All right, we are, we're gonna get started here 2:05, 2:06, actually. For those of you that don't know me, my name is Erik Woodring. I lead the hardware research efforts here at Morgan Stanley. I'm very pleased to be joined here by Patrick Spence, Sonos' CEO, Eddie Lazarus, Sonos' CFO. Before I start, let me just read the research disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.
nope, www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep.
Switch off then.
No.
Got it.
I'd rather it work.
I got it.
Thanks, Patrick. Today is an exciting day for you guys. Usher in, let's call it a new Era of sound. Very pun-worthy, of course. Maybe if you could just talk about the products you launched this morning and some of the more you know, the partnership that you announced as well. Let's start there, and we'll go on.
What Erik's referring to, actually, just to back up for 1 second, you know, we talk about the fact that we introduce at least 2 new products every single year. This is 1 of those moments we're excited to be here and be able to share that. We've done something for the 1st time ever, which is introduce 2 products from the same family simultaneously. Kinda shows our ability to continue to innovate in how we're doing research and development and share some of the engineering and innovation between platforms. We brought out the Era 300, which is the world's best spatial speaker, spatial audio speaker.
Spatial audio, if you haven't heard about it, and you haven't experienced it yet, maybe you probably have through your AirPods or something like that, but you need to listen to it out loud because spatial was meant to be listened to out loud and be immersive in a room like this or any room because you have the height channels, and you feel like you're in the middle of the music. We feel this is as revolutionary as the move from mono to stereo that happened, you know, in the 1950, kind of 40, 50, 60 period. This is massive for the industry. Last year, 80% of Apple Music listeners listened to spatial audio. 85 of the top 100 Billboard artists released in spatial audio.
Everybody's getting behind it is a different experience. Finneas is a friend of the brand, he has this amazing song. It's a concert six months from now that he's mixed in spatial with the Era 300, and it sounds absolutely incredible. The people that are on the leading edge of mixing music are going to be using Era 300 to really figure out how they can bring new experiences to consumers, which we're really, really excited about. That's huge news.
We did something that I think, again, is a testament to the way we think about the world, which is, we introduced today the Era 100. This replaces a product called the Sonos One, which even this year, seven years after its introduction, was named Smart Speaker of the Year. A seven-year-old product was named Smart Speaker of the Year by one of the publications out there. It's our number one selling product, but we felt we could do better, and we could create something that was even more innovative. It has full stereo sound. The old one had mono. It's amazing. I might be a little bit biased in terms of that, but we had, I mean, you'll get to see the media reviews in a couple of weeks and everything.
It is an absolutely outstanding speaker at the price point. We're super excited about that and the partnership with Apple Music as well. Apple Music is trying to push spatial audio in a big, big way. They are believers. We are very aligned in the fact that this is the next wave of audio, as is Amazon Music and Steve Boom over there. One of the kinda superpowers of Sonos is the ability to give customers choice and not trap customers into one ecosystem. We don't have a dog in the hunt when it comes to those music services, so we support all the music services. We're very excited to announce the Apple Music spatial audio partnership today.
Cool. Perfect way to start. Maybe if we take a step back, it's been a sort of very interesting journey for you guys, 17 years of consecutive revenue growth. The last two years, again, from a macro perspective, have been choppy, challenging. You know, maybe just help us understand how you guys got to where you are today. Where do you stand in terms of the business? We'll start going what the forward look.
Yeah. I think the story of Sonos is a very unique one in this day and age. We're unlike any other consumer electronics company I could think of because we build products to last for a long time. Over 90% of the products we've ever shipped over that 17-year period are still in use today. People, investors regularly are like, "Well, what are you doing to try and drive obsolescence and upgrades and some of those things?" The reality is, we're building these products playing the long game, where we know customers will come back and add a product over time. What happens is, people may start with one or two Sonos products, but they'll expand their system over time, and so our average home is up to three at this particular point in time.
