Title

Presentation

Operator: Hello and welcome to the Sonos Second Quarter Fiscal 2025 Conference Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to James Baglanis, Head of Corporate Finance. You may begin.

James Baglanis: Good afternoon and welcome to Sonos second quarter fiscal 2025 earnings conference call. I am James Baglanis. And with me today are Sonos Interim CEO, Tom Conrad; CFO, Saori Casey; and Chief Legal and Strategy Officer, Eddie Lazarus. Before I hand it over to Tom, I would like to remind everyone that today’s discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements.

A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC. During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today’s press release regarding our second quarter results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, including our guidance and a conference call transcript will be available on our Investor Relations website, investors.sonos.com. I will now turn the call over to Tom.

Tom Conrad: Thank you, James and thank you all for joining us today. We delivered a solid second quarter with revenue up 3% year-over-year and adjusted EBITDA increasing by $33 million, driven by a combination of strong gross margin and disciplined execution on our restructuring. These efforts led to a 14% year-over-year decline in non-GAAP operating expenses. We’re executing with more focus and efficiency and the progress we’ve made gives us the confidence to further reduce our annual run rate expense targets which Saori will speak to in more detail shortly. Let me start with an update on the core Sonos experience which remains central to our differentiation and long-term success. My view here is simple. Our software must be responsive, reliable and intuitive.

No exceptions. In the last 120 days, we’ve delivered nine software updates focused on quality, responsiveness and fit and finish. Another is just days away, and more are planned for spring and summer. Our core product metrics now reflect performance and reliability levels that exceed those of our previous generation software. But we’re doing more than just making progress on performance and reliability. We fully operationalize the reorganization I described on our Q1 call. In the process, we’ve sharpened our priorities, restructured how our teams organize and execute, and uncovered new efficiencies. At the same time, we’re tapping into a deep well of creativity and innovation that had been waiting for clearer lanes of expression in our products.

This is an incredibly powerful dimension for Sonos. Just last week, IEEE Spectrum ranked Sonos fourth in patent power for consumer electronics, trailing only Apple, Samsung and LG. By streamlining how we work and where we focus, we’re clearing the way for a bold new chapter of innovation across the Sonos platform. Speaking of innovation powered by our category defining Sound Motion architecture, Sonos continued to gain dollar share in home theater year-over-year in both the US and EMEA. Our Arc Ultra soundbar sets the industry standard for performance and our customers are consistently choosing Sonos over the competition. This quarter we also made a decisive move to invigorate our customer acquisition flywheel through the pricing of one of our most popular gateway products, the Era 100.

Millions of our customers with multiple products in their homes started with our original flagship plug in speaker, the Play:1, and its successor, the Sonos One. These products received great critical acclaim when they were in market and the Era 100 is a step function improvement. That’s why I’m so excited that we are now offering the Era 100 for the same price as its predecessors at under $200. This combination of performance and value is a powerful unlock for attracting new households and feeding long-term Sonos system expansion through repurchase. While it’s early days, we’re pleased with the initial customer response to the pricing change. As we look ahead, we’re operating in a dynamic global environment shaped by macroeconomic forces and an evolving tariff landscape, but Sonos is not on its heels.

We’re well-positioned, thanks to the proactive steps we’ve taken over the past few years. We moved the vast majority of our US bound production out of China and into Malaysia and Vietnam, significantly limiting our exposure to China tariffs. Our remaining China exposure is limited to a few accessories like speaker stands and our Sonance cobranded products which are a very small part of our total business. These actions afford us flexibility as to what products we manufacture in each country and provide critical optionality as new tariff structures take shape. We are managing this moment to improve our position. We’re accelerating production to take advantage of the current pause and reciprocal tariffs for Vietnam and Malaysia. We’re scenario planning with our contract manufacturers to ensure we maintain maximum flexibility on country of origin.

