0.05) last year; non-GAAP diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees increased to $0.67 from $0.37 last year

  • Adjusted EBITDA increased 22% to a record $108.5 million; excluding the effect of tariffs, adjusted EBITDA increased 56% to $140.9 million

  • Adjusted EBITDA margin increased 120 basis points to record 8.2%; excluding the effect of tariffs, adjusted EBITDA margin increased 350 basis points to 10.6%

  • Gross margin increased 130 basis points to 43.1%; excluding the effect of tariffs, gross margin increased 370 basis points to a record of 45.6%

  • Revenue increased 5% to $1.326 billion; excluding the impact of the 53rd week in fiscal 2020, revenue increased approximately 3%

  • Direct-to-consumer revenue increased 84% and represented a record 21% of total revenue compared to 12% last year

  • Cash flows from operating activities of $162.0 million compared to $120.6 million last year

  • Free cash flow of $129.0 million compared to $97.4 million last year

Sonos CEO Patrick Spence commented, "We reached an inflection point in the fourth quarter that demonstrates the power and profitability of our model. As our customers recognize, Sonos products operate seamlessly together, with more products improving the experience. That’s why year in and year out, our existing customers add more products to their systems - every new household that we gain starts that cycle anew. Fiscal 2020 was the 15th year in a row we grew total households by at least 20%, while our existing customers once again showed strong repurchase habits, accounting for a record 41% of total product registrations. We deliver a consistent cadence of new, innovative products and services, and we have only started the process of realizing the lifetime value of our customers, both old and new."

"In fiscal 2020, we delivered a record 8.2% adjusted EBITDA margin, or 10.6% excluding the effect of tariffs, and we project delivering 12% to 14% adjusted EBITDA margins next year, which is ahead of our prior targets," continued Mr. Spence.

Mr. Spence concluded, "As we look ahead, we are focused on delivering innovative new products and services that customers love, strengthening our direct-to-consumer efforts, and supporting our incredible partnerships. We believe we are well positioned to deliver strong profit margins, cash flow, revenue growth and increased shareholder value over the long-term."

Fiscal 2020 Company Highlights

  • Launched three new products including Arc, our premium smart soundbar replacing Playbar; Five, our most powerful speaker and replacing Play:5; and Sub (Gen 3), featuring the same iconic design and bold bass as its predecessor

  • Launched Sonos S2, a powerful new app and operating system

  • Announced multifaceted innovative marketing campaign with Disney, celebrating the widely anticipated premiere of the second season of "The Mandalorian"

  • Introduced Sonos Radio, a free, ad-supported radio service available in the Sonos app

  • Total households increased 20% to 10.9 million in fiscal 2020 on top of 22% growth last year

  • Existing households accounted for 41% of new product registrations in fiscal 2020 up from 37% last year

  • Added record 1.8 million net new households in fiscal 2020

  • Average number of registered products per household at 2.9 in fiscal 2020

  • Listening hours increased 33% in fiscal 2020 compared to 29% growth last year

Fiscal 2021 Outlook

  • Adjusted EBITDA in the range of $170 million to $205 million, representing growth in the range of 57% to 89%, or 21% to 46% excluding the effect of tariffs in fiscal 2020

  • Adjusted EBITDA margin in the range of 12% to 14%, representing a 380 to 580 basis point improvement year-over-year, or 140 to 340 basis points excluding the effect of tariffs in fiscal 2020

  • Gross margin in the range of 45.3% to 45.8%, representing a 220 to 270 basis point improvement year-over-year; excluding the effect of tariffs in fiscal 2020, gross margin roughly flat year-over-year. This includes minimal impact from ongoing tariffs and no impact from the potential tariff refund.

  • Revenue in the range of $1.44 billion to $1.5 billion, representing growth in the range of 11% to 15% from fiscal 2020 on a comparable 52-week basis and 9% to 13% on as reported basis

  • Direct-to-consumer revenue as a percentage of total revenue similar to fiscal 2020

Virtual Investor Event - Tuesday, March 9, 2021

Sonos will host a virtual investor event on Tuesday, March 9, 2021 highlighting its long-term strategic priorities and targets. Further details to come.

Supplemental Earnings Presentation

The Company has posted a supplemental earnings presentation accompanying its fourth quarter and fiscal 2020 results to the Earnings Reports section of its investor relations website at https://investors.sonos.com/reports-and-filings/default.aspx#section=earningsreports.

Conference Call, Webcast and Transcript

The Company will host a webcast of its conference call and Q&A related to its fourth quarter and fiscal 2020 results on November 18, 2020 at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Participants may access the live webcast in listen-only mode on the Sonos investor relations website at https://investors.sonos.com/news-and-events/default.aspx. The conference call may also be accessed by dialing (833) 921-1637 with conference ID 7717309. Participants outside the U.S. can access the call by dialing (236) 714-2128 using the same conference ID.