We have 5 million homes that have a single product, and then all the multi-homes have 4.3 products. It really becomes something where people add more products over time, which is different than any other model in consumer electronics. It's probably the hardest thing to help people understand about what it is that we do, but Sonos is so much better when you have two or three products, and you have it in multiple rooms and everything around that. We've just been relentlessly trying to innovate and bring new products out, and again, as I mentioned, at least two times, at least two new products every year. We use these story moments, and right now is one of those story moments with today's launch, where we get a ton of earned media.
We briefed 450 media over the last few weeks. You see a ton of coverage today, earned media coverage. That creates a halo for the entire brand. Existing customers come back and buy more. New customers come into the family as well. The interesting thing about our story, even after 17 years, is the number one generator of new homes is existing homes. Existing customers tell their friends and family, "You need to get Sonos. Sonos is awesome." Perhaps they see it at your house. I'm sure many of you have it. They get started with the brand that way, which is great, right, from a customer acquisition cost perspective.
We've been able to get leverage out of sales and marketing over time, which everybody at the IPO told me there was no way we would do. We've been able to keep our growth margins, you know, in a very attractive range for the kind of thing that we do. I think we're, I think we're very different in the way that we approach the world, the way our business model works, the way our brand does. I think the best thing we can do in terms of serving consumers well, especially the next generation of consumers, is build products that last for a long time.
I'm very proud of the fact that with the new products today, we have between 40% and 46%, recycled materials in them, better repairability than ever, so you can do all the repair, and they're super energy efficient. We've made great gains on all those fronts. The number one thing that we do that I just don't see others in consumer electronics do is build products that last for 10+ years. You know, I think that when consumers experience that and get that brand trust, they come back and they wanna have more.
Cool. Let's take that and launch forward. December quarter, you reported 7% constant currency growth. Product registration's up 27% year-over-year. Much stronger than the Street expected. What are you hearing from customers? What are the KPIs that you guys are looking at that gives you confidence as you look forward? Are there any more headwinds that you need to continue to work through as we look out over the next, call it, 9 months through the end of this fiscal year?
Well, I think the headwinds for us are the same as the headwinds for the economy as a whole. It's just a very subdued consumer environment. Like others, you know, we've seen the shift in spend away from consumer goods to travel and services.
Mm-hmm
As people emerge from the pandemic, and I think that's especially true in our demographic. People who can afford to take that European vacation, they're taking it. That's fine. We planned for that. We always thought this year was going to be a subdued consumer environment.
Mm-hmm.
We did very well in the first quarter, although very much the way we expected it to come in.
Mm-hmm
Because we were in supply, and we could run our typical promotions.
Mm-hmm.
You know, the headwinds for us are gonna be FX to, as with many international companies, we're getting hit by the strong dollar. You know, that's probably number one, and then, and then just the consumer environment. We've basically said to ourselves, that we were gonna lean forward while other people were leaning back.
Mm-hmm.
We've said from the outset that we were gonna take a little bit less profit this year.
Mm-hmm
Because we're going to enter these four new categories in the near future. We're going to announce one of those this year. We see tremendous opportunity, as we did today by resetting the bar in our current categories. We're also doing some geo expansion. We're looking into India and Japan and LATAM, where we've made some inroads. For us, the future's bright and we want to seize it. That does mean this year, that we're looking at somewhat of a subdued result.
Okay. Then maybe if you just double-click, when you talk about either price points or geos or specific channels, where are you seeing relative strength versus relative weakness?
Well, to use a term of art, we're killing it in home theater. It's been a real strength for us. We have a wonderful set of products there, and in the holiday quarter, we gained tremendous share there, even though, of course, everybody was discounting, and we were actually discounting less than others. We've held our own in all-in-ones, but I fully expect now that we've launched these two incredible products, that we'll even see improvement there. The real strength right now has been in home theater. As far as the different channels, DTC, our installer channel, and retail, they've been performing basically according to expectations.
Okay.