We’re collaborating closely with both our partners and retailers to limit downstream impact to the consumer. And we’re evaluating pricing and promotion strategies that keep our products compelling, while balancing margin and volume to optimize for gross profit dollars. Meanwhile, our investments in global sales expansion are right on time as this moment reinforces the strategic importance of a broader international footprint. Against this backdrop, we’re controlling what we can. We’ve sharpened our focus on the initiatives that matter most, improving our core experience, investing in profitable growth and driving cost efficiency while delivering innovative new experiences. With a strong balance sheet, a nimble operational posture and an experienced team that’s executing with discipline, we’re setting ourselves up to win.

Tremendous opportunity lies ahead. The team and I are moving forward to build the future of Sonos with a renewed sense of purpose and energy. Now let me turn things over to Saori to discuss our Q2 results in greater detail.

Saori Casey: Thank you, Tom. Hi, everyone. We’re pleased to deliver Q2 financial results towards the high-end of our guidance or better. Revenue at $260 million grew 3% year-over-year versus our guidance of down 5% to up 5%. The increase was driven by home theater strength due to Arc Ultra and over the year had found Ace which we launched in June last year. We saw a great response to a targeted promotion to our installed base which was very encouraging sign from our customers. We believe this is a testament of the progress we have made improving our core experience and restoring our customers’ trust. Our Q2 results also benefited from our continued investments in geographic expansion. While our growth markets represent a small share of revenue today, they grew double-digits in Q2 and the first half of the year and contributed nicely to the total revenue growth in the quarter.

Expanding our presence in these markets will be a key driver of our growth in the years to come. GAAP gross margin was 43.7% towards the high-end of our guidance range driven by lower inventory reserves. Non-GAAP gross margin was 47.1%. Q2 GAAP operating expenses were $175 million down 4%. Please note that this included $20 million of restructuring charges related to the reduction in force we announced last quarter. Non-GAAP operating expenses of $135 million were down 14% year-over-year, came in about $5 million below the low end of our guidance. We saw a partial quarter benefit of savings from the reduction in force announced last quarter, as well as many other cost optimization efforts that we had set out last summer. As for the year-over-year trends in each non-GAAP operating expense category, G&A expenses decreased by 32%, driven by headcount and various cost optimization efforts initiated last year.

Research and development expenses decreased by 18% with a partial quarter benefit of the February reduction in force and product roadmap rationalization. Sales and marketing expenses increased by 1% with many puts and takes. Adjusted EBITDA was negative $1 million, which was above the high-end of our guidance range by $5 million primarily due to lower operating expenses. This is a $33 million improvement from last year’s Q2. For the first half of the fiscal year, revenue declined by 6.3%, driven by a 10% decline in Q1 and 3% growth in Q2. GAAP gross margin came in at 43.8% and non-GAAP at 45.4%. Our GAAP and non-GAAP operating expenses declined by 5% and 10%, respectively. Adjusted EBITDA grew 11% year-over-year, driving 170 basis points of margin improvement.

Our balance sheet remains very strong as we ended the quarter with $224 million of net cash which includes $50 million of marketable securities as we hold some excess cash and short duration treasury bills. We also have $100 million of undrawn revolving credit facility at our disposal. Q2 free cash flow was negative $65 million, up from negative $121 million last year due to accounts receivable timing, inventory management and lower operating expenses as well as lower CapEx. CapEx was $6 million, down from $13 million last quarter and $10 million last year as we rationalize our spend in the near term. Please note that our free cash flow in Q2 was reduced by $24 million of non-recurring items, including $12 million of cash restructuring payments and $11 million of tax payments for intercompany transfer of IP.

Excluding these items, Q2 free cash flow would have been negative $41 million, an improvement of $80 million versus Q2 last year. Our period end inventory balance decreased by 23% year-over-year to $138 million, primarily due to lower component balances. Sequentially, this was a decline of 2%. Our inventory consists of $113 million of finished goods and $26 million of components. Under our previous share repurchase authorization, we returned $33 million to shareholders in Q2, reducing our share count by 2.3 million shares. In late February, the Board of Directors approved a $150 million share repurchase authorization, all of which remains available as of Q2 period end. While returning capital to shareholders remain a key pillar of our capital allocation framework, our near-term priority is navigating this dynamic and uncertain environment with ample liquidity to preserve operational flexibility.

