Sonos' Holiday Quarter Hit by Shortages, Lack of Promotions

Constraints “were the main reason we didn't run our typical holiday promotion, and they also impacted our results, especially in our core Sonos speakers product category,” said Chief Financial Officer Brittany Bagley. Quarterly revenue grew 3% year over year to $664.5 million, but “clearly, our revenue growth during the quarter would have been higher, if not for supply constraints,” she said.

Sonos' speaker revenue was down 5% year on year, said Bagley. The company’s system products revenue grew 38%, driven by strength in the custom installation channel and improved availability of component products. Partner products and other revenue increased 37%, fueled by Sonance and IKEA partnerships.

Sonos did slightly better than expected overall in the quarter, Bagley said, despite shortages. Congested ports are “certainly still challenging,” Bagley said, but the company was able to circumvent port congestion using air freight. The company improved on shipping time last quarter, but “I think we're going to be talking about supply chain for the rest of the year,” Bagley said. She expects some improvement by year-end.

Supply constraints limited growth in the number of homes Sonos penetrated -- currently 12.6 million -- said CEO Patrick Spence in Q&A. The company added 3.5 million new households over the past two years. “I don't think all things are firing on all cylinders because we've still been supply constrained, and some of the channels at which we see greater new homes have actually been the most constrained as we go through this,” he said.

Spence sees a target base of 116 million homes “even in existing categories that we think we can address.” Sonos products are in 10% of the homes it sees as addressable for products and services. The company has less than 2% of the $89 billion global audio market, which Spence expects to expand long term “as we enter entirely new product categories and new geographies." Sonos "is not a typical one-and-done purchase. It is a unique system that you build over time,” he said. Growth will come from purchases from existing customers, who recommend their systems to friends, contributing to growth, he said.

Sonos has a recurring goal to launch two products each fiscal year. Spence said customers can expect at least one additional product launch later this year. For fiscal 2022, it’s focused on launching new products in existing categories, he said. Beyond 2024, he envisioned geographic expansion and “further category expansion plus the addition of meaningful service offerings for both consumers and enterprise customers.”

Sonos was "certainly pleased" when the full International Trade Commission "affirmed" Jan. 6 "that Google infringed all five of the patents that we had at issue in the case" (see 2201070022), said Chief Legal Officer Eddie Lazarus. The ITC's limited exclusion order banning imports of the infringing Google products is expected to take effect March 8, he said: "We're certainly looking forward to that moment."

The ITC immediately began imposing 100% bond on imports of Google goods found to infringe the Sonos patents. The bond will stay in effect for up to 60 days, through March 7, while the Office of the U.S. Trade Representative reviews the ITC decision. USTR by the end of the 60-day review can affirm or reject the decision, or take no action. Sonos also has a "quite active" suit against Google in U.S. District Court in San Francisco alleging infringement of a second group of Sonos patents, said Lazarus: "That's really where the action is right now, and we'll see how things play out." Google countersued for a declaration of noninfringement or that the patents are invalid. The complaint and counterclaims were originally filed in Waco, Texas, before being transferred to San Francisco.

Gross margin increased 140 basis points to 47.8% on cuts in holiday promotional spending and product mix, offset by higher shipping and logistics costs, Bagley said. Gross margin outlook for fiscal year 2022 is 46%-47%, reflecting “everything we know about the supply chain situation today across shipping, logistics, and components, as well as a smaller benefit from product and channel mix as compared to last year,” she said. Gross margin for the fiscal year will also benefit from lack of Q1 holiday promotions and price increases, which will help offset higher supply chain costs.

Revenue guidance for 2022 is $1.95 billion-$2 billion, for a 14%-16% growth range, said Bagley. Target revenue for 2024 of $2.5 billion would be a 13% compound annual growth rate, ahead of a prior revenue target of $2.25 billion provided at Sonos' March 2021 investor event, she said. Shares closed 4.8% higher Thursday at $27.84.