We feel good about all of them. On the geos, as I said, we're really interested in what's going on in Japan, in India, LATAM. We have some others in our sights that we haven't launched in yet, but we think over the course of, let's say, the next five years, we can do some real growth in those areas.
Okay. I'm gonna take some feedback that I've gotten since earnings, and then one of the questions I've gotten is, you guys bundled multiple products together. You had success with that. You did discount or you, like you said, promote products. I think, you know, a bear thesis that emerged was you because you didn't raise the guide for the full year, you pulled forward product. I'm not saying don't kill the messenger. Let's just say it that way, right?
Hey.
Help, you know, help us understand why that wouldn't be true and why you're kind of taking a conservative view today, potentially.
Happy to. I'm sure that there's whispers out there that the new CFO is laying a mattress for himself and doesn't want to fall on his face and all the rest of that, but it's actually not true. Look, we performed as we expected to perform in the first quarter.
Right.
We were in stock. We could do our promotions. We thought we were gonna do well. We were delighted to set another revenue record. That's in line with our expectations. We think where the external guide got it wrong was in the cadence of the quarters.
Mm-hmm.
We had an outstanding second quarter last year, but it was completely anomalous. It was driven by one-time events having to do with the supply constraint.
Mm-hmm
Dropping back orders in, huge channel resupply. We're returning to the pre-COVID seasonality cadence that we expected, 55%-60% revenue in the first half. You can, now that you've seen what we did and what our guide is, you can expect, you can calculate the second quarter. We're on our track.
Mm.
What we're actually watching for is, I mean, obviously, if we see upside, that's wonderful.
Yep.
If we don't see upside, we will make, you know, and we actually see weakness, we will make adjustments on the OpEx side.
Right
Because we are committed to keeping this business meaningfully profitable, even through an economic downturn.
Okay. The pull forward I do want to address because I think if we pull forward a new customer, for instance, we're also pulling forward their repurchase.
Mm-hmm.
You know, like, if that's the way people wanna think about it, I mean, we're building for the long term, so whether we get it in one quarter or the next doesn't really matter to us. Fundamentally, that just starts their journey towards repurchase even sooner, right? It's like, okay, like, that's fine. If it got pulled in, then they're gonna get to their second and third faster.
Right.
Okay.
Right. Perfect. Exactly. fiscal 2022, you grew new households 11% year-over-year. That was a bit constrained just by supply and again, the environment. How do we think about kind of the mix of new household additions versus existing purchases or purchases from the existing from the existing core base of households that you have? How does that look this year? Is there any nuances this year that we need to think about, or is this more normalized given some of the supply is now largely behind us?
You wanna take that or me?
Yeah. I think, you know, fundamentally, definitely we're in a better supply situation, that'll be good. You know, it hinges a little bit probably on product mix, but, I wouldn't expect any big changes.
Okay
as we've gone through that. I don't think we've seen big changes as we go through it. Yeah, like, I mean, it's something that we're only at 9% of the addressable homes in the markets that we're in today, so we're pretty early days. We also believe in doing it in a sustainably profitable way, so we don't, you know, we don't spend a ton on customer acquisition side of it. You know, we do have a constant kind of drumbeat around brand. We do a lot on earned media as you'll see, you know, from the new products that we're doing. Some advocacy and influencer work in performance as well. Yeah, I think the.
We're always trying to make sure that our roadmap and our product portfolio is coming out in such a way that we're able to do both, acquire those new homes, right? At the same time, be adding more to existing homes, which, as you know, has typically been in that 40%-45% of our sales, and again, is a huge, unique strength versus any other consumer electronics company.
Okay. Let's touch on gross margins. About 42.5% in the December quarter. In constant currency, that's a little bit over 45%. For the year, you guided 45%-46%. A solid start to the year when you think about the directionality of the dollar, and we can all kind of do that math. What other puts and takes should we be thinking about as we move through the year, specifically as it relates to gross margin?
The FX headwind will abate in the second half. The FX was really a front-loaded problem for us.
