Good afternoon. I'm Steve Frankel, Director of Research here at Rosenblatt, welcome to our sixth annual Age of AI conference. It's my pleasure today to host a conversation with Sonos. We're joined by Saori Casey, who's the company's CFO, and James Baglanis, who runs IR and is here as well. Let's set the stage. About a year ago, Tom Conrad came in as CEO. From a high level, what did Tom set about to try to do differently than the prior management team?
Yeah. Tom, literally a year ago, was named our official CEO, six months prior to that as an interim. What he's brought to the table has been the vision of systemness. The Sonos might have started out as a system company. Along the way, as we were introducing various new products, became more of a one product at a time, as opposed to really leaning in on what we stand as a premium audio company with a strength of the system. He's very much bringing that back live in everything we do. We're very excited about that because otherwise we won't be differentiated as a company in our products value that we bring to our customers. We're super excited about that. FY 2025, last fiscal year, was a year of stability.
Really, we were saying that was a transition year, a transformation year, whether it was writing our software and stability to that, and our cost structure to ensure that we are enduring in both top line and bottom line growth. We very much used FY 2025 as Tom was joining as our transition transformational year and positioning ourselves better for FY 2026, which is what we've done. As a system, as we come out with new products and new software updates, we're starting to very much lean on that. He's also have a new team in place that including our new Chief Marketing Officer, who is a brand expert, who can help us tell that story better. We also recently have started a new Chief Operating Officer, who's also on board with that approach as well. Joins us from Walmart.
We're very much ready to go in this growth story that we've started to not only tell, but to execute and show the results, as we've seen in our fiscal Q2 results, where we grew 8%. We are continuing to build that momentum.
Yeah. Despite the macro, you really have put up some very good numbers and guided to very healthy growth for the June quarter. What's changed? What's working, and what kind of things can these new members of the management team do to add fuel to the fire to help you grow even faster going forward?
Yeah. Part of it is the past year, we tried to stay very focused, not only stabilize, but to really be focused on our investments and execute. I do believe that's key, that it's starting to bear fruit of some of the work that we have been doing along the way. This is not an overnight thing. We've shown on some of the earnings charts the first half has grown 2% year-over-year. Previously, we're continuing to make progress towards the more stable growth. We're very much really building our foundation, whether it's cost structure and how we operate. With our new leadership in place too, we are ready to fuel that growth with both product innovations, as well as how we tell the story. In conjunction, we've also started to talk about the five dimension of growth.
Again, includes product innovation, some of the growth markets area, really the customer experience that's delivered through our software. We have a lot of the AI work that's both in our products as well as internal along the way. We're very much excited about areas of our opportunity that we can focus on and make tangible results and execution against.
Okay. You really were behind the eight ball from a software perspective not that long ago, and it's come a long way. How do you balance the desire to add even more value through software, which is growing the system nature of the product, with the risk that the more you muck with it, the bigger the risk is that maybe something doesn't go right? What have you learned from that process that de-risks being more aggressive about changes?
Yeah. If we didn't know already, it became very apparent that that was really core to the success of Sonos. Without the reliability that the customer can experience, that's very fundamental to the systemness of our products. Really, we've put that as a forefront. Lucky for us, Tom is a very experienced software background CEO, and he understands that very well. He leans in very much understanding our customers, and you've seen some articles about how he leans in and even personally is answering to some of those to understand the customer needs. Very dialed in about that. Therefore, our software cadence in making not only just stability, but going from defensive to offensive mode on software and making that not just reliable in stability, but making that experience greater for our customers. That's very much what differentiates Sonos from other vendors.
That we don't need to compete for the price to the bottom in growing our share, really want to play the system game and grow multi-device household, as well as households that are growing those devices at the same time. We believe that comes from a great software experience and telling better stories about as new products come out as a system story.
Do you have any examples of how my experience gets better through software as I add more products?
Yeah. Some of the experience that we didn't do a great job at the time we had launched our headphones. There's sound swap with our soundbar, for example. That is something that we should lean in harder. Not only that we're delivering those features that may differentiate with our competitors, but that is the advantage of Sonos, being part of the Sonos ecosystem and adding the devices to the system, that really the experience compounds because of software, not because of just the hardware play. There's many more of these coming, and we're very excited about that. We need to do a better job in telling that software story.
Right. That's part of getting a new CMO is trying-
That's right.
To get better at storytelling and-
That's right.
Packaging and delivering value to the customer.
That's right.
The other thing you're battling, like a lot of consumer electronics companies, is memory cost pressure. You navigated tariffs beautifully, and here comes memory. Set the stage. What's happening with memory? How do you battle through it, and how do you decide where you should be raising prices versus sacrificing margins or de-speccing products?