An archived webcast of the conference call and a transcript of the company’s prepared remarks and Q&A session will also be available at https://investors.sonos.com/reports-and-filings/default.aspx#section=earningsreports following the call.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited, dollars in thousands, except share and per share amounts)

Three Months Ended

Twelve Months Ended

October 3, 2020

September 28, 2019

October 3, 2020

September 28, 2019

Revenue

$

339,837

$

294,160

$

1,326,328

$

1,260,823

Cost of revenue

178,301

169,889

754,372

733,480

Gross profit

161,536

124,271

571,956

527,343

Operating expenses

Research and development

54,783

49,644

214,672

171,174

Sales and marketing

58,338

70,894

263,539

247,599

General and administrative

32,986

28,565

120,978

102,871

Total operating expenses

146,107

149,103

599,189

521,644

Operating income (loss)

15,429

(24,832

)

(27,233

)

5,699

Other income (expense), net

Interest income

43

1,416

1,998

4,349

Interest expense

(300

)

(584

)

(1,487

)

(2,499

)

Other income (expense), net

3,273

(4,985

)

6,639

(8,625

)

Total other income (expense), net

3,016

(4,153

)

7,150

(6,775

)

Income (loss) before provision for income taxes

18,445

(28,985

)

(20,083

)

(1,076

)

Provision for income taxes

34

615

32

3,690

Net income (loss)

18,411

(29,600

)

(20,115

)

(4,766

)

Net income (loss) attributable to common stockholders

Basic

18,411

(29,600

)

(20,115

)

(4,766

)

Diluted

18,411

(29,600

)

(20,115

)

(4,766

)

Net income (loss) per share attributable to common stockholders

Basic

$

0.17

$

(0.28

)

$

(0.18

)

$

(0.05

)

Diluted

$

0.15

$

(0.28

)

$

(0.18

)

$

(0.05

)

Weighted-average shares used in computing net income (loss) per share attributable to common stockholders

Basic

111,148,110

107,130,076

109,807,154

103,783,006

Diluted

122,598,225

107,130,076

109,807,154

103,783,006

Total comprehensive income (loss)

Net income (loss)

18,411

(29,600

)

(20,115

)

(4,766

)

Change in foreign currency translation adjustment

(1,095

)

1,107

(1,826

)

1,613

Comprehensive income (loss)

$

17,316

$

(28,493

)

$

(21,941

)

$

(3,153

)

Condensed Consolidated Balance Sheets

(unaudited, dollars in thousands, except par values)

As of

October 3,
2020

September 28,
2019

Assets

Current assets:

Cash and cash equivalents

$

407,100

$

338,641

Restricted cash

191

179

Accounts receivable, net of allowances

54,935

102,743

Inventories

180,830

219,784

Prepaids and other current assets

17,321

17,762

Total current assets

660,377

679,109

Property and equipment, net

60,784

78,139

Operating lease right-of-use assets

42,342

-

Goodwill

15,545

1,005

Intangible assets, net

26,394

13

Deferred tax assets

1,800

1,154

Other noncurrent assets

8,809

2,185

Total assets

$

816,051

$

761,605

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

250,328

$

251,941

Accrued expenses

45,049

69,856

Accrued compensation

44,517

41,142

Short-term debt

6,667

8,333

Deferred revenue, current

15,304

13,654

Other current liabilities

31,150

17,548

Total current liabilities

393,015

402,474

Operating lease liabilities, noncurrent

50,360

-

Long-term debt

18,251

24,840

Deferred revenue, noncurrent

47,085

42,795

Deferred tax liabilities

2,434

-

Other noncurrent liabilities

7,067

10,568

Total liabilities

518,212

480,677

Stockholders’ equity:

Common stock, $0.001 par value

114

110

Treasury stock

(20,886

)

(13,498

)

Additional paid-in capital

548,993

502,757

Accumulated deficit

(228,492

)

(208,377

)

Accumulated other comprehensive loss

(1,890

)

(64

)

Total stockholders’ equity:

297,839

280,928

Total liabilities and stockholders’ equity:

$

816,051

$

761,605

Condensed Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)

Twelve Months Ended

October 3,
2020

September 28,
2019

Cash flows from operating activities

Net loss

$

(20,115

)

$

(4,766

)

Adjustments to reconcile net loss to net cash provided by operating activities

Depreciation and amortization

36,426

36,415

Impairment and abandonment charges

14,174

-

Stock-based compensation expense

57,610

46,575

Other

5,710

2,713

Deferred income taxes

(567

)

(268

)

Foreign currency transaction (gain) loss

(4,143

)

4,035

Changes in operating assets and liabilities:

Accounts receivable, net

49,593

(32,078

)