Mm-hmm.
We bore the brunt of it in the first quarter. The dollar has also moved our way a little bit, although who knows what's going to happen with that, but that's a big piece of it. look, we, again, first quarter, we landed exactly where we thought we would because promotions naturally take down your gross margin.
Mm-hmm.
Supply chain has normalized. That's actually what we expected. We're right on track for the 45%-46% that we projected in our guidance, and that's flat to last year. That seems, you know, right to us, given the FX headwind that we're facing.
Good. Okay. let's talk about then, what you know, you guys haven't shied away from reinvestment in this business.
Yeah.
This is a growth business. Over the last five years, you've grown OpEx to call it 8%. It's gonna grow a little bit faster this year, despite that revenue is not growing that fast, which shows you are still investing in the future. What are you investing in?
I think this is a very interesting time because we've seen big tech pull back from, you know, our category, you've, you know, now it's become evident to everyone, we already knew this, that Google and Amazon have been losing billions in trying to do their hardware efforts and all of those things. You see them starting to pull back. You see what Apple introduced with the HomePod 2 last month, which, you know, if you put our products in comparison today, I feel very comfortable we are the innovation leader in audio. Legacy audio brands don't have software expertise. I always talk about Sonos being the story of software eating audio. We feel it's a time to really lean in and be investing.
What Erik's referring to is we actually decided to consciously, you know, invest more and take our profit, down a little more in 2023 to go invest in four new categories. We, today, we plan about $22 billion of the $96 billion audio market. You can easily figure out categories we don't play in today.
Mm-hmm
That we will in the future, as we go through that. We just think we have a ton of opportunity there, and now is the time to strike. R&D is largely where our dollars are going. You know, through my career, I've always seen that pay off in a sustainable way over a period of time. Remember, we're building these products for the long term. When others are fearful, we're being, you know, more optimistic and investing. As Eddie said, should anything change in that, we also remain, you know, on guard and ready to make changes and perhaps push out a category, for instance, if, you know, all of a sudden the world changes and we had weakness and we needed to do things to retain profitability. We're always trying to balance those two things.
Just a couple of things on the numbers, too. First of all, we're not going to grow OpEx ahead of our revenue growth for any long period of time.
Right. Yep.
That, full stop, period, the end.
Yeah.
You know, the revenue does lag the investment by a couple of years because of our product cycle.
Mm-hmm. Yep.
The other thing I would mention is that in some sense, what we're seeing is the rollover of the investments we made last year. If you annualize the headcount increases that we made last year, that's $30 million of OpEx this year. We also paid out a very low bonus last year because we didn't hit our financial metrics. We reset the bonus for the purposes of OpEx this year at 100%. That's another $30 million. We're actually. While we are definitely investing, it's deceptively, it's not as much as it might look on paper.
Mm-hmm.
It's just enough to keep our roadmap on time, on track, and that's, you know, that's the most important thing from our perspective.
Okay, perfect. This is gonna be a bit of a nuanced question, but you've committed to 2+ new product launches every year. I know Sub Mini was last year. Technically, you did launch an IKEA product this year. Does the Era count as two? Just.
It does. They do count as twi, yes.
Okay. Okay.
Yeah.
'Cause I just wanna make clear.
It's not a new category.
It's not a new category.
Correct.
That's still coming.
Right. Right.
You know, as Patrick has said many times, we have a history of beating our two.
Right. You do.
Yeah.
For those of you that don't know, Eddie is also Sonos' bulldog in court. He wears two hats. He's the chief, CFO, he's the CLO. Eddie, maybe if you could just give us kind of an update on, you're in a number of legal battles today defending Sonos' IP. Where do we stand with a number of those? You know, again, maybe some of the more headline-catching ones. Just give us an update on where we are.