Yeah. Unlike other consumer electronic devices like PCs and smartphones, our customers don't necessarily buy Sonos products for the memory configuration. That said, they expect seamless experience, as we already talked about with the software play. We need to ensure that is our job one. Short of that, we're doing everything we can to mitigate this cost pressure best we can. While we can't control the market, there are a number of levers that some of the playbook that we're borrowing, if you will, from tariff, but and then some, the impact to us is greater here given tariffs are now down to 10%. As it stands from at the peak, we thought it might be as high as 40%, but ended up being 20% for a while, and then most past quarter, it's down to 10%.
Some of the work that we had done from tariff does carry over, for example, the price increase that we had made more selectively and surgically for the tariff purposes, that flows right into helping some of the memory cost mitigation. Specific around memory, back to the point about our configuration is not dependent on memory. Our BOM consists of anywhere from 1- 2 GB at most. When those costs per gigabyte is multiplying, it's not trivial. We're looking hard with our engineering team to see what's the maximum capacity needed for the best customer experience, and where possible looking at optimizing those memory configurations. That's a significant reduction to the cost structure of our products, given the per gig price has gone up quite a bit.
We will continue to look at pricing, not to say we're never going to increase price again on our existing products, but we'll lean hard on the new products as we come out with new products that we know will deliver more value to our customers, both not just software, but also from a hardware perspective. We've done that when we launched Arc Ultra. Arc Ultra was priced more than Arc, its predecessor, given that we can articulate the value to the customers, and customers very much understood that and purchased that with that intent. We'll do the same. As we have the pipeline of our products and our roadmap, we'll be diligent about what value we think we're bringing to the customer and price accordingly.
Last but not least, there's ongoing supply chain cost reductions that we could take, as well as the ongoing optimization of the operating expenses. To the extent this is not just a gross margin issue, it'll flow through to the bottom line. We're doing all line items of the P&L as judiciously as we can. Something that's structurally beneficial for us also long term. We do want to make sure some of the price increases do not shoot ourselves in the foot from a lifetime value of customer that we can gain perspective multiple years, so we very much have that lens when we look at price changes to make sure that it's not tarnishing our new customer acquisitions that will shoot ourselves in the foot from a LTV perspective.
Remind us, because you've done a great job of reducing the cost structure. Roughly on an apples-to-apples basis, how much has OpEx come down over the last couple of years?
Yeah, no. It's hard. I don't know if we've come out and said a total number, because we have reinvested some along the way, so there's a greater amount that we've taken out, but we have reshuffled to where we believe it's best optimized. Our OpEx has been down the first half, double-digit year-over-year, to we had the last restructuring we had done in February. We lap that now, but we believe the cost structure that we have achieved through those restructuring has given us a more sustainable way to be profitable, notwithstanding the memory situation and the tariff. That once those cyclical dynamics are behind us, we're structurally stronger as a result of it. Our work continues, especially with AI. Our ability to do more with what we have, our productivity gain is something that we're very much leaning on, so we can move faster and deliver more.
Okay. At the same time that you were talking about surgical price increases, you've also done some surgical price reductions. Let's talk about what's the philosophy of reducing the price of an Era 100 or the new Era 100 without the voice assistant, which is even at a lower price point. What does that buy you when you do that?
Yeah. No, what it's buying us is a new customer acquisition. Not just a run-of-the-mill new customer acquisition, but the quality customer. We have enough data now to know which products will generate LTV more than others. We're not trying to acquire cheap one-time, one-hit-wonder customer, but customers that tend to come in to Era 100, and that's why we leaned on the pricing on that. We could see from the data in the past that they add, they become multi-device household over time. Those are the most important ones for us to go acquire. It's part of our CAC, if you will. While generating profit at the same time, we're not giving it away.
We'll lean harder on those as opposed to something that we know are one-and-done type of customers that are buying the most deeply discounted portables don't necessarily lend itself. None of these may sound shocking to you, but it's very much proven out with our data as well. We're also looking at not only pricing strategy, but our promotional strategy at the same time. Especially given the memory cost pressure situation that we could be more deliberate about. Era 100, after we reduced the price, despite the tariff looming at the time, it has really grown our customer acquisition for that particular product in double digits growth rate. We're very excited that it's done what it was intended to do.
Okay. What's the company's new product introduction philosophy now?
Yeah.
There was a period of time where it seemed to be throwing a lot of things at the wall. Now appears you're more measured in. How do you determine what's worth bringing to market?
Yeah. Play in Era 100 is so arguably given the lead time of the product development cycle that might have already been in the pipeline as Tom was coming in as a CEO. Notwithstanding that, how we tell not only the story, but with software, how they play in our overall system is very key for us. We never want to just come out with one product and talk just about the features of that product. We want that to be part of a bigger Sonos system play. To earlier point about multi-device households are very important to us, from an LTV perspective. Not to mention, we've punched above our weight in our brand through the word of mouth, both from a consumer as well as installers.