Turning to our guidance. The Q3 outlook we’re providing today reflects the demand trends we have observed quarter-to-date and does not assume any material change in consumer purchasing behavior as a result of this highly dynamic global trade environment. We expect Q3 revenue to be in the range of $310 million to $340 million, up 19% to 31% sequentially from Q2, which is consistent with past seasonality, and down 22% to down 14% year-over-year. As a reminder, last quarter we said we expect to have a very difficult year-over-year comparison in Q3 due to the launch and associated channel fill of Ace headphones towards the end of the quarter. We’re not guiding Q4 at this time, but I would note that we expect revenue to grow modestly year-over-year if current conditions hold.

We expect our Q3 GAAP gross margin to be in the range of 43% to 45%, with non-GAAP gross margin in the range of 45.2% to 47%. Our gross margin guidance embeds our expectations that tariff expenses will be less than $3 million in Q3 due to inventory on hand. We expect our tariff expense to rise to $5 million to $10 million in Q4. These figures do not contemplate any changes to pricing nor promotional strategy, which, as Tom mentioned, we are in the process of evaluating. Please note that the timing of cash payments for tariffs will differ from when we see the P&L expense as the cash outlay happens at the time of receipt of inventory or whereas the P&L expense is incurred when we sell the inventory. On a cash basis, we expect to pay $5 million to $10 million of tariffs in Q3, which may rise to as much as $20 million to $30 million in Q4 as we build inventory ahead of our holiday quarter.

The cash outlay and P&L expense resulting from tariffs will ultimately be determined by both tariff rates and how much inventory purchases we accelerate. We expect Q3 GAAP operating expenses to be in the range of $157 million to $162 million, down 9% to 12% from $179 million in Q3 last year. We expect non-GAAP operating expenses to be in the range of $135 million to $140 million, down 10% to 13% from $155 million in Q3 last year. This is lower than the 14% decline we saw in Q2, primarily due to lower variable compensation expense in Q3 last year. On a normalized basis, our guidance implies non-GAAP operating expenses declined by 19% to 22% from Q3 of last year. Bringing it all together, we expect Q3 adjusted EBITDA to be in the range of $12 million to $37 million, representing a margin of approximately 4% to 11%.

Lastly, I want to provide an update on the transformation journey we embarked on last year. Following the update we provided in Q1, we have continued to make great progress driving efficiencies in our business and improving our cost structure. Accordingly, we are raising our annualized run rate savings for both GAAP and non-GAAP operating expenses. For GAAP operating expenses, we now estimate that our run rate base is $640 million to $670 million, down $100 million to $130 million from our normalized fiscal 2024 GAAP operating expenses of $770 million, a reduction of 13% to 17%. This represents incremental savings of $40 million to $60 million versus the targets we outlined last quarter. For non-GAAP operating expenses, we now estimate that our run rate expense base is $580 million to $600 million, down $80 million to $100 million from our normalized fiscal 2024 non-GAAP operating expenses of $680 million, a reduction of 12% to 15%.

This represents incremental savings of $20 million to $30 million versus the target we outlined last quarter. The new run rate expense range for GAAP operating expenses is wider than the range for non-GAAP operating expenses due to potential variability in our expectations for non-GAAP adjustments, primarily stock-based compensation. Reducing management layers through our reorganization efforts has helped reduce the impact of stock-based compensation on our shareholders. Actions that we have taken should serve to strengthen the business and allow us to continue to invest in most impactful growth opportunities, while structurally improving our profitability. And most importantly, this should enable us to emerge from this uncertain period in a stronger position.

After the call, we will update our earnings slides to reflect the following items; our Q3 guidance, our expected tariff exposures, and expense savings that I just walked through. With that, I’d like to turn the call over for questions.