I have no idea what you're referring to. Look, we're fighting all over the world with Google. We have been for quite some time. We have our first case going to trial, first damages case going to trial in Northern California on May eighth. That involves three patents. We already, as you know, had one at the ITC, validity and infringement on five very important fundamental Sonos patents. That is, Google has appealed parts of that ruling. We've actually appealed parts of that ruling because we think some of the workarounds are not appropriate.
Mm-hmm.
That will be decided this year as well. They have a couple of cases against us at the ITC that will go to hearing this summer. It's very busy. 2023 is gonna be action-packed, and we need to keep winning.
Right.
If we do, we're going to have an outstanding result. We think we should keep winning, but you never know until you get there.
Right. Okay. Patrick, you know, you touched on the competitive landscape earlier in terms of you're leaning into certain, maybe others aren't. How is that competitive landscape changing? Again, I wanna keep the focus on Sonos as opposed to others. You know, again, we talked about home theater being an area of share gains.
Sure.
How do we think about that maybe longer term? Where are you having the most success versus your competitors?
Yeah. I mean, right now, in these periods where you're not, you know, where the economy, you know, has some headwinds and those kind of things, the one thing we do look at is relative, you know, relative performance. We just killed it, as Eddie said, in terms of home theater in calendar Q4. Even before that, I mean, it's just incredible in terms of where we are by, again, building quality premium products, you know, much the way Apple's been able to with the iPhone and just, you know, keeping at it and consistently over-delivering on customer expectations. I fully expect we'll see the same thing in wireless speakers, all-in-ones, as we call it, with the new product introductions that we have today.
That people in this category, especially when you're spending, you know, for a product that's gonna last 10 years, they will step up, right? 'Cause they're putting in their home. It's something they wanna show. I, and I think we went through an era where it was a little bit of disposable tech going in, you know, and these cheap pucks going into people's homes. You know, I think that era feels like it's over, and instead people are looking at quality, thinking more about the environment, some of those things. We're very well positioned across the board. You know, our component products, one of our categories that the installers sell, you know, continue to lead the way and be the number one choice by far, far margin. I think it's 90+% of installers choose Sonos over anything else.
Our portable products, Move and Roam, do incredibly well. We have a well-curated portfolio that's doing really well in all the categories we play, you know, despite the fact we're up against a lot of people discounting a lot of their products, quite frankly. We're trying to underprice, infringing our intellectual property, et cetera. You know, my belief is these investments in innovation pay off over the long term if you can be patient, you properly price your products right, and then you do well by the consumers. I like where we are. I like the, you know, the irons we have in the fire on the new categories to set us up for, continued growth and again, growth with profitability.
Right.
So.
You made a point earlier that I think is really powerful that I just wanna double-click on, and that is 40% of households only have one product.
Yep.
If you can convert those single product households into multiproduct households, that's a $5 billion revenue opportunity. The question is, what tools do you have to do that? Are there any examples of success, you know, historical actions that you've taken that have actually driven that conversion from one to four beyond?
What we know is that, those that are highly engaged, so they're listening and engaged in their Sonos, they're using Sonos Voice Control, they could be using Sonos Radio, are more likely to repurchase.
Mm-hmm
... more quickly and go through it. So we've done, you know, we've done some learning to understand what does it take to get people that are single player to move to the next level. So, those that are single player will see that, you know, we also have all the customer data. People open the app. We have 500 million app sessions a month right now. People open the app all the time. So, you know, we have ways now to talk to those customers and be able to actually approach them with, you know, offers of assistance or setup or services, but as well an offer if we wanna make in terms of saying, "Hey, like, you could pair that product with one or the other." Our CRM efforts have worked.
They haven't been so targeted on the single player.
Mm-hmm.
Now we're starting to do that with the investments we've made in CRM. We've gotten a little bit more mature, put a couple systems in place that allow us to do that. We're really starting that journey at this point. I'm optimistic we'll be able to find the path.
Okay. We add all of this together, and we say, if you look back, you know, kind of pre-pandemic, this was a business that was growing top line 10%, EBITDA 20% annually. Again, we're in a bit of an odd period today, right? As we look forward, should we still be thinking about kind of 10% top line, 20% EBITDA? Is that the goal?