We very much want to play to our strength on that to make sure that products that we come out with are very much part of the story of the system.
Okay. For a company that's been around for a long time, you're relatively under-penetrated in some international markets. You've been talking about that opportunity. Tell us a little more about what the opportunity looks like in markets-
Yeah.
Like India and Japan.
Definitely, yeah. We've been talking over the past year, focused on our growth market, that being very much a greenfield. We have underway from a mix of revenue perspective, for example, APAC, than some of our competitors, that means an opportunity for us, for example, in areas. We still have plenty of growth opportunities in U.S., given our market share. We don't need to come out with one single new product, there's still markets that we can serve, and they're underserved. Those have been growing double digits, strong double digits over the past year. As we look at it on a quarterly basis, and however small the base might be, they actually have a meaningful contribution to growth to the overall total company. We're very excited about continuing that journey. There's lots of opportunities, so we want to stay focused.
We've picked a handful to focus on. Certainly, we don't want the resources away from other mature or growth developed countries we still have opportunities for, we're trying to be very balanced about how we go about doing a handful, in a way that we can be successful and execute. We continue to pursue these opportunities as a result of that.
I think one of the other special aspects of Sonos is this installer channel. Let's scale it for people, and maybe you can help describe why you have this relationship and what it really does for you.
One of our competitive advantage is that, last year, as reported, 22% of our revenue came from the installer channel. That is a little more unique to us, given both the product portfolio that we offer as well as the system play, very much plays into being one of the favorites of the installer channel, which plays directly into the systemness and the multi-device household. That's very important to us. It is a very key channel for us that differentiates Sonos from others. With installers, customers have a great experience with Sonos, too, it grows from there and every which way. Also including music to CFOs' ear is the profitability of that channel is great because the products that we provide in that channel that tends to be strong there are also highly profitable in nature.
On all aspects, it's a great channel for us, and we continue to cultivate that relationship. More recently, we had announced the Amp Multi. That is a channel four- zone, something that installers that have been enjoying Amp have been asking for a long time to make it easier for them. We're very excited about that as they are. That does provide us opportunity to fuel that channel even further to taking advantage of our strength that we have to continue to strengthen that relationship and grow our revenue from there.
Okay. Then, on the distribution front, you're relatively new to a direct presence on Amazon. What have you learned from that?
Yeah. As we gone into that channel, it was with a notion that we want to serve our products where our customers want to buy our products, given the strength of Amazon out there, that we wanted to make sure that we're present where customers want to make their purchases. Well aware that could have some impact to our DTC business, but we felt that very much it should generate net incremental revenue, even though there might be some channel shift there, and we believe we've accomplished that. So we believe we need to be in these channels in order to win, and we feel good about that. DTC channel continues to be an important one, given that's where we can tell our story about Sonos product the best way we can, given we have control over that.
Our partnership with Amazon and Best Buy and Costco, all channels continue to be strong because we want to be able to partner that to make sure that we're able to tell our story through those channels as well. We're working on all cylinders, but we did have our new COO join us, Frank Barbieri from Walmart. He focused on the digital commerce there, so that will also help us strengthen our DTC channel as well.
Okay. How might you differently approach trying to mine this installed base? With new CMO, new COO, do you get more aggressive at marketing to the installed base? Can you do that in ways other than just price?
Yeah. No, that's exactly the goal here, that instead of just competing on promotions and price, that's not what Sonos begun our journey, and that's not how we want to grow. Back to our pricing strategy we discussed a little bit earlier, there are healthy new customers that continue to expand on the installed base and those that don't. Competing with price don't always meet our long-term objectives, because they tend to not have a great LTV. Between our new CMO and COO, we believe we can strengthen our ability to not only tell that story better, but be more deliberate and strategic about how we grow and where we grow for the long-term view, as opposed to optimizing for current quarter's revenue, and sub-optimizing the long term. We're excited about that. It's not an easy cut-over.
Being promotional, I think the consumer electronic industry in general have become more promotional nature post-COVID. How we go about being one of a kind on our own, that's not easy to do turnover overnight, but we're confident that being able to tell our story better about the system and how we go to market, we can gradually shift the tide to honor that as opposed to being the promotional like everybody else type of company.
Okay. Given the interruptions between tariffs and RAM, it's understandable that you're not laying out a long-term model for investors today. What do you think needs to happen before you can sit in front of people and say, "Okay, here's our aspiration in terms of gross margin, operating margin. Here's how you should think about the business over the longer term?"