Operator: Thank you. [Operator Instructions] Thank you. Your first question comes from Steven Frankel with Rosenblatt Securities. Your line is open.

Steve Frankel: Good afternoon and thanks for the opportunity. A lot to unpack here. As you try to deal with the terrorists, what’s your sense of the channel be — the channel’s willingness to take on inventory that might have lower tariff attached to it versus you’re just going to hold the inventory until we get closer to the typical seasonal inventory build?

Saori Casey: Hi, Steve. I can try to take that. Is your question around the channel inventory, or our on-hand inventory?

Steve Frankel: Channel inventory. So, you’re going to be building inventory ahead of tariffs, it sounds like. And do you anticipate that flowing through, or you’re going to build and hold until we get closer to some kind of natural demand curve that’s going to drive that inventory into the channel and into the consumer?

Saori Casey: Yeah. We’re very much in discussion with our partners in the channel on both where this tariff rate will land and how we mitigate the consumer impact to the demand and between pricing strategies and promotion strategies, as well as the channel inventory strategy. So, we’re much — very much at work in progress on that. Thank you.

Steve Frankel: Okay. And then slip another one in here. There’s been press reports about the winding down of the IKEA partnership. Should we read anything into that in terms of your pricing strategies? Or is this just the notion of trying to simplify what you do and having more control over the entire ecosystem and product vision?

Tom Conrad: I just say that, for the last eight years we’ve had the pleasure of working closely with IKEA and we’re proud of what we achieved together. But we have largely wound the partnership down and won’t be releasing new products together. And I think you can read this in part of us just sharpening our focus on what matters most, improving our core experience, investing in profitable growth, driving cost efficiency and delivering innovative new experiences to our customers.

Steve Frankel: And then one last quick one for you, Tom. Where do you think you are in repairing your relationship with the installer team, given all the challenges of the last year?

Tom Conrad: We’ve made tremendous progress over the course of the last 120 days on the quality and reliability of the core experience. I mentioned in my prepared remarks that we’ve delivered nine software updates focused on stability, speed and usability. And we’re getting really great positive customer response on the backs of these improvements. We’re seeing all of our core metrics improve across every dimension. We’re at levels that are better than the previous generation software. We’re seeing positive customer response to targeted installed based promotions suggesting that trust is returning with our customers. We’re seeing social sentiment improve. Our inbound support inquiries are down and that positive momentum accrues to the professional channel as well.

Steve Frankel: Great. Thank you.

Operator: The next question comes from Logan Katzman with Raymond James. Your line is open.

Logan Katzman: Hey, guys. This is Logan on for Adam. Thanks for taking our question. I appreciate you guys sizing the tariff impact. Just a quick question for you guys here. Have you guys seen any demand being impacted by these tariffs yet, or any like pulling ahead of potential tariffs from your customers?

Saori Casey: Hi, Logan. I can take that question. So, we’re five weeks into the quarter now and know somewhere around since the tariffs. And we’re really not seeing any material change to our demand at this point since the announcement. However, we’re monitoring that closely. And what we’ve comprehended in our guidance for Q3 is based on what we are seeing so far today, but nothing material we’ve seen thus far.

Logan Katzman: I appreciate it. And Tom or Saori, maybe just more of a high-level philosophical question around the tariffs as well. Just thinking about them layering in, if they stay status quo into July, how do you guys think about the potential impact on the holiday season? Do you think this could have a material impact on consumer spending there? I know it’s a little early, but I just wanted to get your high-level thoughts.

Saori Casey: I can get started and maybe Tom can chime in. So, we provided the Q3 tariff impact which we said below $3 million since we have mostly our inventory on-hand pre-tariffs. In Q4, we’ve given also an estimate of $5 million to $10 million based on best we know today. Again, the timing in which we are expecting. As Tom said on the call, we’re doing number of — taking a number of actions to try to mitigate including accelerating some of the productions that were in talks with our partners. And so, we’re actively working on that, but it’s still working — very much work in progress and it’s really hard to speculate where the tariff rates will land and the consumer demand, and how much we’re able to accelerate and also migration within our footprint of manufacturing between the countries that we manufacture outside of China.