If not better, for sure. I mean, look, we have at least three strong levers to drive growth.
Mm-hmm.
Resetting the quality bar in the categories we already play in, and obviously, the Era speakers do just that. Enter new categories, we've spoken to the fact that we're gonna work on four, then geo expansion.
Mm-hmm.
When you put that together, with the consistent repurchase patterns that we see, our ability to attract new households over time, we absolutely should be able to drive double-digit top line growth and expand, our bottom line margin.
Okay. Perfect. let's just quickly touch on app capital allocation. I wanna save a, kind of a bigger picture question for the end. You have over $400 million of gross in net cash. your focus today is on kind of reinvesting, buybacks and some tuck-in M&A.
Mm-hmm.
As we look out over the next two or three years, any reason for those priorities to change whatsoever? Specifically on M&A, you know, what are you looking for? Is it filling technology gaps, product gaps, talent gaps? Maybe, again, help us understand that.
Yeah, I mean, it's really to accelerate our roadmap. We've got this great roadmap we're very excited to bring to the world. You know, anywhere we can pick up talent and technology to help accelerate that is a good thing for us, and we'll obviously be opportunistic in terms of stock buybacks as well and going through that. For us, it's really about growth and investment in technology for the future.
Okay. I probably could have saved 30 minutes for this last question that I'm gonna ask you. I'll give you three minutes, though. That is, and someone actually asked me this question, I thought it was very insightful, so I wanna ask it to you. That is, you've always talked about kind of your past experiences at Research in Motion kind of dictating how you think about the world and making sure that you're staying competitive as you look three and five and 10 years out into the future. What do you think of the future of sound? How is Sonos preparing itself to make sure that you are still at the top of your game, again, in three and five and 10 years down the line? Again, with the, with the question in mind of what is the future of sound?
Yeah. I, look, I think the, probably like a good proof point in that right now is just even looking at what Apple did with the HomePod 2 and what we've done today with the Era 300. I'd say, you know, we're resetting the bar in terms of what we're doing with sound. I think the most important thing is we've also done things like have a partnership with IKEA where we've collaborated on products and technology. One of the things that I learned at RIM that's very important is understanding that what you do today may not be what you do tomorrow. We have technology that we've invented, which allows us to put great sound in things like a picture frame, right, that we've launched with IKEA, or a lamp and some of these things.
As we think about the future, you know, a decade or two from now, perhaps, you won't be hearing us from these big, ugly speakers that are on either two sides of this. But rather, you know, from the table itself, perhaps, or just from the lights, right, that are above. I think you have to be very mindful of the fact that things change, and so we're always pushing on what are the physics and what are the physical products that may actually become, you know, sound in the future. I also think that it's important to be on the leading edge of the technologies and emerging standards, like a spatial audio, for instance, right? Spatial audio, as I talked about, is so key because I think that's as major as the move from mono to stereo.
As we go from stereo to spatial, there's opportunities to create sound in different ways. These artists are looking at it and saying, "Hey, how can I change the way people experience sound in their living room, in their kitchen, and all of these areas?" Which I think is very exciting, and we wanna experiment with them as they go through it. The last thing I would say is really, you know, something like, it's tens of thousands of tracks that are uploaded to Spotify every single day. I'm sure everybody's overwhelmed by the number of podcasts they get and see and are told to listen to these days. There's so much audio content out there these days that curation is a massive issue.
I think as we think about the future of audio and sound and all of these things, I actually think helping, and this is where AI and machine learning come into it as well, is that curation is also going to be something that's very important so that people, have a better experience and kinda get to something that they enjoy a little bit faster and don't have to kinda work through, you know, all of the content that's out there, 'cause it is just an overwhelming amount at this time.
Cool. That's just about time. Patrick, you, the bulldog, thank you guys for spending your time with us today. Thank you.
Thank you.