Inventories

38,010

(31,796

)

Other assets

(5,749

)

(7,605

)

Accounts payable and accrued expenses

(24,440

)

85,878

Accrued compensation

1,088

8,231

Deferred revenue

4,754

6,165

Other liabilities

9,635

7,137

Net cash provided by operating activities

161,986

120,636

Cash flows from investing activities

Purchases of property and equipment and intangible assets

(33,035

)

(23,222

)

Cash paid for acquisition, net of acquired cash

(36,289

)

-

Net cash used in investing activities

(69,324

)

(23,222

)

Cash flows from financing activities

Repayments of borrowings

(8,333

)

(6,667

)

Payments for repurchase of common stock under share repurchase program

(50,015

)

-

Payments for repurchase of common stock related to equity awards

(11,029

)

(2,426

)

Proceeds from exercise of common stock options

42,286

31,574

Payments of offering costs

-

(585

)

Net cash provided by (used in) financing activities

(27,091

)

21,896

Effect of exchange rate changes on cash, cash equivalents and restricted cash

2,900

(1,610

)

Net increase in cash, cash equivalents and restricted cash

68,471

117,700

Cash, cash equivalents and restricted cash

Beginning of period

338,820

221,120

End of period

$

407,291

$

338,820

Supplemental disclosure

Cash paid for interest

$

1,647

$

2,517

Cash paid for taxes, net of refunds

$

783

$

3,570

Cash paid for amounts included in the measurement of lease liabilities

$

17,194

$

-

Supplemental disclosure of non-cash investing and financing activities

Purchases of property and equipment, accrued but not paid

$

3,911

$

11,687

Right-of-use assets obtained in exchange for lease liabilities

$

77,416

$

-

Reconciliation of Net Income (Loss) to Adjusted EBITDA

(unaudited, dollars in thousands)

Three Months Ended

Twelve Months Ended

October 3,
2020

September 28,
2019

October 3,
2020

September 28,
2019

Net income (loss)

$

18,411

$

(29,600

)

$

(20,115

)

$

(4,766

)

Add (deduct):

Depreciation and amortization

8,733

9,012

36,426

36,415

Stock-based compensation expense

15,971

13,049

57,610

46,575

Interest income

(43

)

(1,416

)

(1,998

)

(4,349

)

Interest expense

300

584

1,487

2,499

Other (income) expense, net

(3,273

)

4,985

(6,639

)

8,625

Provision for income taxes

34

615

32

3,690

Restructuring and related charges

125

-

26,285

-

Legal and transaction related costs (1)

6,170

-

15,455

-

Adjusted EBITDA

$

46,428

$

(2,771

)

$

108,543

$

88,689

Revenue

$

339,837

$

294,160

$

1,326,328

$

1,260,823

Adjusted EBITDA margin

13.7

%

(0.9

)%

8.2

%

7.0

%

(1) Legal and transaction related costs consist of expenses related to our intellectual property ("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.

Reconciliation of Cash Flows Provided by Operating Activities to Free Cash Flow

(unaudited, dollars in thousands)

Year Ended

October 3,
2020

September 28,
2019

Cash flows provided by operating activities

$

161,986

$

120,636

Less: purchases of property and equipment and intangible assets

(33,035

)

(23,222

)

Free cash flow

$

128,951

$

97,414

Revenue by Product Category

(unaudited, dollars in thousands)

Three Months Ended

Twelve Months Ended

October 3,
2020

September 28,
2019

October 3,
2020

September 28,
2019

Sonos speakers

$

254,874

$

217,526

$

1,034,813

$

1,008,422

Sonos system products

67,901

49,686

218,788

187,172

Partner products and other revenue

17,062

26,948

72,727

65,229

Total revenue

$

339,837

$

294,160

$

1,326,328

$

1,260,823

Revenue by Geographical Region

(unaudited, dollars in thousands)

Three Months Ended

Twelve Months Ended

October 3,
2020

September 28,
2019

October 3,
2020

September 28,
2019

Americas

$

199,549

$

157,540

$

755,874

$

678,224

Europe, Middle East and Africa ("EMEA")

117,076

101,248

470,883

484,785

Asia Pacific ("APAC")

23,212

35,372

99,571

97,814

Total revenue

$

339,837

$

294,160

$

1,326,328

$

1,260,823

Stock-based Compensation

(unaudited, in thousands)

Three Months Ended

Twelve Months Ended

October 3, 2020

September 28, 2019

October 3, 2020

September 28, 2019

Cost of revenue

239

284

1,106

985

Research and development

6,742

4,851

23,439

17,643

Sales and marketing

3,701

3,549

14,359

12,965

General and administrative

5,289

4,365

18,706

14,982

Total stock-based compensation expense

$

15,971

$

13,049

$

57,610

$

46,575

Restructuring and Related Costs(1)

(unaudited, in thousands)

Three Months Ended

Twelve Months Ended

October 3,
2020

October 3,
2020

Research and development

$

125

$

5,074

Sales and marketing

-

19,788

General and administrative

-

1,423

Total restructuring and related costs

$

125

$

26,285

(1) On June 23, 2020, the Company initiated a restructuring plan as part of its efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. As part of the 2020 restructuring plan, the Company eliminated approximately 12% of its global headcount and closed its New York retail store and six satellite offices. The Company believes these initiatives will better align resources to provide further operating flexibility and more efficiently position the business for its long-term strategy. The Company expects activities under the 2020 restructuring plan to be substantially complete in the first quarter of fiscal 2021.