Tom Conrad: I’ll just underscore that we’re just actively engaged in all of these topics every day here, evaluating pricing and promotional strategies, trying to find a balance between margin and volume for gross profit optimization. We’re working closely with our CM partners and retailers as, of course, they want to see demand hold as well. And we’re all working to limit the impact downstream to our customers. So, continues to be a very live and evolving topic and one that we’re deep in every day here.

Logan Katzman: Thank you. I appreciate the color.

Operator: [Operator Instructions] Your next question comes from Erik Woodring with Morgan Stanley. Your line is open.

Erik Woodring: Hey, guys. Good afternoon. Thank you for taking my questions. One quick clarification to start off and I may have missed this at the top of the call. But commerce area, can you just clarify for us what — I know you sized the tariff impact by quarter, but can you just clarify either what percent of your revenue base or what percent of your COGS base is currently exempted versus not exempted and then, obviously, faces a small reciprocal tariff outside of China?

Tom Conrad: So, what we shared on the prepared remarks is that we have moved all of our US bound production out of China and into Vietnam and Malaysia, with the exception of a few accessories like speaker stands and the speakers that we make in partnership with Sonance, collectively those represent a tiny, tiny fraction of our US business. And so, I think the right way to think about it today is that the vast majority of our US bound production comes from Vietnam and Malaysia which is subject to the paused rate of 10%.

Erik Woodring: So, just to clarify on that, the April 11 exemptions for the 20 HTS US categories, the majority of your products fall into the exempted category. I just want to make sure that’s correct.

Tom Conrad: Not into the exempted category, but into the paused category for reciprocal tariffs outside of China. So, at 10%.

Erik Woodring: Right. Okay. Got it. Thank you. And then, I realized that in the June quarter you face the tough year-over-year compares from the over ear headphone launch last year. If — is there any way that you can help us understand that if we normalize for that launch, what would that imply for growth — year-over-year growth or declines for this June quarter? Just trying to do a bit of like an apples-to-apples comparison, if you may.

Saori Casey: Yeah. Thank you, Erik. There’s a lot of different moving parts here that we’re contending with. We know — for sure the Ace channel fill, but there’s also initial Ace channel fill, but also initial pent-up demand of the Ace launch as well, since that was very much rumored out there for many quarters. And so, there was elements of that that we also need to — we hate to normalize for that because that’s a demand. However, that it was — that was something that we now hindsight know that there was an initial pent-up demand that took place in Q3 last year. There are certainly other macro environment in terms of where our category is. While we’re pleased to see how we’re gaining in home theater, the strength in our home theater from a dollar share perspective, both in US and Europe this past quarter.

We have other offsets in other categories like portables, where it’s very price competitive. And so, there’s a lot of puts and takes in that. And even just Ace alone, it’s very hard to perfectly normalize. But we wanted to just put out some of those factors in which that distorts our year-over-year comparability.

Erik Woodring: Okay. Understood. And then maybe last question for you, Tom. And this is kind of big picture is, when we hear you guys on these earnings calls, there’s clearly a focus on cost rationalization, efficiency, kind of going back to the core of Sonos. There’s also a clear focus on repairing the brand image and kind of doing right across several channels. What’s the latest message, just high-level on product launches? I’m not asking for the number of product launches per year. I’m just asking more on the philosophy of when does the focus for Sonos on product launches maybe start to take priority over some of these other factors that you’re talking in the near-term? Again, not saying you’re not prioritizing new products, but just from the narrative, when should we start thinking that product launches new, either in the home or out the home, become more important to the story as opposed to repairing past issues or cutting costs.

And that’s it for me. Thank you so much.