Yeah. I'd love to wake up and not have some kind of news surprising us every day. It's been challenging macro. As we talked about earlier, we're trying to be heads down on doing what we can, and whether it's tariff mitigation or otherwise, so that we come out stronger out of all this. We can tell that story, short of having concrete one-year guidance out there. Right now, just given the volatility in the market, we're in no place to guess. We don't have a crystal ball to say where the memory pricing is going or when that's going to turn back, whether it's going to ever come back to where it started. We have to play the game the best we can in weathering through that, and we are holding our own, doing as much as that.
Short of that, I don't think we're in a position to be able to talk long term until the macro situation stabilizes, especially on the memory front. That's been very much volatile for us. I think we can continue to articulate what our strategy is and number of growth levers that we have and how we are doing on each one of those growth levers, and keep everybody apprised of our execution. I think that's really key for us. That one thing to lay out visions and growth lever that we have, but it's another to execute against all cylinders. The five dimensions of growth, innovations and growth markets and so forth that we talked about, they compound. Each one of them on its own has its limitation.
When you have innovation with growth markets and with better marketing and better customer experience through our software, and AI, they all compound one another. Really, when we say executing on all cylinders, because it's not a one plus one plus one equals five, it's multifold. We need to make sure we're, as a team, lockstep on balancing that. That means, my standpoint, we need to just make sure that resource allocation, the capital allocation to be able to do those things are balanced for us to accomplish them. That's another reason why productivity gains that we get out of AI and so forth will allow us to do more with the existing resources, to be able to reallocate and to really compound some of those impact of the growth levers that we're driving to.
Today, with your AI use internally, have you been able to reduce heads or save money, or we're still in the early phases and we're just trying to figure out how this plays out?
Yeah. There's certainly pockets that there's real, call it cost avoidance. Something that would've taken more resources or more money to do that we've been able to accomplish without growing the headcount or the expenses associated with them. Just given the large portion of our workforce is our software engineers, that's where it gets really most interesting because it turns into the productization and how quickly we can provide software and customer experience delivered to the market too, besides just cost savings play and productivity play. Well, that's certainly in a form of productivity, but my area of G&A function, for example, how can we scale the company and fuel the growth without necessarily adding to the cost structure?
There's very much not just opportunities that we see, that it's already happening, so we're very excited about continuing to lean in. As a company, we believe that we wanted to make that more of a competitive advantage than something that we have to do. We very much see the opportunities that we're already tackling. For example, as we were going through this transformation for operating expenses, we did talk about some of the labor cost arbitrage on some of the back office transactional work in accounting, for example. That was one phase. We reduced some cost structure there, but opportunity there is to go further, AI. You have AI agents working on some of those back office things rather than humans.
We see lots of opportunities that we have a roadmap of work that we're very much cultivating, so we're excited about those opportunities that we can continue to pursue. Every day, there's new things that pop up that what we can do. We're super excited about that.
Great. One other subject that used to be in the forefront, it's a long grind, so it hasn't been talked about a lot, but you're involved in some longstanding litigation with Google and potentially others in the industry over your IP. Are you still confident that there's an ROI for what the company has spent today? Because you spent a lot of money over the last five years on this.
As you can imagine, I ask that all the time. We feel very much a lot of the things that are, while it's taking a long time, it's in play. We have one of the cases, we have a new judge that's coming up to speed of the history of the case in Northern California, and we're optimistic about that. We very much keep pulse on this to make sure that what's the right outcome, what's the outcome we're looking for and what options that we have. Oftentimes, is it worth settling to a certain amount or what's our probability of winning? That's something we weigh in all the time as we see new information that come in. We will continue to look at this with the best information available and weigh our probability. At this point, we're feeling like it's worth pursuing, continue to.
Okay. What do you think investors are missing or not appreciating fully about the Sonos story today?
Yeah. No, I think some of the growth dimensions that we talked about, for example, we were getting, Tom in particular, was getting lots of questions around what does AI, more from a product wise, mean for us, right? We'll very much lean on the fact that we tend to play independent, whether that's music services, we're sort of agnostic to a religion of any one music provider. We could do the same for AI given 53 million-plus installed base, and many are voice-enabled. We feel like we're well-positioned to play a role beyond those things with screen necessary to play a role in AI. While it's early days, there's a lot of work that's happening that we've been saying we can't wait to share it when it becomes available.
That's an opportunity that, given our device is in the homes already, we feel we have an opportunity to play there.
Okay, great. Well, I really appreciate the opportunity today to have this discussion with you and the other meetings that we've done. I look forward to the rest of the year, especially the new products-
Yeah.
That are due out between now and then. Thank you so much.
Sounds great. Thank you, Steve. Thanks for having us.
Thanks, Steve.
Thank you.