Use of Non-GAAP Measures

We have provided in this press release financial information that has not been prepared in accordance with generally accepted accounting principles ("U.S. GAAP"), including adjusted EBITDA, adjusted EBITDA margin, free cash flow, gross margin excluding the effect of tariffs, adjusted EBITDA excluding the effect of tariffs, adjusted EBITDA margin excluding the effect of tariffs, revenue excluding the 14th week, revenue excluding the 53rd week, net income (loss) excluding stock-based compensation, restructuring, and legal and transaction related fees, and diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees. These non-GAAP financial measures are not based on any standardized methodology prescribed by U.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 information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making. Non-GAAP financial measures should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of these financial measures to their nearest U.S. GAAP financial equivalents provided in the financial statement tables above. We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of depreciation, stock-based compensation expense, interest income, interest expense, other income (expense), income 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. We calculate gross margin excluding the effect of tariffs as gross profit dollars removing the effect of tariffs imposed on goods imported to the U.S. from China divided by revenue. We define free cash flow as defined as net cash from operations less purchases of property and equipment and intangible assets. We calculate adjusted EBITDA excluding the effect of tariffs as net income (loss) excluding the effect of tariffs imposed on goods manufactured in China and adjusted to exclude the impact of depreciation, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes and other items that we do not consider representative of our underlying operating performance. We calculate non-GAAP net income excluding stock-based compensation, restructuring and legal and transaction related fees as net income less stock-based compensation, restructuring fees and legal and transaction related fees. We calculate non-GAAP diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees as net income less stock-based compensation, restructuring costs and legal and transaction related fees divided by our number of shares at fiscal year end. We do not provide a reconciliation of forward-looking non-GAAP financial measures to their comparable GAAP financial measures because we cannot do so without unreasonable effort due to unavailability of information needed to calculate reconciling items and due to the variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in future periods. When planning, forecasting and analyzing future periods, we do so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for items such as stock-based compensation, which is inherently difficult to predict with reasonable accuracy. Stock-based compensation expense is difficult to estimate because it depends on our future hiring and retention needs, as well as the future fair market value of our common stock, all of which are difficult to predict and subject to constant change. In addition, for purposes of setting annual guidance, it would be difficult to quantify stock-based compensation expense for the year with reasonable accuracy in the current quarter. As a result, we do not believe that a GAAP reconciliation would provide meaningful supplemental information about our outlook.

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding our outlook for the fiscal year ended October 2, 2021, our long-term focus, financial, growth and business strategies and opportunities, growth metrics and targets, new products, software, services and partnerships, profitability and gross margins, our restructuring efforts, our tariff expense and other factors affecting variability in our financial results. These forward-looking statements are only predictions and may differ materially from actual results due to a variety of factors, including, but not limited to the duration and impact of the COVID-19 pandemic and related mitigation efforts on our industry; changes in general economic or market conditions that could affect consumer income and overall consumer spending; our ability to successfully introduce new products and services and maintain the success of our existing products; the success of our efforts to expand our direct-to-consumer channel; the success of our financial, growth and business strategies; our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands; and the other risk factors set forth under the caption "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 27, 2020 and our other filings filed with the Securities and Exchange Commission (the "SEC"), copies of which are available free of charge at the SEC’s website at www.sec.gov or upon request from our investor relations department. All forward-looking statements herein reflect our opinions only as of the date of this letter, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events. Sonos and Sonos product names are trademarks or registered trademarks of Sonos, Inc. All other product names and services may be trademarks or service marks of their respective owners.

About Sonos

Sonos (Nasdaq: SONO) is one of the world’s leading sound experience brands. As the inventor of multi-room wireless home audio, 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 home design aesthetic, simplicity of use and an open platform, Sonos makes the breadth of audio content available to anyone. Sonos is headquartered in Santa Barbara, California. Learn more at www.sonos.com.

View source version on businesswire.com: https://www.businesswire.com/news/home/20201118005984/en/

Contacts

Investor Contact
Cammeron McLaughlin
IR@sonos.com

Press Contact
Tom Lodge
PR@sonos.com