Tom Conrad: Sure. Thank you, Erik. I guess, I’ll begin by saying, I do think that two new hardware launches a year is a really great case cadence for Sonos. Already this year we’ve launched Arc Ultra Sub 4 and Era 100 Pro. For the balance of the year, we are focused on using software to drive differentiation and experience improvements. And we do this not just to repair our relationship with our customers after the missteps of last year, but also because our flywheel is powered by software. And with every enhancement we make, we’re delivering additional value to our customers and driving delight and incentivizing future repurchase, and we just really believe in that investment. I’ll also offer that I think we have the strongest roadmap in the company’s history. And while we’re not here to talk about that today, I am really excited about the day when we’ll be able to tell you more about that.

Erik Woodring: Okay. Thanks. Maybe if I could just sneak in one more. I apologize, which is, Saori, a healthy cash balance relative to your market cap. Obviously, we can all look at kind of where your stock price is today. But is there an impetus to use that, given where valuation is today, or just help us understand how you’re thinking about the uses of cash? Thanks so much.

Saori Casey: Yeah. Thank you, Erik, for that question. Certainly, returning capital to our shareholders, as you’ve seen in the past, is one of our key pillars of our capital allocations framework. We did return $33 million in Q2, and we do still have the full new $150 million of share authorization that the Board approved this past quarter. And so, we’re very much cognizant of returning capital to our shareholders. However, on the near-term, our priority is to navigating through this dynamic, uncertain environment with ample liquidity, and we want to preserve operational flexibility during this time. So, until we see better clarity around where the tariffs will land and the consumer behavior, we will be as prudent as possible in navigating through this environment.

Erik Woodring: Okay. Totally understood. Thank you so much, guys, and good luck.

Saori Casey: Thank you.

Operator: [Operator Instructions] Your next question comes from Brent Thill with Jefferies. Your line is open.

Rayyana Matraji: Hi, this is Rayyana Matraji on for Brent Thill. Thanks for the question. Given the revenue performance this quarter, could you speak to any specific products or regions that contributed to this? Thanks.

Saori Casey: I can start that. Yeah. So Q2, we have grown 3% year-over-year, and it came in at the high-end of our guidance range, and we were pleased with that. We had — as Tom had referred to, we had a better-than-expected response by our customers on the owner promotion that we had run in the quarter. And so that helped boost our results to be better than the midpoint of the guidance and the higher end of the guidance. From the product perspective, Arc Ultra certainly had a great impact as we also were able to gain share in the quarter in both US and Europe. And so that fueled our growth as well as Ace. The headphone is incremental to us since we did not launch that until Q3 last year. So — and not — last but not least, as we said on the prepared remarks, our growth of 3% had a meaningful contribution from our — what we’re characterizing as our growth markets there.

They had been smaller markets for us that we’re focused on investing in those markets outside of the US and so that also fueled our growth rate for this quarter.

Rayyana Matraji: Okay. Thanks. And on the search for a permanent CEO, what qualities is the Board prioritizing in the selection process? And that’s it for me. Thank you.

Tom Conrad: I think the best thing for me to say is that the Board has — as we described in Q1 has — was working with a leading executive search forum and they’re conducting a comprehensive search. I know that they take this responsibility very seriously. And I’m confident that in the coming months they’ll select a world-class leader for the company’s next chapter. So, I think I’ll just leave that and them to the process. I remain a candidate.

Rayyana Matraji: Great. Thank you. Good luck.

Operator: The next question is a follow up from Steve Frankel with Rosenblatt Securities. Your line is open.

Steve Frankel: Yes. Could you give us any updates on your IP litigations?

Tom Conrad: Sure. Happy to. Sorry, just want to get this right. And I have some notes here. So, we have two affirmative cases against Google that are proceeding. Our damages case that mirrors our successful litigation at the ITC is now getting moving in District Court in Los Angeles. And on our appeal of our other case where the trial judge overturned our jury verdict is now fully briefed and awaiting oral argument before the Federal Circuit.

Saori Casey: But no new updates for today.

Tom Conrad: And those are the same updates we have shared in the past.

Steve Frankel: Great. Thank you.

End of Q&A:

Operator: This concludes the question-and-answer session and will conclude today’s conference call. Thank you for joining. You may now disconnect.